Bought only to be cancelled
A company buys voluntary carbon credits that it will retire against its own emissions to support a carbon-neutral or net-zero claim. Are the credits an intangible asset, inventory or an expense, and when does their cost reach profit or loss?
More companies now buy voluntary carbon credits. These are not EU ETS allowances, which a regulated installation must surrender by law. They are certificates from projects that reduce or remove greenhouse gases, bought on the voluntary market and then retired, or cancelled, in a registry so the buyer can say it has offset part of its footprint. The buyer cannot sell a retired credit. Its only use was to be cancelled.
No IFRS Accounting Standard deals with carbon credits, and the IFRS Interpretations Committee has chosen not to answer the question. So the buyer has to apply standards written for other things: IAS 38 for intangible assets, IAS 2 for inventories, IAS 37 for any obligation to offset, and the IAS 8 hierarchy for what is left over. This post works through the competing readings and lands on an answer for the 31 December 2026 year-end.
Why the issue arises
A voluntary credit is a serialised unit in an electronic registry. It usually represents one tonne of CO2 equivalent reduced or removed by a project. While it sits in the buyer's registry account, the buyer can hold it, sell it or retire it. Once retired, it is gone.
That life cycle creates three questions. Is there an asset at all, given that the buyer only ever meant to cancel it? If there is, which standard governs it: IAS 38, or IAS 2? And when does the cost reach profit or loss: when the credits are bought, when they are retired, or when the emissions they are meant to offset occur?
The answers matter more than the amounts often suggest. Credits are frequently bought in blocks ahead of need, sometimes years ahead. The choice decides whether a year's profit carries one year's offsetting cost, several years' worth, or none.
What is clear
There is no specific standard. The IASB's work on pollutant pricing mechanisms, which would cover carbon credits, is not on its work plan. In January 2025 the IASB decided to defer the decision on adding a project until its next agenda consultation. The IASB decided in late 2025 to run that consultation concurrently with the ISSB's, with internal work starting in late 2026 and stakeholder consultation in 2027 (IASB update, September 2026).
IFRIC has looked at the question and declined to answer it. In April 2025 the Committee finalised an agenda decision on a request asking whether purchased carbon credits and climate-related research and development meet IAS 38's recognition requirements. Because the IASB is researching pollutant pricing mechanisms, and a project remains on its reserve list, the Committee did not consider the carbon credits question "separately from the IASB's research" and answered only the research and development part (IFRIC agenda decision, April 2025).
IFRIC has answered the IAS 37 question. In its April 2024 agenda decision on climate-related commitments, the Committee observed that a public commitment to offset future emissions may create a constructive obligation, depending on the facts. But no provision arises from the commitment itself. A present obligation to offset arises only as the entity emits the gases it has committed to offset. Offsetting meets the probable-outflow test because the entity must buy and retire credits without receiving economic benefits in return. The amount recognised with a provision is generally an expense, unless it forms part of an asset under another standard.
A credit held for sale in the ordinary course of business is inventory (IAS 2.6), and IAS 38 does not apply to it (IAS 38.3(a)). A broker-trader may measure such inventory at fair value less costs to sell (IAS 2.3(b), IAS 2.5).
In the absence of a standard that specifically applies, management develops a policy under IAS 8.10, looking first to standards dealing with similar issues and then to the Conceptual Framework (IAS 8.11). It may also consider other standard-setters' recent pronouncements, if they do not conflict (IAS 8.12).
So the core question is still open. IFRIC has said when an obligation to offset arises. It has not said what the credits are.
The competing readings
Reading 1: inventory. The credits are held to be used up, much like supplies consumed in rendering a service, so IAS 2 applies, at the lower of cost and net realisable value.
Reading 2: expense on purchase. The credits' only purpose is to be cancelled in support of a public claim. The benefit is reputational, much like advertising, which IAS 38 requires to be expensed (IAS 38.69(c)). No asset is recognised, and the full cost hits profit when the credits are bought.
Reading 3: intangible asset, expensed on retirement. The credit is an identifiable non-monetary asset without physical substance (IAS 38.8). The buyer recognises it at cost (IAS 38.24) and derecognises it when it is retired, because no future economic benefits are then expected from its use or disposal (IAS 38.112(b)). The expense falls in the period of retirement.
Reading 4: intangible asset, with the expense following the emissions. The same as reading 3, but where the buyer has a constructive obligation to offset, a provision is recognised as the emissions occur, following the April 2024 agenda decision. The expense then falls in the year of the emissions, whenever the credits are retired.
Why reading 1 fails, and why reading 2 goes too far
Reading 1 fails for a company that retires credits against its own emissions. It does not sell them, so they are not held for sale in the ordinary course of business. Nor are they consumed in a production process or in rendering services (IAS 2.6). Retiring a credit against the company's own footprint produces nothing the company sells. There is one narrow exception. Where credits are retired to make a specific product carbon-neutral and are costed into that product, PwC's view is that they can meet the definition of inventory, effectively as a raw material. But EU consumer law now bans product claims of neutral or reduced climate impact that are based on offsetting, and Member States must apply the ban from 27 September 2026 (Directive (EU) 2024/825, adding point 4c to Annex I of Directive 2005/29/EC). For EU consumer products, that route is now largely closed.
Reading 2 relies on the idea that the only benefit is reputational. That is not right while the credit is unretired. A registered, transferable credit can be sold to another party for cash. An asset is identifiable if it is separable, "regardless of whether the entity intends to do so" (IAS 38.12(a)). The buyer controls it through the registry and can restrict others' access to it (IAS 38.13). And future economic benefits include benefits from use, not only from sale (IAS 38.17). Intent to retire decides when the asset will be used up. It does not decide whether there is an asset in the meantime. The advertising analogy also fails on its own terms: IAS 38.69 is about expenditure where no asset is acquired, and here one is.
Reading 2 is still the right answer in some cases. If credits are bought and retired in the same transaction, or bought under an arrangement that never delivers a transferable unit into the buyer's account, such as a contribution to a project, there is nothing to recognise. The cost is expensed. KPMG's view is that immediate expensing may be appropriate where credits will be retired immediately on purchase.
That leaves readings 3 and 4, and they are not really rivals. Both treat the credit as an IAS 38 asset. They differ only on whether IAS 37 also applies. Reading 4 is what the April 2024 agenda decision produces for an entity with a constructive obligation. Reading 3 is what is left when there is none. The question becomes a fact question: has the company's public commitment created a constructive obligation (IAS 37.10, IAS 37.20)? The Committee was clear that this depends on the specific facts and must be reassessed at each reporting date.
The large firms point the same way. PwC's view is that credits bought to be retired against emission targets will usually be intangible assets, carried at cost less impairment, and derecognised on retirement. KPMG's view is that credits held to offset the company's own emissions may be an intangible asset, generally derecognised on retirement. Neither presents this as the only possible answer, and diversity in practice remains. A July 2024 paper for the IASB's Accounting Standards Advisory Forum, prepared by Canadian standard-setter staff, reported emerging diversity. Users it spoke to seemed to favour immediate expensing; national standard-setters thought an asset could be recognised once a provision exists; and the staff noted that credits that can be sold or traded would likely meet the definition of an asset.
US GAAP has gone the other way. In May 2026 the FASB issued ASU 2026-02, effective for public business entities for annual periods beginning after 15 December 2027, which requires credits acquired solely for voluntary initiatives, such as net-zero claims, to be expensed as incurred. An IFRS preparer can look at that only where IAS 8.10–12 is in play. For a delivered, transferable credit IAS 38 applies directly, so IAS 8 is needed only for the questions IAS 38 leaves open, such as the interaction with a provision. And IAS 8.12 sources may be used only where they do not conflict with IFRSs dealing with similar issues (IAS 8.11).
Worked example: Corrabeg Coffee Roasters Ltd
Corrabeg Coffee Roasters Ltd roasts and supplies coffee to cafés and retailers from a plant in County Cork. It has a 31 December year-end. In October 2025 it published a commitment, on its website, in its annual report and in tender responses to trade customers: from 2026, its roasting operations would be carbon neutral. It would measure its Scope 1 and 2 emissions each year and retire verified carbon credits equal to them, completing the retirements by 31 March of the following year. Corrabeg concludes that the commitment, specific and published and relied on by customers, has created a constructive obligation. That conclusion is a judgement, and the example shows both answers.
Corrabeg's facts in 2026 and 2027:
2 March 2026: it buys 8,000 verified removal credits at €30 each, €240,000 in total. They are delivered into its registry account the same day and are transferable.
2026 emissions (Scope 1 and 2) are 4,000 tonnes of CO2 equivalent.
15 December 2026: it retires 3,000 credits, based on its January to November data.
15 March 2027: once its 2026 inventory is final, it retires the remaining 1,000 credits for 2026.
During 2027 it emits 4,000 tonnes and, in December 2027, retires its last 4,000 credits against them.
To keep the classification question in view, the quoted price of the credits stays at €30 throughout.
Event | Credits | €000 |
|---|---|---|
Bought 2 Mar 2026 | 8,000 | 240 |
Retired 15 Dec 2026 | (3,000) | (90) |
Held 31 Dec 2026 | 5,000 | 150 |
Retired 15 Mar 2027 | (1,000) | (30) |
Retired Dec 2027 | (4,000) | (120) |
Held 31 Dec 2027 | – | – |
At 31 December 2026 Corrabeg holds 8,000 − 3,000 = 5,000 credits at €30, or €150,000. Of those, 1,000 are already spoken for: they will offset 2026 emissions that have occurred but have not yet been offset.
Under reading 4, the entries are:
2 March 2026: Dr Carbon credits (intangible asset) €240,000; Cr Cash €240,000.
15 December 2026: Dr Carbon offset expense €90,000; Cr Carbon credits €90,000.
31 December 2026: Dr Carbon offset expense €30,000; Cr Provision €30,000, for 1,000 tonnes emitted but not yet offset, at €30 (IAS 37.36).
15 March 2027: Dr Provision €30,000; Cr Carbon credits €30,000.
December 2027: Dr Carbon offset expense €120,000; Cr Carbon credits €120,000.
Under reading 3, the 31 December 2026 provision is not recognised, and the 15 March 2027 retirement is expensed when it happens. Under reading 2, the whole €240,000 is expensed on 2 March 2026.
€000 | On purchase | On retirement | On emission |
|---|---|---|---|
2026 expense | 240 | 90 | 120 |
2027 expense | – | 150 | 120 |
Two-year expense | 240 | 240 | 240 |
Credits 31 Dec 2026 | – | 150 | 150 |
Provision 31 Dec 2026 | – | – | (30) |
Net 31 Dec 2026 | – | 150 | 120 |
The arithmetic is simple, and that is the point. Over the two years every reading gives €240,000. What changes is the year. Expensing on purchase charges 2026 with two years of offsetting. Expensing on retirement charges 2026 with €90,000 for 3,000 tonnes, and pushes the cost of the last 1,000 tonnes of 2026 into 2027: €30,000 + €120,000 = €150,000. Expensing as emissions occur matches the cost to the tonnes: 4,000 × €30 = €120,000 in each year, which is 3,000 retired plus 1,000 provided for in 2026, and 4,000 retired in 2027.
Under reading 4, Corrabeg's balance sheet at 31 December 2026 shows credits of €150,000 and a provision of €30,000. They are not offset against each other (IAS 1.32). Both are current: the credits will be consumed within twelve months (IAS 1.66(a)).
What to do
Map every credit the entity holds or has contracted for: vintage, standard, registry, whether delivered and transferable, and what it is earmarked for (own claims, product claims, resale).
Decide the unit of account and the standard. For delivered, transferable credits held to retire against own emissions, apply IAS 38 at cost (IAS 38.24). Use IAS 2 only for credits genuinely held for sale. Treat amounts paid for credits not yet delivered as a prepayment (an advance towards the asset), and check forward purchase contracts against IFRS 9 if they can be settled net.
Assess, and document, whether public claims have created a constructive obligation (IAS 37.10, IAS 37.20). Look at how specific the commitment is, where it was published, and who relies on it. Reassess at each reporting date.
If there is one, provide at the year-end for emissions that have occurred but have not yet been offset (IAS 37.14), and measure the provision at the best estimate of the cost to settle (IAS 37.36).
Write the policy down. Where parts of the policy were developed under IAS 8.10 because no IFRS specifically applies, that is the kind of accounting policy information IAS 1 expects to be material (IAS 1.117B(c)). Disclose the constructive-obligation call as a significant judgement if it is one (IAS 1.122).
Give the IAS 38 disclosures for the class (IAS 38.118), and the IAS 37 disclosures for the provision (IAS 37.84–85).
Smaller questions
Should the credits be amortised? Not in the usual way. A credit's benefit is not consumed over time. It is consumed in one go, on retirement. PwC's view is that there is generally no consumption until derecognition, so the credits are carried at cost less impairment. The policy should say how this fits IAS 38.97, under which the amortisation method reflects the pattern of consumption of the benefits.
Can a fall in the market price cause an impairment? It can be an indicator (IAS 36.12(a)). Recoverable amount is the higher of fair value less costs of disposal and value in use (IAS 36.18). But a credit held for retirement does not generate cash inflows on its own, so IAS 36.22 may push the test up to the cash-generating unit, where no impairment may arise, unless value in use can be estimated to be close to fair value less costs of disposal, which is measurable here (IAS 36.22(b)). Had the price at 31 December 2026 been €25, an individual test would have given an impairment of 5,000 × (€30 − €25) = €25,000. A test at the level of the cash-generating unit could give nil. The choice is a judgement to make once and apply consistently. A related question, which IAS 37.37 does not settle, is whether a provision for offsetting is measured at the market price or at the cost of credits already held for the purpose.
Can the credits be revalued? Only by reference to an active market (IAS 38.75). Credits differ widely by project, vintage and standard. For most holdings, an active market for identical units will be hard to show.
What if the claim the credits were bought for can no longer be made? Corrabeg's claim is about its operations, not its coffee. But a company that bought credits for a product label it may no longer use after 27 September 2026 has a change in its legal environment, which is an impairment indicator (IAS 36.12(b)). It should also reassess whether any constructive obligation survives the withdrawal of the claim.
How do the credits show in sustainability reporting? Never as a reduction of emissions. IFRS S2 requires an entity with a net emissions target to disclose the associated gross target separately (IFRS S2.36(c)), and its planned use of carbon credits: how far the target relies on them, which third-party scheme verifies them, whether they are nature-based or technological and reduction or removal, and other factors bearing on their credibility (IFRS S2.36(e)). IFRS S2 also asks whether the target and its methodology have been validated by a third party (IFRS S2.34(a)). In the EU, two sets of ESRS are now in play. The 2023 set (Delegated Regulation (EU) 2023/2772, as amended by Delegated Regulation (EU) 2025/1416) requires gross Scope 1, 2 and 3 emissions (ESRS E1-6, paragraph 44), excludes credits from the calculation (ESRS E1, AR 43(d) and AR 45(f)) and from reduction targets (ESRS E1-4, paragraph 34(b)), and requires credits cancelled in the year and planned for future cancellation to be shown separately (ESRS E1-7, paragraphs 56(b) and 59). The simplified set, Delegated Regulation (EU) 2026/1563, was published on 21 September 2026, takes effect on 10 November 2026 and applies to financial years from 1 January 2027. For 2026, companies may stay on the 2023 set, adopt the simplified set early, or use the 2023 set with the listed reliefs. The substance is the same, but the numbers change. In the simplified set, credits are excluded from emissions (ESRS E1-8, AR 20(d)) and from gross reduction targets (ESRS E1-6, AR 12), and credits cancelled, and credits bought in the year but not yet cancelled, are disclosed under ESRS E1-9, paragraph 34. Corrabeg is well below the Omnibus I thresholds of €450 million turnover and 1,000 employees, so it does not have to report under ESRS. If it did, it would show gross Scope 1 and 2 emissions of 4,000 tonnes, 3,000 credits cancelled in 2026 and 5,000 purchased but not yet cancelled.
Why it matters for the 2026 year-end
Three things come together at 31 December 2026. Member States must apply the EU ban on product offsetting claims from 27 September 2026, so some companies will have withdrawn claims their credits were bought to support. Some net-zero and carbon-neutral commitments made in 2020 to 2022 are now reaching their first offsetting years, which is when the April 2024 agenda decision starts to produce provisions. And the 2026 statements are the comparatives for the first IFRS 18 year. Carbon offset expense will need a home in the new statement of profit or loss, and a policy chosen now will carry through.
A company that has expensed credits on purchase and now concludes that they meet the IAS 38 definition is not changing an estimate. It is moving to a different policy, or correcting an error, depending on why the earlier answer was reached. That should be worked out before the year-end, not during the audit.
What the auditor will look at
Registry evidence: statements showing credits held, delivered and retired, reconciled to the ledger by serial number and vintage, and retirement certificates naming the entity as beneficiary.
The classification memo: why IAS 38 rather than IAS 2, why an asset rather than an expense, and how the unit of account was set.
The constructive-obligation assessment: the public statements, their wording and audience, and the reassessment at the reporting date.
The emissions data behind any provision: the tonnes emitted but not yet offset, and whether that figure agrees with the GHG inventory reported elsewhere.
Impairment: the indicator review, the level at which recoverable amount is tested, and the prices used.
Consistency between the financial statements and the sustainability statement: credits held, retired and planned should tell the same story in both.
Work it through with our tools
Whether the commitment has created a constructive obligation is the judgement that moves the expense between years. The Tipping Point helps you weigh the indicators and record the conclusion.
If you want to check that your notes cover the IAS 38 and IAS 37 disclosures and the policy information a reader will look for, run them through our disclosure review.
IAS 38 in the Learning Hub: the definition, recognition and derecognition of intangible assets.
IAS 37 in the Learning Hub: constructive obligations and when a provision is recognised.
IAS 36 in the Learning Hub: recoverable amount and cash-generating units.
IAS 8 in the Learning Hub: developing a policy where no standard applies.
A carbon credit bought to be cancelled is still an asset until it is cancelled. Intent decides when it is used up, not whether it exists. Once that is accepted, the remaining question is not really about IAS 38 at all. It is whether the company's own public promise has made the emissions, and not the retirements, the event that drives the expense. That is a question about what the company said, and to whom, and it is worth answering before the auditor asks.
Corrabeg Coffee Roasters Ltd is fictional. Figures are in euro. References are to IFRS Accounting Standards as issued by the IASB, IFRS S2 as issued by the ISSB, and the ESRS in the version stated where cited.
