Carbon credits are an accounting problem before they're a climate one

The attention given to the carbon credit market tends to be environmental: which standards produce credible offsets, which projects are verified, which registries are reliable. These are legitimate questions. They are also, for the finance professional, downstream of a more fundamental set of questions that receive less coverage: what is a carbon credit on a balance sheet, how should it be measured, when is it recognised as income or expense, and what happens when it is retired?

IFRS does not have a specific standard for carbon credits. US GAAP does not either. Both frameworks are developing guidance, but until authoritative standards are finalised, companies are applying existing principles by analogy — sometimes consistently, often not. For a business that acquires, holds, or retires carbon credits as a core operational activity, that ambiguity is a risk. The solution is to build a rigorous accounting framework, document it clearly, apply it consistently, and be able to defend it.

Section IClassification: the threshold question

The first accounting question is classification: what kind of asset is a carbon credit?

The answer depends on the business's purpose in holding it. Three classifications are in common use, each with distinct accounting implications.

Intangible asset — under IAS 38, if the credit is held for use in delivering the company's services (as opposed to for resale), it may be classified as an intangible. IAS 38 allows the cost model or the revaluation model subsequently. Under the cost model, there is no upward revaluation — an appreciation in the carbon market price is invisible on the balance sheet until realisation. Under the revaluation model, upward movements go to other comprehensive income, not profit or loss, which limits the P&L benefit. Impairment is required when carrying amount exceeds recoverable amount.

Inventory — under IAS 2, if the credit is held for sale in the ordinary course of business, it is inventory, measured at the lower of cost and net realisable value. This means write-downs are required when market price falls below cost — relevant in a volatile carbon market — but write-ups above cost are not permitted.

Financial instrument — IAS 32 and IFRS 9 may apply where the credit gives rise to contractual rights to cash or to other financial assets, or where it is used in a derivative contract. Most physical carbon credits do not meet this definition, but carbon futures and options do.

The choice is not purely technical — it has real financial statement consequences. It should reflect the substance of the business's relationship with the credits, be documented at the policy level, and be applied consistently from one period to the next.

Section IIRecognition and cost measurement

On acquisition, a carbon credit is recognised at cost — the purchase price plus directly attributable transaction costs (brokerage, registry fees, transfer costs). Where credits are acquired in batches at different prices, a cost-flow assumption must be chosen and documented: first-in-first-out, weighted average, or specific identification. The choice affects the cost recognised on retirement when credit prices are moving, and it cannot be changed mid-year without a change-in-accounting-estimate disclosure.

For a business retiring credits continuously at scale — matched to every customer transaction on the platform — the cost-flow assumption has a material P&L impact over a full year. The argument for specific identification is accuracy; the argument for weighted average is operational simplicity. Both are defensible.

Section IIIRecognition on retirement

The retirement event — the permanent, irreversible cancellation of a credit on-chain — is the point at which the asset is consumed. In IMPT's model, retirement is a service delivery event: the customer has been promised that a verified credit will be retired in their name, and the on-chain retirement is the fulfilment of that promise. The accounting entries on retirement are: derecognise the credit asset at its carrying amount; and recognise the retirement cost as a cost of sale — it is a direct cost of delivering the carbon offset service.

The revenue recognition side is governed by IFRS 15 / ASC 606. If the carbon offset is a distinct performance obligation — which it typically is, because the customer can benefit from it independently of the travel booking — it has its own transaction price allocation and its own recognition point. Where the on-chain retirement is the delivery event, the recognition is precise and verifiable.

Section IVPeriod-end inventory measurement

Credits held at the balance sheet date must be measured at the appropriate amount. Under the cost model, this is the carried cost. Under the inventory framework, it is the lower of cost and net realisable value, requiring the finance team to monitor secondary market prices for the specific credit type — by registry, vintage, and methodology — and recognise a write-down if NRV has fallen below cost.

For a business with a material credit inventory, this is a significant judgment, not a mechanical calculation. The NRV assessment requires knowledge of current secondary market prices and estimated costs to retirement. It is not a calculation that can be fully delegated to a system without human oversight of the inputs.

Section VDisclosure

The financial statement disclosures should cover, at a minimum: the accounting policy (classification, cost-flow assumption, measurement basis); the carrying amount at the balance sheet date; the retirement volume and cost for the period; and, where the revaluation model is in use, the sensitivity of the carrying amount to changes in market price.

For a business where carbon is a core component of the product — not a peripheral ESG activity — the disclosures should be detailed enough for a sophisticated reader to understand the economics of the credit lifecycle from acquisition through retirement.