This free, guided checker walks your finance team through the key decision points for IAS 38 IAS 37 and IAS 2 Emission Allowances. Answer a few questions to see the likely treatment and the evidence to document.
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This tool is a high-level IFRS screening aid for general information only and is not accounting, audit or legal advice. Conclusions require entity-specific evidence and judgement - confirm the treatment with your advisor.
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Cap-and-trade schemes require entities to surrender allowances equal to emissions; assess whether the entity holds or expects to receive emission rights under EU ETS, UK ETS, or similar programmes. Check registry accounts, compliance filings, and installation permits rather than relying on management assertion alone. Voluntary carbon credits purchased for offsetting claims can also fall in scope when they are separable, tradable rights.
Emission allowance accounting under IAS 38, IAS 37, and IAS 2 does not apply; assess any other environmental obligations separately under IAS 37.14.
Official guidance: IFRS issued standards
Because no IFRS standard specifically addresses emission schemes, management selects a policy under the IAS 8.10-11 hierarchy and applies it consistently. Under the net liability approach, purchased allowances are recognized only to the extent of the obligation; free allocations may still require separate asset recognition at fair value with deferred income. The common trap is mixing net and gross mechanics across schemes or periods without an IAS 8 policy-change analysis.
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Official guidance: IFRS issued standards
Free allocations are intangible assets under IAS 38 initially measured at fair value on the date control is obtained, typically with a credit to deferred income or government grant, unless the entity elects the nominal-amount alternative in IAS 38.44 and IAS 20.23. Trace allocation volumes to the registry statement and the national allocation table. A common misapplication is recognizing the grant income immediately instead of deferring it over the compliance period.
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Official guidance: IFRS issued standards
Measure free allocations at fair value when received; amortize or release deferred income over the compliance period or as allowances are surrendered, per the systematic basis in IAS 20.12. Fair value is normally the quoted allowance price on the allocation date from the relevant exchange. Watch for entities that record free allocations at nil while still applying a gross fair-value provision, which mismatches income and expense.
Recognize free allowances at fair value with a matching deferred income credit under IAS 38.44 and IAS 20.23 (or both at nominal amount) before period-end close.
Official guidance: IFRS issued standards
Purchased allowances are intangible assets under IAS 38 measured at cost; under the net liability approach, offset purchased assets against the emission obligation so only an uncovered shortfall is presented as a liability. Reconcile purchase volumes and prices to broker confirmations and registry transfers. Allowances bought for short-term trading by a broker-trader may instead be inventory measured under IAS 2.3(b) at fair value less costs to sell.
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Official guidance: IFRS issued standards
Record purchases at cost; under the net liability approach the provision is measured only for emissions to date in excess of allowances held, so no separate expense arises while allowances cover emissions. The revaluation model in IAS 38.75 is available only if an active market exists and is applied to the whole class. A frequent error is remeasuring the covered portion of the obligation at period-end spot price, which creates artificial volatility.
Apply cost measurement under IAS 38.24 and IAS 38.74 and restate presentation so a provision is recognized only for the uncovered shortfall under IAS 37.14.
Official guidance: IFRS issued standards
Measure the obligation at the best estimate of expenditure required to settle the liability, typically the market price of allowances needed to cover the shortfall at the reporting date per IAS 37.36-37. Base emitted tonnage on verified monitoring reports, not annual budgets. The obligating event is the emission itself, so a provision cannot be deferred merely because the surrender deadline falls after the reporting date.
Recognize a provision for the emission shortfall at the best estimate required by IAS 37.14 and IAS 37.36 before period-end close.
Official guidance: IFRS issued standards
When allowances are used to cover production emissions, derecognize the allowance asset and charge cost of sales; align the emission expense with the production period the same way other conversion costs are absorbed under IAS 2.12. Map emission volumes to production cost centres so the charge follows the product. The trap is holding the expense until the annual surrender date, which understates cost of sales during the year.
Expense surrendered allowances to cost of sales in the production period under IAS 2.10 rather than deferring the charge.
Official guidance: IFRS issued standards
IAS 38.111 points intangible assets to IAS 36, which requires an indicator assessment each reporting date and a recoverable-amount test when indicators exist; purchased allowances carried at cost may require write-down if the quoted price is lower. Recoverable amount may still exceed a depressed spot price where allowances will be used to settle an obligation measured at the same market price, so document the value-in-use logic rather than mechanically writing down to spot.
Perform the IAS 36 indicator assessment and, where triggered, an impairment test on purchased allowance assets at period-end, as required by IAS 38.111 and IAS 36.9.
Official guidance: IFRS issued standards
Amortize deferred income from free allocations on a systematic basis consistent with the pattern of benefit, typically over the surrender period or as emissions occur, so grant income offsets the emission expense it compensates per IAS 20.12. Reconcile the cumulative release to verified emissions as a percentage of the allocation. Releasing on a straight-line calendar basis while emissions are seasonal misstates interim results.
Establish a deferred income release pattern aligned with the recognition of related emission costs, as required by IAS 20.12.
Official guidance: IFRS issued standards
Disclose the accounting policy for allowances, carrying amounts, the provision for shortfalls, and significant judgments on fair value and net liability presentation. IAS 38.118 requires a reconciliation of the allowance intangible class, IAS 37.84-85 the provision movements and uncertainties, and IAS 20.39 the grant policy and amounts. Because practice diverges after the withdrawal of the emission rights interpretation, the policy note is the disclosure users read first, so make the chosen model explicit.
Emission allowance accounting under the documented policy appears complete, with recognition, measurement, and the IAS 38.118, IAS 37.84-85, and IAS 20.39 disclosures in place. Complete the emission allowance note disclosures required by IAS 38.118, IAS 37.84-85, and IAS 20.39 before financial statement authorization.
Official guidance: IFRS issued standards
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