Decree No. 636/2024 adds the Egyptian Accounting Explanation No. 2, "Certificates of Carbon Emissions Reduction (Carbon Credits) to the Egyptian Accounting Standards.
The decree specifies how carbon credits are treated in terms of accounting depends on the specific arrangements and commercial purpose of their issuance or purchase. Factors considered for determining the appropriate accounting approach include:
- Understanding the carbon credit issuance cycle.
- The arrangement's nature and commercial purpose for buying or issuing carbon credits.
- Classifying carbon credits as financial or intangible assets based on the arrangement and purpose.
- Providing clear disclosures about carbon credits and accounting policies.
Different Cases of Accounting Approaches
The explanation outlines different scenarios and their respective accounting treatments, including initial measurement (i.e. the determination of the value of the carbon credit when first recognized in the financial statements), subsequent measurement, and derecognition, for:
- Carbon credits issued for owned carbon reduction projects (treated as intangible assets for internal use and financial instruments for sale).
- Carbon credits issued for non-owned carbon reduction projects (treated as financial instruments).
- Carbon credits purchased for internal use/retirement (treated as intangible assets).
- Carbon credits purchased for trading (treated as financial instruments).
Tax Treatment, Special Cases, and Disclosure
The explanation also addresses tax treatment according to Egyptian Accounting Standard No. 24 "Income Tax", special cases involving changes in acquisition purpose, and disclosure requirements related to accounting policies, valuation methods, and changes in carbon credit balances.
