1. Purpose and Scope
The regulation establishes mandatory guidelines for the recognition, measurement, and disclosure of impairment of carbon-related assets. It aims to ensure transparency, reliability, and comparability in financial reporting, reflecting the impact of climate-related risks and opportunities on asset values.
The regulation applies to:
- Physical carbon-related assets (e.g., carbon credits, emission allowances, renewable energy infrastructure).
- Intangible carbon-related assets (e.g., carbon offset contracts, intellectual property related to emission reduction technologies).
- Companies with material exposure to carbon-related risks, including energy producers, industrial manufacturers, and financial institutions investing in carbon-related assets.
2. Definitions
- Carbon-Related Asset: Any asset whose value is materially affected by carbon emissions regulations, carbon pricing mechanisms, or climate transition policies.
- Impairment Trigger: Any event or circumstance indicating that the carrying amount of a carbon-related asset may not be recoverable, including regulatory changes, market shifts, or technological obsolescence.
- Recoverable Amount: The higher of an asset’s fair value less costs to sell and its value in use, reflecting climate-related assumptions.
3. Impairment Indicators
Entities must assess carbon-related assets for impairment indicators, including but not limited to:
- Introduction or tightening of carbon pricing mechanisms or taxes.
- Changes in emission reduction mandates affecting operational viability.
- Market price decline of carbon credits or allowances.
- Physical or transitional climate risks that reduce expected future cash flows.
- Legal or contractual restrictions on asset utilization.
4. Measurement of Impairment
- The recoverable amount must be calculated incorporating current and reasonably foreseeable carbon-related costs and benefits.
- Discount rates should reflect the risk associated with carbon exposure.
- Entities must document assumptions, including regulatory forecasts, technology adoption scenarios, and carbon price expectations.
5. Recognition of Impairment Losses
- Impairment losses should be recognized immediately in profit or loss.
- If the impairment relates to a revalued asset, the loss should first reduce any revaluation surplus before recognizing in profit or loss.
- Subsequent reversal of impairment is permitted only if there is a change in the assumptions used to determine the recoverable amount, except for goodwill.
6. Disclosure Requirements
Entities must disclose:
- The nature of carbon-related assets and their carrying amounts.
- Impairment triggers identified during the reporting period.
- Methods and key assumptions used in determining recoverable amounts, including carbon price assumptions and regulatory scenarios.
- Amounts of impairment losses or reversals recognized in the period.
- Sensitivity analysis showing the impact of changes in carbon pricing or regulatory assumptions.
- Information on any material uncertainties that could affect future asset recoverability.
7. Governance and Oversight
- Boards must integrate carbon-related impairment assessment into risk management and audit committees’ responsibilities.
- Independent assurance may be required for high-value or high-risk carbon-related assets.
- Regulators may conduct periodic reviews to ensure compliance and adequacy of disclosures.
8. Compliance Timeline
- Entities must adopt the regulation in their next reporting cycle following its issuance.
- Transitional guidance should be provided for assets previously impaired without consideration of carbon-related risks.
9. Enforcement
- Non-compliance with impairment recognition and disclosure requirements may result in regulatory sanctions, reputational consequences, or restatement of financial statements.
- Auditors are required to evaluate the adequacy of carbon-related impairment reporting as part of standard audit procedures.