# Calculating Scope 3 Emissions GHG Category 2 Capital Goods

Category description – Category 2 Capital Goods includes all upstream (i.e., cradle-to-gate) emissions from the production of capital goods purchased or acquired by the reporting company in the reporting year. Emissions from the use of capital goods by the reporting company are accounted for in either scope 1 (e.g., for fuel use) or scope 2 (e.g., for electricity use), rather than in scope 3.

This guidance page for Category 2 Capital Goods serves as a companion to the Scope 3 Standard to offer companies practical guidance on calculating their scope 3 emissions. It provides information not contained in the Scope 3 Standard, such as methods for calculating GHG emissions for each of the 15 scope 3 categories, data sources, and worked examples.

### Overview – Category 2 Capital Goods

Category 2 Capital Goods refer to a specific classification within capital goods, a broad category encompassing durable assets used by businesses to produce goods or services. These goods are essential for the operation and expansion of a business, serving as long-term investments rather than short-term expenses. Category 2 Capital Goods typically include machinery, equipment, vehicles, and other tangible assets that facilitate production processes but have a shorter lifespan compared to Category 1 Capital Goods.

Here’s an overview of Category 2 Capital Goods:

### Definition and Classification:

1. Capital Goods: Capital goods are tangible assets used by businesses to produce goods or services. They are distinguished from consumable goods by their longevity and role in the production process.
2. Category 2 Classification: Capital goods are often categorized based on their lifespan, with Category 2 referring to assets that have a medium-term lifespan compared to Category 1, which includes long-term assets like buildings and land.

### Characteristics:

1. Durability: Category 2 Capital Goods are durable assets designed to withstand regular use over an extended period but typically have a shorter lifespan compared to Category 1 assets.
2. Utility in Production: These goods are essential for the production process, directly contributing to the creation of goods or services by a business.
3. Depreciation: Like all capital assets, Category 2 Capital Goods undergo depreciation, losing value over time due to wear and tear, technological obsolescence, or market fluctuations.
4. Investment: They represent significant investments for businesses, requiring substantial financial outlay upfront but offering long-term returns through increased productivity and efficiency.

### Examples:

1. Machinery and Equipment: This includes manufacturing machinery, assembly line equipment, packaging machines, and other industrial tools necessary for production processes.
2. Vehicles: Trucks, vans, forklifts, and other vehicles used for transporting raw materials, finished goods, or employees within the production facility or to external locations.
3. Tools and Instruments: Hand tools, power tools, precision instruments, and other equipment used by workers to perform tasks related to production, maintenance, or quality control.
4. Technology and Software: Computer systems, software applications, and technological infrastructure used to automate processes, manage operations, or analyze data for decision-making purposes.

### Importance:

1. Enhanced Productivity: Category 2 Capital Goods play a crucial role in enhancing productivity and efficiency within a business, allowing for faster production cycles and higher output levels.
2. Competitive Advantage: Investing in modern, efficient capital goods can provide a competitive edge by reducing costs, improving quality, and enabling innovation in products or processes.
3. Capacity Expansion: These assets enable businesses to expand their production capacity, meet growing demand, or enter new markets by investing in additional machinery, equipment, or technology.
4. Risk Management: Upgrading or replacing Category 2 Capital Goods can mitigate risks associated with equipment breakdowns, technological obsolescence, or changes in market demand.

### Considerations:

1. Cost-Benefit Analysis: Businesses must conduct thorough cost-benefit analyses before investing in Category 2 Capital Goods to ensure that the benefits in terms of increased productivity or cost savings outweigh the initial investment and ongoing operational costs.
2. Maintenance and Upkeep: Proper maintenance and timely upgrades are essential to prolong the lifespan and optimize the performance of Category 2 Capital Goods, reducing the risk of downtime and costly repairs.
3. Technological Advancements: Rapid advancements in technology may render certain capital goods obsolete sooner than expected, necessitating careful consideration of the asset’s lifespan and future market trends.
4. Regulatory Compliance: Businesses must comply with regulations and standards governing the use of capital goods, particularly regarding safety, environmental impact, and industry-specific requirements.

### Conclusion:

Category 2 Capital Goods form a vital component of business investment, facilitating production processes, enhancing productivity, and driving economic growth. By understanding their characteristics, importance, and considerations, businesses can make informed decisions regarding the acquisition, maintenance, and utilization of these essential assets to achieve long-term success and competitiveness in the marketplace.

## Contributions from owners

Contributions from owners - Future economic benefits or service potential that has been contributed to the entity by parties external to the entity.

## Q&A Borrowing costs

Q&A Borrowing costs is a questions and answers lesson type of narrative following the captions of this rather simple IFRS Standard.

1. General scope and definitions
2. Borrowing costs eligible for capitalisation
3. Foreign exchange differences
4. Cessation of capitalisation
5. Interaction IAS 23 and IFRS 15 Construction contracts with customers

### General scope and definitions

1.1 A qualifying asset is an asset that ‘necessarily takes a substantial period of time to get ready for its intended use or sale’. Is there any bright line for determining the ‘substantial period of time’?

No. IAS 23 does not define ‘substantial period of time’. Management exercises judgement when determining which assets are qualifying assets, taking into account, among other factors, the nature of the asset. An asset that normally takes more than a year to be ready for use will usually be a qualifying asset. Once management chooses the criteria and type of assets, it applies this consistently to those types of asset.

Management discloses in the notes to the financial statements, when relevant, how the assessment was performed, which criteria were considered and which types of assets are subject to capitalisation of borrowing costs.

1.2 The IASB has amended the list of costs that can be included in borrowing costs, as part of its 2008 minor improvement project. Will this change anything in practice?

The amendment eliminates inconsistencies between interest expense as calculated under IAS 23 and IFRS 9. IAS 23 refers to the effective interest rate method as described in IFRS 9. The calculation includes fees, transaction costs and amortisation of discounts or premiums relating to borrowings. These components were already included in IAS 23. However, IAS 23 also referred to ‘ancillary costs’ and did not define this term.

This could have resulted in a different calculation of interest expense than under IFRS 9. No significant impact is expected from this change. Alignment of the definitions means that management only uses one method to calculate interest expense.

## M and A or Mergers and Acquisitions

### 1 Identifying a business combination

IFRS 3 refers to a ‘business combination’ rather than more commonly used phrases such as takeover, acquisition or merger because the objective is to encompass all the transactions in which an acquirer obtains control over an acquiree no matter how the transaction is structured. A business combination is defined as a transaction or other event in which an acquirer (an investor entity) obtains control of one or more businesses.

An entity’s purchase of a controlling interest in another unrelated operating entity will usually be a business combination (see Simple case – Straightforward business combination below). However, a business combination (M and A) may be structured, and an entity may obtain control of that structure, in a variety of ways.

 Examples of business combinations structurings Examples of ways an entity may obtain control A business becomes the subsidiary of an acquirer The entity transfers cash, cash equivalents or other assets(including net assets that constitute a business) Net assets of one or more businesses are legally merged with an acquirer The entity incurs liabilities One combining entity transfers its net assets, or its owners transfer their equity interests, to another combining entity or its owners The entity issues shares The entity transfers more than one type of consideration, or Two or more entities transfer their net assets, or the owners of those entities transfer their equity interests to a newly created entity, which in exchange issues shares, or The entity does not transfer consideration and obtains control for example by contract alone Some examples of this: ‘dual listed companies’ or ‘stapled entity structures’ acquiree repurchases a sufficient number of its own shares for an existing shareholder to obtain control a condition in the shareholder agreement that prevents the majority shareholder exercising control of the entity has expired, or a call option over a controlling interest that becomes exercisable. A group of former owners of one of the combining entities obtains control of the combined entity, i.e. former owners, as a group, retain control of the entity they previously owned.

Therefore, identifying a business combination transaction requires the determination of whether:

• what is acquired constitutes a ‘business’ as defined in IFRS3, and
• control has been obtained.

## IAS 16 Generation assets for Power and Utilities

Generation assets for Power and Utilities

– are often large and complex installations. They are expensive to construct, tend to be exposed to harsh operating conditions and require periodic replacement or repair. This environment leads to specific accounting issues.

### 1 Fixed assets and components

IFRS has a specific requirement for ‘component’ depreciation, as described in IAS 16 Property, Plant and Equipment. Each significant part of an item of property, plant and equipment is depreciated separately. Significant parts of an asset that have similar useful lives and patterns of consumption can be grouped together. This requirement can create complications for utility entities, because many assets include components with a shorter useful life than the asset as a whole.

Identifying components of an asset

Generation assets might comprise a significant number of components, many of which will have differing useful lives. The significant components of these types of assets must be separately identified. This can be a complex process, particularly on transition to IFRS, because the detailed record-keeping needed for componentisation might not have been required in order to comply with national generally accepted accounting principles (GAAP). This can particularly be an issue for older power plants. However, some regulators require detailed asset records, which can be useful for IFRS component identification purposes.

An entity might look to its operating data if the necessary information for components is not readily identified by the accounting records. Some components can be identified by considering the routine shutdown or overhaul schedules for power stations and the associated replacement and maintenance routines. Consideration should also be given to those components that are prone to technological obsolescence, corrosion or wear and tear that is more severe than that of the other portions of the larger asset.

First-time IFRS adopters can benefit from an exemption under IFRS 1 First-time Adoption of International Financial Reporting Standards. This exemption allows entities to use a value that is not depreciated cost in accordance with IAS 16, and IAS 23 Borrowing Costs as deemed cost on transition to IFRS. It is not necessary to apply the exemption to all assets or to a group of assets.

## Need for accounting measurement the big 1

Need for accounting measurement

### Need for accounting measurement provides a summary of the measurement bases in use in Financial Reporting and the concepts behind these measurement bases. The measurement bases that will be considered here are

All these bases are forms of accrual accounting – that is, they are intended to measure income as it is earned and costs as they are incurred, as opposed to simply recording cash flows. The last four are all forms of current value measurement.

In forming a judgment on the appropriateness of measurement bases, in literature, the overriding tests has been identified to be their cost-effectiveness and fitness for purpose. However, in the absence of direct evidence on these matters, it is usual to argue in terms of various secondary characteristics that ought to be relevant in assessing the quality of information (see the key indicators in What is useful information?).

The most important of these characteristics are generally considered to be relevance and faithful representation / reliability (older term).

For each basis, an outline is given of how it works and the relevance and faithful representation of the resulting measurements. The question of measurement costs is also considered briefly. In reading the analyses that follow, the following comments should be borne in mind.

Bases of measurement in financial reporting are not carved in stone. Different people have different views on how each basis should work, and meanings evolve as practice changes. Some readers may therefore find that the way a particular basis is described does not match how they understand it.

This does not mean either that their understanding is wrong or that the description in the report is wrong; views on these things simply differ.

## Fair value measurement

Fair Value Measurement can present significant challenges for preparers of financial statements, particularly because it involves using judgment and estimation. Further, it is the market participant view that shapes fair value, so preparers need to monitor whether the valuation models and assumptions they use for financial reporting appropriately reflect those of market participants.

Fair Value Measurement under IFRS 13:

1. defines fair value;
2. sets out in a single IFRS a framework for measuring fair value; and
3. requires disclosures about fair value measurements.

The definition of fair value focuses on assets and liabilities because they are a primary subject of accounting measurement. In addition, IFRS 13 is applied to an entity’s own equity instruments measured at fair value.… Read more

## Property plant and equipment

Property plant and equipment are tangible items that are held for use in many different ways and are expected to be used during more than one period.

## Presentation and disclosure

Presentation and disclosure are the terms used to describe how information about assets, liabilities, equity, income and expenses is provided in the accounts.

## Intangible assets Example

Intangible assets, other than goodwill, include expenditure on the exploration for and evaluation of oil and natural gas resources, computer software, patents, licences and trademarks and are stated at the amount initially recognized, less accumulated amortization and accumulated impairment losses.