# 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.

# Calculating Scope 3 Emissions GHG Category 1 Purchased Goods and Services

Category description – Category 1 Purchased Goods and Services includes all upstream (i.e., cradle-to-gate) emissions from the production of products purchased or acquired by the reporting company in the reporting year. Products include both goods (tangible products) and services (intangible products).

This guidance page for Category 1 Purchased Goods and Services 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.

Category 1 includes emissions from all purchased goods and services not otherwise included in the other categories of upstream scope 3 emissions (i.e., category 2 through category 8). Specific categories of upstream emissions are separately reported in category 2 through category 8 to enhance the transparency and consistency of scope 3 reports.

Emissions from the transportation of purchased products from a tier one (direct) supplier to the reporting company (in vehicles not owned or controlled by the reporting company) are accounted for in category 4 (Upstream transportation and distribution).

Companies may find it useful to differentiate between purchases of production-related products (e.g., materials, components, and parts) and non-production-related products (e.g., office furniture, office supplies, and IT support). This distinction may be aligned with procurement practices and therefore may be a useful way to more efficiently organize and collect data (see box 5.2 of the Scope 3 Standard).

# Scope 1 emissions

Scope 1 emissions are emissions from sources owned or controlled by a reporting entity. For example, emissions from equipment, a vehicle or production processes that are owned or controlled by the reporting entity are considered Scope 1 emissions. These emissions include all direct emissions within the entity’s inventory boundary.

The combination of organizational and operational boundaries make up a reporting entity’s inventory boundary, which is also called the reporting boundary. Refer to Organizational boundaries for information on organizational boundaries and Operational boundaries for information on operational boundaries.

The GHG Protocol is designed to avoid double counting GHG emissions. That is, two or more reporting entities should never account for the same emissions as Scope 1 emissions. For example, emissions from the generation of heat, electricity or stream that is sold to another entity are not subtracted from Scope 1 emissions but are reported as Scope 2 emissions by the entity that purchases the related energy.

Theoretically, if every entity and individual throughout the world reported their GHG emissions using the same organizational boundary (e.g., equity share, financial control or operational control approach), the total of all Scope 1 emissions would equal the total GHGs emitted throughout the world.

## Types of Scope 1 emissions

The GHG Protocol describes four types of Scope 1 emissions: stationary combustion, mobile combustion, process emissions and fugitive emissions. The type of emissions that are included in Scope 1 will vary based on the industry and business model of the reporting entity.

## The real meaning of integrated reporting

Integrated reporting is more than only aimed at informing interested stakeholders about performance achieved against targets, the vision and strategy adopted to serve the stakeholders’ interests, and other factors that can influence business performance in future.

Clearly regulations require companies to exercise transparency. However, a more fundamental reason for reporting lies in accountability: a company needs to account for the impact it has on the stakeholders it relates to. Not exercising such transparency would impose serious risks, including high financing costs to compensate for a lack of transparency or governance or, ultimately, losing the license to operate. By contrast, a transparent approach would not only improve reputation, but also would bind stakeholders such as employees to the company’s objectives.

### The reason for including environmental and social factors in reporting

In today’s world companies play a significant role in shaping the future of society. Awareness of this has risen significantly over the last decades, resulting in changed attitudes towards the role business is expected to play.

It also resulted in changes in the views of business leaders about the role they want to play.

Business these days is seen more than ever as the agent of a wide group of stakeholders. Unlike the old paradigm that ‘the business of business is business’, companies accept wider accountability in current times towards the stakeholders whose interests they impact – no longer can companies focus only on the interests of those with a financial interest.

This wider accountability implies that companies have to fulfil the (information) needs of those who provide them with other economic resources such as labour, space, air or natural resources and those who enter into transactions with the organization such as customers. Therefore a company’s current performance and future ability to continue operations and achieve business growth needs to be evaluated on the basis of a comprehensive set of factors that influence these.

## Fair value employee share options

Share options give the holder the right to buy the underlying shares at a set price, called the ‘exercise price’, over or at the end of an agreed period. If the share price exceeds the option’s exercise price when the option is exercised, then the holder of the option profits by the amount of the excess of the share price over the exercise price. Benefit is derived from the right under the option to buy a share for less than its value.

The holder’s cost is the exercise price, whereas the value is the share price. It is not necessary for the holder to sell the share for this profit to exist. Sale only results in realisation of the profit. Because an option holder’s profit increases as the underlying share price increases, share options are used to incentivise employees to contribute to an increase in the price of the underlying shares.

Employee options are typically call options, which give holders the right but not the obligation to buy shares. However, other types of options are also traded in markets. For example, put options give holders the right to sell the underlying shares at an agreed price for a set period.

Given that holders of put options profit when share prices fall below the exercise price, such options are not viewed as aligning the interests of employees and shareholders. All references in this section to ‘share options’ are to employee call options.

Share options granted by entities often cannot be valued with reference to market prices. Many entities, even those whose shares are quoted publicly, do not have options traded on their shares. Options that trade on recognised exchanges such as the Chicago Board Options Exchange are created by market participants and are not issued by entities directly.

Even when there are exchange-traded options on an entity’s shares for which prices are available, the terms and conditions of these options are generally different from the terms and conditions of options issued by entities in share-based payments and, as a result, the prices of such traded options cannot be used directly to value share options issued in a share-based payment.

## Transfer pricing  for transactions between related parties

A transfer price is the price charged between related parties (e.g., a parent company and its controlled foreign corporation) in an inter-company transaction. Although inter-company transactions are eliminated when consolidating the financial results of controlled foreign corporations and their domestic parents, for preparation of individual tax returns each entity (or a tax consolidation unit of more than one entity in the group in one and the same tax jurisdiction) prepares stand-alone (or a tax consolidation unit) tax returns.

Transfer prices directly affect the allocation of group-wide taxable income across national tax jurisdictions. Hence, a group’s transfer-pricing policies can directly affect its after-tax income to the extent that tax rates differ across national jurisdictions.

### Arm’s length transaction principle

Most OECD countries rely upon the OECD TP Guidelines for Multinational Enterprises and Tax Administrations, that were originally released in 1995 and subsequently updated in 2017 (OECD TP Guidelines). The OECD TP Guidelines reaffirmed the OECD’s commitment to the arm’s length transaction principle.

In fact, the arm’s length transaction principle is considered “the closest approximation of the workings of the open market in cases where goods and services are transferred between associated enterprises.” The arm’s length principle implies that transfer prices between related parties should be set as though the entities were operating at arm’s length (i.e. were independent enterprises).

The application of the arm’s length transaction principle is generally based on a comparison of all the relevant conditions in a controlled transaction with the conditions in an uncontrolled transaction (i.e. a transaction between independent enterprises).

## Disclosure non-financial assets and liabilities example

The guidance for this disclosure example is provided here.

### 8 Non-financial assets and liabilities

This note provides information about the group’s non-financial assets and liabilities, including:

#### 8(a) Property, plant and equipment

 Amounts in CU’000 Freehold land Buildings Furniture, fittings and equipment Machinery and vehicles Assets under construction Total At 1 January 2019 Cost or fair value 11,350 28,050 27,510 70,860 – 137,770 Accumulated depreciation – – -7,600 -37,025 – -44,625 11,350 28,050 19,910 33,835 – 93,145 Movements in 2019 Exchange differences – – -43 -150 – -193 Revaluation surplus 2,700 3,140 – – – 5,840 Additions 2,874 1,490 2,940 4,198 3,100 14,602 Assets classified as held for sale and other disposals -424 – -525 -2,215 – 3,164 Depreciation charge – -1,540 -2,030 -4,580 – 8,150 Closing net carrying amount 16,500 31,140 20,252 31,088 3,100 102,080 At 31 December 2019 Cost or fair value 16,500 31,140 29,882 72,693 3,100 153,315 Accumulated depreciation – – -9,630 -41,605 – -51,235 16,500 31,140 20,252 31,088 3,100 102,080 Movements in 2020 Exchange differences – – -230 -570 – -800 Revaluation surplus 3,320 3,923 – – – 7,243 800 3,400 1,890 5,720 – 11,810 Additions 2,500 2,682 5,313 11,972 3,450 25,917 Assets classified as held for sale and other disposals -550 – -5,985 -1,680 – -8,215 Transfers – – 950 2,150 -3,100 – Depreciation charge – -1,750 -2,340 -4,380 – -8,470 Impairment loss (ii) – -465 -30 -180 – -675 Closing net carrying amount 22,570 38,930 19,820 44,120 3,450 128,890 At 31 December 2020 Cost or fair value 22,570 38,930 31,790 90,285 3,450 187,025 Accumulated depreciation – – -11,970 -46,165 – -58,135 22,570 38,930 19,820 44,120 3,450 128,890
##### (i) Non-current assets pledged as security

Refer to note 24 for information on non-current assets pledged as security by the group.

##### (ii) Impairment loss and compensation

The impairment loss relates to assets that were damaged by a fire – refer to note 4(b) for details. The whole amount was recognised as administrative expense in profit or loss, as there was no amount included in the asset revaluation surplus relating to the relevant assets. [IAS 36.130(a)]

## Example Disclosure financial instruments

The guidance for this example disclosure financial instruments is found here.

### 7 Financial assets and financial liabilities

This note provides information about the group’s financial instruments, including:

The group holds the following financial instruments: [IFRS 7.8]

 Amounts in CU’000 Notes 2020 2019 Financial assets Financial assets at amortised cost – Trade receivables 7(a) 15,662 8,220 – Other financial assets at amortised cost 7(b) 4,598 3,471 – Cash and cash equivalents 7(e) 55,083 30,299 Financial assets at fair value through other comprehensive income (FVOCI) 7(c) 6,782 7,148 Financial assets at fair value through profit or loss (FVPL) 7(d) 13,690 11,895 Derivative financial instruments – Used for hedging 12(a) 2,162 2,129 97,975 63,162 Example Disclosure financial instruments Financial liabilities Liabilities at amortised cost – Trade and other payables1 7(f) 13,700 10,281 – Borrowings 7(g) 97,515 84,595 – Lease liabilities 8(b) 11,501 11,291 Derivative financial instruments – Used for hedging 12(a) 766 777 12(a) 610 621 124,092 107,565

The group’s exposure to various risks associated with the financial instruments is discussed in note 12. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. [IFRS 7.36(a), IFRS 7.31, IFRS 7.34(c)]

## Reliable information

While everybody agrees that financial reporting measurements should provide reliable information, there is no consensus as to what exactly reliability means.

## Fair value of Cryptographic assets

The fair value of a cryptographic asset (‘CA’) might be accounted for or disclosed in financial statements. Fair value might be needed in a variety of situations, including:

 Inventory of cryptographic assets held by a broker-trader applying fair value less costs to sell accounting Expense for third party services paid for in cryptographic assets Cryptographic assets classified as intangible assets in cases where the revaluation model is used Expense for employee services paid for in cryptographic assets Revenue from the perspective of an ICO issuer Cryptographic assets acquired in a business combination Disclosure of the fair value for cryptographic assets held on behalf of others Cryptographic assets held by an investment fund (either measured at fair value or for which fair value is disclosed)

IFRS 13, ‘Fair Value Measurement’, defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date”, and it sets out a framework for determining fair values under IFRS.