What is natural capital?
Natural capital refers to the inventory of natural resources held by companies, such as water, gold, natural gas, silver or oil. Like all raw materials, these natural capital raw materials must be certified for the company to sell a natural capital derivative for sale in the forward market.
Natural capital must also be managed in line with the company financial state which requires natural capital accounting.
Key points to remember
- Natural capital is the inventory of natural resources owned or claimed by a company.
- Natural capital assets will be listed on a company’s balance sheet because it is a type of asset.
- Natural capital generally must be certified before a derivative contract, such as a futures or futures contract, can be written on it.
Understanding natural capital
Natural capital is a type of commodity capital that includes natural resources extracted, stored, or produced by a business. Natural capital trades alongside agricultural capital in futures markets. Both types of commodities require similar operational procedures for selling options or futures in the public market Exchanges. These two types of capital also include part of the capital of a company balance sheet assets.
Explorers and refiners of natural capital also have an obligation to comply with environmental regulations. Regulations may include rules on exploration conditions and production locations to limit environmental risks. Explorers and producers devote a significant portion of their expenses to recovery and protection measures.
Futures market procedures
To subscribe to a derivative in order to sell a commodity on a public futures market, a producer must follow certain procedures and comply with certain rules.
For writing futures contracts a producer must be registered with the required regulatory authorities. Registration provides producers with links to local stock inspectors who inspect and certify natural capital stock. A producer can write contracts to sell their natural capital on a futures exchange once the natural capital is certified.
Inventory stock that is tied to a futures contract on an exchange will receive a warehouse or storage receipt. The storage receipt verifies principal for futures transactions. It also provides information on where the capital stock is stored and other inventory details. Producers whose capital stock is tied to futures contracts must hold inventory as collateral.
Financial statement accounting
Accounting for natural capital in financial statements can be complex. Natural capital is a business asset. Management should create a schedule for evaluating natural capital on an ongoing basis.
Globally, exhaustion is one of the most important components of natural capital accounting. It can be compared to depreciation. There are two main depletion accounting methods that are used for natural capital accounting, cost and percentage. Depletion allows a company to record expenditures associated with natural capital over time.
The cost exhaustion generates unit costs based on extraction costs. Exhaustion percentage calculates natural resource extraction expenditures as a percentage of revenue. The cost exhaustion method is generally preferred over percentage exhaustion because it is generally considered to create the most accurate estimates.
Example of natural capital for an oil company
Natural capital appears on the balance sheet of a company producing natural resources. Consider Exxon Mobil (XOM), which is a major oil company. In their balance sheet, they indicate how much crude oil (or related products) available to them when they prepare their financial statements.
At the end of 2018, under assets, the company reported $14.8 billion in crude oil, products and commodities. This is often summarized as an inventory. The company can do whatever it wants with this inventory, although if it wishes to sell it via a futures contract, the crude oil will need to be certified in order to ensure that it meets exchange standards and specifications.
Summary financial statements may group several types of natural capital into inventory, but the breakdown of that inventory is often included in the Generally Accepted Accounting Principles (GAAP) of the financial statements and/or in the footnotes to these statements.
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