What is Natural Capital
Natural capital is a reference to the stock of natural resources held by companies, such as water and oil. Like all commodity resources these natural capital commodities must be certificated in order for the company to write a derivative on the capital for sale in the futures market. Natural capital must also be managed on a company’s financial statements which requires natural capital accounting.
BREAKING DOWN Natural Capital
Natural capital is a type of commodity capital that includes natural resources mined from explorers. Natural capital trades alongside agricultural capital on futures exchanges. Both types of commodities require some similar operational procedures for writing options on public market exchanges. Both types of capital also comprise a majority of a company’s balance sheet assets.
Natural capital explorers and refiners also have an obligation to adhere to environmental regulations. Regulations may include rules on exploration conditions, production locations and other factors that can be of risk. These producers spend a substantial amount of their expenses on recovery and protection measures.
Futures Market Procedures
To write a derivative to sell a commodity on a public futures market, a producer must follow certain procedures and adhere to certain rules. Public futures exchange trading can be a good way to hedge the volatility of commodity prices and improve revenue.
To write futures contracts a producer must be registered with the required regulatory authorities. Registration provides producers with connections to local stock inspectors who inspect and certificate natural capital stock. A producer can write contracts to sell its natural capital on any futures exchange once the capital is certificated.
Inventory stock that is tied to a futures contract on an exchange will receive a warehouse or storage receipt. The storage receipt verifies the capital for futures contract transactions. It also provides information on where the capital stock is stored and other details about the inventory. Producers with capital stock tied to futures contracts must hold the inventory as collateral.
Financial Statement Accounting
Accounting for natural capital on financial statements can be complex. Natural capital is an asset of the firm. Management must create a schedule for valuing natural capital on an ongoing basis.
Overall, depletion is one of the most important components of natural capital accounting. This 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 expenses associated with natural capital over time.
The cost depletion method generates per unit costs that are based on extraction costs. Percentage depletion calculates natural resource extraction expenses as a percentage of revenue. The cost depletion method is usually favored over percentage depletion as it is generally considered to create the most accurate estimates.