Organizational and Operational Boundaries

Setting appropriate organizational and operational boundaries is fundamental to accurate GHG accounting and AASB S2 compliance. This lesson covers the key approaches, decision-making frameworks, and practical considerations for boundary setting in complex organizational structures.

Understanding Boundary Setting

Why Boundaries Matter

Foundation of GHG Accounting

Determines scope: Which entities and activities are included in reporting
Ensures consistency: Provides framework for consistent reporting over time
Enables comparability: Allows meaningful comparison with other organizations
Supports decision-making: Aligns emissions data with management structure and accountability

AASB S2 Requirements

Clear boundary definition: Must clearly describe organizational and operational boundaries
Justification: Rationale for boundary choices must be provided
Consistency: Boundaries should align with financial reporting consolidation where possible
Disclosure: Significant boundary changes must be explained and historical data restated

Two-Step Boundary Setting Process

Step 1: Organizational Boundary Define which operations are owned or controlled by the organization and should be included in the GHG inventory.

Step 2: Operational Boundary Determine which emissions from those operations to include (Scope 1, 2, and 3).

This lesson focuses primarily on organizational boundaries, with operational boundaries covered in relation to specific emission scopes.

Organizational Boundary Approaches

Definition Organization accounts for GHG emissions from operations according to its share of equity in the operation.

Key Characteristics:

Proportional accounting: Emissions included based on percentage ownership
Ownership focus: Based on economic interest rather than control
Joint venture treatment: Each partner accounts for their equity share
Simple calculation: Percentage ownership × total emissions

When to Use:

Joint ventures with shared ownership and profits
Investment portfolios where proportional responsibility is clear
Operations where control is shared among partners
Alignment with financial accounting treatment desired

Example Application:

Company A owns 30% of a power plant
Power plant annual emissions: 1,000,000 tCO2e
Company A’s attributed emissions: 300,000 tCO2e (30% × 1,000,000)

Control Approaches

Financial Control Organization accounts for 100% of GHG emissions from operations over which it has financial control.

Definition of Financial Control:

Direct full or majority ownership
Ability to direct financial and operating policies
Right to derive majority of benefits and exposure to majority of risks
Generally aligns with financial statement consolidation

Operational Control Organization accounts for 100% of GHG emissions from operations over which it has operational control.

Definition of Operational Control:

Full authority to introduce and implement operating policies
Day-to-day management responsibility
Control over operational decisions affecting emissions
May differ from financial control in some arrangements

Comparison of Approaches

Approach	Advantages	Disadvantages	Best Use Cases
Equity Share	Proportional responsibility, simple calculation	May not reflect control/influence	Joint ventures, investment portfolios
Financial Control	Aligns with financial reporting, clear accountability	May not reflect operational influence	Traditional corporate structures
Operational Control	Reflects operational influence, management focus	Complex in shared arrangements	Operational management focus

Complex Organizational Structures

Joint Ventures and Partnerships

Incorporated Joint Ventures

Structure: Separate legal entity with shared ownership
Financial Control: Usually no single party has financial control
Operational Control: May be shared or delegated to one party
Recommended Approach: Equity share, unless clear operational control exists

Unincorporated Joint Ventures

Structure: Contractual arrangement without separate entity
Financial Control: Often follows ownership percentages
Operational Control: May be assigned to operating partner
Recommended Approach: Based on contractual arrangements and actual control

Strategic Partnerships

Structure: Various forms from loose cooperation to formal alliances
Boundary Decision: Based on degree of control and integration
Key Considerations: Decision-making authority, financial responsibility, operational integration
Documentation: Clear documentation of rationale for inclusion/exclusion

Corporate Group Structures

Parent-Subsidiary Relationships

Fully Owned Subsidiaries: Include 100% under control approaches
Majority Owned Subsidiaries: Include 100% under financial control
Minority Holdings: Exclude under control approaches, include proportionally under equity share
Special Purpose Vehicles: Assess based on substance over form

Management and Holdings Companies

Pure Holdings: May have minimal direct emissions but significant through subsidiaries
Management Companies: Assess operational control over managed entities
Service Companies: Consider whether providing services creates operational control
Consolidation Alignment: Generally align with financial statement consolidation

Franchises and Licensing

Franchisor Perspective

Operational Control Assessment: Degree of control over franchise operations
Key Factors: Operating standards, purchasing requirements, operational oversight
Typical Treatment: Exclude franchise emissions unless significant operational control
Scope 3 Consideration: May include as Category 14 (Franchises) in Scope 3

Franchisee Perspective

Own Operations: Include emissions from franchise operations under control
Franchisor Requirements: Assess impact of franchisor requirements on operational control
Typical Treatment: Include own franchise operations as Scope 1 and 2

Licensing Arrangements

Technology Licensing: Generally no operational control over licensee operations
Brand Licensing: Limited operational control unless extensive operating requirements
Typical Treatment: Exclude licensee emissions, consider in Scope 3 assessment

Differences Between NGER and AASB S2 Boundaries

NGER Boundary Requirements

Facility-Based Approach

Focus: Individual facilities and their emissions
Thresholds: 25,000 tCO2e facility threshold, 50,000 tCO2e corporate threshold
Control Test: Operational control for facility classification
Scope: Primarily Scope 1 and energy-based Scope 2

Corporate Group Treatment

Consolidation: Based on operational control of facilities
Ownership Changes: Trigger recalculation and rebaseline
Joint Ventures: Operational control determines reporting responsibility
Leased Assets: Operational control determines inclusion

AASB S2 Boundary Requirements

Enterprise-Wide Approach

Focus: Entire organizational boundary and all material emissions
Thresholds: No emission-based thresholds, materiality-driven
Control Test: Choice between financial control, operational control, or equity share
Scope: Comprehensive coverage including material Scope 3

Integration with Financial Reporting

Alignment: Should align with financial statement consolidation where practical
Explanation: Differences from financial consolidation must be explained
Consistency: Consistent application over time required
Materiality: Guided by financial materiality principles

Reconciliation Strategies

Common Approach

Use financial control as primary boundary approach for both NGER and AASB S2
Document differences where NGER operational control differs from financial control
Maintain consistent methodology across both frameworks where possible
Clear documentation of rationale for any differences

Practical Implementation

Data systems: Design to support both boundary requirements
Governance: Align approval processes for boundary decisions
Updates: Coordinate boundary changes across both frameworks
External assurance: Consider integrated assurance approach

Leased Assets and Outsourced Operations

Lease Accounting and GHG Boundaries

Operating Leases

Traditional Accounting: Lessor retains ownership and control
GHG Boundary: Assess operational vs. financial control
Common Treatment: Lessee includes if they have operational control
Examples: Office leases where tenant controls operations

Finance Leases (Capital Leases)

Traditional Accounting: Lessee recognizes asset and liability
GHG Boundary: Usually aligns with financial control to lessee
Common Treatment: Lessee includes 100% of emissions
Examples: Equipment leases with transfer of risks and benefits

AASB 16 Impact

New Standard: Most leases now on-balance sheet
GHG Implications: May support inclusion of more leased assets in boundary
Assessment Required: Evaluate operational control regardless of accounting treatment
Documentation: Clear rationale for boundary treatment required

Outsourced Operations

Service Provision

Boundary Decision: Based on degree of control retained
Key Factors: Specifications provided, performance standards, operational oversight
Typical Treatment: Exclude from organizational boundary, include in Scope 3
Examples: Outsourced logistics, contracted cleaning services

Facilities Management

Assessment Required: Degree of control over facilities and operations
Financial Control: Client usually retains financial control
Operational Control: May transfer to facilities manager
Practical Approach: Assess case-by-case based on contract terms

Manufacturing Outsourcing

Organizational Boundary: Usually excluded from client’s boundary
Scope 3 Treatment: Include as Category 1 (Purchased Goods and Services)
Quality Control: Client quality requirements don’t typically create operational control
Exception: Toll manufacturing with significant operational control

Consolidation for Complex Structures

Step-by-Step Consolidation Process

Step 1: Entity Identification

List all entities: Subsidiaries, joint ventures, partnerships, investments
Ownership percentages: Document ownership structure and voting rights
Control assessment: Evaluate financial and operational control
Legal structure: Consider legal form and jurisdictional requirements

Step 2: Boundary Application

Apply chosen approach: Consistently apply equity share, financial control, or operational control
Document rationale: Clear justification for inclusion/exclusion decisions
Special cases: Identify and address complex arrangements separately
Threshold application: Consider materiality thresholds for minor holdings

Step 3: Data Aggregation

Collect data: Gather emissions data from all entities within boundary
Apply percentages: For equity share approach, apply ownership percentages
Eliminate double-counting: Ensure no double-counting between entities
Quality assurance: Verify data consistency and completeness

Multi-Jurisdictional Considerations

Different Legal Systems

Corporate law differences: Consider how different jurisdictions define control
Reporting requirements: Align with local financial reporting requirements
Documentation: Maintain clear documentation for each jurisdiction
Expert advice: Consider local legal and accounting expertise

Currency and Reporting

Functional currency: Consider functional currency of different entities
Reporting currency: Convert to reporting currency consistently
Foreign operations: Apply boundary approach consistently across jurisdictions
Transfer pricing: Consider transfer pricing impacts on control assessment

Documentation and Governance

Required Documentation

Boundary Decision Documentation

Approach selection: Rationale for choosing equity share, financial control, or operational control
Entity assessment: Control assessment for each entity within group
Exclusion rationale: Justification for excluding entities or operations
Materiality assessment: Documentation of materiality considerations

Change Management

Change documentation: Record all boundary changes and rationale
Impact assessment: Quantify impact of boundary changes on emissions
Historical restatement: Restate historical data for consistency
Stakeholder communication: Communicate boundary changes to stakeholders

Governance Framework

Approval Process

Board oversight: Board or board committee approval for boundary approach
Management responsibility: Clear management accountability for boundary decisions
Expert input: Input from legal, accounting, and sustainability experts
Regular review: Periodic review of boundary decisions and approach

Quality Assurance

Internal review: Multi-level review of boundary decisions
External validation: External expert review of complex situations
Audit preparation: Documentation adequate for external assurance
Continuous improvement: Learn from boundary challenges and improve processes

Summary

Organizational boundary setting is a critical foundation for accurate GHG accounting and AASB S2 compliance:

Three main approaches (equity share, financial control, operational control) each with specific advantages
Complex structures require careful assessment of control relationships and contractual arrangements
NGER and AASB S2 alignment should be sought where practical, with clear documentation of differences
Leased assets and outsourcing require case-by-case assessment based on control criteria
Documentation and governance are essential for consistent application and external assurance

Proper boundary setting ensures that climate disclosures accurately reflect organizational responsibility and enable effective climate action.

Key Takeaways

✅ Three boundary approaches available with different advantages for different organizational structures ✅ Control assessment is critical for determining inclusion in organizational boundary ✅ NGER alignment should be sought where practical while meeting AASB S2 requirements ✅ Complex structures require detailed assessment of contractual arrangements and control relationships ✅ Documentation and governance are essential for consistent application and external assurance ✅ Regular review needed to ensure boundaries remain appropriate as organization evolves

Boundary Approach Decision Framework

Organizational Structure	Recommended Approach	Key Considerations
Traditional corporate group	Financial Control	Aligns with financial consolidation
Joint ventures (no dominant partner)	Equity Share	Reflects proportional responsibility
Operations management focus	Operational Control	Reflects management influence
Investment portfolio	Equity Share	Proportional to investment stake
Mixed/complex structures	Case-by-case assessment	Document rationale clearly

Practical Exercise

Boundary Assessment: For your organization or a complex case study:

Map organizational structure including all subsidiaries, joint ventures, and partnerships
Assess control relationships for each entity using financial and operational control criteria
Apply boundary approach consistently across all entities
Identify boundary differences between NGER and AASB S2 if applicable
Document rationale for inclusion/exclusion decisions
Plan governance process for ongoing boundary management and approvals

Focus on creating clear, defensible boundary decisions that can be consistently applied and externally assured.