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Introduction
History
Flexibility Mechanisms
Carbon credits are earned and traded under three mechanisms specified by
the protocol - Joint Implementation (JI), Clean Development Mechanism
(CDM) and International Emission Trading.
Under JI, a developed country with a relatively high cost of domestic GHG
reduction project can setup a project in another developed country that has
a relatively low cost and earn carbon credits that may be applied to their
emission targets.
a. Reducing emissions below the level that would have occurred in the
absence of the project
b. Demonstrating that a project would not have occurred without the
additional incentive provided by the emission reduction credit
c. Obtaining certification of actual emission reduction from an
independent authority
Under IET, developed countries with emission reduction targets can simply
trade in the international carbon credit market. This implies that entities of
developed countries exceeding their emission limits can buy carbon credits
from those whose actual emissions are below their set limits
The accounting issues and the consequent account treatment involved in the
three different mechanisms mentioned above may be different. However,
since India is a non Annex 1 country, the carbon credits or CER’s generated
from CDM is only relevant . The ICAI, had issued a draft guidance note on”
Accounting for Self Generated Certified Emission Reductions (CER’s) “ in
2009 to provide guidance on matters of applying accounting principles
relating to recognition , measurement and disclosure of CER’s generated by
the entity under CDM . The final approved guidance note is yet to be issued
and hence, the accounting procedures discussed below is based on the
exposure draft.
Recognition of CER’s
Though CERs are non-monetary assets without a physical form, they do not
strictly fall within the definition of ‘intangible asset’ as per AS 26. The reason
is that CERs are not held for use in the production or supply of goods or
services, and neither are CERs used for administrative purposes nor are they
used for the purpose of renting to others. Instead, CERs generated by the
generating entity are held for the purpose of sale.
It may be mentioned that though the definition of ‘intangible asset’ does not
mention assets held for sale, the other requirements of AS 26(Refer Para 44
of AS 26 ) , indicate that intangible assets include assets which are
developed by an entity for sale . However , AS 26 specifically scopes out
those intangible assets from its purview if they are specifically dealt with by
another accounting standards .
Since Intangible assets held for sale in the ordinary course of business comes
under the purview of the definition of inventories under AS -2 , the exposure
draft requires CER’s to be recognized as inventories in the financial
statement in accordance with the requirements of AS 2 . Consequently , they
are measured at the lower of cost or net realizable value .
Cost
However , it is important to note that , since these plant and equipments are
erected for the purpose of generating CER’s , the depreciation of such
devices should not be included in the cost of the inventory of the principal
products of the generating entity as they do not contribute to bringing the
inventory of the principal products to their present location and condition.
Only the costs incurred for the certification of CERs by UNFCCC is considered
to bring the CERs into existence and accordingly is treated as the cost of
inventory. The cost of certification includes
a. Levy by UNFCCC :- Two types of levies are imposed . The first type of
levy is in kind whereby a specified percentage of the CERs earned are
deducted at the point of issuance by the UNFCCC. This increases the
per unit cost of CER . The second type of levy imposed is in the form of
a cash payment which is charged by the UNFCCC towards meeting its
administration costs.
“Estimates of net realisable value are based on the most reliable evidence
available at the time the estimates are made as to the amount the
inventories are expected to realise. These estimates take into consideration
fluctuations of price or cost directly relating to events occurring after the
balance sheet date to the extent that such events confirm the conditions
existing at the balance sheet date”
Revenue Recognition
Revenue from sale of CER’s is disclosed as income in the profit and loss
account , provided the revenue recognition criteria as per AS 9 is satisfied
Emission caps on units abroad
The Exposure draft does not cover Accounting for emission caps when Indian
entities have a factory / unit in Annex 1 countries. In such situations the
branch / factory may have to ‘cap’ their emission levels depending upon the
regulatory requirements in such countries . Currently under IFRS different
approaches are followed to account for emission caps such as the IFRIC 3
approach , the net liability approach and the Government Grant approach.
The Accounting treatmeant under each of the three approaches can be
summarised as under:-
Introduction
Conclusion