ICAI has already issued Guidance Note on Accounting for Self Generated CER’s & it is made effective from 01st July, 2009. It mainly focuses on recognition of CER’s in financial statements. Here, we’ll discuss about five major issues related to CER’s -
Issues to be taken care of –
Issue 1 - Whether CER’s are Assets ?
Issue 2 - When to recognize CER’s as an Asset ?
Issue 3 - How to recognize CER’s in Financial Statements
Issue 4 - What type of Asset is a CER ?
Issue 5 - Measurement of CER’s
Recognition of Self Generated CER’s
Issue 1 – Whether CER’s are Assets ? - YES
- It is a resource controlled by entity
- As a result of past event (I.e. Implementation of CDM technology & reducing the carbon emissions)
- Future Economic Benefits are expected to flow to entity (CER’s, if granted, can be sold for a price)
- In the current year OR future years (CER’s will continue to generate till course of project)
Issue 2 – When to recognize CER’s as an Asset ?
It is to be noted that issuance of CER’s is subject to verification process. If no request for review is received within the period of 15 days of hosting the request for certification of CER’s on UNFCCC Website, they are automatically credited by UNFCCC to generating entity.
Therefore, their exist the two stages for recognition of CER’s –
Stage 1 – Period up to CER’s are issued to generating entity –
……..to be treated as Contingent Asset*.
(Because, while reducing Carbon emissions, entity become eligible to receive CER’s from UNFCCC but, whether CER will actually arise or not depends upon future certification of same by UNFCCC)
(*As per AS 29 – Contingent Asset is defined as a possible asset that arises from past events, the existence of which will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the enterprise.)
Stage 2 – When CER’s are actually issued to entity
CER’s are recognized as an Asset as it meets the definition criteria of Asset at this stage only. I.e.
1. Now CER become resource controlled by entity
2. It leads to future economic benefits in form of cash
& cash equivalents on future sale of CERs – Absolute certainty.
Issue 3– How to recognize CER’s in Financial Statements
As per Para 88 of Framework for the preparation & presentation of FS” –
Asset is to be recognized in Financial Statements if
- Probable that future economic benefits (F.E.B.) will flow to entity (Unconditionally) – As the market of CER’s is relatively new, F.E.B.s are always not assured. Therefore, it all depends upon probability (reasonable assurance) that FEB will generate to entity in coming future.
- Asset has a cost or value, which can me measured reliably. – Certain Costs are incurred to generate CER’s which is reliably measurable. Also, Value of CER’s could be certainly measurable.
Issue 4 – What type of Asset is a CER ?
As per AS 26 – An Intangible asset is an identifiable non monetary asset, without physical substance, held for use in the production or supply of goods & services, for rental to others or for administrative purposes”
As per AS 2 – Inventories are asset held for sale in ordinary course of business or in process of production for such sale or in the form of materials / supplies to be consumed in the production process or in rendering of services.
Although the CER’s are not in physical forms, they doesn’t met the criteria of being an intangible asset as the CER’s are held for sale in normal course of business. They are not held for use in production or supply of goods or services.
Therefore, even though CER’s are intangible in nature, they should be accounted for as per requirements of AS 2.
Issue 5 – Measurement of CER’s
As per AS 2 – Inventory should be valued at
1. Cost, or
2. Net Realizable Value (NRV), whichever is less.
Cost of CER’s –
Cost = Cost of Purchase + Cost of Conversion + Other Costs incurred to bring the inventory to present location & condition.
Various costs are incurred by the generating entity to set up a CDM project activity, operate the CDM project and generate CERs. , such as –
- Research costs arising from exploring alternative ways to reduce emissions;
- Costs incurred in developing the selected alternative as a process/device to
- Costs incurred to prepare the Project Design Documents;
- Fees paid to DOEs for validation and verification and to the National Authority for Approval;
- Fees of registering with UNFCCC;
- Costs incurred for monitoring the reductions of emissions;
- Costs incurred for certification of CERs; and
- Operating costs incurred to run the CDM project.
However, all those costs are not inventorised.
Type of Costs
1 + 2
Pre Implementation Cost & \ treated as per AS 26 – Intangible Assets viz. Research & Development Costs
3 + 4 + 5 + 6
To be expensed (Can’t be inventorized as they are not incurred in relation to bringing CER to current location & condition.
TREATED AS PER AS-2 i.e. Cost incurred to bring the CER into existence
To be expensed
Apart from these costs, entities also incurrs following costs –
- Levies imposed by UNFCCC for meeting Admin cost
- Consultation fees paid for getting certification of CER’s
Both of these costs should form the part of “Cost of CER’s”
Generally, UNFCCC imposes 2 types of levies –
1. LEVY I - Specified Percentage of CER’s earned (In Kind) –
These are deducted at time of issuance of CER’s. E.g. If Levy is 2%, then if 1000 CER’s are to be
issued, only 980 CER’s will be issued, thereby deducting 20 CER’s as Admin fees of UNFCCC.
(Effect on Cost of CER- This deduction would indirectly increase the unit cost of each CER’s
issued to entity. )
2. Levy II - In form of Cash Payment –
It is in form of fixed payment per unit of CER. E.g. if Levy is @ USD 0.10 per CER to be issued,
then in previous example, levy would be USD 98 for 980 CER’s credited.
(Effect on Cost of CER - This cost will be part of “Cost of CER’s”)
Finally, Cost of CER =
Cost incurred for certification of CER’s + Levy imposed by UNFCCC in Cash payment + Consultation fees paid for getting CER’s certified
Net CER’s credited to entity (I.e. after deduction of first levy in Kind)
Net Realizable Value of CER’s –
“It is the estimated selling price in the ordinary course of business less the estimated costs of completion & the estimated costs necessary to make the sale.”
It is based on most reliable evidence available at the time of estimates are made I.e the amount, inventories are expected to realize in near future, after considering the events occurring after the balance sheet date such as fluctuation in price, etc.
Recognition of Sale of CER’s
No treatment has been prescribed for sale of CER’s in Guidance Note. Some of the general practice adopted in India are –
a) Income from sale of CERs is recognized upon execution of a firm sale contract for the eligible credits, as prior to that there is no certainty of the amount to be realized;
b) Income from CERs is recognized at estimated realizable value on their confirmation by the authorities concerned; and
Recognition of Assets acquired for generating CER’s
For the generation of CER’s, Entities may develop certain asset (Intangible or Tangible). These are to be accounted for as follows –
- Intangible Asset – Such as Research & Development costs, if met the recognition criteria, have to be accounted for as per AS 26.
2. Tangible Asset – As part of CDM technology, entity may incur expenditure on equipments to
control carbon emissions. These need to be capitalized as per AS 10. E.g. Pollution Control Devices, Boilers, etc
(For the purposes of Impairment of Tangible Asset, AS 28 is to be applied)
Treatment of Depreciation on Tangible Fixed Asset acquired as a part of CDM –
- Not to be included in Cost of principal product, entity is producing because they do not
contribute to bring inventory to current location & condition.
- Not to be included in Cost of CER’s as these are incurred much before the stage of CER’s
come into existence.
- THEREFORE – EXPENSED IN P&L A/C of period to which it relates.
Some of the loopholes in GN
Treatment prescribed in Guidance Note has resulted in significant mismatch as to cost & revenues, as –
- Most of the cost incurred (as specified earlier) are expensed as soon as they are incurred. Therefore, it will distort the financial statements of the year in which CDM is implemented.
- Inventories of CER’s are shown at very insignificant amount
- No reference has been made for accounting treatment on sale of CER’s
- No Accounting Treatment prescribed for outright purchase of CER’s (Only Self Generated CER’s are dealt with)
- No Treatment specified for subsidies recd. from state Govt. for setting up CDM Projects in Backward Areas.
CONTRADICTORY TREATMENT as compared to IAS/IFRS/US GAAP
It is to be noted that the IASB is still debating on an appropriate treatment for Carbon Emission Reductions (CERs). Under the IFRS, the IASB had issued an interpretation IFRIC 3 (Emission Rights), which was withdrawn in June 2005. Thereafter, No specific guidelines have been issued on the same.
As a general practice –
Entities generating CER’s are treating the same as Government Grants as per IAS 20* (Accounting for Govt. Grants & Disclosure of Govt. Assistance) as they are granted by International Agency (UNFCCC).
*As per IAS 20 – Grants are to be recognized if there is reasonable certainty that the grant will be collected & the enterprise would comply with the terms & conditions.
Measurement of Grants as per IAS 20 –
- It gives an option to measure such grants either at fair value OR nominal value.
- Most entities are measuring the CERs at fair value to ensure appropriate matching with the
costs incurred, as these grants are recognized in the income statement in the same period as the
related cost which the grant is intended to compensate is charged.
- These CER’s are accounted for in financial statements by a corresponding debit made to Intangible Asset as per IAS 38* (Intangible Assets)
*As per IAS 38 – Intangibles are identifiable non monetary assets without physical existence. An
asset must be able to save cost or generate revenue in future or a combination of both.
(CARE IS TO BE TAKEN AFTER TRANSITION TO IFRS w.e.f. Accounting period starting from April 1st, 2011. Issue of Guidance Note contrary to IAS/IFRS is merely duplication of work)
Bird’s Eye view of Differences –
As per IAS / IFRS
As per GN issued by ICAI
Reasonable Certainty is enough
Absolute Certainty is must
Treated as INTANGIBLE ASSET
Treated as INVENTORY
Corresponding Credit is made to Govt. Grants & treated as income of the period by matching the costs incurred in that period
No such method is prescribed. Income is treated only on Sale of CER’s
Till Yet, No specific provisions have been introduced in Direct or any of the Indirect Taxes in India -
Applicability of Direct Taxation-
Income Tax Act, 1961 –
No Specific provisions related to Income on sale of Carbon Credits have been prescribed in act.
However, as per the guidelines issued in GN by ICAI related to accounting norms, it seems to be taxable as normal Business Income.
Depreciation on CDM Devices -
- Specified plants and machinery (Energy Saving Devices, renewal energy devices, etc) in the renewable energy sector are entitled to an accelerated depreciation of 80%. A similar benefit could be extended to machinery employed in clean technologies.
- Some of the Plant & Machinery included in CDM are 100% allowable as depreciation such as Air Pollution control Devices, Solid Waste Control Equipments, etc.
Expectations from Govt. of India –
- Sale of Carbon credit should be taxed as Income from other sources & should not be clubbed with Business Income. Further, it should not form the part of Turnover.
- It should be taxable at special (minimum) rate as may be prescribed. Because, higher rate of taxation may discourage proponents to enter into Carbon market & this will indirectly leads to less forex earnings / GDP Growth in India.
- Had it been treated as per IAS / IFRS, it would be taxable as Income from Capital gains as CER’s would be treated as Intangible asset in that case. Again, special rate of tax must be prescribed.
- The tax holiday available to undertakings engaged in collecting and processing biodegradable wastes for a period of 5 years could be increased to 10 years. Similar provisions could be extended to entities engaged in other types of renewable energy.
- The Income-tax Act provides exemption from tax including minimum alternative tax to a venture capital fund/ company on income derived from investments in venture capital undertakings. The exemption could be extended to include investments by venture capital undertakings in the renewable energy sector.
Applicability of Indirect Taxation-
Before analyzing the applicability of Indirect taxation, a question arises as to -
Q 1. Whether CER is a type of “good” or a type of “service” ?
Q 2. Whether the sale of CERs to overseas buyers would qualify as export of goods or services ?
If treated as Goods - VAT
(It is expected from Govt. to either exclude it from the purview of VAT or they should be
specified in the schedule of Exempted Goods)
If treated as Service - Service Tax
(It is expected from Govt. to either exclude it from the purview of Service Tax or they should be
specified in the schedule of Exempted Services)
Expectation from Govt.-
In order to promote renewable energy projects,
1. Service tax could be exempted for input services necessary for setting up as well as operation of
2. Excise Duty/ Customs Duty could be exempted for input goods necessary for setting up as well
as operation of CDM projects.