Accounting for Carbon Credits!

By: P R Ramesh, Chairman, Deloitte Haskins & Sells

Under the Kyoto Protocol, at present, developed countries have emission reduction targets. Such countries can meet their emission reduction targets through three market-based mechanisms viz. Joint Implementation (JI), Clean Development Mechanism (CDM), and International Emission Trading (IET). The CDM gives opportunities to entities in developing/least developed countries, which are not bound by Kyoto Protocol, to earn revenue by trading in carbon credits. This is possible by setting up CDM projects (e.g., installation of a waste heat boiler) which reduce Green House Gas emissions, thereby generating Certified Emission Reductions ('CERs') which can be sold to entities in developed countries to meet their emission reduction targets. Such CERs will be awarded only by the United Nations Framework Convention on Climate Change (UNFCCC). At present, India is not bound by Kyoto Protocol. Indian entities can set up CDM projects, earn CERs and earn revenue by selling CERs to entities in developed countries. Recently, ICAI has issued a Guidance Note (the 'GN') on Accounting for Self-generated Certified Emission Reductions. The GN is applicable for accounting periods beginning on or after April 1, 2012.

What the Guidance Note deals with

The GN gives guidance for applying accounting principles relating to recognition, measurement and disclosures of CERs generated by the entity that has obtained the same under the CDM.

This Guidance Note does not:

- address the accounting issues involved in carbon credits under JI and IET 
- deal with purchased CERs or with the use of CERs in own business.

When CER qualifies as an asset

As per Framework for the Preparation and Presentation of Financial Statements (the 'Framework') issued by ICAI, an asset is a 'resource controlled by the enterprise as a result of past events from which future economic benefits are expected to the flow to the enterprise'.  Various stages are involved in getting the CER. CER comes into existence and meets the definition of an asset only when the communication of credit of CERs is received by the generating entity. This is because only at this stage the CER becomes a resource controlled by the generating entity and, therefore, leads to expected future economic benefits which would arise on the future sale of CERs.

When CER can be recognised as an asset

As per the