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Accounting for Carbon Credits!

Published on Thu, Feb 23,2012 | 15:55, Updated at Mon, Feb 27 at 11:29Source : 

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 ¡¥Framework¡¦, an asset is recognised in the balance sheet when it is probable that the future economic benefits associated with it will flow to the enterprise and the asset has a cost or value that can be measured reliably.


The market for CERs is relatively new. Hence, the future economic benefits may not always be assured. Therefore, an entity needs to make an assessment for the probability of future economic benefits and, if there is a probable market for the self-generated CERs ensuring flow of economic benefits in the future, CERs should be recognised

Reliable measurement

There are certain costs which are incurred to generate CERs, and therefore the cost of CERs can be measured reliably (see the caption 'Measurement of CER' below).

CER is inventory

CERs are generated and held for of sale in the ordinary course of business. Hence, though intangible in nature, CERs are inventories, and, should be accounted for in accordance with Accounting Standard (AS) 2, Valuation of Inventories.  

Measurement of CER

- Under AS 2, CERs should be valued at the lower of cost and net realisable value ('NRV'). 
- The costs incurred by the generating entity for certification of CERs are the costs of inventories of CERs. Such costs include cash payment to UNFCCC by way of levy as well as consultant fee. There is another levy by UNFCCC in the form of deduction of a certain percentage of CERs. This is a levy in kind which goes to increase per unit cost of CERs.
- R & D costs should be accounted in accordance with AS 26 Intangible Assets.
- Costs incurred for preparation of project design document and registration of CDM project with UNFCCC cannot be inventorised.
- NRV is determined as per AS 2.

Sale of CERs

AS 9, Revenue Recognition, should be applied for recognition of revenue from sale of CERs.

Underlying assets related to CERs

„« Intangible assets are accounted under AS 26.
„« Pollution control/emission reduction devices installed by the generating entity for the purpose of generating CERs are fixed assets. Such equipments should be accounted for as per AS 10 (Revised) Tangible Fixed Assets, which is under formulation.

Presentation of CERs

CERs should be presented as part of inventories in the balance sheet  separately from other categories of inventories such as Raw Materials, W-I-P, Finished goods and others.

Disclosure of CERs

The following information should be disclosed in the financial statements:

- Number. of CERs held as inventory and the basis of valuation.
- Number of CERs under certification.
- Depreciation and operating and maintenance costs of Emission Reduction equipment expensed during the year.


On first-time application of the GN, CERs earned as on that date should be recognised in the financial statements with corresponding credit to revenue reserves.


The GN deals with CERs under CDM only since JI and IET mechanisms are not relevant in the Indian context. However, an Indian holding company may have subsidiaries in developed countries. Hence, guidance is required for JI and IET situations also for preparation of consolidated financial statements of the Indian holding company.

What the GN means for Indian entities

Indian entities earning and selling CERs under CDM should recognise CERs as inventory only on receipt of communication of credit of CERs from UNFCCC, provided there is a probable market for such CERs. The cost of such CERs should consist of only cost of certification of CERs (which includes cash levy by the UNFCCC and consultant fee). NRV should be determined as per AS 2. Revenue recognition should be as per AS 9. Presentation and disclosure requirements of the GN should be kept in mind.

IFRS implications

There is no pronouncement in IFRS corresponding to the GN. Previously, IFRIC 3, Emission Rights, (issued in December 2004) dealt with accounting by participants in a ¡¥cap and trade¡¦ scheme. Due to certain perceived problems, IFRIC 3 was withdrawn in 2005. The International Accounting Standards Board is yet to reopen discussions on this project.


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