Under IFRS, the International Accounting Standards Board (IASB)
had issued an interpretation IFRIC 3 Emission Rights, which was withdrawn
in June 2005. Thus, the IASB is still debating on an appropriate treatment for
CERs (Carbon Emission Reduction). Under IFRS most entities generating CERs
treat the same as government grant covered under IAS 20 Accounting
for Government Grants and Disclosure of Government Assistance. This is
because an international agency grants the same. Accordingly, based on IAS 20
requirements, a generating entity recognises CERs as asset once there is a
reasonable assurance that it will comply with conditions attached and CERs will
be received.
IAS 20 gives an option to measure such grant either at
fair value or nominal value. Most entities will measure the CERs at fair
value to ensure appropriate matching with the costs incurred. They will
recognise the same in the income statement in the same period as the related
cost which the grant is intended to compensate. The corresponding debit will
be to intangible assets in accordance with IAS 38 Intangible Assets.
No guidance is currently available under Indian GAAP;
consequently various practices exist (a) income from sale of CERs is recognised
upon execution of a firm sale contract for the eligible credits, since prior to
that there is no certainty of the amount to be realised (b) income from CERs is
recognised at estimated realisable value on their confirmation by the concerned
authorities (c) income from CER is recognised on an entitlement basis based on
reasonable certainty after making adjustments for expected deductions.
The Accounting Standards Board (ASB) of the Institute of
Chartered Accountants of India (ICAI) has issued an Exposure Draft (ED) of the
Guidance Note on Accounting for Self-generated Certified Emission Reductions.
The ED proposes to lay down the manner of applying accounting principles to CERs
generated by an entity.
As per the ED the generating entity should recognise CERs as
asset only after receipt of communication for credit from UNFCCC and provided it
is probable that future benefits associated with CERs will flow to the entity
and costs to generate CERs can be measured reliably. Further, such assets meet
the definition of the term ‘inventory’ given under AS-2 Valuation of
Inventories and hence are valued at lower of cost and net realisable value.
Only the costs incurred for the certification of CERs bring the CERs into
existence and, therefore, only those costs should be included in the cost of
inventory. All other costs are either not directly relevant in bringing the
inventory to its present location and condition or they are incurred before CERs
come into existence as per the prescribed criteria. Thus, those costs cannot be
inventorised.
The ED will result in significant cost and revenue
mismatch in the financial statements. This is because entities would need to
expense most of their costs as soon as incurred (with an insignificant amount
being capitalised as inventory), but will recognise revenue arising from CERs
only when these are actually sold. Clearly the accounting recommended by the
ICAI is very different from existing practices under Indian GAAP, and hence
every company that has significant revenue from carbon credits will have to
consider the impact of the ED very carefully.
The treatment prescribed in the ED appears to be inconsistent
with the existing Indian GAAP literature in more than one regard. The ED
requirement to recognise CERs as asset only when these are credited by UNFCCC in
a manner to be unconditionally available is contrary to the principles currently
followed for recognition of an asset. In most cases, recognition of an asset is
based on criteria of probability/reasonable assurance as against absolute
certainty prescribed in ED. For example, both under AS-9 Revenue Recognition
and AS-12 Accounting for Government Grants, recognition of income is
based on the criteria of reasonable assurance.
The ED is also inconsistent with an Expert Advisory
Committee’s (EAC) opinion on export incentives. As per the EAC opinion DEPB
credit should be recognised in the year in which the export was made, without
waiting for its actual credit in the subsequent year, provided there are no
insignificant uncertainties of ultimate collection. The EAC opinion is based on
the application of the existing accounting principles, including definition of
the term ‘asset’ given in the Framework, which is based on the
probability theory.
In the authors view, the ED should not have been issued since
it clearly conflicts with the existing requirement and practices under both
Indian GAAP and IFRS and is contrary to the definition of an asset in the
Framework. As India is adopting IFRS and the guidance in these areas is
being developed under IFRS, issuing India-specific guidance is duplicating the
effort and creating more differences in how the 2 GAAPs are applied, which will
have to be then taken care of in 2011, which is the transition date for adopting
IFRS.
