Due to increase in effect of green house gases (GHGs) Kyoto protocol is introduced in February, 2005, which sets limits to the maximum amount of emission of GHGs by countries. This protocol is applicable only on developed countries. This protocol provides three market based mechanisms –Joint implementation (JI), Clean Development mechanisms (CDM) and International Emission Trading (IET), to meet their emissions of GHGs. In India only CDM approach is applicable. As per this Protocol one Carbon Credit represents one metric tone carbon dioxide equivalent. But in accounting of CERs various issues are involved such as whether it is assets or not, when does CER should be recognized, what type of assets is a CER, at what cost CER should be measured etc.
Whether it is assets or not – CERs is an asset because it qualifies definition of Assets given in ‘Framework for the preparation and Presentation of Financial Statements’, issued by the Institute of Chartered Accountants of India which is as follows:
“An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.”
However it is considered assets only after successful registration under United Nations framework convention on climate change (UNFCCC), before registration it is treated only as expenses.
When does CER should be recognized – After a successful registration when CER become an asset then it should be recognized in books of accounts because as per paragraph 88 of the framework, the criteria for recognition of an asset are as follows:
An asset is recognized 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.”
What type of assets is a CER – Keeping in view the non-physical form of CERs, the definition of ‘intangible asset’, as per Accounting Standard (AS) 26, Intangible Assets, is noted as follows:
“An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.”
However 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. However, it may be mentioned that though the definition of ‘intangible asset’ does not mention assets held for sale, the other requirements of AS 26, such as the following, indicate that intangible assets include assets which are developed by an entity for sale:
“44. an intangible asset arising from development (or from the development phase of an internal project) should be recognised if, and only if, an enterprise can demonstrate all of the following:
(a) the technical feasibility of completing the intangible asset so that it will be available for use or sale;
(b) its intention to complete the intangible asset and use or sell it;
(c) its ability to use or sell the intangible assets;
(e) the availability of adequate technical, financial and other resources to complete the development and use or sell the intangible asset; and
(f) …” [Emphasis supplied]
Since CERs not fall with in the scope of intangible assets therefore it does not recognized as intangible assets. But it can be recorded as inventory as per Accounting Standard (AS) 2, Valuation of Inventories because as AS 2
“Inventories are assets
(a) held for sale in the ordinary course of business;
(b) in the process of production for such sale;
(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.”
At what cost CER should be measured – Since CERs qualifies definition of inventory it should be measured at cost or NRV which ever is lower.
To summarize the accounting treatment of CERs, all cost before registration should be treated as expenses and after registration it should be treated as inventory.