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ICAI - Accounting norms from July 1
June, 13th 2009

Accounting guidelines on carbon credits will come into force from July 1. "The Council of the Institute of Chartered Accountants of India (ICAI) has scheduled a meeting between June 18-20 to approve the accounting guidelines on carbon credits,'' S Santhana Krishnan, chairman, Accounting Standards Board, ICAI, told TOI. Krishnan said that the guidelines will be made applicable to companies with effect from July 1.

This means, corporates will have to account for their issued carbon credits, as well as carbon credits which they may have sold in the current financial year, in the September quarter results.

For the current financial year, companies will have to account for carbon credits sold or issued to them by the United Nations Framework Convention on Climate Change (UNFCCC) from April 1 this year.

The core group, which framed the draft guidance note on the accounting guidelines, has concluded that carbon credits are "intangible assets'' and they need to be treated as "inventory'' in the balancesheet till they are sold. TOI had reported this in its edition dated January 7, 2009.

Under UNFCCC's clean development mechanism (CDM), a developed country can take up a greenhouse gas (GHG) reduction project activity in a developing country where the cost of GHG reduction is usually much lower and the developed country would be given carbon credits for meeting its emission reduction targets.

The unit associated with CDM is certified emission reduction (CER)__which are generally termed carbon credits where one CER is equal to one metric tonne of carbon dioxide equivalent.

"With large number of entities in India generating carbon credits and the carbon credits being a relatively new area, a need was felt to provide accounting guidance in this area,'' the guidance note states.

It provides guidance on matters of applying accounting principles relating to recognition, measurement and disclosures of CERs generated by the entity that has obtained the same under the CDM.

The note classifies CERs as `assets' of the generating entity. However, since issuance of CERs is subject to the verification process under the UNFCCC, CERs can be treated as contingent assets, only after it comes into existence, i.e. after the entity has been issued CERs by the UNFCCC. After this, CERs can be recognised in the financial statements.

"As the market for CERs is relatively new, the future economic benefits may not always be assured. Thus, an entity needs to make as assessment for the probable market for the CERs ensuring flow of economic benefits in the future, CERs should be recognised,'' the note states.

India has around 35 million annual CERs under way from registered projects, of which, a large pool remains unsold.

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