Accounting for wind power

By Wenda Lynn M. Loyola

(Second of two parts)

First Published in Business World (3/11/2013)

In last week’s article, we discussed how wind energy is becoming of increasing importance in the global energy sector. We also looked at how the Philippine wind power industry, with its significant potential to generate clean power for our country’s needs, is seen as a strong growth and investment area. However, it is necessary for plant owners and developers to have a solid understanding of how to account for their wind power operations in accordance with Philippine Financial Reporting Standards (PFRS).

Property, Plant and Equipment
Property, plant and equipment (PPE) usually comprise the biggest asset account on the balance sheet of most plant owners and project developers, since most aspects of the wind power industry are capital intensive. Most companies build a wind farm with several wind turbines. The power produced by wind turbines is then sold to the power grid.

PPE is accounted for in accordance with PAS 16, Property, Plant and Equipment. Assets are generally recognized initially at cost, which includes all expenditures directly attributable to bringing the asset to the location and to the necessary condition for its intended use.

Depreciation of wind turbines and sale of electricity during the commissioning period are also important areas to consider.

Depreciation for a wind turbine starts when the asset is capable of operating in the manner intended by management. If any of the wind turbines is individually capable of generating power, depreciation should start even if other wind turbines are still under construction.

The sale of energy from wind turbines prior to the completion of the entire wind farm would still be recognized as revenue. The output is not simply sample production or machine testing necessary to bring the asset itself to the location and condition necessary for it to be capable of operating in the manner intended by management. Therefore, capitalization ceases when the asset is operational (e.g., energy is produced and is capable of being sold through the power grid), regardless of profitability or production levels. As such, any income from energy sold after the point capitalization ceases is presented as revenue.

Carbon Credits
Aside from the revenue generated from sale of power, RE plant owners and developers need to consider the potential revenue they may derive from the sale of carbon credits.

The Kyoto Protocol, an international agreement linked to the United Nations Framework Convention on Climate Change, requires all member states of the United Nations to reduce carbon emissions as an additional precaution against the worsening level of global warming. The Protocol provides for mechanisms to enable countries to reduce their emissions. One such mechanism is the carbon credits or emissions permits trading.

Carbon credit, also known as emission permit, allows the holder to emit a specified amount of greenhouse gases. One carbon credit is equivalent to one ton of carbon dioxide.

Specifically, wind power does not emit harmful greenhouse gases. Each MW of wind power produced by the wind farm offsets certain amounts of carbon dioxide. The greenhouse gas emission reduced as a result of using wind power is measured per ton of carbon dioxide, and a certificate called a carbon emission reduction (CER) is issued for each unit. This certificate can be sold to industrialized countries whose operators have difficulty in meeting the carbon emission targets.

The features of carbon credits do vary such that the terms and conditions attached to them often result in a broad range of accounting issues. The revenue from carbon credits is calculated by the amount of carbon emission that would have been emitted had fossil fuel or other polluting power generator been used to produce the same MW of power. There are various methodologies used in measuring and verifying the emission reduction factor. One of the methods to calculate the carbon reduction emission may be based on the generation-weighted average emission factor of all facilities generating RE, multiplied by the amount of electricity generated by the company’s wind power plant during the year.

Revenue from the sale of carbon credits can be recognized on an accrual basis when verification and certification processes have been completed. More importantly, the important criteria of PAS 18, Revenue, should have been met, namely: that the economic benefits associated with the transaction will flow to the company and such economic benefits can be estimated reliably. PFRS currently does not have any specific guidance on accounting for revenue from carbon credits.

Since diverse accounting practices are applied, management’s judgment plays a crucial role in determining the appropriate treatment of assets, revenue and expenses of wind power companies. There are also a number of ongoing financial accounting projects being undertaken by the International Accounting Standards Board the finalization of which may have significant impact on RE developers as a whole and on carbon credits in particular. Companies in the wind power industry must always consider these developments carefully before making final decisions on wind energy projects.

Wenda Lynn M. Loyola is a Senior Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.