Cleantech Matters IFRS for the wind industry July 2012

Cleantech Matters IFRS for the wind industryJuly 2012

Applying IFRS in the wind industry

ForewordWind energy is playing an increasingly important role in global and national energy markets. Governments around the world have announced strategic plans to embrace clean technologies as part of their long-term objectives. These objectives include job creation, the establishment of new innovation-based industries, enhancing energy security and meeting climate change and environmental goals. Diverse recent events like the natural disaster in Japan and the political instability in the Middle East provide further reasons for businesses to seek cleantech solutions to address such concerns. Nevertheless, the path of this cleantech-driven transformation is not a smooth one, for it aims to remake the world’s energy infrastructure and affects a wide range of interest groups.

As the rate of transformation accelerates, global corporations across many industries are increasingly realising that they must understand the impact of cleantech and develop strategic action plans. We have seen a variety of pure-play cleantech market �� in this development. For the players in the wind industry, this means challenges ahead that may lead to a wide variety of IFRS accounting issues.

This publication is intended to help you identify and address accounting issues relevant to the wind industry. It provides insights on common IFRS issues that may impact your business.

Furthermore, we aim to draw your attention to potentially unforeseen accounting consequences that will require careful consideration when planning prospective transactions and arrangements for your business.

We present several of the key issues facing many wind companies in a Q&A format and discuss our views on the related IFRS solutions. The sample fact patterns included �� business will need to exercise judgement to determine its own appropriate accounting solution. The IFRS solutions presented are based on IFRS effective as of 31 March 2012. We invite you to discuss further issues with us and welcome any thoughts that you may have on this publication.

The International Accounting Standards Board (IASB) has a number of projects currently underway, as well as standards that were issued in 2011, but are not yet �� therefore, some of the areas addressed in this publication (e.g., revenue recognition, �� !�� "��to affect the guidance presented herein, and the status of those projects should be ��"��

Olaf Boelsems Ernst & Young EMEIA Cleantech IFRS Leader

Cleantech matters IFRS for the wind industry 1

Contents

1. Issues for manufacturers 2

1.1 Sales arrangements 2

1.1.1 Bundled offers/multiple element arrangements 3

1.1.2 Sale of wind turbines — pattern of revenue recognition 4

1.1.3 Long-term warranty arrangements 6

1.1.4 Advance consideration 10

1.2 Embedded derivatives 12

2. Issues for plant owners and project developers 16

2.1 Acquisitions — business combinations vs asset purchases 16

2.2 Wind farms 17

2.2.1 Depreciation of wind turbines and sale of output during the commissioning period

17

2.2.2 #�$�� 18

2.3 Leases 20

2.3.1 Wind turbine lease arrangements 21

2.3.2 Long-term output arrangements 22

2.4 Capitalisation of borrowing costs 23

2.5 Contingent (acquisition) costs for wind energy plant 24

2.6 Green certificates and emission reduction programs 25

Cleantech leadership network 26

Resources 28

2 Cleantech matters IFRS for the wind industry

1.1 Sales arrangements

Revenue recognition is a key issue for manufacturers in the wind energy industry. Manufacturers of wind turbines have been looking for ways to grow their revenues beyond selling wind turbines. One response is to offer bundled arrangements that combine the sale of assets (e.g., wind turbines) with service components related to the assets being sold.

IAS 18 Revenue�� order to recognise revenue from the sale of goods:

1. !�� "��ownership of the goods to the buyer

2. The entity retains neither continuing managerial involvement to the degree usually associated with ownership, nor effective control over the goods sold

3. The amount of revenue can be measured reliably

4. % �� '��

5. The costs incurred or to be incurred in respect of the transaction can be measured reliably

IAS 18 views the passing of risks and rewards as the most crucial �� % �� "��of ownership are transferred from the seller to the buyer and any �� * �� are removed. The assessment is based on the individual terms and conditions of the contract, which will require judgement to be exercised.

When the selling price includes an amount for subsequent servicing that is assessed as a separate element, that amount is deferred and recognised as revenue over the period during which that service is performed. For example, a separately priced warranty extension might represent a service that could give rise to a separate revenue stream.

Revenue from services is recognised when the outcome of the transaction involving the rendering of services can be estimated reliably. Revenue is then recognised “by reference to the stage of completion of the transaction at the end of the reporting period” (e.g., using the percentage-of-completion method). In applying the percentage-of-completion method, the requirements of IAS 11 Construction Contracts are “generally applicable to the recognition of revenue and the associated expenses for a transaction involving the rendering of services” (paragraph 21 of IAS 18).

However, a practical expedient is available in paragraph 25 of IAS 18: “When services are performed by an indeterminate �� $�� there is evidence that some other method better represents the stage of completion.”

In the following section, we discuss examples of the application of this guidance to common transactions in the wind industry.

The discussion throughout this publication focuses on IFRS that is effective as of 31 March 2012. The IASB currently has an active project on revenue recognition. The outcome of this project could result in changes to the guidance presented in this section.

1. Issues for manufacturers


1.1.1 Bundled offers/multiple element arrangements

A bundled offer is, in substance, a transaction with several deliverables, sometimes referred to as a “multiple-element arrangement”. Bundled offers are usually priced in a way that the �� are more attractive when they are combined than if the customer purchased the individual components separately. Thus, entities need to determine the total consideration to be received under a �� The total consideration is allocated to the individual elements �� value approach:�� Relative fair value approach — Under this approach, a portion

of the total consideration is allocated to each deliverable based on the fair value of the deliverable relative to the fair values of the other deliverables.

�� Residual value approach — Under this method, the amount of consideration allocated to the delivered item(s) equals the total arrangement consideration less the aggregate fair value of the undelivered item(s) using objective and reliable evidence of the selling price(s) of the underlying goods or services.

IFRS does not indicate any hierarchy or preference for either one of these approaches. The acceptability of the residual method is currently being considered as part of the International Accounting Standards Board’s (IASB) and Financial Accounting Standards Board’s (FASB) (collectively, the Boards) joint project on revenue recognition. Most recent deliberations indicate that, under the proposed revenue standard, the residual method may only be permissible in limited circumstances.

Once each element has been allocated a portion of the total consideration to be received, the recognition of that portion as revenue depends on the criteria for revenue recognition applicable �� *�� order to recognise revenue from the sale of goods under IAS 18 that are listed above).

Fact patternNorthwind Inc. sells wind turbines in a bundled offering that includes the sale of the wind turbine and the provision of maintenance services for a ten-year period after the sale. !�� CU 1,000,000. The customer will pay an additional fee of CU 200,000 for the maintenance services. The maintenance service fees are considered fair value, whilst CU 1,100,000 is considered the fair value of the wind turbine.

IssueHow should Northwind Inc. allocate the total consideration to each element in the bundled offer?

ResolutionIAS 18 requires the sale of a product to be separated from any subsequent servicing. As a result, Northwind Inc. �� +�� The sale of the wind turbine

�� The provision of maintenance services over a period of ten years

The transaction price of CU 1,200,000 is then allocated to these deliverables using either the relative fair value or the residual value approach.

Relative fair value approach — The total consideration of CU 1,200,000 would be allocated to the deliverables based on their estimated fair value. This results in CU 1,015,385 [calculated as CU 1,200,000 * CU 1,100,000/CU 1,300,000] allocated to the wind turbine and CU 184,615 [calculated as CU 1,200,000 * CU 200,000/CU 1,300,000] allocated to the maintenance services.

Residual value approach — On the transfer of risks and rewards to the customer of the wind turbine, CU 200,000 would be allocated to the undelivered maintenance services based on its assessed fair value. This would leave a residual amount of CU 1,000,000 to be allocated to the wind turbine that has been delivered ahead of the maintenance services.

Under both approaches, the amount allocated to the wind turbine would be recognised when the risks and rewards are transferred to the customer (likely upon delivery) and the amount allocated to the maintenance services would be recognised over the 10-year service period.

Cleantech matters IFRS for the wind industry4

1.1.2 Sale of wind turbines — pattern of revenue recognition

Manufacturers of wind turbines enter into a broad range of contracts with customers. Simple arrangements may include contracts for single wind turbines that are manufactured under a modular concept using industrial economies of scale. Those �� regarding the wind turbine the buyer will receive. Complex arrangements may include turnkey projects designed to the ��;�� +� �� <� �� <�� <� �� turbines together with related equipment to complete an entire wind farm.

In practice, the wind turbine industry recognises revenue under both IAS 18 (completed contract method) and IAS 11 (percentage-of-completion method) depending on the individual facts and circumstances of each contract. The application of IAS 18 is more prevalent for larger wind turbine manufacturers. However, IAS 11 is applied if the facts and circumstances warrant such treatment. It is therefore important to analyse the key terms of customer contracts in order to identify the appropriate pattern of revenue recognition for the different types of arrangements

A key determinant in evaluating which revenue recognition � �� %=>�@@�� %=>�@@�� KP�� the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.” V��%=>�@@�� K�� X��

In July 2008, the International Financial Reporting Interpretations Committee (IFRIC) issued Interpretation 15 — Agreements for the Construction of Real Estate (IFRIC 15). Although IFRIC 15 �� Z �� analysis of the distinguishing features of construction contracts. Therefore, it is more generally relevant in determining whether any contract that involves the construction of an asset is within the scope of IAS 11 (i.e., recognise revenue under the percentage-of-completion method) or is a sale of goods (i.e., recognise revenue when construction is completed and the goods are transferred to the customer).

IFRIC 15 provides guidance in the particular context of real estate. Under the Interpretation: �� An agreement for the construction of real estate meets the

�� to specify the major structural elements of the design of the real estate before construction begins and/or specify major structural changes once construction is in progress (whether or not it exercises that ability). When IAS 11 applies, the construction contract also includes any contracts or components for the rendering of services that are directly related to the construction of the real estate. [IFRIC 15.11]

�� An agreement for the construction of real estate in which �� '�� the real estate, for example to select a design from a range �� variations to the basic design, is an agreement for the sale of goods and therefore within the scope of IAS 18. [IFRIC 15.12]

In our view, the manufacturing of single wind turbines under a �� '�Z�� \��;�� =��would generally be recognised under IAS 18 as the sale of a good. However, arrangements for large turnkey wind farm projects may �� ;�� %=>�@@�� percentage-of-completion method.

Overall, the analysis of the terms of the contract, including the customer’s involvement in the design of the wind turbine or wind farm, includes judgement, which has resulted in diversity in practice.

As shown in the following excerpt, Vestas is an example of a company that changed its accounting policy upon issuance of IFRIC 15.


In addition, the application of the percentage-of-completion � �� !��method is based on projections of contract revenues and costs. Under the basic model, when contract revenues and contract costs can be reliably estimated, revenue is recognised as the construction progresses based on a measure of the stage of completion. If revenues and costs cannot be reliably measured, %=>�@@�� *�� _��$��

Several factors in the wind industry may challenge the reliability of projected contract revenues and costs: �� !��

or environmental aspects (e.g., offshore wind farms may pose �� weather, wind and load conditions). These uncertainties may well increase commercial risks.

�� and other clearances required to build a wind farm. This may add to the uncertainty of estimating the project costs and completion date.

�� Construction risks may also arise from the location of the site, in particular, an offshore site. For example, weather conditions may interfere with the entity’s ability to carry out the construction as planned (e.g., ship availability and hire costs).

�� The quality of the entity’s internal costing and budgeting systems ��"��

It is also important to note that the stage of completion may be determined in various ways, depending on the nature of the transaction, such as: �� Surveys of work performed

�� Services performed to date as a percentage of total services to be performed

�� The proportion of costs incurred to date versus the estimated � �� *�� K�� $ �$�� method”)

In November 2011, the Boards issued their updated joint exposure draft Revenue from Contracts with Customers, which includes proposed guidance relating to performance obligations settled over time. The Boards are continuing to deliberate the proposed ��Z�� `z@{��

!�� of revenue from performance obligations settled over time, are expected to clarify when accounting similar to today’s percentage-of-completion may be applied. It is not yet clear �� Z�� many companies that are currently applying the percentage-of-completion method may need to change their accounting, either fully or partly, to recognise revenue at a point in time (i.e., when control of the wind turbines has passed to the buyer).

Excerpt from Vestas Wind systems A/S, Annual Report 2010, pages 85 and 128

Furthermore, the Vestas Group implemented IFRIC 15 �� <�� No. 44/2010. The implementation of IFRIC 15 resulted in Vestas changing its accounting policies for revenue recognition in relation to supply-and-installation projects. The consequences of the changes in accounting policies are illustrated in the aforementioned announcement and note 40 of the consolidated accounts.

Apart from IFRIC 15, the new standards and interpretations do not affect earnings per share and diluted earnings per share. Refer to note 40 for the illustration of the impact of IFRIC15 on earnings per share and diluted earnings per share.

The description of new standards and interpretations that are not yet effective has been included in note 41 to the consolidated accounts.

40 New accounting policies

With reference to company announcement No. 44/2010 of 22 November 2010, Vestas Wind Systems A/S’ Board

evaluated and implemented IFRIC15 (International Financial Reporting Interpretation Committee) as of 1 January 2010. The implementation of IFRIC15 resulted in a change in the accounting policies for revenue recognition in relation to supply-and-installation projects and Vestas is preparing its annual report for 2010 in accordance with the changed accounting policies.

The changed accounting policies for supply-and-installation projects require these projects to be recognised in the income statement, when the project has been delivered to the customer and risk transferred to the customer in accordance with the contract. Until now, supply-and-installation projects have been recognised in line with construction based on the rate of completion of each projects. After the change, supply-and-installation projects will be recognised in the same way as the Group’s supply-only projects are currently recognised i.e. in compliance with the International Accounting Standards (IAS) No. 18.


1.1.3 Long-term warranty arrangements

In order to minimise operating risks in their individual projects, customers generally seek a long-term warranty from energy producers. Entities in the wind industry will face several IFRS issues related to such long-term arrangements, such as the following:�� When to recognise warranty-related revenue

�� How to measure warranty-related revenue

�� Whether to set up a provision for a warranty obligation

�� How to measure a warranty obligation

We discuss these questions further as part of the scenarios presented below.

Revenue

As noted above, determining whether a contract contains multiple elements is critical in determining how to recognise revenue. This is particularly relevant for contract provisions for unsatisfactory performance (i.e., a warranty provision) that are common in the wind industry. In the sale of goods with a standard warranty clause, �� "��ownership are generally transferred when the goods are delivered to the customer. However, in situations where the supplier provides warranty extensions and other non-standard warranty features, an assessment based on the individual terms and conditions of the contract is required and will involve management’s judgement.

|�� revenue generating elements (i.e., separate services), these provisions may impact the determination of when both the �� "�� seller to the buyer. One example that is highly relevant to the wind industry is the situation where the entity retains an obligation for unsatisfactory performance that is not covered by normal warranty provisions, the outcome of which cannot be reliably determined.

In this example, revenue may need to be deferred until the outcome of the additional warranty provisions is resolved.

When the selling price includes an amount for subsequent servicing which is assessed as a separate element, that amount is deferred and recognised as revenue over the period during which that service is performed. An optional warranty extension provided to the customer for an extra fee will often give rise to a separate revenue stream (e.g., a service).

Provision

IAS 37 Provisions, Contingent Liabilities and Contingent Assets �� =�provision must be recognised when:a. An entity has a present obligation (legal or constructive) as a

result of a past event

b. % �� '�� ;��

Andc. A reliable estimate can be made of the amount of the obligation

If all of the conditions listed above are not met, no provision will be recognised (however, disclosures may still be required). Warranty ��Z��@�� Guidance on implementing IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The example deals with a manufacturer that gives warranties to purchasers at the time of sale of its products and, based on past experience, has determined it is probable (i.e., more likely than not) that there will be some claims under the warranties. The example concludes that a provision is recognised for the best estimate of the costs of making good under the warranty products sold before the end of the reporting period.

The standard makes it clear that where there are a number of �� '��occur is based on the class of obligations as a whole. Hence, the �� '��


a whole will need to be evaluated. This is more likely to give rise to a provision, because the probability criterion is considered in terms of whether at least one item in the population will give rise to a payment. Recognition then becomes a matter of reliable measurement and entities calculate an expected amount of the estimated warranty costs.

The extended warranty commitment is also considered at the time of delivery of the good. The cost recognition and, therefore, any provision to be recognised, depends on how the stage of completion is determined for recognising revenue. For example,

�� the costs must also be recognised on a time basis — such that, to the extent there have been no outlays, a provision may need to be built up over the period of extended warranty.

Entities also need to evaluate whether a contract is onerous and recognise a provision for an onerous contract, under the requirements of IAS 37. This may be particularly relevant to �� exist in high-interest rate economies.

1.1.3.1 Standard warranty term plus separately priced prepaid warranty extension

Fact patternBestwind Inc. sells wind turbines and provides a standard two-year warranty term. In addition, a ten-year extension to the warranty is offered to the customer. The extension is sold at an �� '�� Z ��}� ��the product and the additional warranty fee are paid at delivery. Based on past experience, Bestwind Inc. is able to reliably measure the costs to complete the additional service warranty.

Issues�� When does Bestwind Inc. recognise revenue and to

what extent?

�� Is a warranty provision required to be recognised and, if so, how is this provision measured?

ResolutionRevenue

Bestwind Inc. would recognise the revenue associated with the �� "��of ownership are transferred to the customer (i.e., most likely when the wind turbines are received by the customer).

As Bestwind Inc. is able to reliably measure both the revenue associated with the extended warranty and the costs to complete the additional service warranty, the revenue for the separately priced warranty period would be accounted for as a separate element and revenue would be recognised by reference to the stage of completion. There are numerous ways that the stage of completion can be determined as discussed in Section 1.1.2 above, and judgement is required to determine which method is appropriate for the arrangement made.

Provision

!�� }�� %�� two-year standard warranty obligation. As it is more likely �� '��claims under the standard warranty as a whole, a provision is recognised at the time of the sale of the wind turbines for the best estimate of the costs of making good under the warranty.

The costs associated with the extended warranty are dependent on how the stage of completion is determined for recognising revenue. If revenue is recognised on the basis of the time of the contract, the costs must also be recognised on a time basis.


1.1.3.2 Standard long-term warranty agreement — reliable measurement of cost

Fact patternIn line with its standard warranty provisions for large customers, Bestwind Inc. provides a 20-year standard warranty period on the �� >��}�� %�� $�� "�� %�� Z �� Z�� *��comparable products) is available for only the last 15 years. Neither the internal nor the external industry data justify extrapolation of the costs for a 20-year warranty period.

Issues�� =�� }�� %��

information to reliably measure the costs to be incurred in order to recognise revenue at the time the wind turbines are delivered? (Assume the contract represents the sale of a single element.)

�� How should Bestwind Inc. measure the warranty provision?

Resolution

Scenarios When to recognise revenue How to measure the warranty provision

Scenario 1: The materials used have been available for 20 years and the processes to implement the materials have been used in other industries in a broadly comparable manner for a period of more than 20 years. From the available data, Bestwind Inc. can develop an acceptably narrow range of outcomes regarding how the warranty cost may be incurred (extent and time).

As further data for the materials and the processes applied become available, and as these data provide a �� of possible cost outcomes under the warranty obligation, we believe that revenue can be recognised at the time the wind turbines are delivered, provided that all other revenue recognition criteria are met.

It will be critical to determine not only the number of claims and the best estimate of the expenditure related to those claims, but also the timing of expected claims. This is crucial to determining the present value of the obligation as the effect of the time value of money will usually be material considering the term of the warranty agreement. The discount rate (or rates) to be applied should be a pre-tax rate *�� '�� "� �assessments of the time value of �� "�� liability. The discount rate(s) will not ��'�� "�� '��estimates have been adjusted.


Scenarios When to recognise revenue How to measure the warranty provision

Scenario 2: Bestwind Inc. is able to simulate the usage and age of its products in an accelerated manner. Statistically valid tests support a useful life of more than 20 years and indicate the rate of faults giving rise to a potential warranty claim and related costs.

The statistically valid accelerated tests allow an outlook on the number, timing and type of claims. !�� reliable determination of the cost to be recognised. Under these circumstances, revenue recognition is acceptable, provided all other criteria for recognition are met.

Same as Scenario 1 above.

Scenario 3: As Bestwind Inc. expects �� decrease over time, the benchmark value for claims is based on project ��~�� no claim would arise if some items perform worse than the benchmark value as others that perform better could compensate for the underperformance. This benchmark declines in line with the age of the wind turbines.

In this scenario, there are still no data �� @�� experience. Accordingly, there is a gap between the warranty period of 20 years and the historical data available. This may raise doubt as to whether revenue can be recognised over the warranty period.

However, the declining benchmark agreed for the wind turbine may provide a narrowing of potential cost outcomes that would support a �� cost. We believe that this approach is �� overcome the reliable measurement hurdle.

In the event that revenue recognition is acceptable, the determination of the provision will generally follow the same route as in Scenarios 1 and 2. |�� @�� "��difference.

However, for the longer term, the degree of detail may vary, depending on whether and how the expenditure is expected to develop as a result of the falling benchmark agreed on and the discounting effect, which is higher in the longer term.

As shown in the table above, revenue would be recognised as �� ~� ��revenue can be recognised, any prepayment received is deferred, and cost incurred for the inventory would still be recognised in }�� %��\�� |�� set up until revenue is recognised (unless the contract is onerous) and Bestwind Inc. will need to consider if disclosures on critical judgements or estimates under IAS 1 Presentation of Financial Statements need to be made.

�� provide a data basis that covers the whole warranty period of 20 years. In measuring the best estimate of the expenditure required to settle the present obligation at the end of each reporting period, risks and uncertainties will be taken into account. As stated previously, entities calculate an expected value of the estimated warranty costs. IAS 37 refers to the “expected value” method and illustrates how it is calculated in an example of a warranty provision (Example 1 of IAS 37 IE).


1.1.4. Advance consideration

In addition to the above considerations, IAS 18 requires revenue to be measured “at the fair value of the consideration received or receivable”. The accounting guidance in IAS 18 is, however, unclear as to whether long-term advances require interest income to be accrued. We believe that an entity may choose — as a consistently applied accounting policy — one of the two approaches described below when it receives an upfront payment on a long-term arrangement:

1. As the advance is long term in nature, an entity may consider accruing interest on the advance until the respective revenue is recognised. The fair value of consideration received before revenue can be recognised is higher than the fair value of the cash received either upon delivery or after delivery. Therefore, interest may be accrued until the service is delivered using the entity’s incremental borrowing rate at the time the advance payments are received. Accruing interest would be accounted for as a charge to interest expense and an increase to the advance received. Revenue is then measured as the service is rendered based on the allocation of the nominal amounts of the

advance payments corresponding to the stage of completion, plus the amount of interest accrued thereon.

2. An entity may choose not to accrue interest on advance receipts for the purpose of revenue recognition. IAS 18 may be interpreted to only allow interest to be imputed on deferred payments, hence, disallowing the accrual of interest on advance receipts. Alternatively, IAS 18 may be interpreted to require that interest must be imputed on deferred payments, but as it remains silent on advance receipts, it neither requires nor prohibits accrual of interest on these receipts. Revenue recognition would be based on the allocation of the nominal amounts of the advance receipts corresponding to the services delivered.

It is expected that the new standard on revenue will clarify the accounting treatment required for advance receipts.

During its January 2012 meeting, the IFRS Interpretations Committee discussed the accounting for prepayments in connection with long-term supply contracts. Following is a summary of the Interpretations Committee’s discussion on the topic.

Excerpt from the January 2012 IFRIC Update newsletter

The Interpretations Committee received a request seeking �� $ �� of raw materials when the purchaser of the raw materials agrees to make payments to the supplier for the raw materials. The question is whether the purchaser/supplier should accrete interest on long-term prepayments by recognising interest income/expense, resulting in an increase of the cost of inventories/revenue. The Committee observed that there is mixed practice on the issue submitted, and that current IFRSs do not provide clear guidance on this issue.

However, the Committee noted that the exposure draft Revenue from Contracts with Customers published in November 2011 states that:�� in determining the transaction price, an entity should adjust

�� '�� <��

�� the objective is to recognise revenue at an amount that ��'�� customer had paid cash for the promised goods or services at the point that they are transferred to the customer.

�� ;�� \�� made. The Committee observed that considerations regarding �� \�� \��statements.

The Committee decided to ask the Board whether it agrees with the Committee’s observation, and, if so, whether there should be amendments made in the IFRS literature in order to align the ��\�� \�� that the Board agrees that the purchaser and the seller should address the time value of money in such contracts similarly and that the Committee should deal with this matter, the Committee would direct the staff to further analyse which standards should be amended if guidance were to be provided. The Committee would also direct the staff to prepare additional illustrative examples on the impact of accretion of interest on long term �� \�� \�� complex than those that were presented at the January meeting.


The previous page discusses issues arising from the accounting for advance consideration as a seller. However, manufacturers in the wind industry are also often involved in long-term purchase agreements with their suppliers that could include prepayments. Below is an example of accounting for prepayments on a long-term arrangement:

Fact patternNorthwind Inc. agreed to a 10-year contract with its local supplier for the purchase of raw materials to be used in wind turbine production. As part of the contract, a long-term prepayment is agreed. This prepayment is not refundable.

Issues�� How are the prepayments presented?

�� How are the prepayments measured?

ResolutionPresentation

�� *�� =�� period would be split into current and non-current portions of inventory if the current/non-current distinction under IAS 1 is used. Such a split may need to be based on an estimate of how much of the prepayment’s carrying value will probably turn into inventories during the current term, with the remaining portion being allocated to non-current inventory. If the current/non-current distinction is not used, paragraph 61 of IAS 1 requires disclosure of the amount expected to be recovered after more than twelve months.

Measurement

The most important question on long-term items that are non-interest bearing relates to discounting or accruing interest. Northwind Inc. has already made the prepayment and will probably receive goods in the future. If this were a non-interest bearing loan (i.e., a �� $�� V�� %�� %�� !�� }��Z�� application of this guidance:

Scenarios How are the prepayments measured?

Scenario 1: The prepayments will be offset against future supplies (each at market prices at the time of delivery) for a period of up to 10 years. Northwind Inc. makes prepayments at zero interest.

Northwind Inc. is invoiced for the supplies at the market price at the time of �� "�� Inventories are accounted for at cost, which, in most cases, would be the invoiced amount (i.e., market price at time of delivery in this scenario). However, entities could view cost as the invoiced amount plus implied interest on the prepayment. This choice must be consistently applied and could lead to other accounting implications.

The outcome of the IFRIC deliberations described on the previous page could affect the measurement of inventory in this scenario.

Scenario 2: The prepayments will be offset against future supplies at a market price less computed interest — the market �� '�� \�estimate of the consumption of the prepayment.

!�� !�� \�� Z�� it is adequate to consider it in the cost of raw material purchased. Interest is accrued over time, therefore increasing the amount recognised as prepayment *�� #�� material is recorded at market price (with the counter entry being prepayments).


1.2 Embedded derivatives

Many contracts have features such as price escalation clauses, foreign currency arrangements or other components that may be subject to separate accounting under the principles for embedded derivatives in IAS 39 Financial Instruments: Recognition and Measurement. An embedded derivative is a component of a hybrid (combined) instrument that also includes a non-derivative �� '��the combined instrument vary in a way similar to a standalone derivative. An embedded derivative causes some or all of the ��'�� ;�� $�� Z�� Z��rate, index of prices or rates, credit rating or credit index. A �� contract, but is contractually transferable independently of that instrument or has a different counterparty from that instrument, is ��

The embedded derivative will be separated from the host contract and accounted for as a derivative under IAS 39 if, and only if:�� The economic characteristics and risks of the embedded

derivative are not closely related to the economic characteristics and risks of the host contract (see IAS 39 Appendix A, paragraphs AG30 and AG33)

�� A separate instrument with the same terms as the embedded ��

And�� The hybrid (combined) instrument is not measured at fair value

�� *��

If an embedded derivative is separated, the host contract will be �� %=>�{�� %�� other appropriate standards. IAS 39 does not address whether an embedded derivative will be presented separately on the face of ��

The most common examples of embedded derivatives in non-�� escalation clauses in purchase or sales contracts. For example, a manufacturer of wind turbines from Europe (whose functional currency is the euro) may sell wind turbines to a Canadian

customer at a price denominated in Canadian dollars. From the perspective of the manufacturer, the pricing of the contract in Canadian dollars is an embedded derivative. This is because the �� (the Canadian dollar exchange rate), the manufacturer does not initially pay for such pricing and it is settled at a future date (when the cash is received under the contract).

This embedded derivative then needs to be assessed as to whether it is closely related to the host contract (i.e., the sales contract). If it is determined to be closely related to the host contract, it will be treated as part of the host sales contract. The sale contract would normally be accounted for as an executory contract and would only be recognised in the event that it represents an onerous contract. This is because embedded derivatives that are closely related to their host contracts are not separately accounted for at fair value under IAS 39.

Whether the foreign currency component needs to be separately �� IAS 39 provides the following guidance:

Excerpt from IAS 39, paragraph AG33(d)

An embedded foreign currency derivative in a host contract �� (such as a contract for the purchase or sale of a non-�� currency) is closely related to the host contract provided it is not leveraged, does not contain an option feature, and requires payments denominated in one of the following currencies:i. the functional currency of any substantial party to

�� <

ii. the currency in which the price of the related good or service that is acquired or delivered is routinely denominated in commercial transactions around the ��*�� ~>�� <��

iii. a currency that is commonly used in contracts to ��$�� environment in which the transaction takes place (e.g. a relatively stable and liquid currency that is commonly used in local business transactions or external trade).

Below are examples of the application of guidance related to embedded derivatives in the wind industry.


1.2.1 Embedded derivatives in international sales/procurement contracts

Fact patternStrongwind Corp., whose functional currency is the euro, enters into a number of different supply contracts that involve currencies other than the euro.

IssueDoes the foreign currency component in the contracts represent an embedded derivative that needs to be accounted for separately?

Resolution

Scenarios Embedded derivative considerations

Scenario 1: Strongwind Corp. enters into contracts to purchase raw materials �� in the supplier’s respective functional currency, which is a foreign currency to Strongwind Corp.

The contract is denominated in the functional currency of one of the counterparties to the contract. Accordingly, the embedded foreign currency derivative is closely related. The contract is accounted for as an executory contract, unless a provision for an onerous contract is required.

Scenario 2: Strongwind Corp.’s Australian subsidiary (whose functional currency is the Australian dollar (AUD)) enters into euro-denominated bundled contracts with an Australian customer whose functional currency is also AUD. !��=�� Strongwind Corp. The contracts are for construction of wind turbines and farms �� by the Australian subsidiary with substantial involvement of Strongwind Corp. Strongwind Corp. will also produce �� and provide ongoing support (e.g., �� warranty and services to be provided under the contract.

!��;�� %=>�{�� the contract. In many cases, this would include the legal parties to the contract. However, in the case where the legal party to the contract is an agent, the related principal could be a substantial party to the contract.

In this scenario, the functional currency of Strongwind Corp.’s Australian subsidiary is AUD, which indicates that it is not an agent of Strongwind Corp. whose functional currency is the euro. However, Strongwind Corp. will make a substantial economic contribution to the contract on an ongoing basis. Since the %|�>��~>��==��ASC 815-15-15-12 indicates the following with respect to determining who is a substantial party to the contract:

a. Consider all facts and circumstances pertaining to that contract (including whether the contracting party possesses the requisite knowledge, resources, ��

b. Look through the legal form to evaluate the substance of the underlying relationships.



In this scenario, it could be viewed that the Australian subsidiary, by itself, does not possess the requisite knowledge, resources and technology to execute the contract on its own. This is because Strongwind Corp. provides a substantial �� ;�� > ��Corp., the Australian subsidiary and the customer would probably not have entered into the construction contract because the Australian subsidiary likely �� > ��=�� "�� ~>��==�� > ��could be considered a substantial party to the contract and the embedded euro derivative can be regarded as closely related to the sales contract. The contract is accounted for as an executory contract off-balance sheet unless a provision for an onerous contract is required.

Scenario 3: Strongwind Corp.’s supplier is India-based and its functional currency is the Indian rupee (INR). The price agreed to in the contract is denominated in US dollars (USD).

!��'�� *~>�� $�� %�� economic environment in which the transaction takes place. In our view, the foreign currency component is therefore closely related to the host sale contract and there is no need to separately account for the embedded derivative. The contract is accounted for as an executory contract unless an onerous contract provision is required.

Scenario 4: Strongwind Corp. enters into a supply contract with Supply Co., a UK �� }�� *�}��as its functional currency. The agreed contract price is denominated in Swedish kroner (SEK) since the Supply Co. uses some parts from third party suppliers in Sweden that are purchased in SEK.

There is an economic logic behind choosing the SEK as the contract currency from the supplier’s point of view. However, a third party that simply supplies �� *��;�� contract would not qualify by itself as a substantial party to the contract. This differs from Scenario 2, in which the parent is continuously and substantially involved in executing the contract and where this is incorporated by the parties to the contract. As such, the SEK pricing is an embedded derivative that is not closely related and would be recognised at fair value on the balance sheet with ��;��


1.2.2 Embedded derivatives arising from price adjustment clauses in service contracts

Fact patternFrom time to time, Strongwind Inc. sells wind turbines under pricing terms which are contingent on other factors. These contingent pricing terms may relate to input factors like labour or metal, output parameters like electricity price or other economically relevant parameters such as wind.

IssueAre the embedded derivatives in the price escalation clauses closely related to the host contract?

Resolution%=>�{�� $�� V�� accepted that elements of price escalation clauses for goods that are not actively traded can be closely related to the host contract. Some other general points also need to be considered (e.g., a pricing element may not be leveraged and/or it may not include an option).


Scenario 1: In a frame agreement, Strongwind Inc. and the counterparty agree to a price escalation clause for �� !��'�� the kind of material used in the contract and a labour cost index commonly used for this industry and jurisdiction. The �� escalated, whilst decreases in the indices would not result in a decrease in the contract price.

The price escalation indices are based on actual input factors from the contract. |�� '�� =�� normally be considered closely related to the host contract. However, since Strongwind Inc. agreed to an upside price escalation only, this creates optionality in the contract.

If this optionality is out of the money at the inception of the contract, this clause would be considered to be closely related. However, if the price escalation clause is in the money at the outset of the contract, this would not be considered closely related and, accordingly, would need to be separated from the host contract and recognised on the balance sheet at fair value. Subsequent changes ��

%�� *��$�� '�� both upward and downward changes) the embedded derivative would not be separated from the host contract (assuming all other factors are consistent).

Scenario 2: Strongwind Inc. enters into contingently priced contracts to sell wind turbines where the price is adjusted ��'�� \��economic risk (e.g., electricity prices). These contracts occur in very rare circumstances, such as when Strongwind Inc. is trying to develop a new market segment.

The price escalation in this scenario introduces risks to the contract that do not relate to the production of wind turbines themselves. Instead they capture economic risks the buyer faces. Accordingly, the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the sales contract. Therefore, these pricing elements need to be separated and recognised at fair value.


2.1 Acquisitions — business combinations vs asset purchases

For an arrangement to be in the scope of IFRS 3 Business Combinations, it must involve the acquisition of a business. For ��%|�>�{��K�� set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form �� to investors or other owners, members or participants.” IFRS 3 further explains that a business consists of inputs and processes applied to those inputs that have the ability to create outputs. A business need not include all of the inputs or processes that the seller used in operating that business if a market participant is capable of utilising the acquired set of activities and assets to produce outputs, for example, by integrating the acquired operations and assets with their own inputs and processes (essentially replacing the missing elements needed to operate as a business).

The determination of whether the purchase of a small group of assets or even single assets represents a business combination ��;�� %�� ;�� amount paid in excess of the fair value of the net assets acquired will be recorded.

Fact patternBestwind Inc., a wind turbine manufacturer, purchases all of the rights and obligations connected to a project to �� |��from a project developer. This includes the land and the �� contracts exist.

IssueDoes the purchase of a development project for a wind farm represent a business combination?

ResolutionIn this example, it could be argued that the purchase of a development project by a wind turbine manufacturer does �� !�� and operation of a wind farm. The manufacturer of wind turbines is able to generate outputs from the development through installation of its wind turbines. However, we believe that, if the acquirer obtains control of a set of inputs without any processes, it is unlikely that the acquired input(s) would be considered a business, even if a market participant had all the processes necessary to operate the input(s) as a business.

�� business combination or an asset acquisition, Bestwind Inc. will recognise the land (or the rights to build on that land) �� ;�� "�� ;��in such a transaction, given the many legal challenges facing a developer in trying to obtain such permits. If a purchase transaction includes intangible items under development, the acquirer considers the need to identify those items separately as in-process research and development assets.

#�� acquisitions as business combinations or asset purchases.

2. Issues for plant owners and project developers


2.2 Wind farms

2.2.1 Depreciation of wind turbines and sale of output during the commissioning period

Fact patternNorthwind Inc. builds a wind farm with several wind turbines. The power generated by the wind turbines will be delivered into a power grid using one single converter and connection.

Issues1. When should Northwind Inc. begin recording depreciation on

the wind turbines?

2. How is the sale of energy during the commissioning phase of the wind farm treated?

ResolutionsIssue 1

Depreciation for a tangible asset 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, Northwind Inc. should start depreciating that wind

turbine, even when other wind turbines are still under construction. This would not apply before the turbine is operating or the wind farm is connected to the power grid, as the wind turbine would not yet be ready for its intended use at that point.

Issue 2

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


2.2.2 On-shore and offshore sites — testing grounds

Scenario 1

Fact patternStrongwind Inc., an energy producer, builds an offshore wind farm project entitled “Wind at Sea”. The farm is considered a test farm, on which it operates its most recent prototypes for the next product generation. The entity has received regulatory permission for testing, but approval has not yet been received for production. The operation of Wind at Sea should yield important insights into the reliability of the design of the wind turbines and the materials used under tough weather conditions. The insights gained will be incorporated into the design, construction and operation of future offshore turbines. During the testing phase, Wind at Sea generates power for a ��

Issues�� Should the wind farm be considered a research and

development project?

�� >�� \�� '�� as tangible or intangible assets in the balance sheet?

�� How should income earned by the test farm during �� statements?

ResolutionsResearch and development

�� %=>�{��Intangible assets as the �� "�� or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. Commercial �� %=>�{�� it includes an approved technology or any output from its use being available for sale to customers.

Wind at Sea is primarily a testing ground to help generate knowledge about the design of wind turbines suitable to offshore wind, weather and sea conditions. This could be used

to improve existing turbines or the development of entirely new turbines. Thus, as the technology is not yet proven under the tough weather conditions at the offshore site, there is a higher likelihood of technology failures resulting in additional cost and operational losses, which would typically not arise in a commercial project. Until the wind turbines are developed into assets that are capable of operating in management’s �� >��development project should remain. Once the technology is proven and will be used for power generation on a larger scale, the development phase is completed and commercial production starts.

Presentation as intangible or tangible assets

During the development phase, the physical nature of the offshore wind turbines is secondary to their characteristic as a prototype for a new or improved wind turbine design. !�� research and development project, these assets should be treated as intangible assets under development if they meet the capitalisation requirements in IAS 38. Management will need to exercise judgement to determine when it is more appropriate to present the assets as property, plant and equipment. In practice, windfarms in the testing phase are often presented as property, plant and equipment once they are in operation.

Income during development phase

A key question is whether the income generated through the test use of the prototypes should be offset against the development cost incurred or recognised in the statement of �� !�� assets to operate according to their intended use. Therefore, Strongwind Inc. presents this additional income as operating income. Netting the income with the development cost incurred (e.g., by analogy to IAS 23 Borrowing Costs for investment income earned on borrowed funds), is not appropriate due to the different nature of the income and expense items.


Scenario 2

Fact pattern> ��%�� experience. Wind turbines were provided by Bestwind Inc., a leading producer of such devices. The wind turbines delivered by Bestwind Inc. represent the entity’s most up-to-date technology and have received regulatory approval. > ��%��\�� "�� be optimal and due to its preliminary state may even incur overall losses (based on the worst case scenario). Strongwind Inc. is the owner of the facilities and there is no lease involved.

IssueIs the wind farm a development project?

ResolutionFrom the perspective of Strongwind Inc., the wind farm is in operating condition and does not represent a development activity. The wind turbines are accounted for as property, plant and equipment and depreciation starts when the assets are ready for their intended use. Income generated through the operation of wind farm will be recognised as ��>�� impairment needs to be assessed.


2.3 Leases

Companies in the wind industry frequently enter into arrangements that may be considered leases. A wind power plant operator likely has arrangements to consider from both a lessee and a lessor perspective. IFRIC 4 Determining whether an arrangement contains a lease provides the additional guidance to consider when evaluating these arrangements. Under IFRIC 4, an �� <��

The right of use of an underlying asset is conveyed if any one of the following conditions is met: a. The purchaser [lessee] has the ability or right to operate

the asset or direct others to operate the asset in a manner it determines while obtaining or controlling more than an ��

b. The purchaser [lessee] has the ability or right to control physical access to the underlying asset while obtaining or controlling �� of the asset.

c. Facts and circumstances indicate that it is a remote possibility that one or more parties other than the purchaser [lessee] will

�"�� utility that will be produced or generated by the asset during the term of the arrangement, and the price that the purchaser �� Z��unit of output nor equal to the current market price per unit of output as of the time of delivery of the output.

%�� legislation or within the terms of the contract. It is often clear �� *�� %��addition, many contracts may include multiple elements, some of which may be considered as leases under IFRIC 4, while other elements are clearly not leases. The broad range of jurisdictional ��;�� "�� '�� accounting outcome.

The following examples highlight some issues and solutions in assessing whether lease accounting is relevant.

�� %=>}�� Z�� |� �� change and affect the solutions presented herein. Given the �� in the wind industry begin evaluating the impact of those future developments.


2.3.1 Wind turbine lease arrangements

Fact patternBestwind Inc. operates a wind farm under a 10-year contract with the wind turbine manufacturer. The contract stipulates ;�� Z�� service maintenance in addition to the rent for the turbines. %�� $��mechanism whereby any excess over a certain EBITDA target for the wind farm will be shared 80 /20. Accordingly, the manufacturer may receive a contingent amount related to the success of the wind farm’s future operations. At the end of the 10-year contract, Bestwind Inc. may extend the contract at the then market rates for another eight years or purchase the farm at 30% of cost on the date the contract was entered into (assume that this is not regarded as a bargain purchase option at inception of the contract). At inception, the economic life of the wind farm is 25 years.

Issues�� Does the contract represent a lease?

�� How is the contingent price element treated?

Resolution!�� }�� %�� Therefore, the contract includes a lease. Beside these facts, the arrangement also contains non-lease elements (full-

service maintenance) that need to be separated for accounting purposes using the relative fair value approach. The conditions stated above do not include all of the details necessary to �� lease. However, based on the facts described, the arrangement is likely to contain an operating lease as the lease term does not cover the major part of the economic life of the wind farm. In addition, the residual value indicates that the net present value of the minimum lease payments may not amount to at least substantially all of the fair value of the wind farm. Furthermore, the purchase option is not at a bargain and the ownership of the plant is not automatically transferred at the end of the arrangement.

!�� $�� derivative (for further guidance, see examples in Section 1.2 �� V�� Z�� $�� !�� $�� }%!�=��$��>�� contract. If Bestwind Inc. consistently chooses to use this scope �� sharing would be accounted for as an expense as incurred.


2.3.2 Long-term output arrangements

Fact patternBestwind Inc. owns and operates several wind farms. Bestwind Inc.’s strategy is to secure a margin from its investments in wind ��Z�� $��$ �� "� �� different mechanisms are applied by Bestwind Inc. to achieve its overall strategy.

IssueDoes the arrangement contain a lease?

Resolution

Scenarios Does the arrangement contain a lease?

Scenario 1: Bestwind Inc.’s farm in Germany is subject to favourable long-term feed-in-tariffs. Bestwind Inc. may freely decide whether to feed in or not, but expects that it will fully feed electricity from the wind farm into the nearest power grid. The grid operator and Bestwind Inc. agree on some administrative and technical terms to establish and ensure the physical feed-in and the compensation which is based on standard prices set by law.

Bestwind Inc. is not obliged to feed-in any electricity produced �� $��$ ��=�� Therefore, the arrangement does not contain a lease. Instead the electricity fed in under the feed-in-tariff is accounted for as a sale at the time of feeding the electricity into the grid.

Scenario 2: Bestwind Inc. agrees on a 15-year contract �� to a power retailer. The farm’s useful life is estimated to be 18 years. The delivery is not guaranteed and Bestwind Inc. is not required to supply electricity in case of planned / unplanned outages or a lack of wind. The agreed price is based on the MWh delivered with a minimum amount required to be paid to Bestwind Inc. each year, regardless of how much energy is delivered under the contract. In addition, Bestwind Inc. is paid for maintenance and administration of the wind farm. The power retailer may replace Bestwind Inc. as the operator with three months notice, but may not cancel the contract to take all of the wind farm’s output without paying a substantial penalty which essentially covers the depreciated cost of the farm plus a margin.

Bestwind Inc. is obliged to deliver all electricity produced in the ��!��

Since the purchaser may replace Bestwind Inc. as the operator �� of the wind farm’s output, Bestwind Inc. conveyed a right of use to the purchaser. As both conditions in IFRIC 4 are met, the arrangement contains a lease.

=� �� !�� "�� arrangement is for the majority of the economic life of the wind farm and the penalty clause in case of early termination covers the carrying amount of the wind farm.


2.4 Capitalisation of borrowing costs

The IAS 23 Borrowing Costs requires that borrowing costs must be capitalised if they are directly attributable to the acquisition,

construction or production of a qualifying asset. A qualifying asset ��K�� "�� X�� facilities are mentioned in IAS 23 as an example of assets that may ��

Fact patternIn December 2010, Autowind Corp. acquired the land and all necessary permits to build a sizeable wind farm. In January 2011, an agreement was signed with Northwind Inc, a manufacturer of wind turbines, to construct several wind turbines. Autowind Corp. made a down payment of 20% of the purchase price upon signing the contract. The down payment �� @��the contract. Northwind Inc. started construction in April 2011. In October 2011, with milestone 6 being met, Autowind Corp. started making additional milestone payments according to a contractually agreed payment schedule.

On December 31, 2011, the construction was completed and the wind turbine was operating in the manner intended.

!�� a bank.

Issues1. Is Autowind Corp. required to capitalise borrowing costs?

2. If capitalisation is required, when should Autowind Corp. start and cease capitalisation of borrowing costs?

Resolution%�� _��;��for capitalisation of borrowing costs. Capitalisation should begin at the commencement date, which is the date when Autowind Corp. meets all of the following:�� Autowind Corp. incurred expenditures for the asset

�� It incurred borrowing costs

And �� Autowind Corp. undertook activities necessary to prepare

the asset for its intended use.

The last condition above also includes activities associated with obtaining permits prior to the commencement of physical construction. Capitalisation of borrowing costs in connection with land would only be permitted if development activities are undertaken. Thus, the commencement date for capitalisation could be before the beginning of physical construction. However, it is important to note that borrowing costs cannot be capitalised until it is certain that the permits necessary for the construction will be obtained. In the fact pattern above, Autowind Corp. would commence capitalisation of borrowing costs in December 2010 when the costs to obtain the permits are incurred assuming it is certain any further permits required for construction will be obtained.

As long as no development activities occur, borrowing �� be capitalised.

=�� ;�� payment made by Autowind Corp. would be considered an incurred expenditure for purposes of IAS 23. If Autowind Corp. made the payment in January 2011, but development activities only started in April of that year. As a result, borrowing costs incurred on the advance payment for that period may not be capitalised, but must be expensed.


2.5 Contingent (acquisition) costs for wind energy plant

Fact pattern=� �� Z��plus a contingent additional element related to the electricity output of the respective turbine. Beyond a certain threshold, the contingent price increases as the turbine produces additional electricity.

IssueHow does Autowind Corp. determine the cost of the property, plant and equipment and account for the contingent payment arrangement?

ResolutionThe contract does require Autowind Corp. to pay additional �� Z��a certain threshold. This escalation clause may represent an embedded derivative and could require separate accounting �� !�� therefore, depends on whether an embedded derivative exists and is accounted for separately.

%�� %=>�{�� % ��'�Z��

��K��$�� X�� $�� =� ��Corp. and therefore the price escalation would be clearly and closely related to the host and thus, not an embedded derivative.

Accordingly, the cost of the wind energy plant would initially take into account the estimated contingent payments at their present value if the cost of the machinery can be reliably �� '�� =� ��

The accounting for subsequent changes associated with the contingent payments is not clear in current guidance (the IFRIC is currently discussing the accounting for contingent payments �� ~� �� issued, we believe that companies can make a policy choice �� loss or as an adjustment to the historical cost of the property, plant and equipment.


�� reduction programs

Numerous schemes that provide incentives for renewable energy have emerged around the world over the past several years. The characteristics of those schemes vary and the rights and obligations attached to the individual instruments provide a broad range of issues (e.g., how to use a respective instrument, determining fair value, tradability of the instrument, and the accounting implications).

An example of one such scheme is a guarantee of origin (GO) which is issued in the European Union by government-appointed �� *��@��!�� tradable in 16 EU countries (as of October 2011) separately from the electricity produced and does not grant a right to emit. However, national incentive schemes may add tax advantages or � �� "�� instruments economically valuable in addition to being guaranteed clean production.

!�� and similar instruments from the perspective of the producer is �� %|�>��!��%=>}��"��for accounting for emission reductions and similar schemes following its revocation of IFRIC 3 in June 2005. However, the discussion was interrupted and it is not clear currently whether the IASB will again take this issue on its active agenda. The �� instruments are, in principle, similar to those discussed for cap

and trade emission permits. Management judgement is required to determine an appropriate accounting policy.

�� represent government grants and would, therefore, fall within the scope of IAS 20 Accounting for Government Grants and Disclosure of Government Assistance��=�� is recognised as an intangible asset and a generator of renewable electricity can recognise an intangible asset at either its nominal value or its fair value on initial recognition. Subsequent revaluation to fair value is only allowed if an active market exists for the �� *�� ;�� in the market. In this case, many of the consequences of the permissible accounting treatments for emissions cap and trade schemes are equally relevant for the accounting method selected ��

>�� accounting practices are applied, it is important to communicate �� "�� statements about how the entity’s performance and overall value has been, and will be, affected by the relevant schemes.

Further information can be found in our publication, Accounting for emission reductions and other incentive schemes (2009)1.

1 =�� %��%|�>��


Cleantech leadership network

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�� France +33 4 7817 5732 [email protected]

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+49 711 9881 14464 [email protected]

��

�� =�� China

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Documents

Cleantech Matters IFRS for the wind industry July 2012