We organized five meetings for a committee entitled “Accounting and Tax Issues Research Committee on Emission Credits” under the chairmanship of Professor Yukiharu Kurokawa (Keio University) in FY 2006-2007. Over the past few years, GISPRI has explored a number of issues regarding the accounting treatment and legal nature of Kyoto credits. With the completion of the international transaction log (ITL) in the end of 2007, Kyoto credits became available for business and business interests in credits accounting and tax treatment grew stronger among the Japanese business community.

Therefore, the committee decided to take stock of the past arguments over the issue and analyze emerging specific challenges in an attempt to provide a pioneering interpretative guidance for interested parties.

• A Survey on Emissions Credits Accounting and Taxation for Business Entities
  We conducted a questionnaire survey for proactive businesses about currently assumed accounting/tax treatment of obtaining and purchasing emissions credits. Based on the result, the committee held discussion and reviewed.

＜Business Responses and Analyses of the Survey＞
1) Selecting emissions credits：the result showed that “price-consciousness” was significant in business responses. In addition, they seemed to be identifying solid projects and diversifying host countries/project types in order to ensure delivery of credits.

2) Assessing credits:

• Advance Payment :
  • More respondents preferred “investments and other assets,” a category recommended by the committee, over “intangible fixed assets” in dealing with advance payment. Among those who chose “investments and other assets,” however, some explained that it could be changed to “intangible fixed assets” after they acquired emissions credits.
• Evaluation for Amortization: some chose “specific identification method” in addition to “average method.” However, many were left with no answer. As they have still some time to go before the depreciating period, we suppose that this matter will be considered further.
• Account Title for Amortization： all respondents chose “selling and　general administrative expenses,” although it could be treated as ”manufacturing expense”

3) Evaluation method for re-selling: “average method” is recommended from the perspective of avoiding arbitrariness. Nevertheless, more respondents said they adopted “specific identification method .”

4) Evaluation method for funding: those who adopt “investments” and those who adopt “long-term advance payments” were almost the equal in number. Some assume ‘the emission credit is a product of investments’ and envisage the market value as well as availability of emission credits at the time of evaluation. It will require more attention in the future.

5) Indirect cost for purchasing from other entities: while “the commission fee, bank guarantee fee, insurance premium and others” are more often treated as “original cost,” “labor cost” is mostly treated as ‘a transaction during the period.’ However, it might be more appropriate to process the insurance premium including country risks and others as ‘transaction during the period”

• Accounting/Tax issues over carbon offsets
  Carbon offsets include various types of usable credits and offsets. Basically, it is reasonable to treat them in accordance with “The Practical Solution on Tentative Treatment of Accounting for Emission Trades (PITF) No.15” issued by The Accounting Standards Board of Japan and we discussed on the following issues:
  (1)Treatment of credit amortization: a case study was conducted for treatments at following three time-points: “when credits are purchased”, “when products are manufactured” and “when products are sold.”
  (2)Treatment at the time of sales: Whether the additional cost of sales arisen from carbon offsetting should be treated as “totally as sales cost,” or “deposit”?
  (3)Difference between CERs and VERs： In contrast to the UN-backed CERs, how we should handle VERs or business commitments-based offsetting? Should we regard them as the counter value for CO2 emissions reduction, or simply as endowment act?
  (4)Tax Issues：Whether selling and general administrative expenses can be written off in case of carbon offsetting.

• Accounting and tax issues over Green Power Certificates
  The Green Power Certificate is a way to enable trading of the power generated from natural energy sources and of offsetting “added green values” in the form of “certificates.” However there are challenges for wider diffusion. Due to the general lack of recognition for its environmental values, the certificate is only viewed as a form of voluntary investment and thus kept out from the book (in general). To move toward a renewable energy system and promote more business involvement, relevant infrastructure concerning accounting should be developed immediately.