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7.4 Generation of renewable energy credits
Publication date: 20 Jul 2016
us Utilities guide
The accounting for RECs begins at the time they are generated. Whether a reporting entity generates RECs for its own compliance or for sale, it will need to determine whether it should allocate costs of production to RECs produced. Whether costs are allocated generally depends on whether RECs are deemed output, as highlighted in Figure 7-3:
Figure 7-3
Cost allocation for generated renewable energy credits
Cost allocation for generated renewable energy credits
Output? |
Intended purpose |
Type of sale |
Evaluation of determining cost |
Yes |
Held for use |
Not applicable |
A rational costing approach should be used to allocate costs to RECs. |
Held for sale |
Included as part of lease of the facility |
Not applicable. RECs included in an overall lease of a facility do not require any separate accounting. The owner of the plant is selling use of the facility, not RECs. |
|
Executory contract or no current contract (held in inventory) |
Allocate cost to RECs using rational costing approach; allocation may not be necessary if REC revenue is recognized at the time power is sold (see UP 7.5.3). |
||
No |
Held for use or sale |
All |
No cost is allocated to generated RECs. |
If RECs are accounted for as output, the reporting entity should generally allocate costs of production to the RECs, unless the RECs are part of the lease of the facility (see UP 7.5 for discussion of RECs sold as part of a facility lease). That cost becomes the carrying value for the REC when it is used or sold. From a practical perspective, cost allocation may not be necessary when the REC sale occurs simultaneously with the sale of energy.
If the reporting entity’s accounting policy is that RECs are not output, it will not allocate any costs to the RECs. In this case, the RECs are viewed as a government incentive and there is no cost of production. In such cases, the reporting entity should track its RECs, but the carrying value will be zero.
7.4.1 Cost allocation
Unless the plant is leased, reporting entities should allocate costs from the production process costs to RECs accounted for as output, irrespective of the balance sheet classification of RECs as inventory or intangible assets. Considerations with respect to RECs classified as inventory and intangible assets follow.
7.4.1.1 Inventory
ASC 330-10-30-1 states the following:
Excerpt from ASC 330-10-30-1
Cost means in principle the sum of the applicable expenditures and charges directly or indirectly incurred in bringing an article to its existing condition and location.
A portion of the cost of generation should be allocated to RECs in inventory. Consistent with physical inventory costing methods, allocable expenditures include depreciation and operating and maintenance expenses. The remaining cost of generation should be expensed as part of the production cost of power.
See PwC’s ARM 3800 and ARM 3805 for further information on inventory costing.
7.4.1.2 Intangible assets
The guidance on accounting for the cost of internally-developed intangible assets, other than internal-use software or website development costs, is limited. We believe there are two views: (1) expense as incurred or (2) allocate the costs. The reporting entity should consistently apply its policy selected.
The general guidance on developing intangible assets indicates that costs should be expensed as incurred:
Costs of internally developing, maintaining, or restoring intangible assets that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business or nonprofit activity and related to an entity as a whole, shall be recognized as an expense when incurred.
Therefore, when RECs are classified as intangible assets and are generated, it would generally be appropriate for a reporting entity to expense the costs.
RECs accounted for as output
RECs are specifically-identifiable assets, usually with a specific vintage, that do not relate to a reporting entity as a whole. Rather, RECs are tradable units that can be used to demonstrate compliance with RPS requirements, or may be sold to a third party. Therefore, when RECs are accounted for as output, we believe it is appropriate to capitalize a portion of the production cost to RECs. The allocation methodology should be rational, and we would generally expect an approach similar to that applied to RECs classified as inventory.
7.4.1.3 RECs produced for sale and not held in inventory
As illustrated in Figure 7-3, if the power plant is leased to a third party and the RECs are considered output, the lessee is paying for the use of the facility, not for the individual outputs of the facility. In such cases, the selling entity should record lease revenue and no cost allocation for RECs will be applicable. However, if a reporting entity accounts for RECs as output and sells those RECs outside of a lease arrangement, it will need to allocate costs.
In certain situations, revenue from the sale of RECs will be recognized concurrently with the sale of energy, ancillary products, and other outputs from the facility (see UP 7.5.4 for further information on timing of revenue recognition). No cost allocation will be necessary because all costs will be recognized at the time of generation. However, if revenue from the sale of RECs is not recognized concurrently with the sale of energy, or RECs are held for sale at a future date, reporting entities should allocate costs.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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