Assurance Gazette – December 2024 Edition

We are thrilled to present the December 2024 edition of the Assurance Gazette. This edition offers insights for professionals in financial reporting, auditing, and compliance. This edition focuses on Energy Service Companies (ESCOs), emphasizing their role in energy efficiency and sustainability. It covers key accounting treatments under Indian Accounting Standards (Ind AS), including Ind AS 115, 116, and 16. Our goal is to guide professionals in adopting sustainable financial practices while addressing ESCO-related challenges. Additionally, this edition also captures the examination of the accounting treatment of interest payable and depreciation in the context of a joint venture’s termination dispute. It highlights the necessity for proper classification and disclosure in financial statements, ensuring compliance with Ind AS standards and providing clarity to users on exceptional items and routine expenses. 

Accounting Treatment for ESCO Projects 

An Energy Service Company (ESCO) offers energy solutions aimed at optimizing energy usage, improving efficiency, and reducing costs. Through services such as energy audits, efficiency upgrades, renewable energy installations, and ongoing energy management, ESCOs help clients achieve significant savings, reduce environmental impact, and promote sustainability. These services are tailored to meet the specific energy needs of different sectors, including commercial, industrial, governmental, and institutional. 

Revenue streams for ESCOs are primarily categorized into two types. The first is upfront revenue, which includes income earned at the start of the project, such as equipment sales and consulting fees. The second is ongoing revenue, which refers to continuous income tied to the performance of energy-saving measures, including payments for energy management and maintenance services. 

Accounting Treatment under Indian Accounting Standards (Ind AS) 

Applicable IND AS are IND AS 115 “Revenue from contacts with customers”, IND AS 116 “Leases”, IND AS 16 “Property, Plant and Equipment”. 

IND AS 116 “Leases” 

ESCO shall check the contract for classification under IND AS 116 “leases”. IND AS 116 defines lease as, “A contract, or part of a contract, that conveysthe right to use an asset (the underlying asset) for a period of time in exchange for consideration.” 

Further it provides some conditions to be fulfilled by a contract to be identified as a lease contract. These conditions are listed below: 

Right to Control the Use of an Asset  

The contract must convey the right to control the use of an identified asset for a specified period. This means that the lessee must have the ability to direct how and for what purpose the asset is used during the lease term. 

Identification of an Asset  

The contract must involve an identified asset, either explicitly specified or implicitly specified at the time the contract is signed. The asset must be physically distinct or identifiable (e.g., a specific building or piece of machinery).