From competing on cost with traditional fossil fuel-based energy sources; to the challenges of regulation, permitting and licensing; to a vulnerable and complex global supply chain — renewable energy companies face numerous challenges in meeting sustainability priorities while also turning a profit. So why should the accounting aspect of renewable energy organizations be any easier? Unfortunately, it’s not.
The accounting infrastructure you have — or don’t have — can make or break your next big project. As your portfolio scales, so does the complexity of your financial reporting. By understanding six of the most common GAAP (generally accepted accounting principles) accounting challenges in renewable energy, you can avoid costly missteps and build a financial reporting foundation that supports long-term success.
Below we’ve outlined six of the most common and complex accounting challenges for those in the renewable energy development sector. Proactively addressing these issues now can prevent costly surprises later.
From early site control and permitting to Commercial Operation Date (COD) and ultimately operations, renewable energy projects undergo multiple financial and capital-intensive phases — early-stage costs, construction-in-progress (CIP) and eventual depreciation. Navigating what to capitalize, how to track component-level costs and when to begin depreciation is one of the most nuanced areas in project accounting.
Misclassifying development and operational expenses can distort your balance sheet or income statement and understate project value. That’s a problem when you're preparing for financing, financial statement audits or tax equity transactions.
>> Audit Watch: Auditors commonly request support for both capitalized development costs and detailed fixed asset roll forwards. Auditors will review cost details to ensure capitalization categories and depreciation methods are appropriate. Auditors will also evaluate recoverability on the assets and if any impairment is necessary. Inconsistencies between project phases or missing support for component costs can hold up audit timelines.
Most renewable energy projects are structured through multiple legal entities — holding companies, tax equity partnerships, developers, portfolio companies, construction (EPC) contractors and asset management companies. Managing intercompany activity and consolidation rules is critical to producing accurate financial statements.
Improperly tracked intercompany balances can lead to reconciliation issues, misstatements or delays in consolidation and financial reporting. Without a system in place, you may lose visibility into cash flow and profitability across the enterprise.
>> Audit Watch: Auditors will review HLBV calculations to ensure allocation between controlling and non-controlling interests are proper. Intercompany due-to/from accounts and eliminations are frequent audit pain points. Auditors often flag unreconciled balances, missing support or inconsistent consolidation methods, all of which can delay financial statement issuance.
New accounting standards are being developed to provide clearer, more consistent guidance for how companies recognize and report tax and environmental credits on their financial statements. Historically, there was a significant lack of specific rules, leading to diverse and often inconsistent practices. Whether your project qualifies for the Investment Tax Credit (ITC), Production Tax Credit (PTC) or bonus credits under the Inflation Reduction Act, accounting for tax incentives requires careful documentation and treatment under GAAP.
Incorrect accounting for tax incentives can affect your financial reporting, tax liability and audit outcomes. Missteps can result in misstatements or leaving money on the table.
>> Audit Watch: Auditors often request detailed support for tax credit calculations and policies. Incomplete documentation or unclear rationale for GAAP treatment can trigger post-year-end adjustments or delays in sign-off.
Renewable energy projects can generate revenue from multiple sources with different customers, including long-term Power Purchase Agreements (PPAs), Solar Renewable Energy Credit (SREC) sales, Net Metering Credit Agreements, tolling agreements, capacity payments, merchant sales or storage dispatch contracts. Each revenue stream may trigger different recognition criteria under GAAP, subject to ASC 606 or ASC 842.
Without a clear contract analysis and revenue recognition plan, you risk overstating or delaying revenue. This can affect investor reporting, lender compliance and audit results.
>> Audit Watch: Revenue recognition remains a high-risk area. Expect your auditors to test contracts closely, especially when there are multiple revenue sources or new project types in play.
Many long-term land use or lease agreements require developers to decommission equipment and restore the site at the end of a project’s life, often 20 to 30 years. These commitments trigger asset retirement obligation (ARO) accounting under ASC 410.
ARO liabilities must be estimated and recorded early, often during construction or once the site control agreement is executed. Understating these obligations can misrepresent long-term liabilities and lead to material audit adjustments.
>> Audit Watch: Auditors will look for completeness and accuracy in ARO recognition. Expect questions around cost assumptions, management estimates, timing and how you determined present value.
Most renewable energy projects rely on long-term land leases or equipment leases that are subject to ASC 842. These agreements often include rent holidays, milestone-based rent commencements and variable lease payments. However, it’s not just obvious land or equipment arrangements that create risk — many contracts, such as PPAs, storage agreements or service arrangements, may include embedded leases if they grant the right to control the use of an identified asset. Failing to evaluate these agreements properly can result in missing or misclassifying leases.
Improper lease classification, missed embedded leases, or incomplete disclosures can lead to balance sheet and income statement errors and audit delays. Lease-related right-of-use assets and liabilities must be tracked accurately across the project’s life, and undisclosed embedded leases can surface late in the audit process, creating significant adjustments.
>> Audit Watch: Auditors will review your lease calculations for completeness and accuracy, classification (operating or finance leases) and assumptions used in calculating present values. Missing or misclassified leases are common findings.
As your projects scale, your financial operations must scale with them. Proactive planning now can prevent year-end surprises and costly audit delays, protect your tax credits and build investor confidence. Some next steps for your team could include:
When your policies, support and documentation are audit-ready, your team is positioned to close faster and with fewer surprises. Each of the above accounting challenges can be addressed with the right tools, team of technical experts and foresight.
Contact Brooke Fullenkamp, Tyler Rose or a member of your service team to discuss this topic further.
In this blog Cohen & Co is not rendering legal, accounting, investment, tax or other professional advice. Rather, the information contained in this blog is for general informational purposes only. Any decisions or actions based on the general information contained in this blog should be made or taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.