Summary of Significant Accounting Policies

(b) Basis of consolidation

The consolidated financial statements include Canadian Solar Inc. and its subsidiaries where it holds a controlling financial interest or is the primary beneficiary of variable interest entities (“VIEs”). A controlling financial interest generally exists when the Company holds a majority voting interest in an entity, and the non-controlling shareholders or partners do not possess substantive participating or redemption rights, nor are there other conditions that would indicate the Company does not have control. Non-controlling interests in consolidated subsidiaries are reported as equity, unless redeemable outside the Company’s control, in which case they are classified as temporary equity.

The Company consolidates VIEs in which it is the primary beneficiary, with both power to direct the day-to-day operating activities that most significantly impact the VIE’s performance and the obligation to absorb losses or receive benefits that could potentially be significant. Consolidated VIEs include tax equity partnerships and similar structures where the Company, through its subsidiaries, acts as the managing member and controls day-to-day operations, silent partnerships and bankruptcy-remote structures used to hold project companies in Japan, where the Company does not hold a majority equity interest but is entitled to substantially all economic benefits and controls key operational decisions through asset management agreements. The obligations of these consolidated VIEs are nonrecourse to the Company, except where contractual liquidity support or guarantee exists. Required contributions were made during the years ended December 31, 2023 and 2024 in accordance with the respective operating agreements.

Certain solar power and battery energy storage project subsidiaries in the United States have issued Class A membership interests to third-party investors. Under the terms of these tax equity partnership arrangements, the investors are generally entitled to substantially all of the accelerated depreciation tax deductions and investment tax credits (“ITCs”) associated with the projects, together with a portion of the distributable cash, until a specified flip date, after which the majority of economics shift to the Company. These interests are redeemable and classified as temporary equity. The allocation of income or loss to these interests is performed using the Hypothetical Liquidation at Book Value (“HLBV”) method. Under HLBV, the income or loss attributable to redeemable non-controlling interests reflects the changes in the amounts that tax equity investors would hypothetically receive upon liquidation at the beginning and end of each reporting period, after considering any capital transactions, such as contributions or distributions, between these subsidiaries and the tax equity investors. As a result, the income tax benefit from the ITC and accelerated depreciation is reflected in the Company’s consolidated financial statements through the allocation of earnings to the redeemable non-controlling interests representing the tax equity investors’ share in the consolidated project companies.

Assets and liabilities of consolidated VIEs are disclosed separately if creditors do not have recourse to the Company, except where a financial guarantee exists. See Note 10 for details. As of December 31, 2023 and 2024, the Company guaranteed VIE obligations of $11,163 and $87,436, respectively.

Intercompany balances and transactions are eliminated upon consolidation.

Cash, cash equivalents and restricted cash

(d) Cash, cash equivalents and restricted cash

Cash and cash equivalents are stated at cost, which approximates fair value, and includes cash on hand, money market funds and demand deposits that are unrestricted and have original maturities of three months or less when acquired. Restricted cash represents amounts held by banks as security for short-term notes payable, letters of guarantee, letters of credit or bank borrowings. These amounts are unavailable for general use until the related obligations mature or are repaid, at which point the funds become unrestricted.

Allowance for credit losses

(f) Allowance for credit losses

The trade accounts receivable, advances to suppliers, warranty insurance receivables, and other receivables are presented net of allowances for credit losses. Current expected credit losses (“CECL”) are estimated based on external and internal credit ratings, historical loss rates, and other relevant factors. Where individual credit risk evidence is not available, financial instruments are grouped by aging, size, industry, and other shared risk characteristics.

To mitigate credit risk, the Company purchases credit insurance from providers such as China Export & Credit Insurance Corporation and PICC Property and Casualty Company Limited for certain trade receivables. An allowance is recorded based on historical collection experience, receivable aging, and other available evidence, regardless of insurance coverage. When a claim is made, a receivable is recorded equal to the expected recovery, up to the specific allowance amount, with a corresponding reduction in general and administrative expenses. Receivables from insurers included in prepaid expenses and other current assets were $2,929 and $6,881 as of December 31, 2023 and 2024, respectively.

Inventories

(h) Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted-average method. Inventory costs include direct materials such as high purity and solar-grade silicon, silicon wafers, metallic pastes, glass, aluminum frames, ethylene vinyl acetate (“EVA”, an encapsulant used to seal the module), junction boxes, and polymer back sheets, as well as components for energy storage systems including insulated-gate bipolar transistors (“IGBT”) module, magnetic components, lithium iron phosphate battery cells, customized sheet metal and storage inverter components. Applicable direct labor, tolling, and overhead costs incurred to bring inventories to their present location and condition are also included.

When indicators suggest that inventory carrying amounts may not be recoverable, such as obsolescence, damage, declining market prices, and reduced demand forecasts, the Company records inventory write-downs to net realizable value.

Business combination

(j) Business combination

Business combinations are accounted for using the acquisition method. Assets and liabilities assumed are recorded at their fair value as of the acquisition date. Any excess of the purchase consideration over the fair value of the net assets, including identifiable intangible assets, is recorded as goodwill. Acquisition-related costs not included in the purchase price, including legal, accounting, and other professional fees, and integration costs, are expensed as incurred within general and administrative expenses. Adjustments to provisional amounts are recognized as additional information becomes available regarding facts and circumstances that existed as of acquisition date. The measurement period ends when the Company obtains sufficient information to finalize fair value measurements, but no later than one year from the acquisition date.

Property, plant and equipment

(l) Property, plant and equipment

Property, plant and equipment is recorded at cost, less accumulated depreciation. Cost comprises the purchase price and any directly attributable costs, including interest capitalized during the period in which the asset is brought to the condition and location for its intended use. Repair and maintenance costs are expensed as incurred. Costs incurred in constructing new facilities, including progress payments, capitalized interest and other related construction expenditures, are capitalized and transferred to property, plant and equipment upon completion. Depreciation commences when the asset is placed into service.

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Buildings are depreciated over 10 to 20 years. Leasehold improvements are depreciated over the shorter of the lease term or their estimated useful lives. Machinery and equipment are depreciated over 5 to 10 years. Furniture, fixtures, and office equipment, as are motor vehicles, are depreciated over 5 years. If property, plant and equipment placed into service are temporarily idled, the Company continues to record depreciation during the idle period. The estimated useful life of idled assets is reviewed and adjusted if necessary to reflect changes in expected usage.

Intangible assets

(n) Intangible assets

Intangible assets consist of customer-related intangible assets, including customer relationships and backlog, trademarks, technical know-how, and computer software purchased from third parties. These assets are recorded at fair value at the time of acquisition and are subsequently stated net of accumulated amortization, using the straight-line method over their estimated useful lives. Customer-related intangible assets are amortized over periods ranging from 7 to 20 years, trademarks are amortized over 20 years, technical know-how is amortized over 10 years, and computer software is amortized over periods ranging from 3 to 10 years.

Investments in affiliates

(p) Investments in affiliates

The Company accounts for its investments in affiliates using the equity method. Investments are initially recorded at historical cost and subsequently adjusted for the Company’s proportionate share of the investee’s earnings or losses, as well as other required equity method adjustments. Dividends received are recorded as reductions in the carrying amount of the investments. The portion of earnings considered as a return on capital is recognized accordingly, while any excess is treated as a return of capital.

Investments are evaluated for impairment when events or changes in circumstances indicate that the fair value may be less than the carrying amount. An impairment is recognized when the decline in fair value is determined to be other than temporary. In assessing whether a loss is other than temporary, the Company considers several factors, including the nature of the investment, the cause and duration of the impairment, the extent to which fair value is less than cost, the financial condition and near-term prospects of the investee, and the Company’s ability to hold the investment for a sufficient period to allow for recovery. For the years ended December 31, 2022, 2023 and 2024, the Company did not record any material impairment charges on its investments in affiliates.

Interest capitalization

(r) Interest capitalization

The Company capitalizes interest costs that are directly attributable to the acquisition, development, or construction of certain assets during the period required to prepare the asset for its intended use or sale. Interest is capitalized when expenditures to acquire, construct, or develop an asset have been made and interest has been incurred. For property, plant and equipment, and solar power and battery energy storage systems, capitalized interest cost is depreciated over the asset’s estimated useful life once placed in service. For project assets, capitalized interest is included in cost of revenues when sold. Capitalization ceases when the project is substantially complete or when construction activities necessary to prepare it for its intended use are no longer in progress.

Short-term notes payable

(t) Short-term notes payable

The Company enters into arrangements with banks in China whereby the banks issue notes to the Company’s materials and equipment vendors, effectively extending the payment terms of the related accounts payable. Vendors may present these notes to a bank, including the issuing bank, prior to the stated maturity date, generally at a discount to face value. The Company is typically required to maintain restricted cash deposits with the issuing banks, which are used to immediately repay the bank upon settlement of the notes. Given that the purpose of these arrangements is to extend the payment terms to suppliers, the Company records such amounts as short-term notes payable. Because the bank settlements are immediately repaid using the Company’s restricted cash and other deposits held at the same banks, the notes payable do not represent cash borrowings. As of December 31, 2023 and 2024, short-term notes payable totaled $878,285 and $637,512, respectively.

Leases

(v) Leases

The Company determines whether an arrangement contains a lease at inception based on the applicable facts and circumstances. Operating leases are recorded as right-of-use (“ROU”) assets and operating lease liabilities, while finance leases are included in property, plant and equipment and corresponding liabilities on the consolidated balance sheets. ROU assets represent the right to use an underlying asset for the lease term, while lease liabilities represent the obligation to make future lease payments. ROU assets and lease liabilities are measured as the present value of lease payments not yet paid, discounted using the rate implicit in the lease, if readily determinable. If the implicit rate is not readily available, the Company uses its incremental borrowing rate, based on information available at lease commencement. Lease payments exclude variable components, which are expensed when incurred. Operating lease ROU assets include lease prepayments, initial direct costs, and deferred rent, if applicable, and exclude lease incentives. Lease option to extend or terminate is included in the lease term only when it is reasonably certain the option will be exercised. Lease expenses for operating leases are recognized on a straight-line basis over the lease term. For finance leases, asset amortization is recognized over the shorter of the lease term or useful life within depreciation expense, and interest, including variable payments, is recognized in interest expense, in the consolidated statements of operations.

Short-term leases with initial terms of 12 months or less and no extension or purchase option reasonably certain to be exercised are not recorded on the consolidated balance sheets, and instead related lease payments are recognized on a straight-line basis over the lease term. Lease liabilities due within one year are classified as current liabilities. The Company’s leases do not include material residual value guarantees or restrictive covenants.

The Company reviews ROU assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. If the undiscounted cash flows expected from the use and eventual disposition of the asset are less than its carrying amount, an impairment loss is recognized in the consolidated statements of operations for the difference between the carrying amount and asset’s fair value.

Income taxes

(x) Income taxes

Deferred income taxes are recognized for temporary differences between the financial reporting and tax bases of assets and liabilities, and for net tax operating loss carryforwards and tax credits, using enacted tax rates expected to apply when the deferred tax assets or liabilities are realized or settled. A valuation allowance is established to reduce the deferred tax assets if it is more likely than not that some or all of the deferred tax assets will not be realized.

Income tax expense includes current tax expense, which represents amounts payable to or receivable from taxing authorities; deferred tax expense, which reflects changes in deferred tax assets and liabilities, including changes in valuation allowances; and non-current tax expense, which arises from changes in uncertain tax positions not settled with cash or other tax attributes.

The Company only recognizes tax benefits related to uncertain tax positions when such positions are more likely than not of being sustained upon examination. For such positions, the amount of tax benefit that the Company recognizes is the largest amount of tax benefit that is more than fifty percent likely of being sustained upon the ultimate settlement of such uncertain tax position. The Company records penalties and interests associated with the uncertain tax positions as a component of income tax expense.

The Company applies the flow-through method for ITCs related to energy project placed into service. Under this method, ITCs that are not part of a transaction with a tax equity investor are recognized as a reduction to income tax expense in the period in which the credit arises. This approach results in a basis difference between the tax and book value of the related asset, giving rise to a deferred tax liability, which is accounted for using the income statement method. For ITCs monetized through tax equity financing structures, the Company applies guidance under ASC 740 and ASC 810, as applicable, based on the structure and associated accounting model used for the tax equity partnership. Production Tax Credits (“PTCs”) are recognized as solar energy is generated and sold, based on applicable statutory rates, and reduce current income taxes payable or are recorded as deferred tax assets if utilization is limited.

Shipping and handling

(z) Shipping and handling

Amounts billed to customers for shipping and handling are included in net revenues. Related costs are generally included in selling and distribution expenses, and totaled $453,865, $237,947 and $330,909 for the years ended December 31, 2022, 2023 and 2024, respectively.

Other operating income, net

(ab) Other operating income, net

Other operating income, net primarily includes gains and losses on the disposal of property, plant and equipment, solar power and battery energy storage systems, and government grants. For the years ended December 31, 2022, 2023 and 2024, the Company recorded net gains of $4,259, $5,342 and net loss of $896, respectively, on the disposal of property, plant and equipment. The loss on the disposal of solar power and battery energy storage systems were immaterial for the periods presented.

Government grants include both unrestricted and restricted grants and subsidies. Unrestricted grants, which provide the Company with full discretion over the use of funds, are recognized when it is probable that all the conditions stipulated by governments, generally related to operating a business within a government’s jurisdiction and complying with specific policies promoted by the governments, have been satisfied. Restricted grants related to ROU assets, property, plants and equipment, and certain projects are recorded as deferred subsidies within other non-current liabilities and are amortized on a straight-line basis over the useful life of the related assets. In most cases, the conditions attached to such grants pertain to specific performance or time-based requirements, such as the construction or acquisition of property, plant and equipment, achievement of business development milestones, technological innovation, or human capital development. These conditions may be subject to review, audit and approval by the government authorities and, therefore, the actual amounts realized may differ from the amounts initially recorded. As of December 31, 2024, deferred government grants included in other non-current liabilities amounted to $168,708. The Company qualifies for refundable or transferable tax credits under Section 45X of the Internal Revenue Code for eligible solar modules and components manufactured in the United States and sold to third parties. These credits are treated as income-based grants and recognized as reduction to cost of revenues related to the activities that generated the benefit, when there is reasonable assurance that the Company will comply with the eligibility criteria and receive the credits. The Section 45X credits were not material to the consolidated cost of revenues or balance sheet for any of the periods presented.

Foreign currency translation

(ad) Foreign currency translation

The Company uses the United States dollars (“U.S. dollars” or “$”) as its functional and reporting currency. Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates in effect at the balance sheet date. Transactions in foreign currencies are translated at the exchange rates prevailing on the transaction dates. Resulting transaction gains and losses are recognized in the consolidated statements of operations. Gains and losses on foreign currency transactions between consolidated entities that are of a long-term-investment nature, that is, settlement is not planned or anticipated in the foreseeable future, are not recognized in the consolidated statements of operations, but are recorded in other comprehensive income or loss. For subsidiaries that use a local currency as their functional currency, assets and liabilities are translated at exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates, and revenues, expenses, gains and losses are translated at average rates for the period. Resulting translation adjustments are reported as foreign currency translation adjustments and are presented as a separate component of other comprehensive income or loss in the consolidated statements of comprehensive income (loss).

Derivatives and foreign currency risk

(af) Derivatives and foreign currency risk

The Company generates revenues, incurs expenses, holds cash and enters into financing arrangements in multiple currencies. These activities expose the Company to foreign currency risk, which may result in exchange gains or losses due to fluctuations in currency exchange rates. The Company is particularly exposed to foreign currency movements in countries where it has significant manufacturing, sourcing, or financing activities. To mitigate a portion of this risk, the Company uses foreign currency forward or option contracts as part of its hedging plan. These derivative instruments are accounted for in accordance with ASC 815, and changes in fair value that are not designated as hedges are recognized in the consolidated statements of operations within gain or loss on change in fair value of derivatives, net. The fair value of derivatives is determined using observable market inputs, including forward exchange rates. Fair value measurements are adjusted, as necessary, to reflect counterparty credit risk and the Company’s own nonperformance risk. Realized gains or losses on derivative settlements are classified within operating activities in the consolidated statements of cash flows, consistent with the nature of the economically hedged item. For derivatives designated as cash flow hedges, the Company formally establishes and maintains the hedging relationship, including the related risk management objective, at inception. The effective portion of changes in fair value is recorded in other comprehensive income (loss), net of tax and subsequently reclassified into earnings in the same period the hedged item impacts the income statement.

Fair value of financial instruments

(ah) Fair value of financial instruments

The Company applies ASC 820 for fair value measurements of financial assets and liabilities. Fair value is defined as the exit price, the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tiered hierarchy, which prioritizes which inputs should be used in measuring fair value and requires the use of observable market data when available in determining fair value, is comprised of:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities. The Company’s money market funds included in cash equivalent, restricted cash balance, mutual funds related to employee compensation plan, and listed equity securities are measured using Level 1 inputs.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly. These include quoted prices for similar assets in active markets or inputs corroborated by observable market data.

Level 3 - Unobservable inputs reflecting the Company’s own assumptions, consistent with those market participants would use when pricing the asset or liability.

Share-based compensation

(aj) Share-based compensation

The Company may grant restricted share units (“RSUs”) and share options to employees and directors. Awards with time-based vesting conditions are measured at grant date fair value and recognized as compensation expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period. For awards with both time-based and performance-based vesting conditions, compensation expense is recognized when it becomes probable that the performance condition will be met. The fair value of awards with performance conditions, such as the CSI Solar IPO, does not reflect the likelihood of achieving the performance condition and is recognized in accordance with ASC 718. Share-based compensation expense is allocated to cost of revenues, selling and distribution, general and administrative, and research and development expenses, based on the job function of the grantee.