FASB issues environmental credit standard

The Financial Accounting Standards Board posted a new accounting standards update Tuesday aimed at improving the financial accounting and disclosures about activities related to environmental credits and environmental credit obligations, such as emissions allowances and renewable energy certificates. 

The guidance includes recognition, measurement, presentation and disclosure requirements for all entities that generate, purchase or receive environmental credits or have a regulatory compliance obligation that can be settled with environmental credits.

"The new ASU adds guidance that will provide clarity around accounting and disclosures that previously did not exist in environmental credits and related credit obligations," said FASB chair Richard Jones in a statement. "It responds to stakeholders who expressed the need for increased understandability and comparability in this emerging area."

The update defines environmental credits and when they should be recognized as assets. It also distinguishes between compliance and noncompliance credits for subsequent measurement, and requires enhanced disclosures about how credits are obtained, used, and valued. 

The amendments also define environmental credit obligations and clarify when entities need to recognize environmental credit obligation liabilities arising from regulatory compliance programs, how to measure those liabilities, and what information has to be disclosed about those obligations.

FASB proposed the environmental credits accounting standards update in 2024 but has been careful to avoid getting overly involved in environmental issues, unlike the International Financial Reporting Standards Foundation, which oversees both the International Accounting Standards Board and the International Sustainability Standards Board. On Tuesday, FASB noted that its mission is to establish and improve financial accounting and reporting standards; and therefore, the amendments in the accounting standards update are intended to address only amounts reported in financial statements. "As a result, measuring or tracking an entity's voluntary net zero emissions initiatives or the entity's actual greenhouse gas emissions are beyond the scope of the FASB's mission and are not addressed by the FASB or by these amendments," it added.

The update comes in response to feedback from stakeholders who responded to an invitation to comment on FASB's agenda consultation. They indicated that entities are increasingly subject to government mandates and regulatory compliance programs related to emissions, which often result in obligations that may be settled with environmental credits. 

Some companies voluntarily commit to reducing their emissions by a future date, such as through "net zero" and "carbon neutral" initiatives, and use environmental credits to partially offset their emissions. FASB's stakeholders pointed out that U.S. GAAP doesn't provide specific authoritative guidance on how to recognize and measure environmental credits or the related obligations that result from regulatory compliance programs. As a result, entities often account for environmental credits and environmental credit obligations by analogy to Topic 330, Inventory, Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other Than Goodwill, and Topic 450, Contingencies, resulting in diversity in practice. 

FASB cited some examples of environmental credits and the associated regulatory compliance program that are subject to the amendments in the update, while cautioning that the examples are not all-inclusive: 

1. Emissions allowances originating from domestic and global cap-and-trade programs; 
2. Renewable identification numbers originating from the U.S. Renewable Fuel Standard; and 
3. Renewable energy certificates originating from U.S. State Renewable Portfolio Standards. 

In addition, carbon offsets are often generated by projects aimed at reducing or removing carbon dioxide from the atmosphere, and are typically used by entities to meet voluntary initiatives to reduce net emissions. They're also subject to the amendments in the update. 

The amendments apply to all entities and affect entities that: 

1. Buy or receive transferable environmental credits and use those credits: 
a. To settle environmental credit obligations arising from regulatory compliance programs;
b. To transfer in an exchange transaction;
c. In a nonreciprocal transfer (for example, to distribute to an investor);
d. To meet voluntary environmental initiatives, such as carbon neutral or net zero initiatives. 

2. Generate environmental credits. 
3. Have enforceable obligations resulting from regulatory compliance programs represented to prevent, control, reduce, or remove emissions or other pollution that may be settled with environmental credits. 

The amendments are effective for public business entities for annual reporting periods starting after Dec. 15, 2027, and interim reporting periods within those annual reporting periods. For other entities, the amendments are effective for annual reporting periods starting after Dec. 15, 2028, and interim reporting periods within those annual reporting periods. Early adoption is permitted.