The Financial Accounting Standards Board issued an Accounting Standards Update on May 19 intended to improve the financial accounting for and disclosure of activities related to environmental credits and environmental credit obligations.
The guidance provides recognition, measurement, presentation, and disclosure requirements for all entities that generate, purchase, or receive environmental credits or have a regulatory compliance obligation that may be settled with environmental credits, FASB said.
“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,” FASB Chair Richard Jones said in a statement. “It responds to stakeholders who expressed the need for increased understandability and comparability in this emerging area.”
The ASU defines environmental credits and when they should be recognized as assets, 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 must recognize environmental credit obligation liabilities arising from regulatory compliance programs, how to measure those liabilities, and what information must be disclosed about those obligations.
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According to the board, stakeholder feedback, including from respondents to the 2021 FASB Invitation to Comment, Agenda Consultation, 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.
In addition, some entities that voluntarily commit to reducing their emissions by a future date—for example, voluntary “net zero” and “carbon neutral” initiatives—use environmental credits to partially offset their emissions.
Stakeholders emphasized that 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 typically 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 said.
In the ASU, FASB provided examples of environmental credits and the associated regulatory compliance program that are subject to the amendments in this update (examples are not all-inclusive):
- Emissions allowances originating from domestic and global cap-and-trade programs.
- Renewable identification numbers originating from the U.S. Renewable Fuel Standard.
- Renewable energy certificates originating from U.S. State Renewable Portfolio Standards.
In addition, carbon offsets, which often are generated by projects represented to reduce or remove carbon dioxide from the atmosphere, are typically used by entities to meet voluntary initiatives to reduce net emissions and also are subject to the amendments in this update, FASB said.
The amendments in the ASU are expected to provide investors with additional decision-useful information by improving the understandability of financial accounting and reporting information about environmental credits and environmental credit obligations associated with regulatory compliance programs, as well as the comparability of that information by reducing diversity in practice.
The FASB said Tuesday that its mission is to establish and improve financial accounting and reporting standards; therefore, the amendments in this ASU 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 that mission and aren’t addressed by the FASB or by these amendments, the board added.
The amendments in the ASU 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.
For public business entities, the amendments in this update are effective for annual reporting periods beginning after Dec. 15, 2027, and interim reporting periods within those annual reporting periods. For entities other than public business entities, the amendments are effective for annual reporting periods beginning after Dec. 15, 2028, and interim reporting periods within those annual reporting periods. Early adoption is permitted as of the beginning of an annual reporting period.
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Tags: Accounting, Accounting Standards, ESG, FASB, Financial Reporting
