Defining Issues | October 2023
Insight
The FASB continues to discuss the accounting for compliance and other environmental credits.
As more companies enter into commitments to reduce their carbon emissions or invest in renewable energy, how to account for carbon offsets, allowances and credits is becoming more pressing. The complexity and variety of arrangements is giving rise to questions about how US GAAP applies, often involving more than one standard.
Source and applicability
- FASB project: Accounting for Environmental Credit Programs
- Companies that acquire, are granted or create environmental credits
Relevant dates
On October 11, 2023, the FASB continued its discussions about accounting for environmental credit programs.
Key impacts
The accounting for environmental credits (credits) is both an emerging issue and one that has been on the radar of standard-setters for decades. Emissions trading arrangements are not new, but for companies making net-zero or other emissions commitments, offsets and credits are often a key driver of their strategy. These arrangements were historically established to help companies comply with governmental or regulatory emissions mandates. Now they are also a catalyst of growth and innovation, incentivizing companies to develop and implement the latest renewable technology. These growing and largely self-imposed strategic commitments have caused the related accounting issues to reemerge as a high priority.
Although several standard-setting projects have been attempted, there are currently no accounting requirements under US GAAP specific to carbon offsets, allowances or credits. Consequently, practice has become diverse as companies seek to interpret and apply current accounting guidance to arrangements that are often complex and evolving.
After adding the project to its technical agenda and engaging in initial discussions on project scope, the FASB met on October 11, 2023, to refine its project scope and discuss recognition and measurement criteria. The FASB noted throughout the meeting the importance of developing criteria that are operable and decision-useful to investors.
The following are key highlights from the tentative decisions reached at the October 11 FASB meeting:
Project scope
Assets
The Board refined the project scope to include credits that meet all of the following:
- Credits that are enforceable and transferable. In-scope credits can take numerous forms including credits, certificates, allowances and offsets
- Credits that are acquired (including from related parties), granted by a regulatory agency or designee or internally generated (created)
- Credits that lack physical substance and do not meet the definition of financial assets under US GAAP
- Credits that are represented to prevent, control, reduce, or remove emissions or other pollution
The Board confirmed that income tax credits, such as those related to the Inflation Reduction Act, are outside the scope of the project because they are in the scope of other US GAAP.
Liabilities
The Board clarified the following:
- Environmental credit obligations (ECOs) are in the scope of the project. ECOs arise from existing or enacted laws, statutes or ordinances represented to prevent, control, reduce or remove emissions or other pollution that may be settled with environmental credits. ECOs generally arise from compliance programs
- Environmental obligations accounted for under ASC 410-30 are not ECOs
- Constructive obligations for internally established (i.e. voluntary) targets to reduce emissions are not in the scope of the project but may be within the scope of other US GAAP
Recognition and measurement criteria
Recognition
- A credit would be recognized as an asset when it is probable that it will be used to settle an ECO, sold or traded.
- Costs to obtain all other credits (e.g. as part of a voluntary program) would be expensed when incurred unless the costs are capitalizable under other US GAAP (e.g. inventory).
Initial measurement
- Credits that meet the asset recognition criteria would be measured initially at historical cost – consistent with asset acquisition guidance in ASC 805-50 – unless other US GAAP applies.
- Costs for credits that are granted or created would be limited to transaction costs (e.g. application fees) and could be zero if there are no costs directly associated with obtaining the credits.
Subsequent measurement
The measurement model applied would align with how the entity will use the credit (i.e. its intent).
- Credits used to settle an ECO (i.e. compliance environmental credits) would not be remeasured.
- Credits that will be sold or traded (i.e. noncompliance environmental credits) and that are initially measured at historical cost would be assessed for impairment. However, the Board requested further outreach around whether to require or permit a fair value model for credits intended to be traded.
Reassessment
- Each reporting period, entities would reassess whether compliance and noncompliance credits meet the appropriate recognition criteria.
- Credits that are reclassified from compliance environmental credits to noncompliance environmental credits would be assessed for impairment before applying the subsequent remeasurement guidance.
- Subsequent reversal of a previously recognized impairment loss would be prohibited.
- Entities could establish an accounting policy to use a portfolio approach for similar environmental credits to apply the recognition and measurement guidance.
Next steps
The FASB will perform further outreach on recognition and measurement and continue discussions on accounting for environmental credit obligations.
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