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.
On October 11, 2023, the FASB continued its discussions about accounting for environmental credit programs.
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:
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:
Recognition and measurement criteria
Recognition
Initial measurement
Subsequent measurement
The measurement model applied would align with how the entity will use the credit (i.e. its intent).
Reassessment
The FASB will perform further outreach on recognition and measurement and continue discussions on accounting for environmental credit obligations.
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