FASB proposes ASU on environmental credit programs
Defining Issues | December 2024
The proposed ASU introduces an accounting model for environmental credits and environmental credit obligations.
As more companies today become subject to regulatory compliance programs, enter into emissions reduction commitments and invest in renewable energy, how to account for carbon offsets, allowances and credits is becoming more complex. The proposed ASU would create one standard that aims to improve the financial accounting and disclosure of environmental credits and environmental credit obligations (ECO).
Applicability
- Proposed ASU
- All entities that have environmental credits or environmental credit obligations.
Relevant dates
- Exposure draft issued December 17, 2024
- Comments due April 15, 2025
Key impacts
The proposed ASU would create ASC 818 and do the following:
- Define attributes of environmental credits and ECOs and limit the scope of ASC 818 to credits and obligations meeting these definitions.
- Require environmental credits to be accounted for based on how an entity intends to use the credit:
- Environmental credits that are probable of being used to settle an ECO or transferred in an exchange transaction would be recognized as an asset.
- The cost of all other environmental credits would be expensed as incurred.
- Require environmental credits that are probable of being used to settle an ECO (compliance credits) to be recognized at cost with no subsequent remeasurement. All other environmental credits recognized as assets would also be recognized at cost but be tested for impairment at each reporting date.
- Require entities to recognize ECO liabilities based on the amount of credits needed to satisfy the obligation as if the reporting date were the end of the compliance period. A liability would be measured based on the carrying amount of compliance credits on hand (the funded portion). Any unfunded portion would generally be measured based on the fair value of credits the entity would need to purchase to satisfy the obligation.
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