FASB issues ASU on environmental credits and obligations

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With myriad regulatory compliance programs, emissions reduction agreements, and investments in renewable energy, companies have developed diverse practices for accounting for carbon offsets, allowances and credits. The ASU establishes an accounting model under ASC 818 to recognize, measure, present and disclose environmental credits and obligations in the financial statements.

Applicability

ASU 2026-02
All entities that have environmental credits or environmental credit obligations.

Relevant dates

Entities	Effective dates
Public business entities	Annual and interim reporting periods in fiscal years beginning after December 15, 2027
All other entities	Annual and interim reporting periods in fiscal years beginning after December 15, 2028
Early adoption is permitted for all entities in interim and annual periods for which they have not issued or made available to issue their financial statements. If early adoption is elected in an interim period, the entity adopts it as of the beginning of the annual period that includes that interim period.

Key impacts

ASU 2026-02 introduces ASC 818 and sets out the following authoritative guidance:

Scope: ASC 818 applies only to environmental credits and environmental credit obligations (ECOs) that meet the ASC 818 definitions described below.
Environmental credits: Environmental credits are recognized as assets if the entity intends to use them to settle ECOs or transfer them in an exchange transaction or a nonreciprocal transfer. Environmental credits used for compliance (i.e. to settle an ECO) are recorded at cost and not remeasured. Noncompliance environmental credits are also recognized at cost but assessed for impairment at each reporting date. Costs for environmental credits that do not meet the asset recognition criteria (e.g. credits to be used on a voluntary basis), including nonrefundable deposits for those credits, are expensed as incurred.

ECO liabilities: ECO liabilities reflect the number of credits needed to settle the obligation if the reporting date were the end of the compliance period. The ECO liability is measured as the sum of the carrying amount of available compliance credits (the funded portion) and the fair value of any additional credits required to fulfill the obligation (the unfunded portion).

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FASB issues ASU

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