Overview of accounting for indemnification arrangements associated with the acquisition of transferable credits
Due to the influx of new and modified tax credits created by the Inflation Reduction Act of 2022 (IRA), the market for transferable credits has increased significantly. This has resulted in more entities acquiring or planning to acquire transferable credits for the first time. Because the acquirer of U.S. federal transferable credits obtains nonrefundable, nontransferable credits, they are accounted for within the scope of Accounting Standards Codification (ASC) 740 following acquisition. Additionally, the acquirer of a U.S. federal transferable credit becomes the primary obligor for any underpayment due to the taxing authority. As a result, the acquirer accounts for and discloses any potential uncertainties associated with the benefit of the credits in accordance with accounting for uncertainties in income taxes under ASC 740-10.
Given the acquirer becomes the primary obligor for any potential future assessment, buyers may seek indemnification arrangements to help mitigate potential risks. Generally, the indemnification is either in the form of a direct contractual arrangement with the seller of the credits, a third-party insurance policy arranged by the seller with the buyer as the insured, or the direct purchase of an insurance policy by the buyer from a third-party provider. As a result of these types of arrangements, many questions have arisen on how to account for such transactions.
Read a March 2025 report prepared by KPMG LLP that summarizes the accounting for indemnification arrangements, including seller indemnifications and third-party insurance policies, associated with the acquisition of transferable credits in accordance with U.S. generally accepted accounting principles (GAAP).