ARTICLE | February 04, 2025
The Financial Accounting Standards Board (FASB) recently issued a proposed Accounting Standards Update (ASU), Environmental Credits and Environmental Credit Obligations (Topic 818). The FASB initiated this project because of stakeholder feedback received, noting that U.S. generally accepted accounting principles do not provide guidance on recognizing and measuring environmental credits and the related obligations that result from regulatory compliance programs. As a result, entities typically account for these credits and obligations by analogy to FASB Accounting Standards Codification (ASC) Topic 330, Inventory; ASC Subtopic 350-30, Intangibles–Goodwill and Other – General Intangibles Other Than Goodwill; or ASC Topic 450, Contingencies; which has resulted in diversity in practice.
The proposed ASU would update the FASB’s ASC Master Glossary by adding definitions of both environmental credits and the related environmental credit obligations. An environmental credit, which may be acquired, internally generated, granted by a regulatory agency (or its designee(s)), or received in a nonreciprocal transfer that is not a grant from a regulator or its designee, would be defined as enforceable right that meets all of the following criteria:
- Lacks physical substance and is a not financial asset,
- Is represented to prevent, control, reduce, or remove emissions or other pollution,
- Is separately transferable in an exchange transaction, and
- Is not an income tax credit that may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose.
An environmental credit may take many forms including credits, certificates, allowances and offsets (e.g., corporate average fuel economy credits, renewable identification numbers and renewable energy certificates).
An environmental credit obligation would be defined as a regulatory compliance obligation arising 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. Obligations within the scope of ASC Subtopic 410-30 would not be environmental credit obligations.
Under the proposed ASU, environmental credits would be recognized as assets when it is probable that the environmental credit will either be used to settle an environmental credit obligation or transferred in an exchange transaction. Costs to obtain environmental credits that do not meet the criteria to be recognized as an asset would be expensed as incurred. Environmental credit obligations generally would be recognized as liabilities when events occurring on or before the reporting date result in an environmental credit obligation. In determining whether a liability should be recognized, the amendments in the proposed ASU would require that an entity assume that the reporting date is the end of the compliance period regardless of whether the compliance period ends on that date.
For both environmental credits and environmental credit obligations, the proposed ASU also provides initial and subsequent measurement, presentation and disclosure requirements.
The FASB will determine the effective date for the proposed ASU, and whether early application should be permitted, after considering feedback from stakeholders.
Entities would be required to apply the amendments in the proposed ASU retrospectively through a cumulative-effect adjustment to the opening balance of equity as of the beginning of the annual period of adoption. Entities would not be permitted to recast any financial statement information before the period of adoption.
Stakeholders are encouraged to review and provide input on the proposed ASU by April 15, 2025.
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Source: RSM US LLP.
Reprinted with permission from RSM US LLP.
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