FASB tightens draft environmental credit rule’s scope

Dive Brief:

The Financial Accounting Standards Board tentatively decided Wednesday that the new standards it is developing to guide how companies account for certain environmental credits will apply to a variety of forms — from credits to certificates, allowances and offsets — that provide enforceable rights to credit for reducing or removing pollution such as carbon offset programs or renewable energy credits/certificates known as RECs.
The U.S. standard setter held firm on leaving tax credits — including those created by the Inflation Reduction Act last year — outside the scope. While acknowledging that the IRA significantly increased the prevalence of refundable and transferable clean energy income tax credits, a staffer recommended the board exclude credits, citing complications related to the numerous ways that companies accounted for those credits.
The board also determined that the rule will apply to credits with different origins, meaning they could be acquired, granted by a regulatory entity or internally generated. Board Vice Chair Jim Kroeker, who voted in favor of the new criteria, also expressed concerns about liabilities that could stem from credits created by a company. “If I promise to keep trees on a piece of land for 100 years I likely have a performance obligation not satisfied at a point in time and so I think it would be important for people that are generating these to also understand there is a liability side,” Kroeker said.

Dive Insight:

The project came back before the board a year after the FASB decided to add it to its technical agenda, marking it as a priority, in May of 2022. That move was a shift from 2019 when the board opted against addressing credits related to emissions trading and other environmental markets. Since that time environmental, social and governance issues has drawn increased attention from regulators, companies and investors.

FASB has also worked to get feedback from preparers, accountants, companies and investors about how to structure the new guidance amid a growing awareness of its importance. The groups indicated that environmental credits are expected to become “‘material’ in the future,” a staff member told the board during a presentation.

As was the case until new standards were recently issued for crypto, no generally accepted accounting principles specifically address environmental credits. Many report preparers generally apply certain aspects of Topic 330 which covers inventory or Topic 350, which covers intangibles and goodwill, according to a meeting handout.

During the meeting FASB Chair Richard Jones said the scope of the environmental project was a very important element but in an apparent reference to instruments that might not meet the new definition of environmental credits, he noted that the standards now in the works are not the only ones that financial report preparers can use. “It’s always helpful to remind people we have other accounting standards people can look to when they’re outside the scope like contribution accounting,” Jones said.