Dive Brief:
- The Financial Accounting Standards Board on Wednesday made a slew of technically tentative decisions to further shape new accounting standards for environmental credits it is developing, before voting 7-0 to tee up a draft of the rules for public comment. While the unanimous decision formally sets it on a path toward hoped-for finalization later this year, board members expressed split views on some of details of the guidance.
- Some members pushed back before the board decided to allow certain circumstances where companies can elect to value the credits using the fair value method, rather than the historical cost accounting method which is anticipated to be the more typical method used. The board approved new rules last year for crypto that also used the fair value method. Some board members said the potentially opaque environmental credit market could spark similar concerns raised by the young crypto market, in which it would be difficult for companies to accurately determine an EC’s fair market value.
- “I did have some initial discomfort...in part because we had that discomfort when we talked about crypto,” Board member Christine Botosan said. However, she said the staff explained that environmental credits were different than crypto because they have to be registered in some way. “So I think there are other checks and balances out there for the organization that might not exist in the crypto world,” she said.
Dive Insight:
FASB decided to add ECs to its technical agenda 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 have drawn increased attention from regulators, companies and investors.
Last year the standard setter decided its new standards would 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, CFO Dive previously reported.
Exactly how it will impacts businesses and preparers of financial reports will depend on what the final rules look like after changes are made following the public comment period, Logan Kowcheck, audit senior manager at the accounting firm of Schneider Downs said in an interview.
Kowcheck’s energy clients that generate environmental credits, which would be among the most likely companies to be subject to the proposed new treatment, seem to largely accept it as positive in that the standards will provide accounting guidance where currently there is none. Still, he said he expects more changes to the new standard before it is finalized and noted that the full impact it will have on companies subject to it will depend on what the finished rule looks like. "The devil is in the details," he said.
For now, the disclosures that will be required in the footnotes are among the elements of the proposed new rule that Kowcheck thinks are notable. "The requirement to disclose what the credits are in the [profit and loss statement]..is needed for a financial statement reader from a consistency and comparability standpoint if you're evaluating different companies," he said. "But the compliance requirements could get burdensome. This is something they're going to get a lot of comments on."
