Dive Brief:
- The Financial Accounting Standards Board issued new guidance Tuesday for how companies should account for environmental credits such as carbon offsets generated by projects aiming to reduce carbon dioxide in the atmosphere and emissions allowances related to cap-and-trade programs.
- The finalized updates to standards that underpin generally accepted accounting principles have been in the works for about five years and provide specificity lacking in existing rules.
- “The new ASU adds guidance that will provide clarity around accounting and disclosures that previously did not exist,” FASB Chair Richard Jones said in a statement. “It responds to stakeholders who expressed the need for increased understandability and comparability in this emerging area.”
Dive Insight:
The environmental credit standards update drew some pushback from both environmental groups and companies like Ford Motor during the public comment period.
For instance, last year the Environmental Defense Fund, an advocacy group, commended the FASB for providing the accounting guidance while also lamenting that certain elements of the rule could have the unintended consequence of weakening the environmental credit market.
On Wednesday, the EDF in an emailed statement called the final guidance on Topic 818 a “missed opportunity” and a competitive liability for companies who must comply.
“By requiring immediate expensing of carbon credits held for voluntary climate commitments, the standard imposes a direct P&L penalty on companies doing the right thing, putting U.S. firms at a structural disadvantage to global peers operating under more balanced frameworks,” Holly Pearen, EDF’s lead counsel for carbon pricing, said in the statement.
Voluntary climate action is not “a cost to be written off; it is a strategic investment that builds long-term enterprise value, and accounting standards should reflect that reality,” Pearen stated.
FASB decided to add environmental credits to its technical agenda in May of 2022. That move represented a shift from 2019, when the board opted against addressing credits related to emissions trading and other environmental markets.
Since that time, the pendulum of support has swung away from regulation related to environmental, social and governance issues which have faced a backlash in the second Trump administration.
For example, last June the Securities and Exchange Commission abandoned the rulemaking process for regulations requiring enhanced disclosures for ESG.
FASB’s new environmental credit rules will affect companies that generate, buy or receive transferable environmental credits or that participate in climate-related initiatives such as net-zero programs, according to the rule. It also defines the credits as “enforceable rights represented to prevent, control, reduce, or remove emissions or other pollution that are separately transferable in an exchange transaction.”
The updated standards require the credits to be recognized “at each reporting date” as an asset under certain circumstances, and organizations must recognize costs to obtain the credits as an expense. They also require companies to present the environmental assets separate from environmental credit liabilities on the balance sheet and call for companies to disclose in annual reports such related issues as the accounting policies used to account for the environmental credit obligations.
For public companies the new rules will be effective for annual and interim reporting periods that begin after Dec. 15, 2027. Private companies have an additional year before compliance is required.
