- The Financial Accounting Standards Board (FASB) has agreed to move ahead with a project to set new standards for how companies account for environmental credits such as those obtained for carbon offset programs and renewable energy credits/certificates (RECs).
- The U.S. standard setter’s unanimous decision to add the project to its technical agenda signals a shift from 2019 when the board opted against addressing credits related to emissions trading and other environmental markets and comes amid increased interest from regulators, companies and investors in environmental, social and governance (ESG) issues.
- “Clearly this is a pervasive issue,” Board Member Frederick Cannon said during a meeting Wednesday. “ESG investment is growing very fast and this is at the intersection between the financial statements and ESG Issues."
FASB is one of a number of standard setters and regulators worldwide that are working on moving to establish uniform rules that will ultimately guide CFOs with ESG-related business models and investments.
The International Sustainability Standards Board (ISSB) is seeking to build a consensus of regulators from the U.S., Europe, Japan and other jurisdictions on disclosures about climate risk and other ESG issues. In March the Securities and Exchange Commission (SEC) proposed that companies follow detailed rules for reporting climate risk, saying businesses will benefit from clear, uniform disclosures.
As part of a presentation before the board this week, FASB project manager Michael Lupo said he anticipated additional momentum for ESG stemming from the SEC's move. The staff recommended adding the environmental credits project to the board’s active agenda.
“The staff expects the SEC’s decision regarding the disclosure of voluntary use of RECs and carbon offsets for clean energy…will increase the use of these programs and result in additional investor interest in the accounting for these programs,” Lupo told the board. “The staff also believes that users would benefit from consistent accounting for economically similar programs. Consequently the staff believes there’s an identifiable and pervasive need to improve GAAP to provide specific guidance on accounting for environmental credits.”
Currently, Lupo said financial report preparers are treating the credits in a variety of ways, depending in part on whether the credits are part of voluntary or compliance programs. For example, he said some preparers are treating the credits as inventory while others are treating them as intangibles. Board Member Christine Botosan, who voted in favor of prioritizing the issue, said she was concerned about the differences in the way the credits are currently being accounted for.
“As these programs grow…that will become a greater problem as time goes on,” she said, adding that she hopes to better understand how the ways that the credits are used will impact cash flow and related risk exposure.
Earlier this month FASB did another about-face when it opted to add a project to improve the accounting for crypto assets to its technical agenda. In 2020 the board had decided to stand back from the issue but FASB members have since come around to recognizing the need for a better accounting model as an increasing number of companies are venturing into the sector.
FASB Chair Richard Jones said on Wednesday that the board had enough resources to add the environmental credit topic to its prioritized agenda.