Last week, the Financial Accounting Standards Board (FASB) published an Agenda Consultation/Invitation to Comment (ITC) on a number of topics, some of which could impact environmental matters including aspects of climate risk/offsets. One has potential relevance to asset retirement obligations (ARO) accounting for fossil fuel assets – especially given recent changes in the US political setting and meeting AI’s insatiable energy demands (see this recent blog):
“An entity should recognize the fair value of a liability for an ARO in the period in which it is incurred if a reasonable estimate of fair value can be made. If a reasonable estimate of fair value cannot be made in the period the ARO is incurred, the liability should be recognized when a reasonable estimate of fair value can be made. GAAP provides examples of instances in which a reasonable estimate of the fair value of an ARO cannot be made, such as for an asset with an indeterminate useful life.
A few stakeholders expressed concern that under Subtopic 410-20, Asset Retirement and Environmental Obligations—Asset Retirement Obligations, an entity can avoid recognizing a liability if the associated asset has an indeterminable useful life. Also, these stakeholders noted that even when AROs are recognized, fair value measurement does not best reflect the economics of the obligation upon settlement because the fair value of the liability for an ARO may be greater than the settlement amount, which results in an entity recognizing a gain upon settlement.
Question 31: Should the FASB revisit the initial recognition and measurement guidance for AROs (in Subtopic 410-20)? If so, please explain, including what recognition criteria should be considered and how an ARO should be measured (such as expected cost, fair value, or another measure).” [Emphasis added].
There are other topics mentioned related to guarantees, liabilities and revenue recognition that could be relevant to carbon offset project developers and buyers. More generally, the FASB requested input on whether new/additional disclosures are appropriate. Even though ESG/sustainability topics are not specifically mentioned, ESG/sustainability could fit within the broad concepts in which the FASB is interested:
“The FASB has recently issued standards that enhance the disclosures for various areas, including revenue, leases, segments, income taxes, and income statement expenses. Investors and other stakeholders, in both the public and private company sectors, continue to request additional quantitative and/or qualitative financial reporting information about a range of areas. Stakeholders explained that additional information would provide investors with a better understanding of the performance of an entity and would better enable investors to assess the future cash flows and risks in their capital allocation decisions….
Question 44: Should the FASB consider any additional disclosures in any of the above areas? If so, how would that information better inform investment decisions? If these or similar disclosures are currently required outside of the financial statements, why should or shouldn’t they be included in the financial statements? Are there other areas that need additional disclosures?”
Comments are due June 30, 2025.
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