The Financial Accounting Standards Board (FASB) issued a proposed update on December 17, 2024, to Accounting Standards for Environmental Credits and Environmental Credit Obligations (Topic 818). We blogged on their initial decision to move forward with the update here. Comments were due April 15, 2025, and are available here. This update was proposed
“to improve the financial accounting for and disclosure of environmental credits and environmental credit obligations. This proposed Update provides recognition, measurement, presentation, and disclosure requirements for all entities that purchase or hold environmental credits or have a regulatory compliance obligation that may be settled with environmental credits.”
The important part of that sentence is “financial accounting” which is subject to rigorous accounting standards knows as Generally-Accepted Accounting Principles (GAAP) and different from managerial accounting. Financial accounting is the basis of your financial statements that are reported to the SEC and subject to independent third party auditing. It’s the real thing (even though many companies also report non-GAAP measures like EBIT and EBITDA).
Recently, CFO Dive wrote about the Topic 818 proposal:
“The scope of environmental credits and obligations subject to the new rule include emissions allowances originating from cap-and-trade programs, corporate average fuel economy or CAFE credits, renewable identification numbers and renewable energy certificates stemming from state renewable portfolio standards, according to a FASB spokesperson. Formally known as Topic 818, the update is poised to provide specific guidance where GAAP is now effectively silent.”
The article summarized main themes from EDF’s comment letter:
- Where buying environmental credits for voluntary sustainability commitments incurs an immediate expense (the cost of the purchases), non-refundable deposits for future credit purchases should be recorded as deposits and reclassified as intangible assets when the credits are received. This approach to intangibles better aligns with International Financial Reporting Standards and results in a balance sheet that highlights the proactive investments made toward future corporate sustainability commitments.
- The intangible asset presentation and disclosure model would also “eliminate potential unintended economic and behavioral consequences of the immediate expense recognition approach that may disincentivize corporate support for sustainability projects that generate such environmental credits, thereby potentially undermining the economic fundamentals of the environmental credit markets.”
- The proposal would allow companies that generate environmental credits for sale to follow an inventory accounting model that allows them to capitalize a credit generation project’s development costs as a part of inventory costs, which are expensed as the credits are sold.
Another commenter, the Center for Environmental Accountability, pointed to the US-specific nature of FASB/GAAP in relation to EU credits and “whether the FASB will allow American companies to consider EU Emissions Trading System credits or credits traded under Article 6 of the Paris Agreement as assets for accounting purposes.”
We’ll have to see how this proposal fares against the administration’s wide-ranging deregulatory and anti-climate push.
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