Key Points

  • The Financial Accounting Standards Board (FASB) on Tuesday issued new guidance on how companies should account forenvironmental credits, such as those generated by projects aimed at reducing carbon dioxide in the atmosphere,carbon offsets, and emission allowances related to cap-and-trade programs.
  • The issue was raised by stakeholders in 2021, and FASB added it to its technical agenda in 2022. The final updated standard provides specificity under generally accepted accounting principles (GAAP) that was lacking in existing rules.
  • "The new ASU adds accounting and disclosure guidance that did not previously exist and will provide clarity," FASB Chair Richard Jones said in a statement. "It responds to stakeholders' need for greater understandability and comparability in this emerging area."

Deeper Dive

The environmental credit standard update faced opposition during the public comment period from some environmental groups and companies such as Ford Motor.

For example, last year the advocacy group Environmental Defense Fund (EDF), while acknowledging FASB's provision of accounting guidance, also lamented that certain elements of the rule could have unintended consequences that undermine the environmental credit market.

On Wednesday, EDF said in an emailed statement that the final guidance on Topic 818 was a "missed opportunity" and posed a competitive burden on companies that must comply.

"The standard requires immediate expensing of carbon credits used for voluntary climate commitments, which directly penalizes companies doing the right thing and puts U.S. businesses at a structural disadvantage when competing with global peers that adopt more balanced frameworks," Holly Pearen, EDF's chief legal counsel for carbon pricing, said in the statement.

Pearen noted that voluntary climate action "is not a cost to be written off but a strategic investment that builds long-term corporate value, and accounting standards should reflect that reality."

FASB decided in May 2022 to add environmental creditsto its technical agenda. This move marked a shift from 2019, when the board chose not to address issues related to credits from emissions trading and other environmental markets.

Since then, the balance of support has shifted away from regulatory leanings tied toenvironmental, social, and governance (ESG) issues, which have faced pushback in the second Trump administration.

For example, last June, the U.S. Securities and Exchange Commission (SEC) abandoned rulemaking that would have required enhanced ESG disclosures.

Under the rule, FASB's new environmental credit guidance will affect companies that generate, purchase, or receive transferable environmental credits or participate in climate-related initiatives such as net-zero programs. The rule also defines environmental credits as "enforceable rights representing the prevention, control, reduction, or removal of emissions or other pollution, and are separately transferable in transactions."

The updated standard requires companies to recognize environmental credits as assets "at each reporting date" under certain circumstances, and organizations must recognize the cost of acquiring credits as an expense. The standard also requires companies to present environmental assets and environmental credit liabilities separately on the balance sheet and calls for companies to disclose in annual reports matters such as the accounting policies used to account for environmental credit obligations.

For public companies, the new rules will be effective for annual and interim reporting periods beginning after December 15, 2027. Private companies get an additional year to comply.

Editor's note: This story has been updated to clarify the project timeline.