Core Summary

  • The Financial Accounting Standards Board (FASB) made several technical decisions on Wednesday regarding new accounting standards for environmental credits (ECs) and voted 7-0 to issue an exposure draft for public comment. Despite the unanimous vote, board members had disagreements on certain details.
  • Some board members opposed allowing companies to choose fair value measurement in specific circumstances, rather than the historical cost method expected to be more commonly used. The crypto asset rules approved by FASB last year also adopted the fair value method, and board members worried that the opacity of the environmental credit market could trigger similar valuation challenges.
  • Board member Christine Botosan said she initially felt discomfort, partly because she had similar discomfort when discussing crypto assets. However, staff explained that environmental credits need to be registered in some manner, so there are checks and balances that may not exist in the crypto world.

In-Depth Analysis

FASB decided in May 2022 to add environmental credits to its technical agenda. This move contrasts with 2019, when the board chose not to address credits related to emissions trading and other environmental markets. Since then, environmental, social, and governance (ESG) issues have drawn increasing attention from regulators, companies, and investors.

Last year, standard-setters decided the new standard would apply to various forms—from credits, certificates, allowances, to offsets—that provide enforceable rights to reduce or eliminate pollution, such as carbon offset programs or renewable energy credits/certificates (RECs), as previously reported by CFO Dive.

How the standard will affect companies and financial report preparers depends on changes in the final rule after the public comment period, Logan Kowcheck, audit senior manager at accounting firm Schneider Downs, said in an interview.

Among Kowcheck's energy clients, those that generate environmental credits (most likely to be affected by the proposed new treatment) generally seem to view it positively, because the standard will provide accounting guidance that is currently lacking. Nevertheless, he expects more changes before the standard is finalized, noting that its full impact on affected companies will depend on the form of the final rule. "The devil is in the details," he said.

Currently, the footnote disclosure requirements in the proposed new rule are one element Kowcheck finds noteworthy. "Requiring disclosure of credit activity in the income statement... is necessary for financial statement readers from a consistency and comparability perspective when evaluating different companies," he said, "but compliance requirements could become burdensome. That's where they will receive a lot of comments."