The Financial Accounting Standards Board wants to set requirements on how companies account for environmental credits such as renewable energy certificates and carbon offsets, as more state governments set up mandatory programs in the U.S.
The standard setter on Wednesday voted, 7-0, to propose that U.S. public and private companies apply one model to various credits that companies obtain for their compliance programs or voluntary use. Currently, there are no specific environmental accounting rules companies must follow when recording these transactions.
The project has been one of the FASB’s priorities this year, along with establishing new requirements related to software costs and income-statement expenses. Like the board’s proposal on government grants last week, the plan for environmental credits aims to fill a gap in U.S. accounting rules and make the information more comparable for investors.
Wednesday’s proposal covers carbon offsets, cap-and-trade programs and renewable-energy credits. Companies obtain certain environmental credits for producing or selling products aimed at removing or reducing pollution or generating energy from renewable sources. Businesses are also granted emissions allowances and cap-and-trade credits from regulators.
Companies would have to recognize an environmental credit when the credit likely will be used to settle an obligation or be sold to a customer. They would need to record the value of the credits at their cost regardless of whether they expect to settle the obligation. But if they don’t expect to settle it, they also have to test whether to reduce the value of the credits on the balance sheet.
In addition to the accounting requirements, companies would have to disclose significant holdings, compliance obligations and information supporting revenue and expense amounts tied to the credits on the income statement.
“While there’s not a ton of activity yet as best we can tell, it’s a good time for us to fill that hole and to do it in a way that is going to improve the information for investors and reduce diversity in practice,” board member Christine Botosan said.
Carbon offsets are credits companies buy and count toward reducing the overall climate impact of their activities. Renewable-energy credits are certificates regulators provide to energy suppliers when they deliver wind, solar or hydroelectric energy to a power grid.
Mandatory U.S. compliance programs around environmental credits are so far scarce. California, Washington and several states in the Northeast have systems that limit emissions in certain industries over time.
“The environmental credit business as a market is new and it is developing, and here we are standard-setting ahead of what may potentially be a growing market activity,” board member Joyce Joseph said.
The board added the project to its standard-setting agenda in 2022 and has been working toward a proposal ever since. Companies at the time were generally supportive of the FASB’s setting rules around accounting for climate-related transactions because they expected them to become a more relevant part of their business.
Carbon offsets, however, in recent years fell in popularity following several scandals as well as studies that found that they have had minimal impact and could be susceptible to fraud. The Biden administration last month issued a set of nonbinding guidelines aimed at strengthening trust in voluntary carbon markets.
The FASB aims to issue a formal proposal by the end of the year and ask the public for feedback over a 90-day period, a spokeswoman said.