#DeloitteESGNow — FASB Makes Tentative Decisions Related to the Accounting for Environmental Credit Programs
Background
At its October 11, 2023, meeting, the FASB continued
deliberating its project on the accounting for environmental credit programs.
The project was added to the Board’s research agenda in December 2021 and is
intended to improve the recognition, measurement, presentation, and disclosure
requirements for environmental credits. Because the treatment of such credits is
not explicitly addressed in U.S. GAAP, entities have used different approaches,
and questions have emerged, related to how to account for them. The
tentative decisions reached at the FASB’s
meeting are discussed below.
Project Scope
The Board discussed and made several tentative decisions related to the project’s
scope.
Assets
The FASB tentatively decided that the following criteria must be met for an
environmental credit to be within the scope of the project:
- Credits must:
-
Be enforceable but can take many forms, including credits, certificates, allowances, and offsets.
- Be separately transferable in an exchange transaction.
- Lack physical substance and not meet the definition of a financial asset under U.S. GAAP.
- Represent the prevention, control, reduction, or removal of emissions or other pollution.
-
- Credits may:
-
Include those from related parties.
-
Be acquired, granted by a regulatory agency (including those in return for performance), or internally generated.
-
The Board also clarified that tax credits used to settle an entity’s income
tax liability would be outside the project’s scope because they are already
addressed by other U.S. GAAP.
Liabilities
The FASB tentatively decided that environmental credit
obligations (ECOs), which are obligations that arise “from existing or
enacted laws, statutes, or ordinances represented to prevent, control,
reduce, or remove emissions or other pollution that may be settled with
environmental credits,” would be within the scope of the project.
Obligations that are within the scope of ASC 410-301 are not ECOs.
Recognition, Initial Measurement, and Subsequent Measurement
At the meeting, the FASB
discussed a model under which an entity would make an initial assessment of the
probable use of an environmental credit, which would then govern the credit’s
initial recognition and measurement as well as its subsequent measurement. The
decision tree below represents a simplified depiction of the model discussed at
the meeting.
2
This applies unless the costs are included in
the carrying amount of another asset in accordance with other
U.S. GAAP. Further, costs for credits that are granted from a
regulator or internally generated are limited to transaction
costs directly associated with obtaining the environmental
credit (e.g., application fees) and thus could be zero.
3
This applies unless the environmental credits
were obtained as part of a transaction subject to other U.S.
GAAP.
The FASB also discussed different costing methods for environmental credits and
tentatively decided to allow entities to use an average cost and first-in,
first-out (FIFO) approach as well as specific identification costing methods. An
entity would be required to consistently apply its chosen method to all similar
environmental credits. Further, the Board tentatively decided to allow an entity
to elect, as an accounting policy choice, to use a portfolio approach for
similar environmental credits when applying the recognition and measurement
considerations.
Derecognition
Environmental credits would be derecognized in accordance with ASC 610-20 unless
a scope exception applied. For example, the Board tentatively decided that “for
a transfer of an environmental credit in a contract with a customer, an entity
would derecognize an environmental credit in accordance with [ASC] 606.”
Reassessment
In each reporting period, an entity would reassess whether it is probable that an
environmental credit recognized as an asset would be used to settle an ECO
(i.e., a “compliance environment credit”) or transferred in an exchange
transaction (i.e., sold or traded). If an entity determined that it was no
longer probable that an environmental credit could be used to settle an ECO or
transferred in an exchange transaction, the entity would derecognize it through
earnings.
If, upon reassessment, an entity reclassified a compliance environmental credit
as a noncompliance environmental credit, or vice versa, the entity would be
required to test the credit for impairment before applying the subsequent
measurement guidance.
Next Steps
The Board plans to continue its outreach to stakeholders.
Contacts
|
|
Eric Knachel
Audit &
Assurance
Managing Director
Deloitte &
Touche LLP
+1 203 761
3625
|
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Brianna Butterfield
Audit &
Assurance
Senior Manager
Deloitte &
Touche LLP
+1 408 704
2895
|
Footnotes
1
For titles of FASB Accounting Standards
Codification (ASC) references, see Deloitte’s “Titles of Topics and
Subtopics in the FASB Accounting Standards
Codification.”
2
This applies unless the costs are included in
the carrying amount of another asset in accordance with other
U.S. GAAP. Further, costs for credits that are granted from a
regulator or internally generated are limited to transaction
costs directly associated with obtaining the environmental
credit (e.g., application fees) and thus could be zero.
3
This applies unless the environmental credits
were obtained as part of a transaction subject to other U.S.
GAAP.