Accounting for Environmental Credit Programs
Last updated on October 18, 2023. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.
(Sections updated on the date above are indicated with an asterisk *)
The objective of this project is to improve the recognition, measurement, presentation, and disclosure requirements for participants in compliance and voluntary programs that involve environmental credits and for the nongovernmental creators of environmental credits.
On December 15, 2021, in response to feedback received on the Invitation to Comment, Agenda Consultation, FASB Chair Rich Jones added a project to the FASB research agenda to explore the accounting for regulatory credits. On May 25, 2022, the Board added a project to its technical agenda to improve the recognition, measurement, presentation, and disclosure requirements for participants in compliance and voluntary programs that result in the creation of environmental credits and for the nongovernmental creators of environmental credits.
The Board discussed staff research and outreach performed since the project was added to the Board’s technical agenda on scope and asset recognition and measurement. The Board made the following decisions.
Asset Scope
The Board decided that an item that meets the following definition of an environmental credit would be within the scope of the project:
An enforceable right that is acquired, internally generated, or granted by a regulatory agency or its designees that meets all of the following:
The Board decided to clarify that the existence of active markets would not be a consideration for determining whether a credit is separately transferable in an exchange transaction.
The Board decided not to change the accounting requirements for nontransferable credits that meet all of the other criteria in the environmental credit definition.
The Board decided that the acquisition of environmental credits from related parties would be within the project’s scope.
Liability Scope
The Board decided that an obligation that meets the following definition of an environmental credit obligation would be within the scope of the project:
An obligation arising 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.
The Board also decided that obligations within the scope of Subtopic 410-30, Asset Retirement and Environmental Obligations—Environmental Obligations, are not environmental credit obligations regardless of whether those obligations can be settled using environmental credits.
Asset—Recognition
The Board decided that an entity would recognize an asset for an environmental credit when it is probable that the credit will be used to settle an environmental credit obligation or separately transferred in an exchange transaction (for example, sold or traded). Costs incurred to obtain all other environmental credits would be recognized as an expense when incurred unless the costs are included in the carrying amount of another asset in accordance with other GAAP.
Asset—Initial Measurement
The Board decided that an entity would initially measure environmental credits, other than those obtained through a grant from a regulator or its designees or internally generated by the entity, in accordance with paragraphs 805-50-30-1 through 30-4, unless those environmental credits were obtained as part of a transaction subject to other GAAP.
The Board decided that an entity would initially measure environmental credits (1) obtained through a grant from a regulator or its designees or (2) internally generated by the entity at cost, limited to transaction costs, if any, associated with obtaining the environmental credit.
Asset—Subsequent Measurement
The Board decided that an entity would not remeasure environmental credits that are probable of being used to settle environmental credit obligations (hereinafter referred to as compliance environmental credits).
The Board decided that an entity would subsequently measure environmental credits recognized as assets that are not compliance environmental credits (hereinafter referred to as noncompliance environmental credits) at historical cost, less impairment losses, if any. The Board also decided that noncompliance environmental credits would be tested for impairment at the end of each reporting period. An entity would recognize an impairment loss when the carrying value of the noncompliance environmental credit exceeds its fair value, measured as the excess of the carrying value over fair value. Subsequent reversal of a previously recognized impairment loss would be prohibited.
Asset—Costing Methods
The Board decided to allow an entity to use average cost, first-in, first-out (FIFO), and specific identification costing methods and to require an entity to consistently apply the costing method to similar environmental credits.
Asset—Portfolio Approach
The Board decided to allow an entity to use a portfolio approach for similar environmental credits for applying the asset recognition and measurement requirements. An entity would be required to establish an accounting policy for using a portfolio approach and apply that policy consistently.
Asset—Derecognition
The Board 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 Topic 606, Revenue from Contracts with Customers. The Board also decided that a transfer of an environmental credit in a contract with a noncustomer would be derecognized in accordance with Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, unless a scope exception from that Subtopic applies.
Asset—Recognition Reassessment Requirements
The Board decided that at each reporting period an entity would be required to reassess whether it is probable that an environmental credit will be used to settle an environmental credit obligation or transferred in an exchange transaction. An entity would be required to perform that reassessment before applying the corresponding subsequent measurement requirements. For environmental credits an entity previously determined were not probable of being used to settle an environmental credit obligation or separately transferred in an exchange transaction, the Board decided that an entity would be prohibited from subsequently recognizing those environmental credits as assets.
The Board decided that for situations in which an entity determines that an environmental credit is no longer probable of being used to settle an environmental credit obligation or transferred in an exchange transaction, an entity would be required to derecognize the environmental credit through earnings, unless those costs are required to be included in the carrying amount of another asset in accordance with other GAAP.
Asset—Measurement Reassessment Requirements
The Board decided that at each reporting period date, an entity would be required to reassess whether it is probable that an environmental credit recognized as an asset will be used to settle an environmental credit obligation. If, based on that reassessment, an entity reclassifies an environmental credit from a compliance environmental credit to a noncompliance environmental credit or vice versa, an entity would be required to test that environmental credit for impairment before applying the corresponding subsequent measurement guidance.
A summary of decisions reached to date can be found here.
Last updated on October 18, 2023. Please refer to the Current Technical Plan for information about the expected release dates of exposure documents and final standards.
(Sections updated on the date above are indicated with an asterisk *)
Objective:
The objective of this project is to improve the recognition, measurement, presentation, and disclosure requirements for participants in compliance and voluntary programs that involve environmental credits and for the nongovernmental creators of environmental credits.
Background:
On December 15, 2021, in response to feedback received on the Invitation to Comment, Agenda Consultation, FASB Chair Rich Jones added a project to the FASB research agenda to explore the accounting for regulatory credits. On May 25, 2022, the Board added a project to its technical agenda to improve the recognition, measurement, presentation, and disclosure requirements for participants in compliance and voluntary programs that result in the creation of environmental credits and for the nongovernmental creators of environmental credits.
Exposure Draft(s):
There are no exposure documents at this time.
There are no media releases or educational materials at this time.
Decisions Reached at Last Meetings (October 11, 2023):
The Board discussed staff research and outreach performed since the project was added to the Board’s technical agenda on scope and asset recognition and measurement. The Board made the following decisions.
Asset Scope
The Board decided that an item that meets the following definition of an environmental credit would be within the scope of the project:
An enforceable right that is acquired, internally generated, or granted by a regulatory agency or its designees that meets all of the following:
- Lacks physical substance and is not a financial asset (as defined in the Master Glossary of the Codification)
- Is represented to prevent, control, reduce, or remove emissions or other pollution
- Is separately transferable in an exchange transaction
- Is not an income tax credit that may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose.
The Board decided to clarify that the existence of active markets would not be a consideration for determining whether a credit is separately transferable in an exchange transaction.
The Board decided not to change the accounting requirements for nontransferable credits that meet all of the other criteria in the environmental credit definition.
The Board decided that the acquisition of environmental credits from related parties would be within the project’s scope.
Liability Scope
The Board decided that an obligation that meets the following definition of an environmental credit obligation would be within the scope of the project:
An obligation arising 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.
The Board also decided that obligations within the scope of Subtopic 410-30, Asset Retirement and Environmental Obligations—Environmental Obligations, are not environmental credit obligations regardless of whether those obligations can be settled using environmental credits.
Asset—Recognition
The Board decided that an entity would recognize an asset for an environmental credit when it is probable that the credit will be used to settle an environmental credit obligation or separately transferred in an exchange transaction (for example, sold or traded). Costs incurred to obtain all other environmental credits would be recognized as an expense when incurred unless the costs are included in the carrying amount of another asset in accordance with other GAAP.
Asset—Initial Measurement
The Board decided that an entity would initially measure environmental credits, other than those obtained through a grant from a regulator or its designees or internally generated by the entity, in accordance with paragraphs 805-50-30-1 through 30-4, unless those environmental credits were obtained as part of a transaction subject to other GAAP.
The Board decided that an entity would initially measure environmental credits (1) obtained through a grant from a regulator or its designees or (2) internally generated by the entity at cost, limited to transaction costs, if any, associated with obtaining the environmental credit.
Asset—Subsequent Measurement
The Board decided that an entity would not remeasure environmental credits that are probable of being used to settle environmental credit obligations (hereinafter referred to as compliance environmental credits).
The Board decided that an entity would subsequently measure environmental credits recognized as assets that are not compliance environmental credits (hereinafter referred to as noncompliance environmental credits) at historical cost, less impairment losses, if any. The Board also decided that noncompliance environmental credits would be tested for impairment at the end of each reporting period. An entity would recognize an impairment loss when the carrying value of the noncompliance environmental credit exceeds its fair value, measured as the excess of the carrying value over fair value. Subsequent reversal of a previously recognized impairment loss would be prohibited.
Asset—Costing Methods
The Board decided to allow an entity to use average cost, first-in, first-out (FIFO), and specific identification costing methods and to require an entity to consistently apply the costing method to similar environmental credits.
Asset—Portfolio Approach
The Board decided to allow an entity to use a portfolio approach for similar environmental credits for applying the asset recognition and measurement requirements. An entity would be required to establish an accounting policy for using a portfolio approach and apply that policy consistently.
Asset—Derecognition
The Board 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 Topic 606, Revenue from Contracts with Customers. The Board also decided that a transfer of an environmental credit in a contract with a noncustomer would be derecognized in accordance with Subtopic 610-20, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets, unless a scope exception from that Subtopic applies.
Asset—Recognition Reassessment Requirements
The Board decided that at each reporting period an entity would be required to reassess whether it is probable that an environmental credit will be used to settle an environmental credit obligation or transferred in an exchange transaction. An entity would be required to perform that reassessment before applying the corresponding subsequent measurement requirements. For environmental credits an entity previously determined were not probable of being used to settle an environmental credit obligation or separately transferred in an exchange transaction, the Board decided that an entity would be prohibited from subsequently recognizing those environmental credits as assets.
The Board decided that for situations in which an entity determines that an environmental credit is no longer probable of being used to settle an environmental credit obligation or transferred in an exchange transaction, an entity would be required to derecognize the environmental credit through earnings, unless those costs are required to be included in the carrying amount of another asset in accordance with other GAAP.
Asset—Measurement Reassessment Requirements
The Board decided that at each reporting period date, an entity would be required to reassess whether it is probable that an environmental credit recognized as an asset will be used to settle an environmental credit obligation. If, based on that reassessment, an entity reclassifies an environmental credit from a compliance environmental credit to a noncompliance environmental credit or vice versa, an entity would be required to test that environmental credit for impairment before applying the corresponding subsequent measurement guidance.
Tentative Board Decisions Reached to Date (as of October 11, 2023):
A summary of decisions reached to date can be found here.
The Board meeting minutes, handouts, and videos are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final standard.
The following are links to the minutes for each meeting. To view Board meetings and handouts from the past 90 days, click here.
The following are links to the minutes for each meeting. To view Board meetings and handouts from the past 90 days, click here.
| October 11, 2023* | Board Meeting—The Board discussed and made refinements to the scope of the project for asset and liability recognition and measurement and discussed asset recognition and measurement requirements. |
| May 25, 2022 | Board Meeting—The Board added a project to its technical agenda to improve the recognition, measurement, presentation, and disclosure requirements for participants in compliance and voluntary programs that result in the creation of environmental credits and for the nongovernmental creators of environmental credits. |
The Board will consider potential accounting alternatives at a future Board meeting.
Chris Roberge
Senior Project Manager
ceroberge@fasb.org
Michael Lupo
Project Manager
mlupo@fasb.org
Michael Berryman
Practice Fellow
mberryman@fasb.org
Katy Rossino
Practice Fellow
krossino@fasb.org
Michael Yip
Academic Fellow
myip@fasb.org
Nathan Brown
Postgraduate Technical Assistant
nbrown@fasb.org
Nathan Clark
Postgraduate Technical Assistant
nclark@fasb.org
Senior Project Manager
ceroberge@fasb.org
Michael Lupo
Project Manager
mlupo@fasb.org
Michael Berryman
Practice Fellow
mberryman@fasb.org
Katy Rossino
Practice Fellow
krossino@fasb.org
Michael Yip
Academic Fellow
myip@fasb.org
Nathan Brown
Postgraduate Technical Assistant
nbrown@fasb.org
Nathan Clark
Postgraduate Technical Assistant
nclark@fasb.org
The staff has prepared this summary for information purposes only. Any Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.