Broadly defined, ECs are enforceable rights represented to prevent, control, reduce, or remove emissions or other pollution that are separately transferable in an exchange transaction. ECs include emission allowances, Corporate Average Fuel Economy credits, renewable identified numbers originating from U.S. Renewable Fuel Standards, renewable energy certificates originating from U.S. State Renewable Portfolio Standards, carbon offsets, and other ECs.
Stakeholders have indicated that entities are increasingly subject to additional government mandates and regulatory compliance programs related to emissions, which often result in obligations that may be settled with ECs. Some entities also voluntarily commit to reducing their emissions by a future date and use ECs to partially offset their emissions.
GAAP does not provide specific authoritative guidance on how to recognize and measure ECs or the related obligations that result from regulatory compliance programs; therefore, many entities by analogy have accounted for these under Topic 330, Inventory, Topic 350-30, Goodwill and Other—General Intangibles Other Than Goodwill, and Topic 450, Contingencies. This creates diversity in practice.
The Exposure Draft would apply to all entities that a) buy or receive transferable ECs and use those credits i) to settle ECOs arising from a regulatory compliance program; ii) sell or trade the ECs; or iii) for voluntary purposes, such as carbon neutral or net zero initiatives; and b) generate ECs.
The ECs would be recognized as an asset and separately disclosed on the balance sheet when it is probable that the ECs will be used to settle an ECO or transferred to another party in an exchange transaction. This asset would be recognized at cost unless it is received in a nonreciprocal transfer that is not a grant from a regulator or its designees.
ECs received through a grant from a regulator or internally generated by an entity would be initially measured at the amount of transaction costs incurred to obtain the ECs. Subsequent measurement of the asset would be based on the intended use. ECs to be used to settle an ECO would be subsequently measured at cost and not tested for impairment.
All other ECs would be subsequently measured at cost less any impairment losses as tested at the end of each reporting period. An entity may elect an accounting policy to measure certain classes of noncompliance ECs at fair value, with subsequent changes recognized through earnings. Costs to obtain these ECs are expensed as incurred.
Disclosures would include significant EC holdings, cash paid for ECs, revenues and gains from sales of ECs, expenses for ECs not initially recognized, and impairment expenses. If the fair value accounting policy is elected, fair value disclosures would be required. The entity would also disclose in annual reporting periods qualitative information about how it obtains and uses ECs, significant estimates and judgments, and other aspects of environmental credit accounting requirements.
ECOs are enforceable obligations resulting from regulatory compliance programs represented to prevent, control, reduce, or remove emissions or other pollution required to be settled with ECs. The ECO would initially be recognized as a liability when the events occurring on or before the reporting date result in such an obligation.
The entity would initially and subsequently measure an ECO liability using the carrying amount of the compliance ECs that the entity holds and expects to use to settle the obligation at the reporting date. If there are insufficient compliance ECs at the reporting date to satisfy the liability, the unfunded portion would be measured at fair value of the ECs necessary to settle the unfunded portion at the reporting date. The liability would be derecognized when the entity remits the necessary ECs to a regulator.
The entity would disclose significant ECO liabilities as current and noncurrent on the balance sheet, as well as information on both the funded and unfunded portions of the liability. Disclosure of disaggregated accruals for emissions occurring and liability remeasurements would be required, as well as fair value disclosures for the unfunded portion of the ECO liability.
A description of the regulatory compliance program related to the nature, settlement provisions, types of ECs, and activities that result in the obligation would also be required.
The Exposure Draft would require a cumulative-effect adjustment to opening retained earnings in the period of adoption. The effective date will be determined after the FASB considers stakeholder feedback. Early adoption would be permitted. The FASB has asked stakeholders for feedback on a series of questions with comments due by April 15, 2025.
The full text of the Exposure Draft can be found here.
Published: 01/06/2025
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