August 13, 2022

The Financial Accounting Standards Board accepts environmental credits and carbon offsets

Diving Brief:

  • The Financial Accounting Standards Board, or FASB, has agreed to move forward with a project to set new standards for how companies account for environmental credits such as those earned for carbon offset programs and credits. /renewable energy certificates, or RECs.
  • The U.S. standards setter’s unanimous decision to add the project to its technical program signals a change from 2019, when the board opted not to process credits related to emissions trading and other environmental markets and comes against a backdrop of heightened interest from regulators, businesses and investors in environmental, social and governance issues.
  • “This is clearly a pervasive problem,” board member Frederick Cannon said during a meeting on Wednesday. “ESG investing is growing very rapidly and is at the intersection of financial statements and ESG issues.”

Overview of the dive:

The FASB is one of many standard setters and regulators around the world who strive to establish uniform rules that will ultimately guide CFOs with ESG-related business models and investments.

The International Sustainability Standards Board seeks to build consensus among regulators in the United States, Europe, Japan and other jurisdictions on the disclosure of climate risks and other ESG issues. In March, the Securities and Exchange Commission offers companies follow detailed rules for reporting climate risks, saying companies will benefit from clear and consistent disclosures.

In a presentation to the board this week, FASB project manager Michael Lupo said he foresees additional momentum for ESG as a result of the SEC’s decision. Staff recommended adding the environmental credits project to the board’s active agenda.

“Staff expects the SEC’s decision regarding disclosure of voluntary use of CERs and carbon offsets for clean energy…will increase the use of these programs and drive additional investor interest in the accounting for these programs,” Lupo told the board. “Staff also believe that users would benefit from consistent accounting for economically similar programs. Therefore, staff believe that there is an identifiable and pervasive need to improve GAAP to provide specific guidance on accounting for environmental credits.

Currently, Lupo said financial report preparers process credits in a variety of ways, in part depending on whether the credits are part of voluntary or compliance programs. For example, he said some preparers treat credits like inventory while others treat them like intangible assets. Board member Christine Botosan, who voted in favor of prioritizing question, said she was concerned about the differences in how credits are currently accounted for.

“As these programs grow…it will become a bigger issue over time,” she said, adding that she hopes to better understand how the way the credits are used will impact the cash flow and associated risk exposure.

Earlier this month, the FASB made another U-turn when it chose to add a project to improve the accounting for crypto assets on its technical agenda. In 2020, the board decided to take a step back on the issue, but FASB members have since recognized the need for a better accounting model as more companies venture into the sector.

FASB Chairman Richard Jones said Wednesday that the board has enough resources to add the topic of environmental credit to its priority agenda.