FASB proposes new environmental credit accounting guidance
The Financial Accounting Standards Board (FASB) in the US has proposed new guidance for the accounting of environmental credits and related obligations.
This initiative follows stakeholder feedback highlighting the absence of specific US generally accepted accounting principles for these items.
An environmental credit is an enforceable right without physical substance, represented to mitigate pollution and is transferable in an exchange transaction.
It is not a financial asset or an income tax credit. Credits, certificates, allowances, and offsets are various forms of environmental credits.
An environmental credit obligation is a regulatory compliance obligation that arises from laws aimed at pollution control and cannot be settled with obligations under ASC Subtopic 410-30.
The proposed Accounting Standards Update (ASU), titled Environmental Credits and Environmental Credit Obligations (Topic 818), aims to address the diversity in practice resulting from entities using analogies to existing FASB standards for accounting.
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It would introduce definitions for environmental credits and environmental credit obligations into the FASB’s ASC Master Glossary.
The proposed guidance stipulates that environmental credits should be recognised as assets when their use or transfer is probable, and costs for credits that do not meet asset criteria should be expensed as incurred.
Environmental credit obligations would be recognised as liabilities when events up to the reporting date result in an obligation.
The proposed ASU requires entities to assume the reporting date coincides with the end of the compliance period for liability recognition.
ASU also outlines initial and subsequent measurement, presentation, and disclosure requirements for both credits and obligations.
FASB will decide on the effective date and the possibility of early application after reviewing stakeholder feedback.
The amendments would be applied retrospectively, with a cumulative-effect adjustment to equity at the start of the adoption year. Recasting of financial statements prior to adoption would not be allowed.
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