FASB to issue proposal for new environmental credit accounting rules later this year

The FASB on June 12, 2024, voted to propose new accounting rules for environmental credit programs, aiming to fill a gap in current accounting standards.

The proposal would provide guidance on recognizing, measuring, presenting, and disclosing environmental credits for companies and non-governmental organizations participating in compliance and voluntary programs, according to the discussions.

This move is expected to increase transparency and comparability in financial reporting, allowing investors to better understand the impact of environmental credit programs on a company's cash flows and operating results.

"The proposal is a step forward in addressing the lack of explicit accounting provisions for environmental credits," said Frederick Cannon, a member of the FASB. "We've put a lot of work into this, and I think the package we're putting out there will give people a lot to think about."

The proposal will be issued later this year, followed by a 90-day comment period.

Environmental Credit Programs Poised to Increase in the Future

The development of these rules comes at a critical time, as environmental credit programs (ECPs) are poised to become increasingly important in the future. Currently, the lack of standardized reporting and disclosure practices has resulted in significant variability in how companies report on these programs, the board acknowledged during the discussions. This lack of transparency has made it difficult for investors and other users of the information to accurately assess the financial implications of ECPs on a company's operations and cash flows.

Under the provisions, companies would only recognize environmental credits as assets on their balance sheet if they were driven by regulatory requirements or if they intend to sell them. The liability associated with environmental credits would be recognized on the balance sheet if it is funded, with the value based on the cost of the credits. If the liability is unfunded, a fair value approach would be used.

FASB board members commended the staff for their work on the project, recognizing the effort to create a model from scratch for a developing market. They expressed confidence that the proposed model will fill a gap in Generally Accepted Accounting Principles (GAAP), enhance financial reporting, and potentially shape a growing market activity.

"While there's not a ton of activity yet, it's a good time to fill that hole and do it in a way that's going to improve the information for investors and reduce diversity in practice," Board member Christine Botosan said.

The board also acknowledged the potential for implementation and incremental costs but stressed these are justified by the benefits of increased comparability, consistency, and the provision of more relevant and reliable information for investors.

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