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Early FASB decisions on accounting for environmental credits get thumbs up from firms

So far, firms like the FASB's "reasonable" decisions on accounting for environmental credit programs, especially because the guidance would be flexible where it matters most, panelists at a financial reporting conference recently said.

"It allows companies to account for things differently based on how they plan to use the environmental credits, which I think is making them feel a lot better," Scott Taub, managing director at Financial Reporting Advisors said on May 2, 2024, at the 22nd Annual Financial Reporting Conference at Baruch College in New York. "These programs are really ramping up now and becoming far more prevalent," he said. "Just about any large company these days is probably running into one of these programs somewhere around the world, either because they're on the obligation side, they're emitting too much carbon and therefore have to pay, or on the asset side where they have some carbon offset credits or something similar that they can sell."

The topic relates to things like renewable energy credits (RECs), renewable identification numbers (RINs), the EU emissions allowances or other carbon offsets. But the FASB won't specifically define the list of all of the environmental credits that are within the scope of this project. However, there will be definitions of environmental credits and environmental credit obligations that will be flexible enough to deal with emerging programs in the future.

How companies are going to use these credits is particularly relevant to financial reporting as well as related disclosures, panelists said.

"Understanding whether this is something that's going to be turned into cash in the future as opposed to something that's going to offset an expense in the future is relevant to how it's presented and reported," Mark LaMonte, partner at Williams Marston LLC, said. "And again, the key ultimately is going to be transparency in the disclosures that allow investors to understand what is being done and this is going to place a lot of judgment and companies are going to have to really think through this when they make those disclosures and they make those presentation decisions," he said.

Their remarks were part of a panel discussion on "Hot Topics at the FASB," which was moderated by Angela Fergason, partner in the national professional services group at PwC. FASB Technical Director Hillary Salo was also part of the panel.

Generally a historical cost model

The FASB has substantially advanced on drawing what it plans to put in a proposal that would provide an accounting standard on environmental credit programs as there isn't specific guidance in US GAAP. Today, companies use different accounting rules to report them. Some firms account for them as intangible assets, while others account for them as inventory. Further, there is a wide spectrum of other views related to the accounting. The board has therefore said it would make sure there is a model that can be applied consistently that will provide transparency to investors for companies that are entering into and using these type of credits - whether voluntarily or for compliance purposes.

To date, the board has tentatively decided that an environmental credit would be recorded as an asset if it's probable that the credit will be used to satisfy an environmental credit obligation or will be sold. On the liability side, the measurement would depend on whether it's a funded or unfunded liability. If it's funded, that portion will be measured equal to the value of the credits that the company is going to use to satisfy the obligation. And if it's unfunded, it would be recorded at fair value.

In general, the model would be a historical cost model, but there would be a fair value option element for entities that are using it from a business perspective for trading purposes, Salo told the conference.

"From a recognition and measurement perspective, I think we're also looking to have that flexibility for how entities use these credits in these programs," Salo said. "These are definitely not a one -size -fits -all type of asset class, or in certain cases liability," she said. "And I think that's really the important part of this project is trying to make sure that we can address and put a model in place where entities can look at it and say, 'okay, in my fact pattern, I think it's probable I'm going to use that credit to fulfill a compliance obligation. I know what to do now. I have this credit, and I think I'm going to sell it in the marketplace I know how to account for that.'"

A key benefit of guidance is that it would provide enough specificity while allowing companies to be able to tell their story of how they're using these credits based on their business model, Salo also said. "And I think that's something that's important from a transparency perspective for investors as well. And certainly, for a lot of companies this isn't material today, but it may become more material in the future," she said. "So, we're really focused on making sure not only will the accounting model be clear, but the disclosures will be clear about what type of credits are you entering into, how are you using those credits to really help understand those future cash flows in considerations from a future standpoint."

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