FASB to Tighten Environmental Credit Rule: Implications for Company Balance Sheets

The Financial Accounting Standards Board (FASB) is considering altering Generally Accepted Accounting Principles (GAAP) regarding environmental credit programs, like carbon credits, leading to potential significant impacts on company balance sheets. Deloitte's Heads Up reported the FASB's intentions to enhance the recognition, measurement, presentation, and disclosure of environmental credits.

Currently, companies adopt various methods for accounting these assets and liabilities, with many capitalizing the purchase of environmental credits, treating them as assets until sold or retired. However, the FASB's tentative decision, reached during a mid-October working session, suggests an impending change. They plan to require companies to expense many of these credits upon purchase, impacting profit and loss immediately rather than capitalizing them.

This shift would categorize carbon credits as period costs rather than long-term assets like equipment or real estate. Such changes could significantly affect financial statements, potentially leading to substantial differences in company reports.

Brad Poole, an Audit & Assurance partner at Deloitte & Touche LLP, highlights that the proposed standard would offer a consistent framework for accounting environmental credit instruments, aiming for more comparable results across entities and potentially providing investors with more informative data.

The FASB's intended changes encompass various environmental credits, including those preventing emissions or pollution, enforceable in different forms like certificates or offsets. Additionally, environmental credit obligations (ECOs) under existing or enacted laws to prevent pollution could fall under the purview of the new accounting.

While these changes are in deliberation, the FASB plans to engage stakeholders further before issuing any proposed updates to accounting standards.