Proposed U.S. accounting guidance for carbon offset credits and other climate-related financial instruments still need some revisions to ensure that they don’t harm the environmental credit markets, according to the Environmental Defense Fund, an environmental advocacy group.
The EDF was one of 37 organizations that submitted letters during the public comment period for the standards update. Others that weighed in included Big Four accounting firms, General Motors and Ford Motor Co., and another environmental advocacy group, the Center for Environmental Accountability.
The scope of environmental credits and obligations subject to the new rule include emissions allowances originating from cap-and-trade programs, corporate average fuel economy or CAFE credits, renewable identification numbers and renewable energy certificates stemming from state renewable portfolio standards, according to a FASB spokesperson. Formally known as Topic 818, the update is poised to provide specific guidance where GAAP is now effectively silent.
Appreciation for that specificity was articulated in a number of the comment letters including in the letter from EDF, which started off by commending the FASB for offering “much needed and helpful industry-specific” accounting guidance, that will promote “enhanced financial reporting clarity and consistency.”
However, the EDF also noted several areas where the proposed rules are in need revisions. For example, where the proposal requires those buying environmental credits for voluntary sustainability commitments to immediately expense the cost of the purchases, the EDF asserts the non-refundable deposits for future credit purchases should be recorded as deposits and reclassified as intangible assets when the credits are received.
Among several benefits of the EDF’s proposed revision is that the intangible approach would better align with International Financial Reporting Standards. It also results in a balance sheet that highlights the proactive investments made toward future corporate sustainability commitments, EDF asserted in its letter.
Then too the intangible asset presentation and disclosure model would also “eliminate potential unintended economic and behavioral consequences of the immediate expense recognition approach that may disincentivize corporate support for sustainability projects that generate such environmental credits, thereby potentially undermining the economic fundamentals of the environmental credit markets,” according to the April 9 letter sent to the FASB by Holly Pearen, lead counsel, carbon pricing with EDF.
EDF also suggests that the proposed standard allow companies that generate environmental credits for sale to follow an inventory accounting model that allows them to capitalize a credit generation project’s development costs as a part of inventory costs, which are expensed as the credits are sold. Under the current proposal, companies must follow an intangible asset accounting model that doesn’t allow development costs to be capitalized.
Separately, the Center for Environmental Accountability in a letter submitted April 15 warned that, except for government-created cap-and-trade programs in which a credit is measurable, “environmental credits can be misleading with respect to how they represent a given environmental attribute. FASB should avoid lending credence to programs that encourage misleading representations that border on fraud.”
As such, the rules should only treat environmental credits purchased in compliance with programs created by federal and state laws as assets, the letter said. Further, the CEA notes that the Trump administration’s shift in U.S. federal policy on climate issues is cause for great care in defining the terms in the new rule.
For example, it states that the update is unclear whether the FASB will allow American companies to consider EU Emissions Trading System credits or credits traded under Article 6 of the Paris Agreement as assets for accounting purposes, given that under the Trump administration the U.S. is withdrawing from the agreement.
“FASB should tread carefully as it considers how to incorporate environmental credits into GAAP. Because GAAP is incorporated by reference into many regulatory programs, anything more than modest changes can raise substantive legal questions about those regimes,” CEA President Marc Marie wrote in the letter.
Corporations also expressed some concern about the rules. For example, an April 15 comment letter from Ford Motor stated that the automaker agreed with most of the proposed updates, though it asserted that certain disclosure requirements could cause “competitive concerns” and that the rule’s proposed liability measurement requirements that don’t allow the consideration of future “mitigating actions” when estimating the value of an obligation “will likely introduce income statement volatility.”
The FASB will discuss all comments received on the proposed rules at a future meeting, a spokesperson said. FASB added environmental credits to its high-priority technical agenda in May of 2022.
