Potential Accounting Changes for Environmental Credits

The Financial Accounting Standards Board (FASB) is considering a change in Generally Accepted Accounting Principles (GAAP) that would impact the way companies account for environmental credits.

The change could impose material effects on balance sheets – if the changes are approved. FASB has indicated in its tentative decision, that credits which would be subject to the new accounting would include those that represent the prevention, control, reduction or removal of emissions or other pollution.

The FASB has stated that it intends to improve the recognition, measurement, presentation and disclosure of environmental credits. 

Currently, there is no explicit guidance in GAAP, and inconsistencies in practice have caused the FASB to review the accounting. Currently, many companies capitalize the purchase of environmental credits such as carbon credits. This means that they are recorded as assets on the balance sheet and only removed from the balance sheet when the company retires or sells the credit. 

During the mid-October working session to deliberate an update to accounting standards, FASB reached a tentative decision stating that it plans to require companies to expense many of these types of credits rather than capitalize them. That means when companies purchase credits, they would often be required to record an immediate expense through profit and loss in the period the credits are purchased as opposed to when used. Under the new guidance, the purchase of carbon credits would be more of a period cost. 

The FASB has tentatively decided that it would provide companies with a consistent framework for how to account for most environmental credits. This would promote consistency and provide comparable results across entities, helping financial statement users evaluate information. The FASB also decided that environmental credit obligations would also be within the scope of the new guidance. These obligations arise when existing or enacted laws require settlement with environmental credits.

The FASB plans to continue its outreach to stakeholders and further deliberate the accounting for environmental credits before issuing a proposed update to accounting standards.

About Schneider Downs Energy & Resources Services 

The Schneider Downs Energy & Resources industry group provides specialized financial advice and services to our clients in the oil and gas, mining and aggregates, forest products and alternative fuel and energy industries throughout the Columbus and Pittsburgh regions. Our extensive knowledge of industry issues enables us to provide proactive audit, tax and management consulting services.  

To learn more, visit our Energy and Resources Industry Group page. 

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2024 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
Postcard from the AADE Operator’s Forum
An Increase in LNG Exports Could Lead to Higher Seasonal Price Volatility
Cap Table Basics for Startup Companies
Potential Accounting Changes for Environmental Credits
Marginal Well Credit Back to Zero for 2023 Tax Year
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.