On May 19, 2026, the FASB issued ASU 2026-02: Environmental Credits and Environment Credit Obligations (Topic 818). This new standard will aim to bring consistency to an area that has grown quickly in recent years but has lacked defined rules under GAAP.
Until now, there has been diversity in practice, with companies often accounting for environmental credits through inventory, intangible assets or contingencies, resulting in inconsistent balance sheet, income statement and financial statement disclosures.
ASC Topic 818 gives companies a defined guideline for recognizing, measuring, presenting and disclosing environmental credits and any related regulatory obligations.
Who Is Affected and What Is Included
The guidance applies to all entities that:
- Buy, receive, generate or transfer environmental credits
- Have regulatory compliance obligations that may be settled with those credits
Within the context of Topic 818, environmental credits must:
- Be enforceable
- Contain transferable rights
- Be represented to prevent, control, reduce or remove emissions or other pollution
Companies should note that any income tax credits that “may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose” are scoped out of Topic 818.
Some examples include emissions allowances from cap-and-trade programs, renewable identification numbers, renewable energy certificates and carbon offsets.
Voluntary sustainability commitments, by themselves, do not create environmental credit obligations unless they arise from enforceable laws, statutes or ordinances.
Accounting Changes: New Rules Versus Current GAAP
Under Topic 818, an environmental credit is recognized as an asset only when it is probable that the credit will be used:
- To settle an environmental credit obligation
- Transferred as an exchange transaction
- Used in a nonreciprocal transfer
Credits acquired only for voluntary initiatives, such as a carbon-neutral pledge, are expensed as incurred unless another qualifying use is probable.
Initial measurement depends on how the credit is obtained. Internally generated credits and regulator-granted credits are measured at transaction costs, if any. Other credits generally follow the relevant transaction guidance or are measured at cost.
After recognition, compliance credits expected to settle compliance obligations are carried at cost and are not tested for impairment on each reporting date. Noncompliance-related credits are measured at cost less impairment. However, the new standard includes a fair value election that can be made for certain noncompliance environmental credits. If this option is made, certain eligible noncompliance credits will continue to be measured at fair value, with changes reflected in earnings.
Environmental credit obligations are recognized when events, such as emissions, occur by the reporting date. The funded portion is measured using the carrying amount of related compliance credits; the unfunded portion is generally measured using the fair value of credits needed to settle the obligation.
Presentation and disclosure requirements also become more defined, requiring that:
- Compliance credit assets must be presented separately from obligation liabilities
- Annual disclosures must explain matters listed below, among other requirements:
- Credit types
- Intended use
- Accounting policies
- Significant judgments
- Expenses
- Impairments
Effective Dates: Timeline for Implementation
Public business entities must apply the amendments for annual periods beginning after December 15, 2027, including interim periods within those years.
All other entities must apply them for annual periods beginning after December 15, 2028, including interim periods. Early adoption is permitted. Adoption should be retrospective through a cumulative-effect adjustment to opening retained earnings in the year of adoption, without recasting prior periods.
Industry Impact: Energy and Natural Resources
Energy and natural resources companies are likely to be directly impacted because emissions allowances, RECs, renewable fuel credits, etc. often sit at the center of both operating strategy and regulatory compliance. Finance teams will need stronger controls over credit inventory, intended use, remaining compliance exposure and market pricing.
The standard also might affect debt covenants, borrowing base calculations or other meaningful metrics for stakeholders depending on whether there are any significant differences between historical accounting and the new defined rules under Topic 818.
Separate balance sheet presentation means that environmental credit assets and obligation liabilities might be more visible and might not offset in the way stakeholders had historically expected. Working capital, current ratio, tangible net worth, leverage, EBITDA and borrowing base availability could change depending on how agreements were previously set up and whether or not the adoption of the new standard will have a significant impact on current accounting policies at your company.
Next Steps
To start preparing now for Topic 818’s adoption, accounting teams should inventory covered programs, document credit intent, evaluate systems for tracking funded versus unfunded obligations and discuss covenant definitions with lenders, including whether there will be any perceived impact due to the accounting rule changes. Early planning will make adoption less disruptive and help leadership to explain the financial statement impacts effectively.
The FASB had previously declared its intent to bring defined rules into place to help govern and ensure comparability for the accounting for environmental credits. For background on what the FASB’s aim was, see our previous thoughts on this topic.
About Schneider Downs Energy Services
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To learn more, visit our Energy Industry Group page.
