Quick Summary
ASC 818 establishes GAAP’s first framework for environmental credit accounting, requiring companies to disclose the types, valuation and financial statement impact of credits like RINs, RECs and emissions allowances. Energy companies with existing credit programs face significantly expanded footnote disclosures.
One of the primary objectives of ASC 818 is to improve transparency and comparability by creating a standardized disclosure framework. Prior to ASC 818, disclosures related to carbon credits, RINs, RECs, emissions allowances and other environmental credits varied significantly because no specific GAAP guidance existed. ASC 818 now requires both qualitative and quantitative disclosures designed to help users understand the nature, risks, valuation and financial statement impact of environmental credits and related obligations.
Enhanced Qualitative Disclosures
Entities must provide narrative disclosures describing:
- The types of environmental credits held
- How environmental credits are obtained (purchased, internally generated, regulator-issued, donated, etc.)
- How environmental credits are intended to be used
- Regulatory compliance programs to which the entity is subject
- Significant accounting policies applied to environmental credits and environmental credit obligations
- Significant judgments, estimates and assumptions used in measuring credits and obligations
Impact: Companies will need to document management’s intent regarding environmental credits, which becomes a critical accounting determination under ASC 818.
Quantitative Disclosure Requirements
ASC 818 requires disclosures regarding significant environmental credit assets and obligations, including:
- Description of credit types
- Carrying amounts of environmental credit assets
- Classification within the financial statements
- Environmental credit obligation balances
- Revenues and gains recognized from sales of environmental credits
- Losses recognized on environmental credits
- Impairment charges
- Expenses recognized for environmental credits that were expensed rather than capitalized
- Expenses associated with environmental credit obligations
- Cash paid to acquire environmental credits
Impact: Users will be able to see the magnitude of an entity’s environmental credit position and its effect on earnings and cash flows, which often was not readily apparent under prior accounting approaches.
Separate Visibility of Assets and Obligations
ASC 818 also requires separate presentation of:
- Environmental credit assets
- Environmental credit obligation liabilities
The related disclosures must help users understand how much of the obligation is:
- Funded by credits already held
- Unfunded and dependent on future credit purchases or generation
Impact: Investors, lenders and sureties will have greater insight into future compliance costs and environmental exposure.
Fair Value Disclosures
For entities electing the fair value option for certain classes of noncompliance environmental credits, ASC 818 requires applicable fair value disclosures consistent with Topic 820.
These disclosures may include:
- Fair value measurements
- Valuation methodologies
- Significant inputs used in valuation
Impact: Users can better assess how fluctuations in environmental credit markets affect earnings and asset values.
Disclosure of Significant Judgments
Because the accounting treatment depends heavily on intended use, ASC 818 specifically requires disclosure of significant estimates and judgments. Examples may include:
- Whether credits are expected to be used for compliance purposes or sold
- Changes in management’s intended use
- Impairment assessments
- Fair value assumptions
- Measurement of environmental credit obligations
Impact: Auditors and regulators will likely focus heavily on these disclosures because management intent directly affects recognition and measurement.
Practical Impact for Energy Companies
For oil and gas producers, refiners, renewable energy companies, utilities and biofuel participants, ASC 818 will likely result in significantly expanded footnote disclosures. Many entities that currently provide only limited discussion of RECs, RINs, carbon credits or emissions allowances may need entirely new footnote sections explaining:
- Credit inventories
- Compliance obligations
- Market exposure
- Accounting policies
- Significant judgments
- Gains, losses, impairments and related expenses
Example Disclosure Areas Likely Needed
A company holding RINs could be required to disclose:
- Number and carrying value of RINs held
- Intended use (compliance versus trading)
- Amount of compliance obligation accrued
- Expense recognized during the year
- Cash spent acquiring additional RINs
- Significant judgments used in measuring any unfunded obligation
Bottom Line
ASC 818 moves environmental credit reporting from a largely disclosure-light area with diverse accounting practices to a highly transparent framework requiring detailed information about:
- What credits are held
- Why they are held
- How they are measured
- What obligations exist
- What earnings and cash flow impacts occurred
- What significant judgments management made
The new disclosures are expected to make environmental credit programs far more visible to investors, lenders, audit committees and regulators than under current practice.
The Schneider Downs Energy & Resources industry group has served oil and gas, mining and aggregates, forest products and alternative energy clients since 1980. Our specialists bring deep, sector-specific knowledge to proactive audit, tax and consulting work for producers and service providers of every size. To learn more, visit our Energy & Resources Industry Group page or contact us, or email us directly.
