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.
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