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FASB to explore rules on accounting for ESG credits
  • Accounting & Auditing

FASB to explore rules on accounting for ESG credits

Imtiaz Munshi, CPA
Imtiaz Munshi, CPA
  • July 16, 2022 12:31 PM EST
  • | 538 Views
  • | 5 mins read

A large number of public companies are requesting that the Financial Accounting Standards Board should write rules to clarify how to treat cryptocurrency assets related to environmental, social, and governance (ESG) credit concerns.

Release of First Agenda Consultation

In June, the first agenda consultation was released by the American accounting standards setter in five years to solicit public input on its long-term priorities. According to the feedback, the FASB could consider new accounting projects.

Letter To the FASB

In letters to the FASB, which establishes standards for public and private companies and nonprofits, companies and other stakeholders have voiced their concerns about ESG priorities.

Charter Communications suggested - that the FASB develop accounting guidelines for carbon offsets as well as renewable-energy credits. For example, a company earns one credit for every megawatt-hour of electricity generated from renewable energy.

In addition to becoming carbon-neutral, the Stamford, Conn.-based company said it plans to engage in more energy-related transactions but didn't have a plan for how those transactions would take place.

In a Sept. 22 letter, Kevin Howard, Charter Communications' chief accounting officer, and controller wrote -"Uncertainty exists today on what…accounting literature to apply.’

On Sept. 21, Stephen Hope, Autodesk's chief accounting officer, echoed this sentiment in a letter to investors. He said that investors are faced with incomparable financial reporting due to unclear accounting guidelines for renewable-energy credits and carbon offsets.

The Board discussed the Accounting Standards Update proposal based on the feedback received. Accordingly, FASB explores ways to account for ESG credits. 

How is FASB exploring rules on accounting for ESG credits?

Financial instruments tied to environmental, social, and governance (ESG) factors and regulatory credits are accounted for.

Discussion of the pre-agenda ESG Credits research

Based on the June 2021 Invitation to Comment, the Board discussed the pre-agenda research, including feedback from stakeholders on regulatory credits (also known as environmental credits).

As part of the technical agenda, the Board approved a recognition, measurement, presentation, and disclosure requirements project. This project is for participants in programs that result in the creation of environmental credits. Examples of these credits include:

  1. Programs that create compliance, such as cap and trade and baseline allowance programs.
  2. Renewable energy credits/certificates.
  3. Renewable identification numbers.
  4. Carbon offset credits

In addition, the project contains financial reporting requirements for nongovernmental environmental credit creators. It was decided that the project's preliminary scope would be to create legally enforceable and exchangeable environmental credits.

What will not be included in the project?

The board decided that tax credits, tax incentives, and investments in renewable energy structures and entities (such as partnerships) will not be included in the project's scope.

Addition in Agenda

FASB has added another research project to its agenda: Financial Key Performance Indicators for Business Entities.

The project aims to standardize financial KPIs and consider their interaction with regulatory frameworks.

The FASB has decided not to add projects on the following topics to its agenda because of investor feedback and the need to prioritize higher-priority projects.

  1. Key performance indicators for finance;
  2. Balance sheet classification;
  3. Disclosure of materiality considerations;
  4. Debt modifications;
  5. Disclosure of fair value measurements;
  6. Income tax backtracking;
  7. Equity method of accounting;
  8. Accountant responsibilities when a business is sold;
  9. Market risk benefits are recognized and measured;
  10. Stock buybacks;
  11. Definition of participating interest in transfers and servicing of financial assets;

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Imtiaz Munshi, CPA

Imtiaz Munshi, CPA

CFO, AZSTEC LLC

The author Imtiaz Munshi is a Certified Public Accountant and CFO at Azstec, LLC. He is Business Strategist, Tax Planner, Entrepreneur and Advisor to "HNEs" (High Net Worth Entrepreneurs).

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