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Green Energy Credits, Carbon Offsets Due for Clearer Accounting

Aug. 31, 2022, 8:45 AM

Airlines, manufacturers, and other companies that rely on trucking or freight increasingly turn to carbon offsets and renewable energy credits to blunt the impact of their emissions and meet green corporate targets.

The problem: Companies ranging from Pfizer Inc. to Charter Communications Inc. have told US accounting rulemakers they need clear rules on how to report these popular tools in their financial statements. One company could land on an accounting answer that creates a different earnings impact than a peer company using a similar credit. Meanwhile, solar companies, wind farms, and utilities that produce green energy and sell credits to businesses face a separate list of accounting questions.

They’re set to get answers. The Financial Accounting Standards Board is working to write consistency for companies that must account for environmental credits and offsets they use, as well as for the companies and utilities that create the credits.

It’s welcome news to a market dealing with disparate guidance and uneven financial accounting outcomes, said Marc Siegel, an Ernst & Young LLP partner who focuses on corporate and environmental, social, and governance reporting.

“The more companies set targets, the more they seek out and demand these credits in order to make progress toward those targets, the more pervasive it is,” said Siegel, who also is a former FASB member. “And the more you want to make sure everyone is on a similar accounting platform so you can compare and contrast between the different companies.”

No part of US generally accepted accounting principles specifically states how companies should report carbon offsets, cap-and-trade programs, and other green credits in their financial statements. Depending on whether companies plan to hold onto them or trade them, some businesses record them as inventory while others consider them intangible assets.

This leads not only to different earnings impacts, but also different bookkeeping logistics. If they are considered inventory, as outlined in ASC 330, companies have to perform an analysis every quarter to determine the historical cost and market value and pick whichever one is lower, an accounting calculation called the lower of cost or market method. If they are treated as intangible assets under ASC 350, companies record the the credits or offsets at their cost and then record impairments if their value declines. Those impairments can’t get reversed if the value rebounds.

“So basically there’s a lot of diversity,” Siegel said.

Enter FASB. The board got its first request to tackle the issue in 2018, but other accounting questions took higher precedence at the time. Calls to take action increased last year once the board asked the public to weigh in to help shape its next priorities. Companies including Pfizer Inc., Cigna Inc., and Charter Communications Inc. said the lack of accounting clarity for credits and ESG-related transactions means inconsistent reporting from business to business.

The accounting board hasn’t laid out exactly what it will do. It unanimously agreed to add the topic to its rulemaking agenda in May but hasn’t publicly discussed the issue since then. The board’s accounting staff is in the early stages of research, FASB said.

Net-Zero Accounting

FASB is examining rules around both voluntary and mandatory efforts to go green. This means companies voluntarily declaring that they’re going to net-zero carbon emissions in the next two decades, in addition to companies being forced by regulators to reduce their pollution impact. Some companies attempt to reduce their emissions by investing in efforts that reduce emissions elsewhere, such as buying credits from wind farms or buying acres of forest.

Compliance programs include cap-and-trade and baseline allowance programs, FASB says, and voluntary efforts include renewable energy credits and certificates, renewable identification numbers, and carbon offset credits.

A company’s intent for the credits it holds—whether it wants to sell or trade credits versus hold onto them—creates further accounting questions.

In addition, wind farms, solar power plants, and utility companies that create credits when they generate clean power face questions about when they can recognize gains from selling those credits.

“There’s no guidance saying which is correct,” said Bethany Ryers, partner at Baker Tilly LLP.

FASB will have to walk a fine line between laying down rules versus offering guidelines, said Anne Coughlan, director at Forvis LLP. If the board produces overly technical rules, it risks capturing only specific transactions without taking account of how the market could evolve in the future.

“Given that the environment is changing so quickly, if they issued prescriptive rules there’s all sorts of structuring opportunities,” Coughlan said. “It would have to be principles-based to be sustainable.”

FASB hasn’t committed to an action timeline yet. When the board agrees to add a project to its rulemaking agenda, it can take months of behind-the-scenes research before it holds its first public deliberations.

Whatever FASB does to increase consistency for both measuring credits and offsets as well as disclosing details will be helpful for the market, said Aaron Worthman, partner at Baker Tilly.

“This is great that it’s finally getting the attention and scrutiny it needs; this will help for transparency,” Worthman said.

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editor responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com