ASC

ASC 818-10

Overall

818 Environmental Credits and Environmental Credit Obligations

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In brief

IntermediateRecognitionSubsequent measurementTransition and effective datesFinancial instruments

ASC 818-10 is the Overall subtopic of the new Environmental Credits and Environmental Credit Obligations Topic (created by ASU 2026-02), which sets the accounting and reporting requirements for entities that acquire, internally generate, or receive environmental credits and for entities subject to regulatory compliance programs (e.g., cap-and-trade, renewable portfolio or fuel standards) that create environmental credit obligations. It applies to all environmental credits and environmental credit obligations, and items within its scope are excluded from derivatives accounting under Topic 815. The objective is to give investors useful information about the amount, timing, and uncertainty of cash flows from these transactions.

Key points (7)
  • Topic 818 comprises three Subtopics — Overall (818-10), Environmental Credits (818-20), and Environmental Credit Obligations (818-30) (818-10-05-1).
  • The guidance applies to all environmental credits and environmental credit obligations, which are used to settle environmental credit obligations, transferred in exchange transactions, used in nonreciprocal transfers, or used for voluntary purposes (818-10-05-3; 818-10-15-1).
  • Items within the scope of Topic 818 are outside the scope of Topic 815 on derivatives and hedging per 815-10-15-82B (818-10-15-3).
  • Separate transferability does not require an active market, and the length of time an item is transferable is irrelevant — an item transferable only momentarily before retirement still qualifies if the other criteria in the environmental credit definition are met (818-10-55-1).
  • In applying the Topic, an entity considers the rights provided by the environmental credits it obtains and the terms and conditions of the regulatory compliance programs creating the obligations (818-10-10-1).
  • Effective for public business entities in annual periods beginning after December 15, 2027, and for other entities after December 15, 2028, with early adoption permitted as of the beginning of the annual period (818-10-65-1(a)–(c)).
  • Transition is retrospective through a cumulative-effect adjustment to opening retained earnings; a credit is recognized as an asset at the date of initial application only if it is probable it will be used to settle an obligation, transferred in an exchange, or used in a nonreciprocal transfer, with compliance credits carried at existing carrying amount and noncompliance credits at the lower of carrying amount and fair value (818-10-65-1(d)–(f)).

For students. This is brand-new guidance (ASU 2026-02) that finally gives carbon allowances and renewable energy credits their own model instead of forcing them into inventory, intangibles, or derivatives analogies. A common misunderstanding is assuming an active market or extended transferability is needed for an item to be an environmental credit — 818-10-55-1 says even momentary transferability before immediate retirement suffices.

environmental creditenvironmental credit obligationregulatory compliance programcap-and-tradecompliance versus noncompliance environmental creditsseparately transferablenonreciprocal transfercumulative-effect transition adjustment

Machine-generated study aid for ASC 818-10. Check the source paragraphs below.

818-10-00Status

Source downloaded: .Record version 913d74688d21. Effective date must be checked in the source.

818-10-00-1
The following table identifies the changes made to this Subtopic.
Paragraph Action Accounting Standards Update Date
Active Market Added Accounting Standards Update No. 2026-02 05/19/2026
Compliance Environmental Credit Added Accounting Standards Update No. 2026-02 05/19/2026
Environmental Credit Added Accounting Standards Update No. 2026-02 05/19/2026
Environmental Credit Obligation Added Accounting Standards Update No. 2026-02 05/19/2026
Exchange Added Accounting Standards Update No. 2026-02 05/19/2026
Fair Value (2nd def.) Added Accounting Standards Update No. 2026-02 05/19/2026
Financial Asset Added Accounting Standards Update No. 2026-02 05/19/2026
Income Taxes Added Accounting Standards Update No. 2026-02 05/19/2026
Market Participants Added Accounting Standards Update No. 2026-02 05/19/2026
Noncompliance Environmental Credit Added Accounting Standards Update No. 2026-02 05/19/2026
Nonreciprocal Transfer (1st def.) Added Accounting Standards Update No. 2026-02 05/19/2026
Orderly Transaction Added Accounting Standards Update No. 2026-02 05/19/2026
Probable Added Accounting Standards Update No. 2026-02 05/19/2026
Related Parties Added Accounting Standards Update No. 2026-02 05/19/2026
818-10-05-1 through 05-3
 Added Accounting Standards Update No. 2026-02 05/19/2026
818-10-10-1 Added Accounting Standards Update No. 2026-02 05/19/2026
818-10-15-1 through 15-3
 Added Accounting Standards Update No. 2026-02 05/19/2026
818-10-55-1 Added Accounting Standards Update No. 2026-02 05/19/2026
818-10-65-1 Added Accounting Standards Update No. 2026-02 05/19/2026

818-10-05Overview and Background

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818-10-05-1
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1The Environmental Credits and Environmental Credit Obligations Topic includes the following Subtopics:
  1. a
    Overall
  2. b
    Environmental Credits
  3. c
    Environmental Credit Obligations.
818-10-05-2
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1The Subtopics listed in paragraph 818-10-05-1 establish the financial accounting and reporting requirements for entities that obtain or generate an environmental credit or are subject to regulatory compliance programs (for example, cap-and-trade, renewable portfolio standards, or renewable fuel standards) that result in an environmental credit obligation.
818-10-05-3
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1Entities engage in a variety of transactions that involve environmental credits. Environmental credits are acquired, internally generated, granted by a regulator or its designee(s), or received in a nonreciprocal transfer that is not a grant from a regulator or its designee(s). Entities use those environmental credits:
  1. a
    To settle environmental credit obligations
  2. b
    To transfer in an exchange transaction
  3. c
    In a nonreciprocal transfer
  4. d
    To meet voluntary environmental initiatives (referred to as using environmental credits for voluntary purposes).

818-10-10Objectives

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818-10-10-1
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1This Topic specifies the financial accounting and reporting requirements for transactions and arrangements involving environmental credits and environmental credit obligations with the objective of providing investors with useful information about the amount, timing, and uncertainty of cash flows arising from those transactions. An entity should consider the rights provided by the environmental credits it obtains and the terms and conditions of the regulatory compliance programs that result in environmental credit obligations when applying this Topic.

818-10-15Scope and Scope Exceptions

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818-10-15-1
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1The guidance in this Topic applies to all environmental credits and environmental credit obligations.
818-10-15-2
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1See paragraph 818-10-55-1 for implementation guidance on the application of the scope of this Topic.

Other Considerations

818-10-15-3
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1Environmental credits and environmental credit obligations that are within the scope of this Topic are outside the scope of Topic 815 on derivatives and hedging in accordance with paragraph 815-10-15-82B.

818-10-55Implementation Guidance and Illustrations

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Implementation Guidance

818-10-55-1
Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:
818-10-65-1The existence of active markets is not a requirement when determining whether an item that may be an environmental credit is separately transferable in an exchange transaction. Additionally, the length of time that an item is transferable should not be considered for that purpose. In certain instances, an item may only be separately transferable momentarily because an entity retires the item immediately after obtaining it or instructs another party, such as a broker, to do so. That item would be subject to the provisions of this Topic if all other criteria in the environmental credit definition are met.

818-10-65Transition and Open Effective Date Information

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Transition Related to Accounting Standards Update No. 2026-02, <em class="ph i">Environmental Credits and Environmental Credit Obligations (Topic 818)</em>

818-10-65-1
Accounting Standards Update 2026-02
2027-06-30
2027-12-16
2027-12-16
2027-12-16
2027-12-16
2028-12-16
2028-12-16
2028-12-16
2028-12-16
2028-12-16
2028-12-16
2028-12-16
2028-12-16
2028-12-16
2028-12-16
The following represents the transition and effective date information related to Accounting Standards Update No. 2026-02, Environmental Credits and Environmental Credit Obligations (Topic 818):
Effective date and early adoption
  1. a
    Public business entities shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods.
  2. b
    Entities other than public business entities shall apply the pending content that links to this paragraph for annual reporting periods beginning after December 15, 2028, and interim reporting periods within those annual reporting periods.
  3. c
    Early adoption of the pending content that links to this paragraph is permitted in an interim or annual reporting period in which financial statements have not yet been issued or made available for issuance. If an entity adopts the pending content that links to this paragraph in an interim reporting period, it shall adopt the pending content as of the beginning of the annual reporting period that includes that interim reporting period.
Transition method
  1. d
    An entity shall apply the pending content that links to this paragraph on a retrospective basis through a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets on the balance sheet) as of the beginning of the annual reporting period of adoption, subject to the guidance in (e) through (i). The date of initial application shall be the beginning of the annual reporting period in which the entity first applies the pending content that links to this paragraph.
  2. e
    An entity shall recognize an environmental credit as an asset at the date of initial application of the pending content that links to this paragraph if it is probable at that date that the environmental credit will be used to settle an environmental credit obligation, transferred in an exchange transaction, or used in a nonreciprocal transfer. For all other environmental credits, an entity shall derecognize the carrying amount of those environmental credits at the date of initial application unless those environmental credits are within the scope of (g). In addition, at the date of initial application, an entity shall derecognize the carrying amount of an asset recognized for a nonrefundable deposit made to obtain an environmental credit if it is not probable that the environmental credit will be used to settle an environmental credit obligation, transferred in an exchange transaction, or used in a nonreciprocal transfer.
  3. f
    An entity shall measure an environmental credit recognized as an asset at the date of initial application of the pending content that links to this paragraph in accordance with (e) as follows:
    1. 1
      An environmental credit that is classified as a compliance environmental credit at the date of initial application of the pending content that links to this paragraph shall be measured using the entity’s carrying amount of that environmental credit existing at the date of initial application.
    2. 2
      An environmental credit that is classified as a noncompliance environmental credit at the date of initial application of the pending content that links to this paragraph shall be measured at the lower of the entity’s carrying amount of the environmental credit existing at the date of initial application and the fair value of the environmental credit at the date of initial application.
    3. 3
      Notwithstanding the requirements of (f)(1) and (f)(2), an entity may make an entity-wide election to measure those environmental credits that were internally generated by the entity or received through a grant from a regulator or its designee(s) at the amount of the transaction costs incurred in accordance with paragraph 818-20-30-1.
    4. 4
      Notwithstanding the requirements of (f)(2), an entity that elects an accounting policy to subsequently measure a class of eligible noncompliance environmental credits at fair value shall measure those environmental credits at fair value at the date of initial application of the pending content that links to this paragraph.
  4. g
    An entity shall continue to include the cost of environmental credits capitalized as part of another asset accounted for in accordance with another Topic (for example, Topic 330 on inventory) before the date of initial application of the pending content that links to this paragraph as part of the carrying amount of that other asset.
  5. h
    An entity shall apply the liability recognition and measurement requirements of Subtopic 818-30 on environmental credit obligations at the date of initial application of the pending content that links to this paragraph.
  6. i
    An entity shall apply the pending content in paragraphs
    805-20-25-15B through 25-15D
    and 805-20-30-32 prospectively to transactions accounted for as business combinations occurring after the date of initial application of the pending content that links to this paragraph.
Transition disclosures
  1. j
    An entity shall provide the transition disclosures required by paragraph 250-10-50-1(a), (b)(3), and (c) and paragraph 250-10-50-2. The transition disclosure required by paragraph 250-10-50-1(b)(3) shall be as of the beginning of the annual reporting period of adoption rather than as of the beginning of the earliest period presented.

Related subtopics