# ASC 818-20-55: Environmental Credits and Environmental Credit Obligations — Environmental Credits — 55 Implementation Guidance and Illustrations

Source: FASB Accounting Standards Codification, Basic View

[Read online](https://asc.understandingaccounting.org/asc/818/20/#55-implementation-guidance-and-illustrations)

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## ASC 818-20-55: 55 Implementation Guidance and Illustrations

[Read section](https://asc.understandingaccounting.org/asc/818/20/#55-implementation-guidance-and-illustrations)

SEC content: no

#### Implementation Guidance

##### [818-20-55-1](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-1)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)The following flowchart illustrates the accounting requirements for [environmental credits](https://asc.understandingaccounting.org/glossary/e/#environmental-credit "(P) December 16, 2027; (N) December 16, 2028818-10-65-1An enforceable right that is acquired, internally generated, granted by a regulatory agency or its designee(s), or received in a nonreciprocal transfer that is not a grant from a regulator or its designee(s) that meets all of the following criteria:Lacks physical substance and is not a financial asset.Is represented to prevent, control, reduce, or remove emissions or other pollution.Is, or previously was, separately transferable in an exchange transaction. If an item is no longer separately transferable in an exchange transaction, an entity must be able to use that item to satisfy an environmental credit obligation to meet this criterion.Is not an income tax credit that may be used to settle an entity’s income tax liability, regardless of whether the entity has a tax liability or intends to use the credit for that purpose.An environmental credit that meets the above criteria may exist in a variety of forms, including (but not limited to) credits, certificates, allowances, and offsets."). The flowchart is a supplement to the guidance in this Subtopic, and it should not be interpreted to change any requirements of this Topic or be considered a substitute for those requirements.

![](https://asc.understandingaccounting.org/asc-img/GUID-0C65DE53-5368-443F-9DF3-E479655BD2EE-low.gif)

At the date the credit is obtained Is it probable that the environmental credit (EC) will be used to settle an environmental credit obligation (ECO), transferred in an exchange transaction, or used in a nonreciprocal transfer (paragraph 818-20-25-1)? "No " "Recognize the cost of the EC as an expense as incurred (paragraph 818-20-25-1)." Yes Recognize an asset, classify, and measure as a compliance environmental credit or noncompliance environmental credit in accordance with paragraphs 818-20-25-2 and 818-20-30-1 through 30-3. At each reporting date For all ECs recognized as assets, is it still probable that the EC will be used to settle an ECO, transferred in an exchange transaction, or used in a nonreciprocal transfer (paragraph 818-20-35-1)? "No " "Derecognize the carrying amount of the EC through earnings (paragraph 818-20-40-2)." Yes Is it probable that the EC will be used to settle an ECO (paragraph 818-20-35-3)? Yes No "EC is classified as a compliance environmental credit and is not remeasured (no impairment testing)1,2 (paragraph 818-20-35-3)." "EC is classified as a noncompliance environmental credit and is tested for impairment1,2 (paragraph 818-20-35-4)." "1 If the classification of the EC changes from a previously determined classification, the EC is tested for impairment before it is reclassified (paragraph 818-20-35-5). 2 The flowchart assumes an entity has not made an accounting policy election to remeasure noncompliance environmental credits at fair value at each reporting period (paragraph 818-20-35-7)."

##### [818-20-55-2](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-2)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)Paragraph [818-20-25-1](https://asc.understandingaccounting.org/asc/818/20/#818-20-25-1) requires that an entity recognize an environmental credit as an asset if it is [probable](https://asc.understandingaccounting.org/glossary/p/#probable "The future event or events are likely to occur.") that the environmental credit will be used to settle an [environmental credit obligation](https://asc.understandingaccounting.org/glossary/e/#environmental-credit-obligation "(P) December 16, 2027; (N) December 16, 2028818-10-65-1A regulatory compliance obligation arising from existing or enacted laws, statutes, or ordinances represented to prevent, control, reduce, or remove emissions or other pollution that may be settled with environmental credits. Obligations within the scope of Subtopic 410-30 are not environmental credit obligations."), transferred in an [exchange](https://asc.understandingaccounting.org/glossary/e/#exchange "An exchange (or exchange transaction) is a reciprocal transfer between two entities that results in one of the entities acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations.") transaction, or used in a [nonreciprocal transfer](https://asc.understandingaccounting.org/glossary/n/#nonreciprocal-transfer "Nonreciprocal transfer is a transfer of assets or services in one direction, either from an entity to its owners (whether or not in exchange for their ownership interests) or to another entity, or from owners or another entity to the entity. An entity's reacquisition of its outstanding stock is an example of a nonreciprocal transfer."). That assessment of probability is a collective assessment whereby the evaluation is made on the probability of any of those events occurring. For example, an entity purchases an environmental credit that it will use to either settle an environmental credit obligation or transfer in an exchange transaction. The entity determines that there is a 50 percent likelihood that the environmental credit will be used to settle an environmental credit obligation and a 50 percent likelihood that the environmental credit will be transferred in an exchange transaction. Therefore, an asset would be recognized because collectively the likelihood of those outcomes occurring is probable.

##### [818-20-55-3](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-3)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)An entity does not need to have recognized an environmental credit obligation liability in accordance with Subtopic 818-30 to determine that it is probable that the entity will use an environmental credit to settle an environmental credit obligation because the liability may be recognized in a future period. In most instances, an entity will be able to readily determine whether it is probable that an environmental credit will be used to settle an environmental credit obligation, transferred in an exchange transaction, or used in a nonreciprocal transfer. The following factors may be helpful in determining whether it is probable that an environmental credit will be used to settle an environmental credit obligation, transferred in an exchange transaction, or used in a nonreciprocal transfer:

1.  a
    
    The entity’s purpose for acquiring the environmental credit
    
2.  b
    
    The quantity of environmental credits the entity owns compared with existing and expected environmental credit obligations
    
3.  c
    
    Expected events and activities that may change the entity’s need for [compliance environmental credits](https://asc.understandingaccounting.org/glossary/c/#compliance-environmental-credit "(P) December 16, 2027; (N) December 16, 2028818-10-65-1An environmental credit recognized as an asset in accordance with Topic 818 and probable of being used to settle an environmental credit obligation.") in future periods
    
4.  d
    
    The entity’s past uses of environmental credits
    
5.  e
    
    Whether the entity would be committed to transfer in an exchange transaction any environmental credits in excess of those needed to satisfy an environmental credit obligation
    
6.  f
    
    An entity’s internal emission reduction initiatives.

##### [818-20-55-4](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-4)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)In accordance with paragraph [818-20-25-5](https://asc.understandingaccounting.org/asc/818/20/#818-20-25-5), an entity is not required to apply the recognition requirements in paragraphs

[818-20-25-1 through 25-2](https://asc.understandingaccounting.org/asc/818/20/#818-20-25-1)

at the individual environmental credit level. For example, if an entity acquires 1,000 Class A renewable energy certificates, it evaluates whether it is probable that the renewable energy certificates will be used to settle an environmental credit obligation, transferred in an exchange transaction, or used in a nonreciprocal transfer. The entity determines that it is probable that it will use 900 of those renewable energy certificates to settle an environmental credit obligation and that it is not probable that it will use the remaining 100 renewable energy certificates to settle an environmental credit obligation, transfer the renewable energy certificates in an exchange transaction, or use the renewable energy certificates in a nonreciprocal transfer. Therefore, the entity recognizes 900 Class A renewable energy certificates as environmental credit assets, and the remaining 100 Class A renewable energy certificates are expensed as incurred.

##### [818-20-55-5](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-5)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)Paragraph [818-20-30-1](https://asc.understandingaccounting.org/asc/818/20/#818-20-30-1) requires that an entity initially measure an internally generated environmental credit or an environmental credit received through a grant from a regulator or its designee(s) at the transaction costs incurred, if any. Transaction costs include costs such as those that are necessary to validate, register, or authenticate an environmental credit so that the environmental credit may be used to settle an environmental credit obligation, transferred in an exchange transaction, or used in a nonreciprocal transfer. If an entity does not incur transaction costs, the initial measurement of those environmental credits should be zero. That initial measurement should not affect whether an asset is recognized in accordance with paragraph [818-20-25-1](https://asc.understandingaccounting.org/asc/818/20/#818-20-25-1) or whether the environmental credit is classified as a compliance environmental credit or a [noncompliance environmental credit](https://asc.understandingaccounting.org/glossary/n/#noncompliance-environmental-credit "(P) December 16, 2027; (N) December 16, 2028818-10-65-1An environmental credit recognized as an asset in accordance with Topic 818 that is not a compliance environmental credit.") in accordance with paragraph [818-20-25-2](https://asc.understandingaccounting.org/asc/818/20/#818-20-25-2). For example, a renewable energy certificate granted to an entity by a regulator that is determined to be probable of being used to settle an environmental credit obligation when received would be recognized as an asset and classified as a compliance environmental credit at initial recognition. That compliance environmental credit would be measured at zero if the entity does not incur transaction costs. Additionally, when that environmental credit is used to measure the funded portion of an environmental credit obligation liability, the liability also would be measured at zero.

##### [818-20-55-6](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-6)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)Paragraph [818-20-30-2](https://asc.understandingaccounting.org/asc/818/20/#818-20-30-2) requires an entity that obtains an environmental credit in a transaction initially measured in accordance with another Topic to follow the initial measurement requirements of that other Topic. For example:

1.  a
    
    A renewable energy certificate received as consideration in a [contract](https://asc.understandingaccounting.org/glossary/c/#contract "An agreement between two or more parties that creates enforceable rights and obligations.") that is within the scope of Topic 606 on revenue from contracts with [customers](https://asc.understandingaccounting.org/glossary/c/#customer "A party that has contracted with an entity to obtain goods or services that are an output of the entity's ordinary activities in exchange for consideration.") should be initially measured in accordance with paragraphs
    
    [606-10-32-21 through 32-22](https://asc.understandingaccounting.org/asc/606/10/#606-10-32-21)
    
    .
    
2.  b
    
    A carbon offset or renewable energy certificate received in a nonreciprocal transfer from an investee in a transaction that is within the scope of Topic 845 on nonmonetary transactions should be initially measured in accordance with that Topic.
    
3.  c
    
    An environmental credit received in a nonreciprocal transfer between entities under common control should initially be measured in accordance with paragraphs
    
    [805-50-30-5 through 30-6](https://asc.understandingaccounting.org/asc/805/50/#805-50-30-5)
    
    .

##### [818-20-55-7](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-7)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)Paragraphs

[818-20-35-7 through 35-10](https://asc.understandingaccounting.org/asc/818/20/#818-20-35-7)

permit an entity, as an accounting policy election, to subsequently measure a class of eligible noncompliance environmental credits at [fair value](https://asc.understandingaccounting.org/glossary/f/#fair-value "The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.") at each reporting date, with changes recognized in earnings. An entity should determine what constitutes a class based on its facts and circumstances. Eligible noncompliance environmental credits are those obtained in an exchange transaction, received in a nonreciprocal transfer that is not a grant from a regulator or its designee(s), or acquired in a [business combination](https://asc.understandingaccounting.org/glossary/b/#business-combination "A transaction or other event in which an acquirer obtains control of one or more businesses. Transactions sometimes referred to as true mergers or mergers of equals also are business combinations. See also Acquisition by a Not-for-Profit Entity."). Environmental credits generated by the entity or received through a grant from a regulator (or its designee(s)) are ineligible for fair value measurement. For example, an oil refinery acquires 100 renewable identification numbers in an exchange transaction and is granted 20 similar renewable identification numbers from a regulator. The oil refinery determines that it is not probable that it will use the environmental credits to settle an environmental credit obligation because the entity intends to transfer in an exchange transaction all 120 of those noncompliance environmental credits. The 100 acquired renewable identification numbers are eligible for fair value measurement, and the 20 granted renewable identification numbers are not.

##### [818-20-55-8](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-8)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)Notwithstanding the requirements of paragraphs

[818-20-35-4 through 35-5](https://asc.understandingaccounting.org/asc/818/20/#818-20-35-4)

, an environmental credit subsequently measured at fair value in accordance with an entity’s accounting policy election should continue to be measured at fair value at each reporting date until the environmental credit is derecognized. For example, assume that an entity elects an accounting policy to subsequently measure a class of 600 eligible noncompliance renewable identification numbers at fair value at each reporting date. If the entity subsequently determines that it is probable that a portion (or all) of those 600 noncompliance renewable identification numbers will be used to settle environmental credit obligations, those renewable identification numbers would be reclassified as compliance environmental credits and would continue to be measured at fair value at each reporting date until derecognized. Therefore, measuring those compliance environmental credits at fair value would affect the measurement of the related funded portion of an entity’s environmental credit obligation liability measured in accordance with paragraph [818-30-30-2](https://asc.understandingaccounting.org/asc/818/30/#818-30-30-2).

#### Illustrations

##### [818-20-55-9](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-9)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)Examples 1 through 4 illustrate the application of the recognition and measurement requirements of this Subtopic.

##### [818-20-55-10](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-10)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)An industrial manufacturing entity is subject to a cap-and-trade regulatory compliance program that mandates the remittance of emissions allowances to a regulator by March 31, 20X5, based on the amount of the entity’s emissions for a compliance year ending on December 31, 20X4. On January 1, 20X4, the entity purchases 10,000 emissions allowances at a regulator-sponsored auction for $1,000,000 ($100 per allowance) and pays $25,000 in auction fees. At initial recognition, the entity determines that it is probable that it will use those emissions allowances to settle its 20X4 cap-and-trade environmental credit obligation because it estimates that its emissions during 20X4 will require the remittance of 15,000 emissions allowances. The entity classifies the 10,000 emissions allowances as compliance environmental credits, initially measured at $1,025,000, in accordance with paragraph [818-20-30-3](https://asc.understandingaccounting.org/asc/818/20/#818-20-30-3). Those emissions allowances are not remeasured if they continue to be classified, at each reporting date, as compliance environmental credits.

##### [818-20-55-11](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-11)

Pending content: yes

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)A cloud-based software developer publicly announces its voluntary initiative to be carbon neutral for the fiscal year ending December 31, 20X4. The carbon neutral initiative of the cloud-based software developer does not represent an environmental credit obligation because it does not result from a regulatory compliance obligation under existing or enacted laws, statutes, or ordinances. Specifically, this voluntary initiative does not establish an environmental credit obligation. The entity purchases 1,000 carbon offsets for $50,000 on March 1, 20X4, to meet its voluntary initiative. Because it is not probable that the entity will use the acquired carbon offsets to settle an environmental credit obligation, transfer those carbon offsets in an exchange transaction, or use those carbon offsets in a nonreciprocal transfer, the entity recognizes the $50,000 as an expense as incurred on March 1, 20X4, in accordance with paragraph [818-20-25-1](https://asc.understandingaccounting.org/asc/818/20/#818-20-25-1).

##### [818-20-55-12](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-12)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)An entity that owns a tree farm uses a nationally accredited third-party registry to certify the tree farm and issue carbon offsets. During January 20X4, the entity’s tree farm activities resulted in 30,000 carbon offsets issued to the entity by the registry. The entity pays $1 per carbon offset as an administrative fee to the registry. The entity determines that it is not probable that it will use the carbon offsets to settle an environmental credit obligation because it intends to sell all of the carbon offsets created as a result of its tree farm activities. The entity recognizes the carbon offsets as assets and classifies them as noncompliance environmental credits. Those noncompliance environmental credits are initially measured at $30,000, the amount of the transaction costs, in accordance with paragraph [818-20-30-1](https://asc.understandingaccounting.org/asc/818/20/#818-20-30-1). In accordance with paragraph [818-20-35-9](https://asc.understandingaccounting.org/asc/818/20/#818-20-35-9), an entity’s internally generated environmental credits are not eligible for the fair value measurement accounting policy election.

##### [818-20-55-13](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-13)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)A U.S. oil refinery is subject to a regulatory compliance program represented to control fuel emissions. The program requires fuel produced by the entity to include a minimum volume of fuel generated from renewable sources. The entity refines crude oil and conventional biofuel (renewable). During October 20X4, the entity refines 100,000 gallons of conventional biofuel, which results in 100,000 renewable identification numbers granted to the entity by the regulator in accordance with the program. The entity incurred no transaction costs to obtain the renewable identification numbers. The entity determines that it is probable that the renewable identification numbers will be used to settle an environmental credit obligation, transferred in an exchange transaction, or used in a nonreciprocal transfer and recognizes an asset that is initially measured at zero, in accordance with paragraph [818-20-30-1](https://asc.understandingaccounting.org/asc/818/20/#818-20-30-1). Environmental credits received through a grant by a regulator or its designee(s) are not eligible for the fair value measurement accounting policy election in accordance with paragraph [818-20-35-9](https://asc.understandingaccounting.org/asc/818/20/#818-20-35-9).

##### [818-20-55-14](https://asc.understandingaccounting.org/asc/818/20/#818-20-55-14)

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Transition date:(P) December 16, 2027; (N) December 16, 2028Transition guidance:

[818-10-65-1](https://asc.understandingaccounting.org/asc/818/10/#818-10-65-1)The following is an illustration of the quantitative disclosures required by paragraphs

[818-20-50-2 through 50-4](https://asc.understandingaccounting.org/asc/818/20/#818-20-50-2)

for annual reporting periods. The format in the illustration is not a requirement, and the information should be formatted in the most understandable manner for an entity’s specific circumstances. This illustration does not illustrate comparative period disclosures.

![](https://asc.understandingaccounting.org/asc-img/GUID-7C921BE8-2DB2-4E2A-BCBC-04E7F9CE514D-low.gif)

As of December 31, 20X4 Environmental Credit Carrying Amount Classification Current portion $5,100 Compliance Current portion 500 Noncompliance Noncurrent portion 3,800 Compliance Noncurrent portion - Noncompliance Total $9,400 Environmental Credit Expense Information For the Year Ended December 31, 20X4 Expense for voluntary environmental credit costs(a) $118 Impairment expense(b) $15 (a) Expense for voluntary environmental credit costs is included in other expenses in the income statement. (b) Impairment expense is recorded because of a decline in the fair market value of Project A carbon offsets. Impairment expense is included in cost of goods sold in the income statement. Change in Use of Environmental Credit Information For the Year Ended December 31, 20X4 Expense for voluntary environmental credit costs(a) $100 (a) Certain compliance environmental credits were expensed because it was no longer probable that the credits would be used to settle an ECO, transferred in an exchange transaction, or used in a nonreciprocal transfer.