(P) December 16, 2027; (N) December 16, 2028
818-10-65-1The following flowchart illustrates the accounting requirements of this Subtopic for environmental credit obligations. The flowchart is a supplement to the guidance in this Subtopic. It should not be interpreted to change any requirements of this Topic or be considered a substitute for those requirements.![](\"/asc-img/GUID-C7A1B943-AF39-4A5E-AF2F-F0FF2AC37AF5-low.gif\")
Have events occurred on or before the reporting date that result in an environmental credit obligation (ECO) liability (paragraph 818-30-25-1)? \"No\" ECO measurement requirements are not applicable. Yes Recognize an ECO liability and measure the liability as follows: Funded Portion Unfunded Portion Measure the funded portion of the ECO liability using the carrying amount of compliance environmental credits at the reporting date (paragraph 818-30-30-2). \"Measure the unfunded portion using the fair value of the environmental credits necessary to settle that portion at the reporting date (paragraph 818-30-30-3), unless:\" The entity intends to settle the unfunded portion in cash. The entity intends to settle the unfunded portion using environmental credits from either (a) an existing unconditional purchase commitment (fixed quantity at a fixed price) or (b) an unconditional right to receive a fixed quantity of environmental credits as part of a regulatory compliance program or contract for which environmental credits will be received as consideration. Measure the unfunded portion using the cash settlement amount specified by the regulatory compliance program (paragraph 818-30-30-3(a)). Measure the unfunded portion using the estimated cost basis of the environmental credits to be obtained (paragraph 818-30-30-3(b)).
(P) December 16, 2027; (N) December 16, 2028
818-10-65-1In some regulatory compliance programs, the qualifying events or activities that trigger an obligation to remit an environmental credit (which is often emissions as they occur) are established and specified by the program. In those programs, an entity typically cannot reduce the quantity of environmental credits that it is obligated to remit to the regulator at a point in time through future performance. For those programs, an entity should recognize an environmental credit obligation liability upon the occurrence of each qualifying event or activity. For example, if a utility company is required to remit one renewable energy certificate for every one megawatt-hour of electricity delivered to customers, the entity would recognize an environmental credit obligation liability for the obligation to remit one renewable energy certificate upon the delivery of one megawatt-hour to a customer. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1In other regulatory compliance programs that result in environmental credit obligations, an entity is obligated to remit environmental credits to a regulator after it exceeds an established threshold of emissions. After exceeding the established threshold, each qualifying activity results in an incremental obligation to remit an environmental credit to the regulator at the settlement date specified by the program. For example, a regulatory compliance program obligates an entity to remit one emissions allowance for each metric ton of greenhouse gas emitted over 1,000 metric tons. An entity subject to that program should recognize an environmental credit obligation liability after its emissions exceed 1,000 metric tons. Because the entity is not obligated to remit an environmental credit until the threshold is exceeded, a liability should not be recognized before excess emissions occur. Therefore, when the entity emits above the 1,000 metric ton threshold, it should recognize an environmental credit obligation liability for each emissions allowance due thereafter. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1Some regulatory compliance programs determine an entity’s environmental credit obligation by considering activities over a period of time. Under those programs, an entity’s future performance or actions may increase, reduce, or eliminate the need to remit environmental credits to a regulator at the settlement date. For those regulatory compliance programs, an entity should recognize an environmental credit obligation liability at a reporting date when activities or events occurring on or before that date obligate the entity to remit an environmental credit to the regulator assuming that the reporting date was the end of the compliance period. This assumption should be applied regardless of whether the regulatory compliance period ends after the reporting date. For example, consider an automotive manufacturer subject to a regulatory compliance program that requires that an entity remit environmental credits if the fuel efficiency of vehicles sold over a multiyear compliance period does not satisfy a benchmark threshold for that compliance period. Under those programs, an entity may sell vehicles during a reporting period that indicates that an environmental credit obligation liability exists at one reporting date that can be reduced or eliminated upon future sales of more fuel-efficient vehicles and before the compliance period ends. The entity should recognize an environmental credit obligation liability at the reporting date based on the facts and circumstances existing at that date. An entity should not forecast future activities or events that may increase, reduce, or eliminate the need to remit environmental credits to a regulator at the settlement date when determining whether it should recognize an environmental credit obligation liability. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1When applying paragraph 818-30-30-2 for the measurement of the funded portion of an environmental credit obligation liability, an entity should consider only compliance environmental credits recognized as assets at the reporting date, not those credits that will (or may) be obtained in future periods. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1In accordance with paragraph 818-30-30-3(b), if an entity intends to settle the unfunded portion of an environmental credit obligation liability using environmental credits to be obtained before the settlement date through an unconditional purchase commitment for a fixed quantity of environmental credits at a fixed price that exists at the reporting date, that liability should be measured using the estimated cost basis of the environmental credits to be obtained. For example, a contract specifying that an entity will purchase 10,000 renewable energy certificates each year for the next 5 years at a fixed price of $20,000 ($2 per renewable energy certificate) per year may be considered when measuring the unfunded portion. If the entity intends to settle the unfunded portion of an environmental credit obligation liability using environmental credits to be obtained under that commitment before the settlement date, that unfunded portion would be measured using a cost basis of $2 per renewable energy certificate. However, if those renewable energy certificates are obtained as part of a bundled arrangement (for example, a power purchase arrangement) that includes the related energy, the estimated cost basis of the environmental credits to be obtained may differ from the fixed price per the contract because the amount allocated to that renewable energy certificate in accordance with Subtopic 805-50 on asset acquisitions may be different from the fixed price per the contract. In that scenario, an entity would measure the environmental credit obligation liability using the estimated cost basis of the renewable energy certificates to be obtained based on the estimated amount to be allocated to the renewable energy certificates in accordance with Subtopic 805-50. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1Also in accordance with paragraph 818-30-30-3(b), if an entity has an unconditional right to receive a fixed quantity of environmental credits either from a regulator at a future date as part of a regulatory compliance program or as part of a contract for which the environmental credits are received as consideration, it should consider those environmental credits when measuring the unfunded portion of an environmental credit obligation liability if it intends to settle the obligation by remitting those credits. For example, if an entity is subject to a cap-and-trade program that specifies that the entity has an unconditional right on December 31, 20X4, to receive 1,000 emissions allowances on March 15, 20X5, the entity may consider those environmental credits to be received at a later date when measuring the unfunded portion if it intends to settle its environmental credit obligation by remitting those credits. That right would not be considered unconditional if the future grant is contingent on the entity’s future performance, including continuing to conduct business in the program’s jurisdiction after the reporting date. For example, if an entity subject to a cap-and-trade program specifying that an entity subject to the program as of December 31, 20X4, will receive 1,000 emissions allowances on March 15, 20X5, if the entity continues to operate in the program’s jurisdiction on that date, the entity should not consider those environmental credits when measuring the unfunded portion before March 15, 20X5. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1Examples 1 through 3 illustrate the application of the environmental credit obligation liability recognition and measurement requirements in this Subtopic.(P) December 16, 2027; (N) December 16, 2028
818-10-65-1A manufacturing entity is subject to a cap-and-trade program that obligates the entity to remit emissions allowances to a regulator at a future settlement date with the quantity due determined based on greenhouse gas emissions for a calendar year. On March 31, 20X4, the entity determines that its 20X4 emissions to date would obligate it to remit 10,000 emissions allowances assuming that the March 31, 20X4 reporting date represents the end of the program’s compliance period. On that date, the entity has 20,000 emissions allowances accounted for as compliance environmental credits with a carrying amount of $206,000. The entity subsequently measures its emissions allowances using the first-in, first-out costing method in accordance with paragraph 818-20-35-2. Those 20,000 emissions allowances comprise 8,000 acquired in March 20X3 for $96,000 ($12 per allowance Vintage Year 20X2), 7,000 acquired in August 20X3 for $70,000 ($10 per allowance Vintage Year 20X3), and 5,000 acquired in January 20X4 for $40,000 ($8 per allowance Vintage Year 20X4). For purposes of this Example, vintage year refers to the year that the emissions allowances were issued or sold at auctions by the regulator of the cap-and-trade program. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1The entity first applies the asset reassessment requirements in paragraph 818-20-35-3 and determines that all 20,000 emissions allowances continue to be probable of being used to settle environmental credit obligation liabilities. Therefore, those emissions allowances remain classified and accounted for as compliance environmental credits. In accordance with paragraph 818-30-30-2, the entity measures the environmental credit obligation liability for the 10,000 emissions allowances using the carrying amount of compliance environmental credits recognized on March 31, 20X4. When assessing the carrying amount of the related compliance environmental credits, the entity considers the costing method applied in accordance with the requirements in paragraph 818-20-35-2 and uses that method to determine its best estimate of the carrying amount of compliance environmental credits. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1Therefore, the carrying amount of the 10,000 credits expected to be used to satisfy the regulatory compliance program is $116,000 (the sum of the 8,000 Vintage Year 20X2 allowances at $12 per allowance plus 2,000 of the Vintage Year 20X3 allowances at $10 per allowance). The entity recognizes an environmental credit obligation liability on March 31, 20X4, for 10,000 emissions allowances measured at $116,000. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1Assume the same facts and circumstances as Case A except that the entity’s 20X4 emissions to date would obligate it to remit 14,000 emissions allowances. Additionally, assume that the entity subsequently measures the emissions allowances using an average cost method in accordance with paragraph 818-20-35-2. Vintage Years 20X2 through 20X4 emissions allowances are accepted methods of settlement for 20X4 cap-and-trade obligations, and the entity accounts for them as a single cost pool. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1Regardless of the specific emissions allowances that the entity intends to transfer to the regulator, the entity will derecognize the environmental credits remitted at their average cost based on the entity’s previously elected accounting policy. Average cost is one of the three allowable costing methods that an entity can use for subsequently measuring similar environmental credits in accordance with paragraph 818-20-35-2. On March 31, 20X4, the entity determines that the average cost is $10.30 per emissions allowance (the total cost of the emissions allowances of $206,000 divided by the total number of emissions allowances of 20,000). On that basis, the environmental credit obligation liability recognized for the 14,000 emissions allowances necessary to satisfy the liability at the reporting date is $144,200 in accordance with paragraph 818-30-30-2 (the average cost of $10.30 per emissions allowance multiplied by 14,000 emissions allowances necessary to satisfy the liability). (P) December 16, 2027; (N) December 16, 2028
818-10-65-1An automotive manufacturer selling vehicles is subject to a regulatory compliance program represented to control greenhouse gas emissions by establishing minimum levels of average fuel economy standards for vehicles sold. The compliance period begins on January 1, 20X4, and ends on December 31, 20X7. The entity is obligated to remit 1 environmental credit per vehicle for each mile per gallon that the average fuel economy of all of its vehicles sold within a designated model year is less than 32 miles per gallon. The regulator grants the entity 1 environmental credit per vehicle for every mile per gallon that the average fuel economy of all vehicles sold exceeds 32 miles per gallon. The entity has not executed an unconditional purchase commitment to acquire environmental credits, and the regulatory compliance program does not permit an alternative cash settlement mechanism. The entity determines that it intends to settle the obligation by acquiring the necessary environmental credits from another automotive manufacturer. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1For the 3 months ending March 31, 20X4, the entity sold 100,000 20X4 model year vehicles with an average fuel economy of 30 miles per gallon. On that basis, the entity would be obligated to remit 200,000 environmental credits if the compliance period ended on March 31, 20X4. In accordance with paragraph 818-30-25-1, the entity should recognize an environmental credit obligation liability on that date. The liability is initially measured in accordance with paragraphs . On March 31, 20X4, the fair value of those environmental credits is $4 per credit. Therefore, the entity recognizes an unfunded environmental credit obligation liability of $800,000 on that date. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1When measuring its March 31, 20X4 environmental credit obligation liability, the entity should not consider any activities or events that may increase, reduce, or eliminate the number of environmental credits that would be required at the reporting date. For example, if the entity intends to manufacture and sell more fuel-efficient vehicle models that result in environmental credits being granted to the entity before the settlement date, it should not consider the receipt of those expected future environmental credits when measuring the existing environmental credit obligation liability.(P) December 16, 2027; (N) December 16, 2028
818-10-65-1Assume the same facts and circumstances as in Case A except that the regulatory compliance program permits an alternative cash settlement mechanism that the entity intends to use because of a shortage of environmental credits associated with the program in the market. That alternative cash settlement mechanism allows the entity to settle its environmental credit obligation by paying $4.25 per environmental credit due to the regulator. In accordance with paragraph 818-30-30-3(a) and because the entity intends to use the alternative settlement mechanism, the entity recognizes an environmental credit obligation liability of $850,000 on March 31, 20X4. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1Assume the same facts and circumstances as in Case A except that during 20X3 the entity executed an unconditional purchase commitment for 500,000 environmental credits at $3 per credit to be received before the settlement date. On March 31, 20X4, the entity intends to settle its environmental credit obligation liability using environmental credits to be obtained from that purchase commitment. In accordance with paragraph 818-30-30-3(b), the entity recognizes an environmental credit obligation liability of $600,000. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1An e-commerce retailer is subject to an annual regulatory compliance program that obligates it to remit 1 environmental credit for each metric ton of emissions in excess of 1,000,000 metric tons. The regulatory compliance program ends on December 31, 20X4. As of June 30, 20X4, the entity’s year-to-date emissions are 750,000 metric tons. At that date, the entity expects to emit 750,000 additional metric tons by December 31, 20X4. On that basis, the entity estimates that by the end of the regulatory compliance program, it will be obligated to remit 500,000 environmental credits to the regulator for its excess emissions. On June 30, 20X4, the entity does not recognize an environmental credit obligation liability because it is not obligated to remit any environmental credits assuming that date was the end of the compliance period. An environmental credit obligation liability is recognized under this program only after emissions exceed 1,000,000 metric tons. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1An entity publicly states its voluntary initiative to reduce its net annual emissions by 50 percent by 20X0 by acquiring carbon offsets in addition to making infrastructure investments and process changes. Because the entity’s statement does not arise from a regulatory compliance obligation under existing or enacted laws, statutes, or ordinances, it is not an environmental credit obligation accounted for in accordance with this Subtopic. (P) December 16, 2027; (N) December 16, 2028
818-10-65-1The following is an illustration of the quantitative disclosures required by paragraphs 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. ![](\"/asc-img/GUID-E947093F-2943-40D4-A99C-7BD92CDD069E-low.gif\")
\"As of December 31, 20X4\" Environmental Credit Obligation Liability Funded Obligation Unfunded Obligation Total Obligation Current liability \" $5,100 \" \" $1,400 \" \" $6,500 \" Noncurrent liability \" 3,800 \" - \" 3,800 \" Total \" $8,900 \" \" $1,400 \" \" $10,300 \" Environmental Credit Obligation Cost and Expense Information \"For the Year Ended December 31, 20X4\" Expense recognized for environmental credit obligations(a) \" $9,370 \" Costs capitalized as part of inventory that are associated with environmental credit obligations \" $2,000 \" (a) Expense recognized for environmental credit obligations is included in other expenses in the income statement.