In a matter of months, companies will possess first-ever guidelines for environmental credit accounting. Public and private firms will be required to follow one model for marking down projects like carbon dioxide offsets.
The Financial Accounting Standards Board (FASB) unanimously approved Accounting for Environmental Credit Programs (AECP) on June 17. FASB started working on AECP in 2022, at least in part, to rectify widespread “greenwashing” done by corporations, particularly in the oil & natural gas sector.
FASB will accept comments on what will eventually become Generally Accepted Accounting Principles used by the Securities & Exchange Commission (SEC). FASB will accept comments through the middle of September and could make changes depending on feedback from tax preparers, accountants, auditors, companies and investors.
FASB is notorious for moving at a glacial pace, so count on a late 2024 or early 2025 rollout of AECP. Note: FASB did not factor in renewable energy tax credits available to companies via the Inflation Reduction Act of 2022.
Inside the First-Ever ESG Accounting Guidelines
Many companies voluntarily report emissions of carbon dioxide, methane and other greenhouse gases to meet environmental, social and governance (ESG) goals. Others are required to do so, and are typically regulated by air pollution standards set by the Environmental Protection Agency (EPA) and their respective state agencies.
AECP provides accounting guidance for both environmental credit programs or obligations. Projects include:
- carbon dioxide offsets
- cap-and-trade programs
- renewable energy (solar, wind, hydro, et al.) certificates, and
- greenhouse gas allowances.
Companies will be required to “recognize an environmental credit when the credit likely will be used to settle an obligation or be sold to a customer,” according to The Wall Street Journal. “They would need to record the value of the credits at their cost regardless of whether they expect to settle the obligation. But if they don’t expect to settle it, they also have to test whether to reduce the value of the credits on the balance sheet.”
AECP will allow a company to make a fair value accounting election for an environmental credit so long as it discloses:
- industrial activities that spurred it
- significant credit holdings including descriptions, carrying amounts and classifications
- significant environmental program or obligation liabilities
- cash paid for credits, and
- sales of credits and associated costs.
Say Goodbye to Greenwashing?
Once the most popular type of environmental credit programs, carbon offset use is declining. Too many companies faced media backlash and investor and consumer lawsuits for trying to hide their carbon output.
A notorious example: In 2017 Microsoft concluded it was responsible for 22 million metric tons (mmts) of greenhouse gases. Then it ran the numbers again using the EPA’s guide on scope 3 (primarily supply chain-side) emissions. It then reported just 11 mmts for the year — half of its emissions erased through savvy accounting.
The SEC recently pulled an ESG reporting rule over complaints that it would burden small companies the most. Multi-national corporations like ExxonMobil and Dow would be able to deduct a lot more scope 3 emissions to hide their total impact on the environment.
PCAOB Updates Tech-Assisted Audit Rules
The Public Company Accounting Oversight Board (PCAOB) updated two of its accounting standards (AS) governing technology-assisted analysis of information in electronic form: AS 1105 — Audit Evidence, and AS 2301 — The Auditor’s Responses to the Risks of Material Misstatement.
Accountants told PCAOB they weren’t using tech tools such as ChatGPT to perform audits because regulations on the practice weren’t clear. PCAOB is clarifying that tech-assisted analysis can be used for an unspecified variety of purposes, such as:
- analyzing “a population of transactions as part of identifying risks of material misstatement or to perform, after identifying such risks, substantive procedures on all items within a population,” or
- identifying “transactions and balances that meet certain criteria and warrant further investigation. For example, auditors may identify all transactions within an account exceeding a certain amount or processed by a certain individual.”
As always, it’s the accountant’s legal responsibility to use tech responsibly and appropriately, and to verify that analyses are correct. Best practice is to inform clients of how their audits are conducted.
Auditor Bar of Conduct Raised from Reckless to Negligent
PCAOB also strengthened Rule 3502, previously titled Responsibility Not to Knowingly or Recklessly Contribute to Violations, to clarify that an “associated person” [auditor] “must have contributed to [a] firm’s violation directly, substantially and negligently in order to be held liable.”
Bottom line: PCAOB is raising the liability bar from “recklessly” to “negligently” to align with the SEC’s “standard of reasonable care auditors [must] exercise anytime they are executing their professional duties.”
