Accounting, Reporting, and Compliance Hub (ARCH)

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2026-02, Environmental Credits and Environmental Credit Obligations (Topic 818) to provide guidance on the recognition, measurement, presentation, and disclosure requirements for environmental credits (ECs) and EC obligations (ECOs) in an entity’s financial statements.

To read more about ASU 2026-02, download the full Bulletin.

Background

Environmental credits, such as for carbon and renewable energy, are becoming an important part of efforts to promote sustainability. An entity may hold environmental credits to:

• Settle regulatory compliance obligations.
• Transfer in an exchange transaction (for example, a sale or trade).
• Distribute in a nonreciprocal transaction (for example, to an investor). 
• Meet voluntary environmental, social, and governance (ESG) goals (such as carbon neutral or net-zero commitments).

An entity may obtain environmental credits in many ways, including by grant or allocation from regulators, by acquisition, or by producing the credit itself. 

Historically, the lack of specific accounting guidance in U.S. GAAP has led to diverse practices. In response to the diversity in practice, the FASB issued ASU 2026-02 to enhance transparency, comparability, and reliability in financial statements. 

Scope

To meet the definition of an environmental credit, the item must be an 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 regulatory agency or its designee(s). It also must meet all the following criteria: 

• It lacks physical substance and is not a financial asset.
• It is represented to prevent, control, reduce, or remove emissions or other forms of pollution.
• It is or was separately transferable in an exchange transaction.
• It is not an income tax credit and cannot be used to reduce income taxes.

Accounting for Environmental Credit Assets and Obligations

ASU 2026-02 includes guidance on accounting for environmental credit asses and obligations, including the following:

• Recognition (only some environmental credits can be recognized)
• Initial and Subsequent Measurement (which varies depending on an entity’s intent for using the assets and settling the obligations)
• Presentation (netting assets and obligations is not permitted)
• Disclosures

Effective Date and Transition

The following table summarizes transition for ASU 2026-02:

To read more about ASU 2026-02, download the full Bulletin, which also includes helpful flowcharts (adapted from ASC 818) for applying the new guidance.