FASB adds ESG project to agenda

Accounting

The Financial Accounting Standards Board voted to add a project to its technical agenda on accounting for financial instruments with environmental, social and governance-linked features and regulatory credits.

During a meeting last Wednesday, FASB discussed the research its staff had done on items to add to its agenda after a consultation with stakeholders last year. The board decided to add a project to its technical agenda on the recognition, measurement, presentation and disclosure requirements for participants in compliance and voluntary programs that result in the creation of environmental credits. The credits include, but aren’t limited to, those created under compliance programs, such as cap and trade and baseline allowance programs, as well as renewable energy credits and certificates, renewable identification numbers and carbon offset credits.

The move comes as standard-setters find themselves under increasing pressure to agree to a common set of standards on environmental, social and governance issues as ESG funds grow in popularity among investors and in response to the accelerating pace of climate change. The Securities and Exchange Commission proposed new rules in March requiring companies to provide disclosures about climate-related risks that are reasonably likely to have a material impact on their business, the results of their operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements (see story).

Last week, the SEC also proposed rules on how funds could use terms such as ESG to describe their investments in an effort to crack down on false claims by companies accused of so-called “greenwashing.”

FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut
FASB, GASB and FAF logos on the wall at headquarters in Norwalk, Connecticut

Courtesy of GASB

Up to now, FASB has hesitated to wade far into the ESG area, although its parent organization, the Financial Accounting Foundation, proposed a strategic plan last week in which it described its commitment to ongoing dialogue with relevant parties about future developments in financial reporting around sustainability (see story). In contrast the International Financial Reporting Standards Foundation has gotten much more heavily involved in the ESG and sustainability area by setting up a new International Sustainability Standards Board it has begun overseeing alongside the International Accounting Standards Board.

The new FASB project also includes financial reporting requirements for nongovernmental creators of environmental credits, according to a description of the meeting’s tentative decisions. FASB decided that the preliminary scope of the project would cover environmental credits that are legally enforceable and can be traded, but that the scope of the project would exclude the accounting for tax credits, tax incentives or investments in renewable energy structures or entities, such as partnerships.

At the meeting, FASB also decided against adding several other projects to its technical agenda at this time, including financial key performance indicators; balance sheet classification; materiality considerations for disclosures; debt modifications; fair value measurement disclosures; backwards tracing for income taxes; accounting for the sale of a business; recognition and measurement of market risk benefits; equity method of accounting; stock buybacks; and definition of participating interest in transfers and servicing of financial assets. In deciding not to take on those projects, the board cited the feedback it had received on its agenda consultation and the need to focus FASB resources on higher priority projects.

However, in response to investor feedback, FASB chair Richard Jones added a project, Financial Key Performance Indicators for Business Entities, to FASB’s research agenda. The project will be informed by the progress of a related project, the Disaggregation—Income Statement Expenses project. It will explore standardizing the definitions of financial key performance indicators as well as consider interactions with the regulatory framework.

During a meeting earlier this month, FASB added a project on digital assets such as cryptocurrency to its technical agenda in response to the agenda consultation (see story).

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