Before May 19, 2026, there was no specific GAAP guidance on how to account for environmental credits. Companies holding carbon allowances, renewable energy certificates, or credits generated under cap-and-trade programmes had been picking whichever framework their auditors found most defensible, inventory, intangibles, or contingency models. The result was material diversity in practice across companies operating in the same regulatory programmes, which made comparability difficult and disclosures hard to audit.
The FASB fixed that on May 19, 2026, with ASU 2026-02, Environmental Credits and Environmental Credit Obligations (Topic 818). This is the first comprehensive GAAP model for environmental credits and related obligations. It applies to all entities that generate, purchase, receive, sell, or hold environmental credits, and to all entities with regulatory compliance obligations that can be settled with those credits.
The effective date for public business entities is annual periods beginning after December 15, 2027, with interim periods included. For calendar-year-end companies, that means mandatory adoption in the December 31, 2028 annual report.
That date matters less than this one: your 2026 10-K. Under SAB Topic 11.M (codified at ASC 250-10-S99-5), companies must disclose the expected effects of recently issued but not yet effective standards when the effect is or may be material. If your company holds material environmental credit positions or has regulatory compliance obligations, ASU 2026-02 belongs in your 2026 SAB 74 disclosures, now, before adoption.
This post covers what the standard requires, what changes on your balance sheet and income statement, and what your SAB 74 disclosure needs to say this cycle.
What Is ASU 2026-02 and Why Did FASB Issue It Now?
The short version: the FASB got tired of watching the same type of asset get accounted for differently by companies in the same regulatory programme.
Some companies carrying emissions allowances used ASC 330 (Inventory). Others used ASC 350-30 (Intangibles). For the related compliance obligations, many were using ASC 450-20 (Loss Contingencies). None of those frameworks was written with environmental credits in mind, and none produced consistent results. Two utilities operating in the same cap-and-trade programme could present materially different balance sheets and income statements, which is exactly the kind of diversity the FASB exists to eliminate.
The problem grew as the market grew. By 2025, material environmental credit positions were showing up in the financial statements of energy companies, utilities, industrials, transportation companies, and increasingly consumer products and technology businesses. The FASB's response was to build a dedicated accounting model rather than patch existing guidance.
ASU 2026-02 creates ASC Topic 818, Environmental Credits and Environmental Credit Obligations, as a brand new Codification Topic with its own recognition, measurement, presentation, and disclosure requirements. It covers credits and the regulatory compliance obligations (ECOs) that can be settled with them. Both private companies and public companies follow the same model. Private companies just have an extra year to adopt.
What Is an Environmental Credit Under ASC Topic 818?
The definition is specific and you need to apply all five criteria for an item to qualify.
An environmental credit is an enforceable right that:
- Is acquired, internally generated, granted by a regulatory agency or its designee, or received in a nonreciprocal transfer that is not a grant from a regulator.
- Lacks physical substance and is not a financial asset.
- Is represented to prevent, control, reduce, or remove emissions or other forms of pollution.
- Is, or was previously, separately transferable in an exchange transaction.
- Is not an income tax credit and cannot be used to reduce income taxes.
The separately-transferable criterion in criterion 4 trips people up. A credit that was transferable when issued but is no longer transferable still qualifies, as long as it was separately transferable at some point. Credits that were never separately transferable by design do not meet the definition and fall outside ASC 818.
Items that typically meet the definition: carbon allowances under cap-and-trade programmes, renewable energy certificates (RECs), renewable fuel standard credits (RINs), and third-party purchased carbon offsets.
Items explicitly outside ASC 818's scope: income tax credits regardless of whether they can be used to settle a tax liability, environmental remediation liabilities covered by ASC 410-30, environmental credits covered by ASC 832 (Government Assistance) as amended by the ASU, and environmental credits acquired in a business combination at the acquisition date. That last one gets its own treatment: credits acquired in a business combination are initially measured at fair value under the ASC 805 amendments in ASU 2026-02, then subjected to ASC 818 subsequent measurement based on intended use.
What Is an Environmental Credit Obligation and What Is Not in Scope?
An ECO is a regulatory compliance obligation arising from existing or enacted laws, statutes, or ordinances represented to prevent, control, reduce, or remove emissions or other pollution, where the obligation may be settled with environmental credits.
Three parts of that definition do real work.
"Regulatory compliance obligation" is the key phrase. The obligation has to come from a law, statute, or ordinance. A voluntary net-zero pledge, a carbon-neutral commitment, or a science-based target does not create an ECO, regardless of how publicly the company has made that commitment. No legal obligation, no ECO.
"Arising from existing or enacted laws" closes off the anticipated-regulation loophole. A proposed rulemaking, an industry agreement, or a commitment to comply with a regulation that has not yet been finalised does not create an ECO under ASC 818.
"May be settled with environmental credits" is the programme-type filter. If the only way to satisfy a regulatory obligation is a cash payment, it falls outside ASC 818 even if it is emissions-related.
Programmes that clearly fit: cap-and-trade programmes, state-level renewable portfolio standards requiring utilities to surrender RECs, the federal Renewable Fuel Standard requiring obligated parties to surrender RINs. The EY analysis of ASU 2026-02 confirms these are the types of programmes the FASB intended to capture.
Environmental remediation liabilities within the scope of ASC 410-30 are excluded from ASC 818's ECO definition. Those continue to follow ASC 410-30.
How Does Accounting Differ for Compliance Versus Noncompliance Environmental Credits?
The compliance/noncompliance distinction is where most of the complexity in ASC 818 sits. The subsequent measurement model and income statement treatment are different depending on how the company intends to use the credit.
Compliance credits are credits the company intends to use to settle an ECO. They are recognised as assets when it is probable they will be used to settle the ECO, transferred in an exchange transaction, or used in a nonreciprocal transfer. Once recognised, compliance credits are carried at cost and are not tested for impairment at each reporting date. They are not remeasured to fair value unless the company makes the fair value election that is available only for noncompliance credits.
Noncompliance credits cover everything else: credits held for speculative sale, voluntary programme use, or distribution. These follow a cost-less-impairment model. The company tests for impairment at each reporting date and writes down impaired credits to recoverable amount. A fair value election is available for noncompliance credits, requiring measurement at fair value at each reporting date with changes recognised in net income. If elected, it must be applied consistently to all noncompliance credits within a class.
When intended use changes, the credit gets reassessed. If a credit initially held as a compliance credit is no longer probable of being used to settle an ECO, it is derecognised under ASC 610-20 unless the company now intends to sell or transfer it. That derecognition runs through the income statement.
Credits that were never going to be recognised as assets are expensed when acquired. A credit bought to offset corporate travel emissions as part of a carbon-neutral pledge, where there is no compliance obligation and the credit will simply be retired, goes straight to expense. The ASU is direct about this: credits acquired only for voluntary initiatives are expensed as incurred unless another qualifying use is probable.
How Are Voluntary Carbon Credits Treated Under the New Standard?
This is the question most accounting teams are asking first, because voluntary carbon markets have expanded significantly and many companies are retiring credits against public net-zero or carbon-neutral commitments.
The answer is that most voluntary carbon credits are expensed when acquired, not capitalised.
A voluntary net-zero pledge is not a regulatory compliance obligation arising from a law, statute, or ordinance. It does not create an ECO. Without an ECO, there is no probable compliance use to link the credit to. Without probable compliance use, the credit does not meet the recognition threshold for asset treatment. So it goes to expense in the period it is acquired and retired.
This holds regardless of how formal the commitment is. A board-approved sustainability plan, a Science Based Targets initiative disclosure, or a public carbon-neutral announcement does not change the accounting. None of those are laws or statutes. Public commitments without regulatory enforcement are not ECOs under ASC 818.
The one scenario where a voluntary credit could be capitalised: if the company holds it with intent to sell or transfer in an exchange transaction. In that case it meets the asset recognition criteria and is carried at cost less impairment, or at fair value under the election, until sold. The economic purpose there is trading or sale, not sustainability-related retirement.
One nuance worth flagging: the boundary between a voluntary programme and a regulatory programme is not always clean. California's Low Carbon Fuel Standard involves credits that some entities hold voluntarily as part of sustainability strategy, but which also operate within a regulatory compliance framework for obligated parties. Whether a specific entity has an ECO under that programme depends on whether it is an obligated party under the regulatory structure. If it is, the credits it holds to satisfy that obligation are compliance credits under ASC 818. If it is not an obligated party and is simply buying credits to reduce its reported carbon intensity voluntarily, those credits go to expense.
What Changes on Your Balance Sheet and Income Statement?
What changes depends on how your company has been accounting for these positions.
Balance sheet. The standard requires separate presentation of environmental credit assets and ECO liabilities. Netting is not permitted. A company that has been presenting compliance credits and ECO liabilities net at zero will now show both on a gross basis. If you hold $50 million of compliance credits and have a $50 million ECO, the balance sheet now shows $50 million of assets and $50 million of liabilities, not a single net zero line.
The ECO liability measurement uses a two-part model. The funded portion, the part the company expects to settle using compliance credits already held, is measured at the carrying amount of those credits. Since compliance credits are carried at cost, and internally generated or grant-received credits may have been acquired at zero or minimal cost, the funded ECO liability is often small. The unfunded portion, the part for which the company does not yet hold sufficient credits, is measured at the fair value of the credits needed to settle it at the reporting date.
Income statement. Where environmental credit expense lands on the income statement depends on the credit type and the company's business model. Companies with material voluntary credit purchases that have been capitalising them as intangibles will see those costs shift to expense as incurred, affecting gross margin or operating expense depending on current classification.
ASU 2026-02 also makes consequential amendments to ASC 220-40 (the DISE standard), requiring the DISE tabular disclosure to separately show: total expense recognised for environmental credits not initially recognised as an asset or subsequently derecognised, total impairment expense on environmental credits, and total expense recognised for ECO liabilities. If your company will be adopting both ASU 2024-03 and ASU 2026-02, the interaction between these two tabular disclosure requirements needs to be worked through in advance.
What Are the New Disclosure Requirements in Your 10-K and 10-Q?
The disclosure requirements in ASC 818 are more granular than what most companies currently provide. They apply in both annual and interim periods following adoption.
For each environmental credit programme the company participates in, the notes must describe the type of credit, how the credits are obtained, and whether the programme is a regulatory compliance programme or a voluntary initiative.
For environmental credit assets: the carrying amount by programme at the balance sheet date, the number of credits held, the fair value if the fair value election was made, and impairment losses recognised during the period.
For ECO liabilities: the total number of credits required to satisfy the obligation, the number of credits already held that are expected to be used (the funded portion), the number still needed (the unfunded portion), the measurement basis for the unfunded portion, and the total liability on the balance sheet.
The ASU includes an illustrative quantitative ECO disclosure at ASC 818-30-55-21. Reading that illustration directly from the standard is the most efficient way to understand what the required table looks like before designing your own.
One additional point: the DISE consequential amendments described above add three new line items to the DISE tabular disclosure required by ASC 220-40. If your company is also preparing for ASU 2024-03 adoption, the disclosure committee needs to work through the intersection of these two standards before the first mandatory filing.
What Is the Effective Date and What SAB 74 Disclosures Are Required Now?
Public business entities adopt for annual periods beginning after December 15, 2027, including interim periods within those annual periods. For calendar-year-end public companies, the first affected 10-K is December 31, 2028. Early adoption is permitted.
All other entities get one additional year: annual periods beginning after December 15, 2028.
Transition is retrospective through a cumulative-effect adjustment to opening retained earnings at the beginning of the annual period of adoption. Prior periods are not recast.
What your 2026 10-K needs to say right now.
SAB Topic 11.M requires companies to disclose the expected effects of recently issued but not yet effective standards when those effects are or may be material. For companies with material environmental credit positions or ECO liabilities, ASU 2026-02 is a material pending standard. The 2026 10-K needs a SAB 74 disclosure for it.
A complete SAB 74 disclosure for ASU 2026-02 covers: the standard's name and a brief description of what it requires, the effective date for the company, whether early adoption is being considered, and either a quantitative estimate of the transition effect or a statement that the company is currently evaluating the effect and cannot yet reasonably estimate it.
"Currently evaluating" is acceptable in the 2026 10-K if that is genuinely the case. But the SEC staff has consistently pushed back on SAB 74 disclosures that stay in "currently evaluating" mode for multiple consecutive reporting periods without becoming more specific. Companies with material credit positions should aim to quantify the transition effect, or at least provide directional guidance, in the 2027 disclosure cycle.
What Should Your Controller Be Doing Before Year-End 2026?
Five things, and the first one unlocks all the others.
Inventory every programme. Build a complete list of every environmental credit programme the company participates in, whether as an obligated party, a voluntary participant, a buyer, a seller, or a generator of credits. For each programme, document the regulatory basis (or confirm it is voluntary), the credit type, the current balance held, and how it is currently being accounted for. You cannot assess the transition impact without this inventory.
Apply the ASC 818 scope tests. For each programme, apply the five-criterion definition and the ECO definition. Identify credits currently carried as inventory or intangibles that would be expensed under ASC 818. Identify ECO liabilities not currently recognised that would need to be recorded under the new standard. This gap analysis is the basis for the SAB 74 disclosure.
Quantify the balance sheet impact. Estimate the cumulative-effect adjustment to opening retained earnings at adoption. This means modelling the reclassification of credits from their current treatment into ASC 818 asset treatment, the recognition of any previously unrecognised ECO liabilities, and the write-off of any voluntary credits that would no longer be capitalised. This is what goes into the quantitative SAB 74 disclosure.
Assess system readiness for the funded/unfunded ECO model. The ECO liability requires the ability to link specific credits to specific portions of the obligation at each reporting date. That is a data question: does the current ERP or credit tracking system produce the output necessary to populate this model quarterly? If not, system changes or manual tracking processes need to be designed now, not in 2027.
Review covenants and contracts. Gross presentation of environmental credit assets and ECO liabilities will increase reported total assets and total liabilities. Review any credit agreements, loan covenants, or other contracts that reference balance sheet metrics and assess whether the ASC 818 transition would trigger anything. Have the conversation with lenders before the numbers change.
Frequently Asked Questions
What is ASU 2026-02?
ASU 2026-02, Environmental Credits and Environmental Credit Obligations (Topic 818), is the FASB's May 19, 2026 standard creating the first comprehensive GAAP model for environmental credits. Before it, no specific guidance existed and companies used inventory, intangible, or contingency frameworks inconsistently. The standard covers recognition, measurement, presentation, and disclosure for both the credits and the regulatory compliance obligations that may be settled with them.
What is ASC Topic 818?
ASC Topic 818 is the new Codification Topic created by ASU 2026-02. It provides the accounting model for environmental credits such as carbon allowances, RECs, and RINs, and for environmental credit obligations (ECOs), which are regulatory compliance obligations that may be settled with those credits.
When is ASU 2026-02 effective for public companies?
Public business entities must adopt for annual periods beginning after December 15, 2027, including interim periods. For calendar-year-end companies, mandatory adoption begins January 1, 2028. The first affected 10-K is December 31, 2028. Early adoption is permitted.
Do voluntary carbon credit commitments create a liability under ASC 818?
No. An ECO requires a regulatory compliance obligation arising from a law, statute, or ordinance. A voluntary net-zero pledge or carbon-neutral commitment does not qualify. Credits acquired only for voluntary retirement are not capitalised as assets, they are expensed when acquired.
What SAB 74 disclosures are required before the effective date?
Companies with material environmental credit or ECO positions must include an ASU 2026-02 SAB 74 disclosure in the 2026 10-K and in each quarterly filing through adoption. The disclosure should describe the standard, the effective date, whether early adoption is being considered, and either a quantitative estimate of the transition effect or a statement that the company is currently evaluating it. The SEC staff expects "currently evaluating" to be replaced with more specific information as the adoption date approaches.
Key Takeaways
- FASB issued ASU 2026-02 on May 19, 2026, creating ASC Topic 818 as the first comprehensive GAAP model for environmental credits and ECOs. Before this standard, no specific GAAP guidance existed.
- An environmental credit under ASC 818 is an enforceable right meeting five specific criteria including lacking physical substance, being pollution-related, and being separately transferable. Income tax credits and ASC 410-30 remediation liabilities are explicitly excluded.
- An ECO is a regulatory compliance obligation arising from a law, statute, or ordinance that may be settled with environmental credits. Voluntary pledges and net-zero commitments do not create ECOs.
- Compliance credits are carried at cost without impairment testing. Noncompliance credits follow cost-less-impairment, with a fair value election available. Voluntary credits acquired for retirement with no compliance use are expensed as incurred.
- The ECO liability uses a funded/unfunded two-part model. The funded portion is measured at the carrying amount of credits intended to settle it. The unfunded portion is measured at the fair value of credits needed at the reporting date. Gross presentation of assets and liabilities is required.
- Public business entities adopt for annual periods beginning after December 15, 2027. For calendar-year-end companies, that means the December 31, 2028 annual report is first.
- SAB 74 disclosures are required now in 2026 filings. Companies with material credit positions must include ASU 2026-02 in the 2026 10-K and quarterly disclosures through adoption.
