The Financial Accounting Standards Board moved forward this spring with two targeted Accounting Standards Updates that address long-standing gaps in U.S. GAAP. Update 2026-02 creates an entirely new Topic 818 for environmental credits and environmental credit obligations. Update 2026-01 clarifies initial measurement for paid-in-kind dividends on equity-classified preferred stock under Topic 505. Both build on earlier signals from the board about upcoming work on debt exchanges, government grants, and hedge accounting refinements expected later in the year.
FASB’s official list confirms the issuances. FASB Accounting Standards Updates shows Update 2026-02 and Update 2026-01 under the 2026 heading. The board issued 2026-02 on May 19, 2026, according to multiple firm analyses. Deloitte’s Heads Up publication dated May 19, 2026, details the release and its scope. PwC’s In depth report from May 21, 2026, and RSM’s insights from May 26, 2026, echo the timeline.
Environmental credits have proliferated under cap-and-trade systems, renewable portfolio standards, and voluntary corporate targets. Prior to ASU 2026-02, companies applied varied models drawn from inventory, intangibles, or expense-as-incurred approaches. The new standard ends that patchwork by defining an environmental credit as an enforceable right, lacking physical substance and not a financial asset, represented as preventing, controlling, reducing, or removing emissions or pollution. It must be or have been separately transferable in an exchange transaction, or usable to settle an obligation if transferability lapses. Income tax credits fall outside scope.
Recognition hinges on probability. An entity capitalizes a credit only if it is probable—generally interpreted as likely to occur, often 75 percent or higher—that the credit will settle an environmental credit obligation, transfer in an exchange, or move in a nonreciprocal transfer. The assessment aggregates possible uses. Voluntary retirement for marketing or reputational purposes alone triggers immediate expensing. Nonrefundable deposits for credits unlikely to meet the threshold also expense immediately.
Measurement follows acquisition method. Internally generated credits or those granted by regulators start at transaction costs, which can be zero. Purchased credits record at cost. Classification splits into compliance credits—those probable for settling obligations—and noncompliance credits for other qualifying uses. Subsequent accounting differs by category, with impairment testing required for noncompliance credits.
Environmental credit obligations arise only from existing or enacted laws, statutes, or ordinances that can be settled with credits. Self-imposed climate pledges do not create liabilities. Recognition occurs when the triggering events, such as emissions, happen on or before the reporting date. Measurement depends on whether the entity holds and expects to use compliance credits to settle the obligation.
Presentation requires gross display of assets and liabilities. Disclosures cover how credits are obtained, used, and valued, plus changes in intent and their financial statement effects. The standard creates ASC 818 and removes these items from derivative, government assistance, and contribution scopes where overlaps existed.
Effective dates give public business entities annual periods beginning after December 15, 2027, with interim periods included. All other entities receive one additional year. Early adoption is permitted at the start of an annual period. Transition is prospective for most elements.
The second update, 2026-01, tackles diversity in measuring PIK dividends. Issued April 23, 2026, it requires issuers to measure such dividends initially using the stated PIK rate in the preferred stock agreement. That rate multiplied by the liquidation value sets the amount recorded and used for earnings per share calculations. The guidance applies to equity-classified preferred stock, including mezzanine instruments under SEC rules, but not liability-classified instruments under ASC 480.
FASB’s news release notes the change will enhance comparability among issuers of PIK dividends. PwC’s April 30, 2026, In brief and Deloitte’s Heads Up from April 24, 2026, confirm the measurement basis and effective date for annual periods beginning after December 15, 2026, with early adoption allowed. BDO and RSM analyses from late April 2026 align on the details.
Debt exchanges, grants, and hedges on the horizon
FASB signaled additional activity. The board’s technical plan referenced work on accounting for debt exchanges, government grants, and hedge accounting improvements slated for Q2 2026 or later. A proposed ASU on debt exchanges appeared in April 2025 and remains under review. It would simplify debtor accounting for certain exchanges by treating qualifying new debt issuances and contemporaneous repayments as separate transactions when specific conditions hold, avoiding detailed lender-by-lender modification analysis.
Government grant guidance arrived in December 2025 as ASU 2025-10 under Topic 832. It supplies recognition, measurement, and presentation rules for business entities, drawing from IAS 20 principles while adding targeted improvements. Public entities face effective dates after December 15, 2028.
Hedge accounting saw a June 17, 2026, proposed ASU for targeted improvements to interest rate risk and net investment hedging. The exposure draft would permit hedging of held-to-maturity debt securities’ interest rate risk, broaden eligible SOFR tenors, and expand instruments for net investment hedges. Comments close August 17, 2026. FASB’s announcement and related coverage in Banking Journal ABA confirm the scope.
Recent X posts from practitioners highlight the environmental credits standard’s impact on carbon markets and RECs, with effective dates noted for public business entities after December 15, 2027. One post from June 20, 2026, summarizes recognition rules. FASB’s own account on June 17 referenced the hedge proposal.
These updates arrive as companies navigate expanding environmental programs and complex capital structures. The environmental credits model introduces probability-based recognition that demands robust intent documentation and ongoing monitoring. PIK measurement brings consistency to dividend accounting that previously varied by fair value estimates or other proxies. Upcoming projects on debt, grants, and hedges suggest the board continues refining areas where practice diverged or complexity grew.
Entities should assess current holdings of credits and obligations against the new definitions and probability thresholds. Preferred stock agreements warrant review for stated PIK rates. Preparers tracking debt refinancings or grant receipts will want visibility into the proposed and issued guidance. FASB continues to issue updates through its standards page, providing PDFs and summaries for each release.
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