The IFRS Interpretations Committee (Committee) discussed the following matter and tentatively decided not to add a standard-setting project to the work plan. The Committee will reconsider this tentative decision, including the reasons for not adding a standard-setting project, at a future meeting. The Committee invites comments on the tentative agenda decision. All comments will be on the public record and posted on our website unless a respondent requests confidentiality and we grant that request. We do not normally grant such requests unless they are supported by good reason, for example, commercial confidence.
Tentative Agenda Decision
The Committee received a request asking it to clarify:
The Committee considered this request by reference to the following fact pattern.
In 20X0 an entity, a manufacturer of household products, publicly states its commitment:
With its statement, the entity publishes a detailed plan setting out how it will gradually modify its manufacturing methods between 20X1 and 20X9 to achieve the 60% reduction in emissions by 20X9. The modifications will involve investing in more energy-efficient processes, buying energy from renewable sources and replacing existing petroleum-based product ingredients and packaging materials with lower-carbon alternatives. Management is confident that the entity can make all these modifications and continue to sell its products at a profit.
Does the entity have a constructive obligation?
Paragraph 10 of IAS 37 defines a constructive obligation as an obligation that derives from an entity’s actions where:
The Committee observed that a constructive obligation to reduce or offset greenhouse gas emissions, if one exists, would be owed to all people adversely affected by the emissions so would extend to the public at large. The Committee further observed that whether an entity’s statement of its commitment to reduce or offset its emissions creates a valid expectation that it will fulfil its commitment—and hence creates a constructive obligation—depends on the facts of the commitment and the circumstances surrounding it. Management would apply judgement to reach a conclusion considering those facts and circumstances.
If the entity’s statement has not created a constructive obligation, the entity does not recognise a provision. If the entity’s statement has created a constructive obligation, the next question to consider is whether that obligation satisfies the criteria for recognising a provision.
Does the constructive obligation satisfy the criteria for recognising a provision?
Paragraph 14 of IAS 37 requires an entity to recognise a provision when:
An entity recognises a provision only if all three of these criteria are met.
Present obligation as a result of a past event
The first criterion for recognising a provision is that the entity has a present obligation as a result of a past event.
The Committee observed that, just as an entity has a present legal obligation only when it has taken the action to which a law applies, it has a present constructive obligation only when it has taken the action to which its published policy or statement applies. For example, as illustrated in Illustrative Example 2B accompanying IAS 37, an entity with a widely published policy of cleaning up land it contaminates incurs a present obligation only when it contaminates land—publishing the policy is necessary but not sufficient.
In explaining the requirement for a present obligation, paragraph 18 of IAS 37 states that ‘no provision is recognised for costs that need to be incurred to operate in the future’ and paragraph 19 of IAS 37 states that ‘it is only those obligations arising from past events existing independently of the entity’s future actions (ie the future conduct of its business) that are recognised as provisions’.
Applying those paragraphs, the Committee concluded that if the commitment described in the fact pattern creates a constructive obligation for the entity:
Probable outflow of resources
The second criterion for recognising a provision is that it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation.
The Committee concluded that if the commitment described in the fact pattern creates a constructive obligation for the entity:
The final criterion for recognising a provision is that a reliable estimate can be made of the amount of the obligation.
Paragraph 25 of IAS 37 states that 'except in extremely rare cases, an entity will be able to determine a range of possible outcomes and can therefore make an estimate of the obligation that is sufficiently reliable to use in recognising a provision’.
The Committee concluded that in the fact pattern described, it is likely that the entity would be able to make a reliable estimate of the amount of a constructive obligation that satisfies the other recognition criteria.
Conclusion on whether a provision is recognised
The Committee concluded that in the fact pattern described:
If a provision is recognised, is the expenditure required to settle it recognised as an expense or as an asset when the provision is recognised?
The Committee observed that expenditure is recognised as an expense, rather than as an asset, unless it gives rise to—or forms part of the cost of—an item that qualifies for recognition as an asset in accordance with an IFRS Accounting Standard.
Other accounting implications
The Committee observed that, irrespective of whether an entity’s commitment to reduce or offset its greenhouse gas emissions results in the recognition of a provision, the actions the entity plans to take to fulfil that commitment could affect the amounts at which it measures its other assets and liabilities and the information it discloses about them, as required by various IFRS Accounting Standards.
The Committee concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine:
Consequently, the Committee [decided] not to add a standard-setting project to the work plan.
The deadline for commenting on the tentative agenda decision is 5 February 2024. The Committee will consider all comments received in writing by that date; agenda papers analysing comments received will include analysis only of comments received by that date.