Growing corporate responsibility for climate change has led to more entities making climate-related commitment statements to reduce or offset greenhouse gas emissions. A new IFRIC agenda decision; Climate-related Commitments (IAS 37 Provisions, Contingent Liabilities and Contingent Assets clarifies how the accounting standards apply to such statements. The IFRS Interpretations Committee responds to questions about the application of IFRS Accounting Standards – to support consistent application. Agenda decisions do not add or change the requirements in IFRS Accounting Standards, but any explanatory material included may provide new information on how to apply a standard(s) for a specific transaction or fact pattern.

Fact pattern

The Committee received a request to clarify how an entity's public commitment to reduce or offset greenhouse gas (GHG) emissions should be accounted for under IAS 37. The entity made a public statement and committed to:

• Reduce its annual GHG emissions by at least 60% by 20X9, and
• Offset its remaining annual emissions from 20X9 by buying and retiring carbon credits.

It also published a transition plan and took other actions that publicly affirmed its intention.

Three questions

There are three questions to consider:

1. Does the commitment create a constructive obligation?
2. If so, should a provision be recognised for the constructive obligation?
3. If a provision is recognised, does it result in a corresponding asset or expense?

1. Constructive obligation?

Paragraph 10 of IAS 37 defines a constructive obligation as an obligation that results from an entity’s past practice, a policy or a statement which creates a valid expectation that the entity has accepted and will discharge certain responsibilities. The Committee determined that a public statement may create a constructive obligation, but it depends on the facts and circumstances and requires judgement.

2. Provision?

If there is a constructive obligation, paragraph 14 of IAS 37 provides three criteria that must all be satisfied to recognise a provision:

a. The entity has a present obligation (legal or constructive) because of a past event,
b. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and
c. A reliable estimate of the amount of obligation can be made.

The Committee determined that:

a. A public statement alone does not create a present obligation, a past event is also required. In this case the ‘past’ event is the actual emission of GHGs that the entity has committed to offset. This means no provision would be recognised prior to 20X9, only from 20X9.
b. The commitment to reduce GHG emissions does not require an outflow of resources, but the commitment to offset GHG emissions does.
c. It is likely that entities can reliably estimate the amount of obligation to offset GHG emissions.

3. Asset or expense?

The Committee determined that where a provision is recognised (from 20X9), the corresponding amount is recognised as an expense, rather than as an asset. However, there may be specific instances where an item qualifies for recognition as an asset in accordance with an IFRS Accounting Standard.

Conclusion

The Committee, therefore, concluded that existing accounting standards provide an adequate basis to determine the accounting for climate-related commitments. Consequently, the Committee decided not to add a standard-setting project to the work plan.