Latest developments on recent IFRS Interpretations Committee (“IFRIC”) agenda items
Climate-related commitments (IFRIC Agenda Decision)
The IFRS Interpretations Committee received a request asking it to clarify whether climate-related commitments create a constructive obligation for the entity under IAS 37 Provisions, Contingent Liabilities and Contingent assets, and if so, whether the obligation results in the company recognizing a provision for costs related to fulfilling those commitments, and whether the related costs to settle a provision, if recognized, is an asset or should be expensed. The submission presented the following fact pattern:
In 20X0, a company publicly states its climate-related commitment as follows:
to reduce current green house gas emissions by at least 60% before 20X9; and
to offset its remaining emissions in 20X9 onwards by buying carbon credits and retiring them from the carbon market.
Along with the statement, the company publishes a detailed plan setting out how it will operationally achieve the 60% reduction in emissions by 20X9. This will be achieved through modifying the current manufacturing process by adapting more energy efficient processes, buying energy from renewable-sources and packaging the company’s product in lower-carbon alternatives.
Management is confident that the company can make these modifications between 20X1 and 20X9 and remain profitable.
To determine if the public statements result in a constructive obligation, the IFRIC staff referred to paragraph 10 of IAS 37 and concluded not every public statement made by an entity results in a constructive obligation. The entity would need to apply judgement based on the facts and circumstances surrounding its public statement to determine if it creates a valid expectation that the company will fulfill its commitment. If management concludes that there is a constructive obligation, it then considers whether this obligation satisfies the criteria for recognizing a provision. To determine if a constructive obligation results in a provision being recognized, the IFRIC staff referred to paragraph 14 of IAS 37 which lays out the requirement for an entity to recognize a provision. The criteria under IAS 37 are as follows:
Entity has present obligation as a result of past event;
Economic outflow of resources is probable; and
Obligation can be reliably estimated.
Based on the fact pattern described, the IFRIC concluded that the entity would not recognize a provision at the time the statement is made because, at that time, a constructive obligation is not a present obligation as a result of a past event. Rather, the entity will have a present obligation and recognize a provision as it emits greenhouse gas that it has committed to offset in 20X9 onward. Settling that obligation will require an outflow of resources embodying economic benefits as the company will be required to purchase and retire carbon credits without receiving any resources embodying economic benefits in exchange.
The IFRIC also observed that an entity will never have a present obligation for the costs to reduce its emissions in the future because they are costs that will be incurred to operate in the future. IAS 37 does not allow a provision to be recognized for costs that need to be incurred to operate in the future. In addition, the IFRIC observed that settling a constructive obligation to reduce emissions will not require an outflow of resources embodying economic benefits. Although the company will need to incur expenditures to modify its manufacturing methods, it will receive other resources in exchange that it can use to manufacture products and generate a profit.
The last requirement to recognize a provision is if a reliable estimate can be made for the amount of the obligation, and the IFRIC concluded except in rare cases, an entity should be able to estimate the amount of the obligation.
The IFRIC also concluded that the expenditure to settle the provision should be recognized as an expense unless it qualifies for recognition as an asset under another IFRS Accounting Standard.
As a result of this analysis, the IFRIC staff concluded IFRS provides an adequate basis for an entity to determine the circumstances in which an entity recognizes a provision for the costs of fulfilling a commitment to offset or reduce its greenhouse gas emissions and, if a provision is to be recognized, whether the costs are recognized as an expense or as an asset. As such, the IFRIC decided not to add a standard-setting project to the work plan. The IFRIC concluded its discussion on the agenda decision at its March 2024 meeting. In its April 2024 meeting, the IASB unanimously voted to finalize the agenda decision.
We expect that climate-related matters will continue to draw the interest of a wide range of stakeholders, including those outside of the traditional accounting and financial reporting community.
Yes, additional information will need to be disclosed
No, no additional information will need to be disclosed
Not sure yet
Disclosure of revenues and expenses for reportable segments (IFRIC TAD)
The IFRIC received a request about how an entity applies the requirements in paragraph 23 of IFRS 8, Operating Segments, when disclosing specified amounts of revenues or expenses for each reportable segment. The questions asked were as follows:
whether an entity is required to disclose the specified amounts listed in paragraph 23(a)–(i) of IFRS 8 for each reportable segment if those amounts are not reviewed separately by the chief operating decision maker (CODM); and
how to interpret the meaning of ‘material items of income and expense’ in the context of paragraph 97 of IAS 1 as referenced in paragraph 23(f) of IFRS 8, and more specifically, how does an entity determine ‘material items’ (for example, whether to use a qualitative basis, whether to aggregate individually immaterial items, and/or whether to consider at an overall reporting entity level or at a segment level).
The IFRIC published a Tentative Agenda Decision (TAD) which was discussed by the Committee in the November 2023 meeting.
Regarding the first question mentioned above, the Committee observed that, in applying paragraph 23 of IFRS 8, an entity discloses specified amounts for each reportable segment if those specified amounts are either (a) included in the measure of segment profit or loss reviewed by the CODM, or (b) otherwise regularly provided to the CODM, even if not included in that measure of segment profit or loss. Therefore, the Committee concluded that an entity is required to disclose the specified amounts in paragraph 23 of IFRS 8, not only when those amounts are separately reviewed by the CODM.
The second question referenced above relates to one of the ‘specified amounts’ set out in paragraph 23(f), which is to disclose ‘material items of income and expense disclosed in accordance with paragraph 97 of IAS 1’. Paragraph 97 of IAS 1 states that ‘when items of income or expense are material, an entity shall disclose their nature and amount separately’. The Committee observed that in applying paragraph 23(f) of IFRS 8, an entity:
applies paragraph 7 of IAS 1 and assesses whether the disclosure of information is material in the context of its financial statements taken as a whole;
applies the requirements in paragraphs 29-31 of IAS 1 in considering how to aggregate information in the financial statements;
considers both qualitative and quantitative factors, representing the nature or magnitude of information, or both, in assessing whether an item of income and expense is material;
does not omit material items on the basis that those items are presented or disclosed applying a requirement in IFRS Accounting Standards other than paragraph 97 of IAS 1.
The Committee tentatively concluded in its TAD that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to apply the disclosure requirements in paragraph 23 of IFRS 8 and consequently, to not to add a standard-setting project to the work plan.
It was previously highlighted in the responses to the Staff’s request for information prior to the November meeting that established practice suggests that there are different interpretations of IFRS 8.23(f) which may be acceptable. Some stakeholders are concerned that the current wording of the TAD will lead to a presumption that all material items of income or expense presented or disclosed elsewhere in the financial statements should also be disclosed by segment if such items are included in the measure of segment profit, even if these amounts are not currently separately reported to the CODM.
The latest IFRIC update can be found here. The IFRIC is anticipated to conclude its discussion on the agenda decision at a future meeting.