Publication of IFRS IC decision on climate related commitments (IAS 37)

The question initially submitted to the Committee and the subsequent clarifications related to commitments of two types:  (the IFRS IC Update for March 2024 can be consulted here) 

The question initially submitted to the Committee and the subsequent clarifications related to commitments of two types: 

• a commitment to reduce annual GHG emissions by a specified amount by a specified future date;  
• a commitment to offset the remaining annual GHG emissions thereafter, by purchasing and retiring carbon credits. 

The Committee concluded that the current provisions of IAS 37 provide an adequate basis for an entity to determine (i) the conditions under which a public statement gives rise to a constructive obligation to fulfil the commitment; (ii) whether the entity recognises a provision for this obligation; and (iii) whether the corresponding amount is recognised as an expense or as an asset.  

The Committee first observed that a constructive obligation does not arise automatically as soon as the entity makes a public statement, but that this qualification is a matter for the entity’s judgement and may change depending on the relevant facts or circumstances, including any actions taken by the entity in this regard.  

The Committee then observed that under paragraph 14 of IAS 37, an entity must recognise a provision when: (i) the entity has a present obligation as a result of a past event; (ii) it is probable that an outflow of resources will be required to settle the obligation; and (iii) a reliable estimate can be made of the amount of the obligation. With regard to the first criterion, the Committee points out that ‘no provision is recognised for costs that need to be incurred to operate in the future’ (IAS 37.18) and that ‘it is only those obligations arising from past events existing independently of the entity’s future actions (i.e. the future conduct of its business) that are recognised as provisions’ (IAS 37.19).

In the Committee’s view, settling the reduction obligation will not require an outflow of resources, as the entity will receive other resources in exchange of the expenditure then incurred (e.g. investment, improvement expenditure, etc.). On the other hand, settling the offsetting obligation will require an outflow of resources, as the entity will be required to purchase and retire carbon credits without receiving any economic benefits in exchange. Nevertheless, the past event that gives rise to the offsetting obligation is the emission of greenhouse gases at the future date mentioned in the commitment (and not the entity’s declaration or the measures it has taken to publicly affirm this commitment): prior to this date, no provision is therefore recognised. 

Finally, the Committee clarifies that a provision for the offsetting commitment is recognised as an expense, unless the IFRS criteria for recognising an asset are met (without specifying the conditions for recognising a carbon certificate as an asset).