As the importance of climate-related commitments grows in the corporate sector, questions arise regarding their accounting treatment under IFRS. The IFRS Interpretations Committee (IFRIC) received a submission requesting clarification on how IAS 37 applies to such commitments.  This standard deals with Provisions, Contingent Liabilities, and Contingent Assets. This article provides an overview of the agenda decision.

Accounting questions around climate commitments

The submission raised three questions:

• Does a commitment to reduce or offset greenhouse gas emissions create a constructive obligation under IAS 37?
• If a constructive obligation exists, should a provision be recognised?
• If so, will the related expenditure be treated as an expense or an asset?

These questions arguably provide a good indication as to where the accounting issues with these types of commitments and the related obligations would typically be.

The obligation and past event

The IFRIC’s decision largely centred around the requirement in IAS 37 that a provision should reflect a present obligation, whether legal or constructive, that exists as a result of a past event. The IFRIC’s agenda decision provides helpful guidance on applying these principles to climate-related commitments.

Constructive obligation

The IFRIC observed that a public commitment to reduce or offset greenhouse gas emissions might create a constructive obligation if it results in a valid expectation among stakeholders that the entity will fulfil the commitment. However, determining 

whether such an obligation exists requires careful consideration of the facts and circumstances, such as the specificity of the commitment and any supportive actions taken by the entity.

Past Event

The obligating event must have already occurred rather than one expected to happen in the future. In the context of climate-related commitments, this is a crucial point. The mere public announcement of a future goal (e.g., reducing emissions by a certain percentage by a future date) does not, in itself, create a present obligation. The obligation is likely to be contingent on future actions and events. The Committee highlighted that climate-related commitments typically involve future actions and costs, so they generally do not satisfy the past event requirement.

The IFRIC compared this to the distinction between the enactment of a law and the event that triggers the legal obligation under that law. The example in IAS 37 illustrates that a law that requires environmental cleanup does not create a present obligation simply because of its enactment. The obligation arises only when the entity engages in activities that cause contamination. Similarly, in the case of many climate-related commitments, a present obligation arises only when the entity’s actions, such as emitting greenhouse gases that it has committed to offset, have already occurred.

Take-home message

The agenda decision highlights some aspects of IAS 37 that are likely to be critical when considering the accounting treatment of climate-related commitments. It suggests that these commitments, while significant, often involve future actions that do not meet the criteria for recognising a provision when the commitment is made. The decision emphasises the need for careful judgment in assessing the commitments made.