Members of the International Financial Reporting Standards Interpretations Committee (IFRS IC) have formally rejected a request for them to clarify the accounting for net zero transition commitments under international standards.
According to a decision notice posted last week, the decision would now go to the International Accounting Standards Board (IASB) for review.
Summing up the IFRS IC’s 5 March discussion, committee chair Bruce Mackenzie said he had heard nothing “massively substantial” during a drafting discussion to finesse the decision. All 13 members of the committee supported the decision.
In November 2023, the Committee discussed a submission asking it to clarify how IAS 37 Provisions, Contingent Liabilities and Contingent Assets, applies to net zero commitments by companies to reduce or offset its future greenhouse gas emissions.
The committee concluded that the requirements of international standards were clear and that no further clarification was necessary. However, in a surprise twist, the original party who took the issue to the IFRS IC made a second submission, joined by another organisation.
This new submission argued that the committee’s decision was flawed and could hinder progress towards more responsible environmental practices.
It introduced two new scenarios that focus solely on a company’s pledge to significantly reduce its carbon emissions by 2030, following scientifically backed goals.
These two scenarios, while similar to each other, highlight different industries and the unique actions each company is undertaking to adhere to their emission reduction pledges.
The submission also askeed the IASB to examine 17 specific areas within IAS 37 that arise from these scenarios.
Donné Sephton, IFRS’s head of advisory services, said that provisions have become “such a hot topic” in recent months and that the committee’s work in analysing the comment letters they have received has been “insanely useful”.
She also noted that there was now a better understanding of the crucial distinction between a construction obligation and a legal obligation.
Under IAS 37, an entity could be required to recognise either a legal or a constructive obligation. However, just as the enactment of a law does not automatically result in a legal obligation, nor does a company’s policy statement lead to a need to recognise a constructive obligation.
This intense focus on IAS 37 comes as the distinction between financial and non-financial reporting becomes increasingly blurred.
The IASB is expected to review the committee’s decision at its April meeting.
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