The IFRS^® Accounting Standards Discussion Group’s purpose is to act in an advisory capacity to assist the Accounting Standards Board (AcSB) in supporting the application in Canada of IFRS^® Accounting Standards. The Group maintains a public forum at which issues arising from the current application, or future application, of issued IFRS Accounting Standards are discussed and makes suggestions to the AcSB to refer particular issues to the International Accounting Standards Board (IASB) or IFRS^® Interpretations Committee. In addition, the Group provides advice to the AcSB on potential changes to IFRS Accounting Standards and such discussions are generally held in private.

The Group comprises members with various backgrounds who participate as individuals in the discussion. Any views expressed in the public meeting do not necessarily represent the views of the organization to which a member belongs or the views of the AcSB.

The discussions of the Group do not constitute official pronouncements or authoritative guidance. This document has been prepared by the staff of the AcSB and is based on discussions during the Group’s meeting.

Comments made in relation to the application of IFRS Accounting Standards do not purport to be conclusions about acceptable or unacceptable application of IFRS Accounting Standards. Only the IASB or the IFRS Interpretations Committee can make such a determination.

ITEMS PRESENTED AND DISCUSSED AT THE DECEMBER 12, 2023, MEETING

Revenue Recognition for Carbon Credits

Background

Overview

The increasing focus on companies’ environmental, social, and governance and net-zero commitments has created demand for carbon credits generated by voluntary schemes designed to drive “greener” behaviour. These carbon credits are meant to certify that a company has reduced or removed a specific amount of greenhouse gas (GHG) emissions from the atmosphere through its activities.

At its May 2023 and September 2023 meetings, the Group discussed the accounting for the development of carbon credits. The Group noted that this is a rapidly emerging area and recommended discussing similar issues in the future. Accordingly, the Group discussed revenue recognition for the sale of carbon credits by applying the guidance in IFRS 15 Revenue from Contracts with Customers. The discussion focused on one fact pattern in which the seller is required to make a long-term commitment with a carbon registry to ensure the permanence of carbon stocks. The carbon registry establishes this requirement as a condition of certifying the credits. Under different fact patterns, separate and additional accounting considerations may arise.

What is a carbon credit?

A carbon credit under a voluntary scheme is a transferrable instrument certified by an independent certification body (typically a carbon registry) to represent an emission reduction of one metric tonne of carbon dioxide, or an equivalent amount of other GHGs. An entity can purchase a carbon credit and “retire” it to claim the underlying emissions reduction toward its own GHG emissions reduction goals.

How do carbon registries work?

Voluntary carbon registries typically operate an online system for members to register projects and record the issuance, transfer, and retirement of serialized, project-based, and independently verified credits, outside of a regulatory regime. The registry is not an exchange, and it does not facilitate or enter into carbon credit sales between parties. Rather, transactions are negotiated directly between buyers and sellers, and these take place outside of the registry. After a transaction takes place, the counterparties record the transfer of ownership or retirement of credits on the registry using the unique serial numbers assigned to each credit. There may be many customers for a particular project or tranche of credits within a project. Any issues or disputes that may arise between project developers and third parties are independent of the registry.

Each registry develops its own standards and methodologies for quantifying, monitoring, and reporting project-based GHG emissions reductions and removals, verification, project registration, and issuance of carbon credits. These standards establish the quality level every project must meet to be able to list credits on the registry. Project developers must agree to the terms and conditions outlined by the registry. Voluntary carbon registries are often non-profit in nature and project developers pay fees to support the operation of the registry.

Why are carbon registries important?

Listing on an established carbon registry is generally required to effect meaningful voluntary carbon credit sales. This is because potential purchasers require certification that GHG emissions have truly been reduced or removed. Carbon credits are generally required to be issued, or to be very close to being issued, before sales transactions can take place. “Pre-sales” are possible but are contingent on successful issuance. Conversely, issuance of carbon credits on a registry does not guarantee sales.

Eligible projects are long-term endeavours. The chosen methodology will determine:

the minimum period for which a project developer commits to project monitoring and verification (“Minimum Project Term”); and
the period during which the project activities are eligible to generate carbon credits (“Crediting Period”). During the Crediting Period, a new tranche of credits is verified and issued by the registry periodically (e.g., annually).

Fact Pattern

A Company owns and manages forests for the primary purpose of harvesting trees for timber. The Company determined that by reducing its harvest levels by 10 per cent, it could develop carbon credits and sell them in the voluntary market for a greater return than the foregone amount of harvested timber. The Company therefore developed a project to reduce harvest levels on designated lands to generate carbon credits. The Company will also continue some harvesting activities on these lands.

The project has been verified and registered on a voluntary registry. The Minimum Project Term is 40 years, and the Crediting Period is the first 10 years. This means that the Company must maintain the carbon-stocking level associated with verified and issued carbon credits for 40 years by limiting its harvesting activities. This ensures a level of “permanence” for the related carbon stocks. Per the terms and conditions agreed to with the registry, the Company is responsible for the following activities over the 40-year term (the “Long-Term Commitments”):

annual reporting of estimated carbon stocks and known harvests or disturbances;
periodic physical site verification by an accredited verifier;
periodic re-inventorying activities; and
repayment of carbon credits “reversed” due to harvesting. This can be done by cancelling/retiring an equivalent volume of unsold credits in its registry account or by purchasing other credits that are then immediately cancelled/retired. The Company is not liable for reversals due to natural events beyond its control. Those are covered from a pooled buffer (insurance) account, which is funded through the registration process.

The costs associated with reporting, verifications, and re-inventorying activities are immaterial to the Company.

The first tranche of carbon credits has been issued and is now available for sale. They are recorded as inventory in the Company’s financial statements. They will be purchased by third-party companies who can resell or retire them. Each sale is subject to a separately negotiated contract between the Company and the customer. The sales price is fixed once agreed with the customer. Upon sale, the credit is transferred to the customer and payment is due immediately.

There are no further obligations outlined in the contract with the customer beyond the transfer of a specific serialized carbon credit in exchange for cash consideration. There are no further carbon capture requirements associated with that credit, and there is no further reporting to the customer. Any reversal of carbon credits sold does not impact the customer who purchased the credits.

The following assumptions and considerations are relevant to the analysis:

The sales of the carbon credits are material to the Company and are an output of the Company’s ordinary activities in exchange for consideration in the scope of IFRS 15 (paragraph 6 of IFRS 15). Therefore, the analysis follows the five-step revenue recognition model under IFRS 15.
The third parties purchasing the carbon credits from the Company are considered customers since they are the “party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration” (paragraph 6 of IFRS 15).
This analysis focuses on the accounting for the sale of the carbon credits and does not address the accounting for the related costs associated with the sale.

Step 1: Identifying the Contract with the Customer

Analysis

Paragraph 9 of IFRS 15 indicates that:

An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are
committed to perform their respective obligations

(b) the entity can identify each party's rights regarding the goods or services to be transferred;

(d) the contract has commercial substance (i.e. the risk, timing or amount of the entity's future cash flows is expected to change as a result of the
contract); and

(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred
to the customer.…

The contracts between the Company and the third-party purchasers of the carbon credits are in the scope of IFRS 15 because they satisfy all the criteria listed above. The contracts create enforceable rights and obligations regarding the sale of carbon credits by the Company to the third-party purchasers.

The Group’s Discussion

The Group agreed with the analysis.

Step 2: Identifying Performance Obligations

Analysis

Performance obligations are the unit of account for the purposes of applying IFRS 15. They are identified at contract inception and form the basis for how and when revenue is recognized. In accordance with paragraph 22 of IFRS 15, an entity shall identify as a performance obligation each promise to transfer to the customer either:

(a) a good or service (or a bundle of goods or services) that is distinct; or

(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Per paragraph 24 of IFRS 15, identifying performance obligations involves assessing customer expectations that may go beyond explicit promises in the contract. That is, they may include implied promises based on customary business practices, published policies, or specific statements that create valid expectations that the entity will deliver a good or service.

Once the various promises are identified, the Company would assess whether the related goods or services transferred are distinct. If they are distinct, that means they are separate performance obligations under paragraph 22(a) of IFRS 15. Per paragraph 27 of IFRS 15, they are distinct if both of the following criteria are met:

(a) the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer
(i.e. the good or service is capable of being distinct); and

(b) the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e. the promise
to transfer the good or service is distinct within the context of the contract).

Four views have been identified for this step of the revenue recognition model.

View 2A – Performance obligation corresponds only to the sale of carbon credits

The customer purchases carbon credits that are certified at the time of the transaction. Proponents of this view note that subsequent actions of the seller do not impact the customer’s ability to retire the carbon credits. If the Company defaults on its Long-Term Commitments (e.g., by overharvesting), it would need to take action with the registry (i.e., retire unsold credits or purchase and retire other credits). Such actions would be separate transactions from the sale of the original carbon credits. The original carbon credits would not lose their value, and the customer would not be entitled to any refund. The Long-Term Commitments represent an obligation from the Company to the registry to obtain and maintain accreditation for the project and not an obligation to the customer.

View 2B – Performance obligation corresponds to the sale of carbon credits AND the Long-Term Commitments

Proponents of this view note that the customer purchases carbon credits because they have been certified by an independent party (the registry). The carbon credits have value because the Company has made an implicit promise to the customer to fulfill the Long-Term Commitments. Proponents of this view think these terms do not need to be specified in the sales contract since the value of the carbon credits is negotiated between the Company and the customer in the context of the accredited program. Without the Long-Term Commitments from the Company and the ongoing monitoring from the registry, the program is less valuable. As such, proponents of this view think the promises associated with the Long-Term Commitments cannot be considered distinct from the sale of the carbon credits. The fact that there are substantive consequences to the Company if it defaults on its Long-Term Commitments supports the presence of a promise made to the customer, even if the customer is not entitled to a refund.

View 2C – Distinct performance obligations for the sale of carbon credits AND the Long-Term Commitments

Proponents of this view think there are distinct performance obligations for the sale of carbon credits and the Long-Term Commitments, as they think the customer can benefit separately from each. That is:

the customer can retire the carbon credits independently from the Company’s compliance with its Long-Term Commitments; and
the Long-Term Commitments represent a type of service in addition to the assurance that the carbon credits comply with the program terms when sold to the customer (meaning they can ultimately be retired by the customer).

Proponents of this view note that this is similar to the analysis of warranties under paragraphs B28-B33 of IFRS 15. Paragraph B31 of IFRS 15 discusses factors that may indicate that a warranty is a performance obligation, including the length of the warranty coverage period and nature of the tasks the entity promises to perform. Considering those factors:

The Company has a commitment spanning several years and there are specific actions it must undertake to satisfy its Long-Term Commitments (e.g., ongoing surveying and verification).
Customers purchased the carbon credits with the expectation that the Company will meet its Long-Term Commitments, even if this does not impact their ability to retire the carbon credits.

View 2D – Development of an accounting policy based on facts and circumstances

Proponents of this view think Views 2A, 2B, and 2C all have merit. Therefore, depending on the facts and circumstances, the Company should apply judgment to determine which method best reflects the economics of the transaction. This may require disclosing this accounting policy in accordance with paragraph 122 of IAS 1 Presentation of Financial Statements if it is material.

The Group’s Discussion

The Group agreed with the analysis of factors an entity might consider when identifying performance obligations. Most Group members agreed with View 2A. Some Group members thought View 2B also had merit. No Group members agreed with View 2C, as they thought the Long-Term Commitments were not a separate performance obligation.

Group members who agreed with View 2A highlighted that the Company’s engagement with the customer ends after the carbon credits are sold. They noted that in this fact pattern, there would be no impact to the customer if the Company were to default on its Long-Term Commitments. They commented that any resulting obligations from defaulting would not bear on the sale of the carbon credits insofar as the credits relate to past carbon capture. A few Group members also indicated that the customer could control and benefit separately from the carbon credits but not from the Long-Term Commitments.

In supporting View 2A, various Group members drew analogies to explain why there may not be a performance obligation corresponding to the Long-Term Commitments:

Meeting long-term debt covenants or government grant conditions are generally not considered performance obligations to customers. Rather, entities need to meet these in order to maintain funding for business activities. Similarly, complying with the Long-Term Commitments may not be considered a performance obligation because the Company would need to comply with these as part of the terms and conditions for listing carbon credits on the registry.
Customers may purchase a product because it is made locally. However, the seller would not have a performance obligation associated with continuing to produce locally. If the seller moves its production overseas, that does not change the original item the customer purchased. Similarly, there would be no performance obligation corresponding to the Long-Term Commitments.

Some Group members also noted that if the Company were to default on its Long-Term Commitments, it may have a different type of obligation to be separately accounted for in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. This obligation would be to the registry rather than to the customer. One Group member commented that this likely would not qualify as a warranty-type performance obligation under IFRS 15 because such warranties represent obligations to customers rather than to registries or other such bodies. They also noted in accordance with paragraph B33 of IFRS 15, obligations associated with breaching product liability laws would be accounted for in accordance with IAS 37 rather than as performance obligations under IFRS 15. Considering the analogies above, this guidance on product liability laws could be applied to the Long-Term Commitments. The AcSB Chair commented that in assessing the treatment under IAS 37, there may be relevant considerations in the IFRS Interpretations Committee’s Tentative Agenda Decision, Climate-related Commitments (IAS 37).

Some Group members who agreed with View 2A thought View 2B also had merit. A couple Group members commented that they would support View 2A if the carbon credits related purely to past carbon capture, but considered if there may be elements of future carbon capture in this fact pattern. The Group emphasized that the facts and overall environment would need to be fully understood in order to determine the appropriate accounting treatment. Two Group members noted the importance of long-term carbon storage in this particular fact pattern, and accordingly favoured View 2B over View 2A. One Group member noted that the customer would likely perform significant due diligence before purchasing the credits, as this is a voluntary scheme, and the customer would want to make sure it can use the credits to meet its GHG emissions reduction goals. A few Group members considered what would happen if, after the customer retired the credits, the Company were to harvest the trees that were meant to store the carbon associated with the retired credits for 40 years. In this case, the customer may be under pressure to take some form of action in order to still be able to meet its GHG emissions reduction goals. This could include purchasing more carbon credits or possibly pursuing legal action against the Company. The Group members thought that the carbon credits would be less valuable to the customer in this case. Some Group members thought that this would be a separate issue from revenue recognition (e.g., impairment).

Group members emphasized that there would not be an accounting policy choice. Rather, the facts and circumstances of the transaction would drive the accounting treatment. In establishing an accounting policy for these transactions, it will be important to understand whether the promise to the customer relates to past carbon capture, future carbon capture, or a combination thereof.

Step 3: Determining the Transaction Price

Analysis

Per paragraph 47 of IFRS 15, the transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. It may include both fixed and variable amounts. In this fact pattern, there is no variability associated with the transaction price. The consideration is fixed once the sales price has been agreed to between the Company and customer. There are no significant financing components since payment is due upon sale. Therefore, the transaction price is the sales price per the contract.

The Group’s Discussion

The Group agreed with the analysis.

Step 4: Allocating the Transaction Price to the Performance Obligations

Analysis

Step 4 builds on the conclusions in Steps 2 and 3. Under Views 2A and 2B, there is no allocation to perform because there is a single performance obligation. Under View 2C, the transaction price from Step 3 would be allocated to the two performance obligations (being the sale of the carbon credits and the Long-Term Commitments). Their stand-alone selling prices are not directly observable since the total transaction price covers both and the Company does not regularly sell one without the other. Therefore, these would need to be estimated in accordance with paragraph 78 of IFRS 15, considering all information reasonably available and maximizing the use of observable inputs.

Paragraph 79 of IFRS 15 indicates that suitable allocation methods include, but are not limited to the:

(a) adjusted market assessment approach;

(b) expected cost plus a margin approach; and

View 4A – Relative fair value allocation between the two performance obligations

Per paragraph 73 of IFRS 15:

The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or
service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods
or services to the customer.

Proponents of this view think that a relative fair value allocation would best meet that objective, for example, using a market assessment approach. Under this
approach, the Company would consider the price a customer would pay for the carbon credits and the Long-Term Commitments separately. Since the
stand-alone selling price of the Long-Term Commitments might not be directly observable, the Company may need to estimate it based on observable inputs
from similar transactions in voluntary markets.

View 4B – Nominal value assigned to the Long-Term Commitments

Proponents of this view think the allocation objective in paragraph 73 of IFRS 15 would be met by allocating a nominal value to the Long-Term Commitments under the expected cost plus a margin approach. This is because the costs associated with reporting, verifications, and re-inventorying activities are immaterial to the Company. The outcome would be similar under the residual approach, though further analysis would be required to determine if the residual approach could be used based on the criteria in paragraph 79(c) of IFRS 15.

The Group’s Discussion

The Group agreed with the analysis of factors to consider when allocating the transaction price to the performance obligations. This analysis would only be relevant when there are multiple performance obligations – that is, only when View 2C is taken in Step 2. However, no Group members supported View 2C. For purposes of the discussion, Group members discussed what their views would be in Step 4 had they taken View 2C in Step 2.

A few Group members favoured View 4A, as they thought there would be a significant commitment/cost associated with the Long-Term Commitments. One Group member noted that even if the costs of reporting, verification, and re-inventorying activities are immaterial, the value of the Long-Term Commitments may not be nominal because there would be a significant opportunity cost associated with not harvesting the trees for 40 years.

One Group member favoured View 4B. They thought it would be difficult to determine a stand-alone selling price for the Long-Term Commitments because customers may not pay for these separately.

Step 5: Recognizing Revenue

Analysis

In accordance with paragraph 31 of IFRS 15, revenue will be recognized when (or as) the performance obligations are satisfied by transferring control of a promised good or service to the customer. Thus, Step 5 depends on the conclusions in Step 2.

Per paragraph 32 of IFRS 15, control can transfer at a point in time or over time.

View 5A – Point-in-time revenue recognition for the sale of the carbon credits

This view is applicable under Views 2A and 2C in Step 2. Proponents of this view think the criteria in paragraph 35 of IFRS 15 for recognizing revenue over time are not met. Control of the carbon credits passes from the Company once the sales contract is concluded with the customer. At that point:

(a) the Company has a right to payment;

(b) the customer has legal title to the carbon credits (as evidenced by the change in ownership recorded in the registry); and

(c) the customer has the significant risks and rewards of ownership, including the unrestricted ability to retire the carbon credits when they choose.

View 5B – Over time revenue recognition for the sale of the carbon credits (when combined with the Long-Term Commitments) and for the Long-Term Commitments (when distinct)

This view is applicable under Views 2B and 2C in Step 2. Proponents of this view think that customers consume the benefits associated with the Long-Term Commitments as the Company restricts its harvesting activities over the Minimum Project Term (i.e., 40 years). This is consistent with revenue recognition patterns for the provision of services. A deferred revenue would be established, and revenue would be recognized over the Long-Term Commitments period.

View 5C – Point-in-time revenue recognition for the sale of the carbon credits and the Long-Term Commitments

Proponents of this view think that the Long-Term Commitments to avoid harvesting above specific levels is not viewed as a continuous service provided by the Company to the customer. This is due to the Company's commitment to inaction during this period. Furthermore, the costs associated with reporting, verifications, and re-inventorying activities are immaterial to the Company. Proponents of this view also note that the customer receives the benefit from the Company’s carbon emissions reduction activity upfront when it transfers the carbon credit to them. Since the Company does not transfer control of a service over time to its customers, paragraph 35 of IFRS 15 does not apply. Therefore, the Company would apply paragraph 38 of IFRS 15 and recognize revenue for the Long-Term Commitments and carbon credits when the carbon credits are transferred to the customer. The outcome of this view is similar to the outcome under View 5A.

The Group’s Discussion

Group members agreed with the analysis of factors to consider when recognizing revenue in Step 5.

A few Group members who supported View 2A in Step 2 noted that they agreed with View 5A. Two of the Group members indicated that they agreed with View 5A because the carbon credits relate purely to past carbon capture and could be retired immediately. However, one Group member commented that if the carbon credits contained an inherent promise for future carbon capture, it may not be appropriate to recognize revenue until that carbon capture occurs. To determine the appropriate revenue recognition in such a case, it would be important to understand when the customer could retire the credits (e.g., over time or only when all the carbon capture is complete).

One Group member saw merit in View 5B if View 2B were taken in Step 2. Under View 2B, there is a single performance obligation corresponding to the sale of carbon credits and the Long-Term Commitments together. This Group member noted that if these elements are viewed to be so connected that they cannot be considered distinct, then it may be appropriate to recognize revenue over time as customers consume the benefits of both elements. They thought that View 5C would be difficult to support because the Company has Long-Term Commitments to meet over the 40-year term.

Overall, the Group’s discussion raised awareness of how an entity recognizes revenue for the sale of carbon credits by applying IFRS 15. This is a rapidly emerging area, which the Group will continue to monitor. The Group may discuss similar issues in the future as other fact patterns emerge.

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IAS 1: Classification of Liabilities with Covenants when an Entity is Granted a Waiver or Period of Grace

Background

At its September 2023 meeting, the IFRS Accounting Standards Discussion Group discussed various scenarios and examples of the application of the 2022 amendments to IAS 1 on non-current liabilities with covenants when an entity is granted a waiver or period of grace. The Group noted that there were diverse views on how to apply these amendments to different fact patterns, and how to determine whether an arrangement is considered a waiver, a period of grace, or a waiver with a new future covenant. The Group recommended that this topic be included on the December 2023 agenda so that the Group can discuss whether any consensus has emerged on these matters. Accordingly, the Group continued this discussion by considering how the timing of a waiver affects the classification of a loan as current or non-current.

The term “waiver” is not defined in IAS 1. However, it is generally considered to mean that a lender has relinquished its right to apply covenant provisions in a contract. When a lender grants a waiver to a borrower, the contractual terms of the loan are modified, and the covenant subject to the waiver does not apply.

The term “period of grace” is also not defined in IAS 1. However, paragraph 75 of IAS 1 refers to periods of grace by explaining that:

An entity classifies a liability as non-current if the lender agreed by the end of the reporting period to provide a period of grace ending at least twelve months
after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment.

A period of grace is generally considered a period of time during which a lender agrees not to demand repayment of a loan even though the borrower breached a loan covenant. Lenders often provide periods of grace to borrowers to give them time to rectify a breach. Once a period of grace has elapsed, a lender typically regains all the rights related to the covenant breach before the period of grace was granted. This differs from a waiver because a period of grace is generally time-limited, and the lender has discretion as to whether it will demand repayment of the loan once the period of grace has elapsed. It may be challenging for entities to determine whether an arrangement is a waiver or a period of grace because lenders may not clearly explain which rights they surrendered, and whether they are time-limited or contingent on future events.

For the purposes of determining whether the loan in this discussion should be classified as current, the Group assumed that the criteria in paragraphs 69(a)-69(c) of IAS 1 are not applicable. Therefore, the Group focused on whether the criteria in paragraph 69(d) of IAS 1 applies—that is, determining whether an entity has the right at the end of the reporting period to defer settlement of the liability for at least 12 months after the reporting period.

Fact Pattern 1

Entity A obtained a loan on January 1, 20X0. The loan is repayable in full on December 31, 20X5, with no periodic repayments of the principal until the due date.
Entity A has a calendar year-end.
The loan agreement includes a covenant that requires Entity A to maintain a debt-to-equity ratio no greater than 1.0 as at October 31 of each year. If Entity A fails to comply with this covenant, the lender has the right to demand immediate repayment of the loan until the next covenant testing date, unless the lender waives this right.
On October 15, 20X3, Entity A informs the lender that it thinks it will not meet the covenant requirements on the upcoming testing date. As a result, the lender waives its rights with respect to the October 31, 20X3 covenant test. Therefore, even if Entity A’s debt-to-equity ratio exceeds 1.0 on October 31, 20X3, the lender will not have the right to demand immediate repayment of the loan.
As a condition of this waiver, the lender requires Entity A to comply with a new covenant on March 31, 20X4. The new covenant was not part of the original contractual terms of the loan. If Entity A does not meet the new covenant requirements on March 31, 20X4, the lender will have the immediate right to demand repayment of the loan.

Issue 1: How should Entity A classify the loan as at December 31, 20X3?

Analysis

The classification of the loan as current or non-current depends on whether Entity A has the right at the end of the reporting period to defer settlement of the loan for at least 12 months after the reporting period. Since Entity A is required to comply with a loan covenant, it applies the guidance in paragraph 72B of IAS 1 as part of this assessment.

Paragraph 72B(a) of IAS 1 indicates that a covenant affects whether an entity has the right to defer settlement of a liability for at least 12 months after the reporting period if the entity is required to comply with the covenant on or before the end of the reporting period. Entity A is not required to comply with the loan covenant on or before the end of the reporting period because the lender waived its right to enforce the covenant before the October 31, 20X3, testing date. As a result of this waiver, the lender did not have the right to demand repayment of the loan regardless of Entity A’s debt-to-equity ratio as at October 31, 20X3.

Paragraph 72B(b) of IAS 1 indicates that a covenant does not affect whether an entity has the right to defer settlement of a liability for at least 12 months after the reporting period if the entity is required to comply with the covenant only after the reporting period. Entity A is required to comply with the new covenant on March 31, 20X4, which is after the reporting period. Therefore, this covenant does not affect whether Entity A has the right to defer settlement of the loan for at least 12 months, even though it could be required to repay the loan within 12 months if it fails the March 31, 20X4, covenant test.

Since Entity A has the right to defer settlement of the loan for at least 12 months after the reporting period, it should classify the loan as non-current as at December 31, 20X3. Since Entity A will be required to comply with a covenant within 12 months after the reporting period, it must apply the requirements in paragraph 76ZA of IAS 1 and disclose information in the notes that enables users of financial statements to understand the risk that the liabilities could become repayable within 12 months after the reporting period.

The Group’s Discussion

The Group agreed that Entity A should classify the loan as non-current as at December 31, 20X3, for the reasons highlighted in the analysis. One Group member emphasized that as long as a waiver is obtained before the balance sheet date, there is no covenant violation as at that date. Another Group member noted the importance of validating the terms of the waiver to ensure it provides a permanent relinquishment of the lender’s right to demand repayment. If the waiver does not provide a permanent relinquishment of this right, this might impact the borrower’s classification of the loan, depending on the facts and circumstances.

One Group member raised a consideration when the covenant testing date is after the reporting date but before the financial statements are issued – i.e., a future covenant is tested in the subsequent events period (e.g., a March 31 20X4 testing date, and a venture issuer with a 120-day reporting deadline). They noted that an entity in this situation would know whether they have violated the future covenant before their year-end financial statements are issued. If the entity breaches the covenant before the issuance date, the risk that the liability could become repayable within twelve months is no longer a risk, but a fact. Therefore, they thought that the new disclosure requirements under paragraph 76ZA could be addressed by reference to the disclosure requirements for non-adjusting subsequent events in paragraph 21 of IAS 10.

Fact Pattern 2

Assume the same fact pattern as Fact Pattern 1, except:

• Entity A tested and violated the covenant on October 31, 20X3. On November 5, 20X3, the lender waived its rights to demand repayment—that is, after the covenant violation occurred.

Issue 2: How should Entity A classify the loan as at December 31, 20X3?

Analysis

Similar to Issue 1, the classification of the loan as current or non-current depends on whether Entity A has the right at the end of the reporting period to defer settlement of the loan for at least 12 months after the reporting period. Since Entity A is required to comply with a loan covenant, paragraph 72B of IAS 1 also applies to this fact pattern.

When Entity A violated the terms of the loan agreement on October 31, 20X3, the lender had a contractual right to demand repayment of the loan. However, since the lender waived this right before the end of the reporting period, it did not affect whether Entity A had the right to defer settlement of the loan for at least 12 months as at December 31, 20X3. When assessing whether an entity has the right to defer settlement of a liability arising from a loan arrangement for at least 12 months, it does not matter whether the waiver is granted before or after the covenant is tested as long as the lender waives its right to demand repayment before the end of a reporting period. That is because the requirements in paragraph 72B of IAS 1 only consider the rights that exist at the end of the reporting period. As noted in the analysis of Issue 1, the new covenant inserted on March 31, 20X4, does not affect whether Entity A has the right to defer settlement of the loan for at least 12 months because Entity A is required to comply with it only after the reporting period. Therefore, similar to Issue 1, Entity A should classify the loan as non-current as at December 31, 20X3, because it has the right to defer its settlement for at least 12 months after the reporting period.

The Group’s Discussion

The Group agreed that Entity A should classify the loan as non-current as at December 31, 20X3, for the reasons highlighted in the analysis. Some Group members observed varied application of IAS 1 for similar fact patterns due to unclear guidance in the standard before the October 2022 amendments. They noted that some entities classified the loan as non-current, and others as current. However, they think consensus is emerging on the application of the October 2022 amendments that will reduce diversity in the application of the requirements. One Group member highlighted that paragraph 72B(b) is particularly helpful for reducing diversity in the application of IAS 1 by emphasizing that the borrower shall only consider its rights at the balance sheet date when classifying a loan (i.e., covenants that an entity is required to comply with only after the reporting period do not affect an entity’s right to defer settlement of a liability for at least 12 months after the reporting period).

Some Group members noted other factors an entity should consider when it obtains a waiver. One Group member thought that entities should review their other credit and loan agreements to determine if they contain any cross-default provisions, as the waiver might impact the classification of those loans. Another Group member noted that entities should consider whether the negotiation of the waiver will result in any changes to the risk, timing, or amount of contractual cash flows associated with the loan. If so, the entity may need to consider whether to apply the derecognition or modification guidance in IFRS 9 Financial Instruments.

Overall, the Group’s discussion raised awareness of the consensus that is emerging on the application of the October 2022 amendments to IAS 1. The Group recommended monitoring this issue to determine if diversity in the application of the Standard continues after the amendments become effective in 2024. If so, the Group might consider discussing this issue again at a future meeting. No further actions were recommended to the AcSB.

Year-end Financial Reporting Reminders

The Group discussed several topics relating to the preparation of 2023 year-end financial statements.

Issue 1: Disclosures about estimation uncertainties and sensitivities given market volatility

Analysis

Companies are facing significant uncertainty in the current economic environment due to global supply-chain disruptions, labour shortages, shifts in consumer demand, and market volatility. In the face of such uncertainty, companies need to apply judgment in making some estimates that impact the preparation of their financial statements, for example, estimates of the fair value of investment properties, the recoverable amount of long-lived assets, expected credit loss allowances, and the carrying amount for deferred tax assets. However, not all estimates are created equal, and some may involve such significant estimation uncertainty that they fall in the scope of paragraph 125 of IAS 1. That paragraph indicates that:

An entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of
the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next
financial year. In respect of those assets and liabilities, the notes shall include details of:

(a) their nature, and

(b) their carrying amount as at the end of the reporting period.

These disclosure requirements apply to those estimates that require management’s most difficult, subjective, or complex judgments. Once an entity has identified these estimates, it must present disclosures in a manner that helps users understand the judgments that management makes about the future and other sources of estimation uncertainty. Paragraph 129 of IAS 1 sets out the following examples of the types of disclosures that an entity might consider:

(a) the nature of the assumption or other estimation uncertainty;

(b) the sensitivity of carrying amounts to the methods, assumptions and estimates underlying their calculation, including the reasons for
the sensitivity;

(c) the expected resolution of an uncertainty and the range of reasonably possible outcomes within the next financial year in respect of the carrying
amounts of the assets and liabilities affected; and

(d) an explanation of changes made to past assumptions concerning those assets and liabilities, if the uncertainty remains unresolved.

Sometimes it is impracticable to disclose the extent of the possible effects of an assumption (or other source of estimation uncertainty) at the reporting period end. In those cases, minimum disclosures are required. The above disclosures are not required for assets and liabilities measured at fair value based on a quoted market price in an active market.

As a best practice, entities should revisit their existing disclosures at year-end to determine if they:

quantify the amount of the assets or liabilities at risk of material adjustment in the next financial year due to estimation uncertainty;
provide sufficient granularity in the description of assumptions and meaningful ranges of reasonably possible outcomes;
provide “sensitivity” analysis of the impact of changes to the assumptions on related carrying amounts of assets and liabilities; and
enable users to distinguish between the estimates that represent management’s most complex, judgmental, or subjective estimates from other estimates.

Example

A mining company has determined that one of its mines has an impairment indicator.
The cash flows from this mine will continue for 15-20 years.
The most significant assumption that impacts the recoverable amount in the impairment test is the long-term commodity price.
The company uses the forward price of the commodity for the first two years, but estimates the long-term price for the remaining years using its own assumptions.
Significant volatility in the market has made predicting the long-term commodity price difficult and subjective.
No impairment loss is recognized at year-end.
The actual long-term price used by other companies in the same sector may differ significantly.

Disclosure Requirements

The company thinks it should disclose information about how it developed its estimate of the long-term commodity price to meet the requirements in paragraph 125 of IAS 1. This is because a reasonable change in this assumption within the next year would lead to a material adjustment to the carrying amount of its mining assets (e.g., a material impairment loss). The company also notes that estimating the commodity price beyond the forward pricing information was difficult, complex, and judgmental. The disclosures that the company might provide regarding this significant estimation uncertainty include:

quantitative information about the price assumption (e.g., prices used at different points in time);
information about different scenarios that have been considered, as well as their weightings;
sensitivities of the carrying amount to different price assumptions; and
other information that may be relevant to users, including how the entity has incorporated climate risk into the scenarios.¹

These disclosures would signal to users that a significant estimation uncertainty exists regarding the long-term commodity price used. This uncertainty could materially impact the carrying value of its mining assets at year-end as well in the next year, even though no impairment loss has been recognized. Note that IAS 36 Impairment of Assets requires some of these disclosures but only in specific circumstances.

The Group’s Discussion

The Group agreed with the analysis, and noted several other factors an entity should consider when preparing disclosures about estimation uncertainties and sensitivities. Some Group members noted that many IAS 1 disclosure requirements are not prescriptive. Therefore, entities often need to apply significant judgment to determine the nature and extent of disclosures needed to meet these requirements. Another Group member highlighted the importance of applying the requirements in paragraph 129 of IAS 1 along with those in paragraph 125 (i.e., paragraph 125 does not take precedence over paragraph 129). They also noted that for assets measured at fair value using level 3 inputs (e.g., investment properties measured at fair value), an entity might be able to meet the requirements for disclosure of measurement uncertainty by referencing the related financial statement note addressing the requirements in IFRS 13 Fair Value Measurement.² One Group member highlighted the importance of considering climate risk in the disclosures of significant estimation uncertainty. They think that investors are increasingly demanding information that helps them assess entities’ climate resilience, and considering climate risk as part of any entity’s sensitivity analysis is one way to provide this information. Some Group members also noted that entities should consider the requirements in paragraphs 122-124 to disclose information about significant judgments that management has made in the process of applying the entity's accounting policies.

Issue 2: Disclosure of material accounting policy information

Analysis

Recent amendments to IAS 1 and IFRS Practice Statement 2: Making Materiality Judgements require entities to disclose material accounting policy information instead of significant accounting policies.³ This is not a “search and replace” exercise but one which requires entities to apply judgment to ensure their accounting policies meet the needs of users. The amendments are effective for annual reporting periods beginning on or after January 1, 2023.

The amendments include enhanced guidance for assessing whether accounting policy information is material. This includes a three-step approach, which asks:

Is the transaction, event, or condition material in size, nature, or both?
If so, is the accounting policy information itself material to the financial statements?
If so, material accounting policy information should be disclosed.

Accounting policy information is expected to be material if users of an entity’s financial statements would need it to understand other material information in the financial statements. For example, an entity is likely to consider accounting policy information material to its financial statements if that information relates to material transactions, events, or conditions and the accounting policy:

(a) was changed during the reporting period, resulting in a material change to information in the financial statements;

(b) was chosen from options permitted by IFRS Accounting Standards;

(c) was developed in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors in the absence of an IFRS Accounting
Standard that specifically applies;

(d) relates to an area where the entity is required to make significant judgments or assumptions in applying the accounting policy and these are disclosed
under paragraph 122 or 125 of IAS 1; or

(e) relates to complex accounting (such as when an entity applies more than one IFRS Accounting Standard to a material class of transactions).

If an entity determines that accounting policy information is material, it needs to decide what to disclose. The amendments acknowledge that users generally find accounting policy information more useful when it focuses on how an entity has applied the requirements of IFRS Accounting Standards to its own specific facts and circumstances, and when it relates to an area for which the entity has exercised judgment. Users generally find accounting policy information less useful when it includes standardized information or information that only duplicates or summarizes the requirements of IFRS Accounting Standards. If an entity discloses immaterial accounting policy information, such information should not obscure material accounting policy information.

As a result of the amendments to IAS 1, entities are expected to consider areas where they can enhance and tailor their accounting policy disclosures and areas where they can scale back their existing disclosures.

Example of Enhancing and Tailoring a Disclosure

An entity has acquired a material subsidiary during the year.
Management has to make a significant judgment around the determination of control because the entity holds less than a majority of the voting equity in the investee, but also holds decision-making rights by contract that give it the current ability to direct certain activities of the investee.
The entity thinks the determination of control constitutes material accounting policy information.

To satisfy the requirements in IAS 1 and paragraph 9(b) of IFRS 12 Disclosure of Interests in Other Entities, the entity should consider enhancing its existing accounting policy for consolidation to describe how control is assessed in this situation. This disclosure should include the nature of the contractual rights considered, the relevant activities to which they apply, and the judgment made in determining whether the contractual rights (together with voting rights) are sufficient to confer control.

Example of Scaling Back a Disclosure

An entity has not undertaken any hedging activity in the past three years.
The entity’s financial statements contain a detailed accounting policy note on the requirements necessary to apply hedge accounting.

The entity should consider removing this note or replacing it with a note that is more useful to financial statement users. For example, the entity might consider disclosing that it does not undertake hedging activities that qualify for hedge accounting under IFRS 9.

The Group’s Discussion

The Group agreed with the analysis and noted some other factors an entity should consider when disclosing material accounting policy information. One Group member thought that entities should consider ordering their financial statement notes based on relevancy to the company as this might help them identify accounting policy information that is material. Another Group member thought that entities are often reluctant to scale back their disclosures to avoid non-compliance with regulatory reporting or audit requirements. They thought that this analysis of IAS 1 and IFRS Practice Statement 2 is a helpful reminder that entities are encouraged to scale back the disclosure of accounting policy information that is immaterial. One Group member commented that in the financial services sector, expected credit loss is often a material accounting policy for entities. Therefore, they thought that entities in this sector should consider ways to enhance this disclosure to help users understand how this amount was calculated.

Issue 3: Impairment of assets in the scope of IAS 36

Analysis

Adverse changes in the marketplace and declines in commodity prices in certain sectors have increased entities’ focus on the impairment test. Below is a non-exhaustive list of factors entities should consider when reviewing assets in the scope of IAS 36 Impairment of Assets for impairment.

When to test

Entities are required to perform an impairment test on goodwill, indefinite-life intangible assets, and intangible assets not yet available for use annually, and whenever there are indicators of impairment. Entities are required to perform an impairment test on other assets in scope of IAS 36 only if there are indicators of impairment. Special rules, which are highlighted below, apply to newly acquired goodwill.

Have there been any changes in the business?

Entities should consider whether any of the following have taken place since the entity performed its last impairment test:

an acquisition or divestiture of a business or group of assets;
the introduction or withdrawal of products or services;
a restructuring; or
a sub-lease of property.

If any of the above transactions have taken place, this could result in the identification of new cash-generating units (CGUs) or a change in existing CGUs.

Have you assessed whether there are any indicators of impairment (or impairment reversal) at the reporting period end?

IAS 36 sets out a minimum list of impairment indicators that entities should review. Entities should pay particular attention to impairment indicators for assets or CGUs that have little or no headroom (i.e., excess of the recoverable amount over the carrying amount) at the time of the last test, as they may be more susceptible to impairment. Entities should also consider whether increases in market interest rates could cause the recoverable amount of an asset or CGU to fall below its carrying amount. When performing this assessment, entities should consider all relevant factors (e.g., whether the interest rate impacts the rate of return demanded for the asset given its estimated life; whether the company is able to recover higher interest costs through prices charged to its customers). Also, entities that recognized impairment losses in prior periods (other than for goodwill) should consider whether there are any indicators that the impairment loss may no longer exist or may have decreased, as this will trigger the estimation of a new recoverable amount.

Compliance with value-in-use (VIU) rules

An impairment loss arises when the carrying amount of an asset or CGU exceeds its recoverable amount. The recoverable amount is the higher of the VIU and fair value less costs of disposal. Entities calculating VIU should demonstrate that they comply with the VIU rules, which include rules for the preparation of cash flow projections, excluded cash flows (e.g., from uncommitted restructurings and asset enhancements), the cash flow projection period, growth rates used beyond the projection period, and the discount rate. Also, in uncertain times, entities may find it more effective to incorporate risk into their calculation of VIU by using multiple cash flow scenarios that are probability weighted, rather than using a single set of cash flows where the risk is incorporated into the discount rate (paragraph 32 and Appendix A of IAS 36).

Comparing “like” with “like”

Entities should allocate assets to the carrying amount of CGUs when those assets contribute to the cash inflows generated by those CGUs and are therefore factored into the recoverable amount. This involves identifying all corporate assets (such as head office, brands, and trademarks) that relate to a CGU, and determining whether they can be allocated on a reasonable and consistent basis to the CGU (or group of CGUs) in accordance with the requirements in paragraphs 100-103 of IAS 36. If this allocation is not performed, an entity is at risk of understating the carrying amount of its CGUs, and potentially overstating any headroom or understating an impairment loss.

Any newly acquired goodwill

Paragraph 96 of IAS 36 requires that any goodwill acquired in a business combination in the current annual period, that has been allocated to one or more CGUs, be tested for impairment before the end of the current annual period. For any goodwill that has not been allocated, it is required to be tested if there are any indicators of impairment (see paragraphs 84-85 of IAS 36 and IDG Report on Public Meeting, January 2012).

Disclosures

The disclosure requirements in IAS 36 are extensive. Entities with goodwill and indefinite-life intangible assets should pay particular attention to the disclosure requirements, as these can impact an entity even if no impairment loss or reversal is recognized in the reporting period.

The Group’s Discussion

The Group agreed with the analysis of factors entities should consider when applying the requirements in IAS 36. One Group member noted that entities with investments in associates and joint ventures accounted for using the equity method should ensure that the associates and/or joint ventures also apply these impairment considerations. This is because impairment losses in the associate or joint venture might be material to the entity. Another Group member noted that entities with exploration and evaluation activities should apply the indicators in paragraph 20 of IFRS 6 when assessing whether these assets should be tested for impairment (see IDG Report on Public Meeting, December 2, 2013 and October 18, 2012 for discussion of impairment indicators in IFRS 6 and market capitalization).

Issue 4: Pillar Two financial statement disclosures

In 2021, with the support of more than 135 countries, the Organisation for Economic Co-operation and Development (OECD) agreed to move forward with a new global minimum tax (i.e., Pillar Two). Pillar Two requires that in-scope multi-national enterprises with revenues in excess of €750 million pay a minimum tax of 15 per cent on income in each jurisdiction in which they operate. The OECD has released Pillar Two model rules—which are complex and evolving. Each country is responsible for enacting the rules based on their own legislative process. As of today, some countries have already enacted or substantively enacted Pillar Two tax legislation. Pillar Two tax legislation is expected to be effective as early as January 1, 2024.

In response to these developments, in May 2023, the IASB issued amendments to IAS 12 Income Taxes. The amendments introduce:

(a) a mandatory temporary exception from recognizing and disclosing information about deferred tax assets and liabilities related to Pillar Two income
taxes; and

(b) targeted disclosure requirements for affected entities.

IAS 12 requires an entity to disclose:

(once Pillar Two legislation is in effect) current tax expense (income) relating to Pillar Two; and
(in periods in which Pillar Two legislation is enacted or substantively enacted but not yet in effect) known or reasonably estimable information that helps users of financial statements understand the entity’s exposure to Pillar Two income taxes arising from that legislation. To meet this disclosure objective, entities shall disclose qualitative and quantitative information about its exposure to Pillar Two income taxes at the end of the reporting period. These disclosures do not need to reflect all the specific requirements of the Pillar Two legislation and can be provided in the form of an indicative range. To the extent information is not known or reasonably estimable, an entity should instead disclose a statement to that effect and information about the entity’s progress in assessing its exposure (paragraph 88C-88D of IAS 12).

The above disclosures apply for annual reporting periods beginning on or after January 1, 2023, with no requirement to make these disclosures in interim periods ending on or before December 31, 2023. In addition, entities are required to disclose use of the temporary exception.

Canadian entities within the scope of Pillar Two would need to consider what disclosures should be made regarding Pillar Two in their upcoming annual consolidated financial statements (i.e., at December 31, 2023) to comply with IFRS Standards. Factors to consider include:

Does the entity have operations in at least one jurisdiction in which Pillar Two legislation has been enacted or substantively enacted before the year-end? If so, the disclosures in paragraphs 88C-88D of IAS 12 would apply.
If qualitative information is disclosed, does it consider how the entity is affected by Pillar Two legislation and the main jurisdictions in which its exposures might exist? If quantitative information is disclosed, is the basis for its preparation clear and based on information available at the year-end?
If Pillar Two legislation is not yet enacted or substantively enacted before year-end, is there information that the entity should consider disclosing to achieve fair presentation in accordance with the requirements in paragraph 17(c) of IAS 1?
If Pillar Two legislation is enacted or substantively enacted after year-end and before the date the financial statements are authorized for issue, has the entity considered subsequent events disclosure (paragraph 22(h) of IAS 10 Events After the Reporting Period and paragraph 88 of IAS 12)?
If the entity has disclosed that it expects the impacts of Pillar Two legislation to not be material, are these statements appropriate and supportable?

In addition to disclosure, where Pillar Two legislation has been announced in a jurisdiction, entities should consider the implications of the expected additional cash taxes on fair value measurement (e.g., in a business acquisition), impairment tests, and the going concern assessment.

The Group’s Discussion

The Group agreed with the analysis. One Group member emphasized that Pillar Two disclosures are important because for those impacted entities, it may have a material impact on future taxes payable. Another Group member commented on the requirement for an entity to disclose known or reasonably estimable information about their exposure to Pillar Two in periods when the legislation is not yet in effect. They indicated that known and reasonably estimable information might change over time, and that entities should adjust their disclosures as new information about the impact of Pillar Two on their financial statements becomes available.

Overall, the Group’s discussion raised awareness of some financial reporting issues that entities should consider relating to the preparation of their 2023 year-end financial statements. No further actions were recommended to the AcSB.

¹As noted in the September 2023 IASB Staff paper (agenda reference 14B) on the Climate-related Risks in the Financial Statements project, some entities may focus on complying with specific disclosure requirements. However, they should not overlook the broader requirements of IAS 1 to provide additional disclosure when the specific requirements in IFRS Accounting Standards are insufficient to meet users’ needs (paragraph 31 of IAS 1) or to provide information that is not presented elsewhere in the financial statements but is relevant to understanding them (paragraph 112(c) of IAS 1). Refer to the IASB’s “Effects of Climate-related Matters on Financial Statements” (republished July 2023)..

²IFRS 13 establishes a fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value. Level 3 inputs, which are given the lowest priority in the fair value hierarchy, are unobservable inputs for assets and liabilities.

³Paragraph IN6 of IFRS Practice Statement 2 states: “A Practice Statement is non-mandatory guidance developed by the International Accounting Standards Board. It is not a Standard. Therefore, its application is not required to state compliance with IFRS Accounting Standards.”

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OTHER MATTERS

Financial Instruments with Characteristics of Equity

The IASB issued the Exposure Draft, “Financial Instruments with Characteristics of Equity.” The Exposure Draft proposes amendments to:

(a) IAS 32 Financial Instruments: Presentation to clarify the requirements and underlying principles for classifying financial instruments;

(b) IFRS 7 Financial Instruments: Disclosures to require disclosure about financial liabilities and equity instruments within the scope of IAS 32; and

(c) IAS 1 Presentation of Financial Statements to require separate presentation of amounts attributable to ordinary shareholders.

Canadians are encouraged to submit their comments to the IASB by March 29, 2024.

Recent IFRS Interpretations Committee (the Interpretations Committee) Tentative Agenda Decisions

Climate-related Commitments (IAS 37)

The Interpretations Committee received a request asking it to clarify:

(a) whether an entity’s commitment to reduce or offset its GHG emissions creates a constructive obligation for the entity;

(b) whether a constructive obligation created by such a commitment meets the criteria in IAS 37 for recognizing a provision; and

(c) if a provision is recognized, whether the expenditure required to settle it is recognized as an expense or as an asset when the provision is recognized.

The Interpretations Committee concluded that the principles and requirements in IFRS Accounting Standards provide an adequate basis for an entity to determine:

(a) the circumstances in which an entity recognizes a provision for the costs of fulfilling a commitment to reduce or offset its GHG emissions; and

(b) if a provision is recognized, whether the costs are recognized as an expense or as an asset when the provision is recognized.

Consequently, the Interpretations Committee tentatively decided not to add a standard-setting project to the work plan.

Disclosure of Revenues and Expenses for Reportable Segments (IFRS 8)

The Interpretations Committee received a request about how an entity applies the requirements in paragraph 23 of IFRS 8 to disclose for each reportable segment specified amounts related to segment profit or loss. The Interpretations Committee concluded 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 tentatively decided not to add a standard-setting project to the work plan.

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PRIVATE SESSION

The Group’s mandate includes assisting the AcSB in influencing the development of IFRS Accounting Standards (e.g., providing advice on potential changes to the standards). The Group’s discussion of these matters supports the Board in undertaking various activities that ensure Canadian perspectives are considered internationally. Since these discussions do not relate to assisting interested and affected parties in applying issued IFRS Accounting Standards, this portion of the Group’s meeting is generally conducted in private (consistent with the Board’s other advisory committees).

At its December 2023 meeting, the Group provided input on the following document for comment to assist in the development of the AcSB’s response letter:

IASB’s Exposure Draft, “Financial Instruments with Characteristics of Equity."

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