Let’s return to IFRIC’s recent tentative agenda decision on climate-related commitments.

As we addressed here, the agenda decision states that an entity’s commitment to reduce or offset its greenhouse gas emissions could in some circumstances create a constructive obligation that meets the criteria under IAS 37 for recognizing a provision. Some commenters saw this as a significant step toward tackling an existing expectation gap; on the other hand, we noted a possibility that in practice it might amount to less than hoped for. Some of the comment letters subsequently received could support the latter view; this for instance is from KPMG:

• We agree with the Committee’s analysis and conclusion that an entity that makes a public statement about net-zero targets and plans, performs an assessment to determine if a present obligation exists and if the specific criteria are met at a reporting date to recognize a liability. In particular, we agree that judgement would be required to conclude whether the entity’s statement that it will reduce or offset its emissions creates a valid expectation that it will fulfil its commitment – and hence creates a constructive obligation.
• …We also agree with the Committee’s conclusion that in the specific fact pattern discussed, there is no present obligation as a result of a past event at the point in time the entity makes its public statement – neither for the costs to modify its manufacturing methods in the future, nor for the surrender of carbon credits required to offset greenhouse gases it will emit in the future. Therefore, there is no liability to recognize, at that date, in the specific fact pattern discussed.

KPMG’s submission is just two concise pages; coincidentally or not, that’s exactly the same length as the comment letters submitted by the other major firms (excluding, in Deloitte’s case, a brief appendix of suggested drafting changes). Like those other letters, it’s framed as an expression of support for the analysis, while indicating that in many (or most?) specific cases, an entity’s assessment of the matter might often lead to the conclusion that no obligation exists. This is from EY:

• We agree with the technical analysis and the conclusion reached in the Tentative Agenda Decision (TAD), which is consistent with our understanding of both the current IAS 37 requirements and current practice. We acknowledge that there is sometimes a misunderstanding about the trigger for recognition of a liability. Therefore, the TAD is helpful in clarifying that, under IAS 37, a public statement by an entity is not sufficient, on its own, to trigger the recognition of a liability…

And likewise PwC, going out of its way to be convivial:

• We would like to extend our appreciation to the Committee for engaging in a comprehensive discussion on a matter that is growing in significance for companies that are making commitments pertaining to their carbon footprint. We acknowledge the importance for entities to consider sustainability-related liabilities and related disclosures that comply with the requirements of IFRS® Accounting Standards.
• We agree with the Committee’s analysis reflected in the TAD. We believe that the TAD reflects the application of the existing principles in IAS 37…

Like many respondents, PwC suggested that more guidance might be helpful on some key points:

• A key area of judgement related to climate-related commitments is whether a constructive obligation exists; it will be helpful if the International Accounting Standards Board could include some factors that an entity might consider in making this judgement as part of (targeted improvements to IAS 37).

And Deloitte made another commonly-raised point:

• This issue highlights the need for connectivity between broader corporate reporting (including sustainability reporting) and information in the financial statements to, in this case, provide clarity for the broad range of interested stakeholders on whether statements made as part of a sustainability report do, or validly do not, affect the recognition and measurement of items in the financial statements. We urge the International Accounting Standards Board (the IASB) to accelerate its project on climate-related and other uncertainties in financial statements and, in collaboration with the International Sustainability Standards Board, to focus on the interaction between those disclosures and the information provided by sustainability reporting.

Overall, the comment letters yielded a very high degree of consensus on the appropriateness of IFRIC’s basic analysis – far more than Rethinking Capital, who originally submitted the issue, had expected (they had said “we expect the global audit firms and probably companies in the so-called ‘hard to abate’ sectors to (a) raise technical concerns on the decision (though the uncertainty of the fact pattern used may argue against this because uncertainty will encourage the status quo) and/or (b) argue for a 2 or 3 year transition period…”). But that doesn’t necessarily indicate an imminent closing of the “expectation gap” in this area, and could even suggest it will continue for years to come…

The opinions expressed are solely those of the author.