A recent IFRIC agenda decision addressed the following fact pattern:

1. an entity made a commitment in 2020 and 2021 to other parties to reduce a percentage of its carbon emissions by 2030 (referred to as a ‘2030 commitment’).
2. the entity has taken ‘affirmative actions’ and, in its view, has created an established pattern of practice to achieve its 2030 commitment. These affirmative actions include: (i) creating a transition plan; (ii) engaging with ‘net zero focused investors’; (iii) publishing its commitment and plans on its website; (iv) joining coalitions with a mission to collaborate to achieve emissions reductions; (v) stating its emission reduction targets in its financial statements and in presentations to investors and others; and (vi) allocating capital to buying carbon credits and investing in ‘innovation programs’ purposed to find solutions to reduce emissions to meet its 2030 commitment.
3. the entity’s innovation programs will typically involve creating teams of people with know-how, expertise and other intellectual property to create and develop solutions for emissions reductions specific to the entity or its sector and will result in the creation of intellectual capital.
4. the entity’s investors, insurers and bankers have made their own transition commitments relying on the entity’s actions.
5. the entity has concluded that its 2030 commitment and subsequent affirmative actions have created a constructive or legal obligation applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

Regarding that last point, you’ll recall that IFRIC previously determined that if an entity has such a constructive or legal obligation, it considers the criteria in IAS 37.14 in determining whether it recognizes a provision for the costs of fulfilling that obligation, separately assessing whether it recognizes a related asset or expense. A request to the committee asked whether, in the fact pattern set out above, the entity’s acquisitions of carbon credits and expenditure on research activities and development activities meet the requirements in IAS 38 to be recognised as intangible assets during its 2024 annual reporting period.

The Committee ducked the part of the question relating to carbon credits, as the IASB is already studying that area, and just addressed the expenditure on research and development, concluding simply: “Evidence gathered by the Committee indicated no material diversity in the accounting for expenditure on research activities and development activities. Based on its findings, the Committee concluded that the matter described in the request does not have widespread effect. Consequently, the Committee decided not to add a standard-setting project to the work plan.”

An underlying staff paper indicates that the initial tentative agenda decision along those lines attracted broad agreement. One respondent said that “any differences in accounting practice for expenditure on research and development activities likely arise from entities’ judgment based on their specific situations and practices in their industries. This respondent says existing requirements in IAS 38 provide a sufficient basis for an entity to determine whether expenditures are to be recognized as intangible assets.” Along similar lines, another says “there is currently no specific guidance in IAS 38 on research and development expenses for any industry or activity in particular, and, in their view, there is no reason to develop specific guidance pertaining to climate-related expenditure. This respondent says any necessary amendment or implementation examples would best be considered as part of the IASB’s ongoing intangibles project.”

Others noted more guidance might be required in the future. One respondent said “there is uncertainty about the potential impact of incorporating carbon-related innovation programs into the existing framework of IAS 38, which might affect financial statement comparability across entities. This respondent says more evidence might be needed to assess whether this trend (in future) introduces significant divergence in practice.” And another: “while currently there might not be much diversity in practice, as more entities begin to make climate-related commitments, ‘the accounting implications are likely to come to the fore and we foresee a critical tipping point on this topic not being too far off into the future.’” Another asked the IASB “as part of its intangible assets project, to at least develop illustrative examples focusing on the application of the development phase capitalization criteria in the context of climate-related expenditures. (Such) examples would help ensure consistency in how entities account for such expenditures, thereby avoiding potential diversity in practice.”

The initial submission to the committee, by the organization Rethinking Capital, is quite detailed and in itself provides a useful reference in thinking about the kind of (in its terminology) intellectual capital that might be created under climate-related innovation programs and in working through the accounting treatment under IAS 38. As with many IFRIC agenda decisions then, the conclusion of “no material diversity” existing in this area and of there being no need for a standard-setting project shouldn’t be taken to mean everything is clear and easy; rather, it’s that the way in which it might be challenging is already adequately mapped out…

The opinions expressed are solely those of the author.