The IFRS Interpretations Committee (the “Committee”) is an interpretative body of the International Accounting Standards Board (the “IASB”) which works with the Board in supporting the application of IFRS Standards.

Agenda decisions are a way of making a statement about why a change of an IFRS Standard requirement or an interpretation of that requirement is unnecessary. They often include explanatory information that is intended to provide guidance for the consistent application of IFRS Standards. The Board expects entities to implement accounting policy changes in a timely manner if their policies are inconsistent with an agenda decision.

Merger between a parent and its subsidiary in separate financial statements

(IAS 27 Separate Financial Statements)

Published in January 2024

The Committee received a request about how a parent entity that prepares separate financial statements applying IAS 27 accounts for a merger with its subsidiary in its separate financial statements.

Fact pattern

In the fact pattern described in the request:

a) a parent entity prepares separate financial statements applying IAS 27 and recognises an investment in a subsidiary applying paragraph 10 of IAS 27.

b) the subsidiary contains a business (as defined by IFRS 3 Business Combinations); and

c) the parent entity merges with the subsidiary, resulting in the subsidiary’s business becoming part of the parent entity (merger transaction).
The Question

The request asked how the parent entity should account for the merger transaction in its separate financial statements. In particular, the request asked whether, in the context of the parent entity’s separate financial statements, the merger transaction:

a) constitutes a business combination as defined in IFRS 3 and consequently, whether an entity should apply the acquisition method (and related requirements) in IFRS 3; or

b) should not be accounted for as a business combination. Applying this view, the parent entity—in its separate financial statements—recognises the subsidiary’s assets and liabilities at the previous carrying amount.

Findings

Evidence gathered by the Committee indicates little, if any, diversity in determining whether to apply the acquisition method (and related requirements) in IFRS 3 to the merger transaction described in the request. In accounting for the merger transaction described in the request in their separate financial statements, parent entities generally do not apply the acquisition method (and related requirements) in IFRS 3.

Conclusion of the Committee

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.

The full text of this Agenda Decision can be found here.

Climate-related Commitments

(IAS 37 Provisions, Contingent Liabilities and Contingent Assets)

Published in April 2024

The Committee received a request asking it to clarify:

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

2) whether a constructive obligation created by such a commitment meets the criteria in IAS 37 for recognising a provision; and

3) if a provision is recognised, whether the corresponding amount is recognised as an expense or as an asset when the provision is recognised.

The Committee considered this request by reference to the following fact pattern.

Fact pattern

In 20X0 an entity, a manufacturer of household products, publicly states its commitment:

a) to gradually reduce its annual greenhouse gas emissions, reducing them by at least 60% from their current level by 20X9; and

b) to offset its remaining annual emissions in 20X9 and in subsequent years by buying carbon credits and retiring them from the carbon market.

To support its statement, the entity publishes a transition plan setting out how it will gradually modify its manufacturing methods between 20X1 and 20X9 to achieve the 60% reduction in its annual emissions by 20X9. The modifications will involve investing in more energy-efficient processes, buying energy from renewable sources and replacing existing petroleum-based product ingredients and packaging materials with lower-carbon alternatives. Management is confident that the entity can make all these modifications and continue to sell its products at a profit.

In addition to publishing the transition plan, the entity takes several other actions that publicly affirm its intention to fulfil its commitments.

Findings

ad 1) Does the entity have a constructive obligation?

The Committee analysed Paragraphs 10 and 20 of IAS 37 and observed that whether an entity’s statement of its commitment to reduce or offset its emissions creates a valid expectation that it will fulfil the commitment—and hence creates a constructive obligation to do so—depends on the facts of the commitment and the circumstances surrounding it, including any actions the entity has taken that publicly affirm its intention to fulfil the commitment. Management would apply judgement to reach a conclusion at each reporting date considering all relevant facts and circumstances existing at that date. If the facts or circumstances change from one reporting date to the next, so too could the conclusion. If the entity’s statement has not created a constructive obligation, the entity does not recognise a provision. If the entity’s statement has created a constructive obligation, the next question to consider is whether that obligation satisfies the criteria for recognising a provision.

ad 2) Does the constructive obligation satisfy the criteria for recognising a provision?

After detailed analysis, the Committee concluded that if the entity’s statement of its commitment creates a constructive obligation:

i. The entity does not recognise a provision when it makes the statement in 20X0. At that time, the constructive obligation is not a present obligation as a result of a past event.

ii. The entity does not recognise a provision between 20X0 and 20X9 because it does not have a present obligation as a result of a past event until it has emitted the greenhouse gases it has committed to offset.

iii. As the entity emits greenhouse gases in 20X9 and in subsequent years, it will incur a present obligation to offset these past emissions. If the entity has not yet settled that obligation and a reliable estimate can be made of the amount of the obligation, the entity recognises a provision.

Ad 3) If a provision is recognised, is the corresponding amount recognised as an expense or as an asset when the provision is recognised?

The Committee observed that if a provision is recognised, the corresponding amount is recognised as an expense, rather than as an asset, unless it gives rise to—or forms part of the cost of—an item that qualifies for recognition as an asset in accordance with an IFRS Accounting Standard.

Conclusion

The Committee concluded that the principles and requirements of IFRS Accounting Standards provide an adequate basis for an entity to answer all three questions. Consequently, the Committee decided not to add a standard-setting project to the work plan.
The full text of this Agenda Decision can be found here.

Sources: Compilation of Agenda Decisions (Volume 10)