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IAS 37 Provisions: Obligating Event in the Light of the EU Directive on Waste Electrical and Electronic Equipment

Go To List of IFRIC Issues Issue Description: Directive 2002/96/EC of the European Parliament and of the Council of 27 January 2003 requires that from 13 August 2005 producers of electrical and electronic equipment must assume responsibility for proper disposal of such equipment when it has become waste. The producers are responsible not only for ensuring that their products are handled and processed in an environmentally sound manner when they eventually become waste but also for financing the eventual disposal. Producers can meet that responsibility individually by posting financial guarantees or through a collective scheme whereby they share joint responsibility. Waste electrical and electronic equipment (WEEE) includes: large and small household appliances; IT and telecommunications equipment; consumer equipment; lighting equipment; electrical and electronic tools (with the exception of large-scale stationary industrial tools); toys, leisure and sports equipment; medical devices (with the exception of implanted and infected products); monitoring and control instruments; automatic dispensers. The accounting issue is what is the obligating event that would require a producer to accrue a provision for its obligation for proper disposal of WEEE. Discussion at the IFRIC Meeting June 2004 The IFRIC discussed the German Accounting Interpretation Committee's (AIC) draft proposals on accounting for the impacts of the EU directive and in particular when an obligating event arises. It was noted that the AIC would proceed to develop its draft interpretation based on the outcome of the discussions. The Directive requires that the costs relating to disposing of the relevant equipment are borne by those producers who are in the market when the costs are incurred. As there was uncertainty as to the workings of the directive, the IFRIC proceeded on the basis that the costs would be allocated based on the annual market share of the relevant producers. On this assumption, the IFRIC leaned toward concluding that the creation of the market share in the period in which the costs are incurred is the final aspect of the obligating event, and no provision should be recognised in prior periods. The cash outflows should, however, be considered in an impairment test on the related production assets. It was agreed that the AIC would proceed on this basis. Discussion at the IFRIC Meeting July 2004 Certain types of products bear an obligation of the producer to contribute to the cost of waste management at the end of the product's life cycle. The obligation sometimes depends on the future market share of the producer at that time. The accounting question for the producer is whether the obligating event for the waste management cost occurs (a) when the product has been put onto the market or (b) when the future market share determines the cost for waste management. The issue has arisen under EU Directive 2002/96/EC on Waste Electrical and Electronic Equipment (WEEE), which regulates the collection, treatment, recovery, and environmentally sound disposal of waste equipment. The Directive came into force on 13 February 2003. The issue has been addressed by the Accounting Interpretations Committee of the German Accounting Standards Board (AIC) which has developed a draft interpretation on WEEE in December 2003 (D-AIC-1). The draft interpretation provides guidance on applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets relating to the constitution of an obligating event. The draft proposes that if an obligation for cost of waste management depends on a participation of the producer in the future, i.e. future market share, the obligating event is the future participation in the market and not the date when the products are put onto the market. The was some debate around the specific provisions of the draft interpretation put before the IFRIC with the following notable points: IFRIC decided to rename the interpretation to 'Liabilities arising from market share'. It was decided not to include the notion of 'future' market share into the title. Although no decision was made, IFRIC members questioned whether the draft interpretation should deal with measurement issues pertaining to the obligation, as it did not seem to be part of the issue brought to them to consider. There was agreement not to mention the EU directive in the draft Interpretation but instead to use more generic wording. Discussion at the May 2005 IASB Meeting The Board was asked to approve the Interpretation on this topic developed by the IFRIC. The Board discussed the appropriateness of issuing an interpretation on such a specific matter in a particular jurisdiction. It was noted that an interpretation on this matter is also being developed by the US. The Board agreed that the interpretation was necessary and an appropriate subject matter for an IFRIC interpretation. The Board noted that the disclosure of possible future outflows which the IFRIC 'encouraged but did not require' in its basis for conclusions was inconsistent with IASB policy. Firstly, a disclosure requirement should either be contained in the authoritative pronouncement or it should be excluded, the basis for conclusions is an inappropriate place for it. Secondly, the Board has made a deliberate policy choice not to 'encourage' disclosure, and the Interpretation is inconsistent with that policy decision. Thirdly, the disclosure would be more onerous than those proposed in the proposed revisions to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. The Board note that in the Basis for Conclusions the IFRIC noted that it did not address the accounting for 'new' waste management obligations because the IFRIC believe the accounting treatment is clear. The Basis for Conclusions went on to explain what that accounting treatment should be. The Board noted this was inappropriate use of the basis for conclusions. The Board agreed to endorse the issuance of the Interpretation providing that: The interpretation would be withdrawn and incorporated into the revised IAS 37 when that document is issued as a standard; The conclusion on 'new' waste management obligations in the Basis for Conclusions is moved to the 'Background' section of the Interpretation; and The 'encouraged' disclosure is removed. The Board also agreed to recommend to the IFRIC that the transition paragraph be re-drafted to reflect that for many entities this will not be a change in accounting policy, rather it will be an election of an accounting policy for a previously un-accounted for transaction. September 2005: IFRIC 6 Issued On 1 September 2005, the IFRIC issued Interpretation 6 Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic Equipment.