Go To List of IFRIC Issues

Issue Description:

How to account for costs incurred to comply with the requirements of the European Commission Regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). The Regulation came into force in part on 1 June 2007, and was binding immediately on Member States.

Discussion at the July 2008 IFRIC Meeting

REACH is an EU regulation on the Registration, Evaluation, Authorisation, and Restriction of Chemicals.

At this meeting, the IFRIC considered a request that it provide guidance on the treatment of costs incurred to comply with the requirements of the European Commission Regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). The Regulation came into force in part on 1 June 2007, is binding immediately on Member States, and companies have begun to account for the first costs incurred to comply. Diversity in practice has arisen.

The staff noted that they had not completed their information gathering and analysis of this issue, but that their preliminary assessment was to recommend tentatively adding the issue to the agenda. IFRIC members agreed, noting that the retrospective cost of new regulation was a generic issue faced by entities in a variety of jurisdictions. The staff noted that scoping the issue would be critical, and that the costs of implementing the REACH Regulation could be used as examples, rather than scope the issue to address REACH specifically.

The staff will return with scope recommendations at the September 2008 IFRIC meeting.

Discussion at the November 2008 IFRIC Meeting

The staff introduced a paper on accounting for costs incurred to comply with the requirements of the European Regulation concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH). The IFRIC in July 2008 tentatively agreed to add the issue to its agenda and asked the staff to provide additional analysis on the basis of broader principles. The purpose of this session was to make a decision whether the item meets the IFRIC's criteria for adding it to the agenda in the light of the analysis provided by the staff.

The staff continued to introduce the background and regulation mechanisms of REACH noting that entities that have to comply with the regulation would regularly incur significant costs, particularly in connection with the technical dossier and safety tests required by the regulation. This was confirmed by some of the IFRIC members.

The staff noted that there is no specific guidance in IFRSs that would address schemes like REACH. The key accounting issues identified were:

• Should a provision for expected REACH costs be recognised?
• Should REACH costs be expensed or capitalised as an intangible asset?

Regarding the first issue it was noted that there was general consensus amongst constituents that expected REACH costs should not be provided for.

On the second issue the IFRIC had a discussion over how to distinguish between REACH costs and other costs of compliance if one would go down a capitalisation route.

Again, it was confirmed that the costs are generally significant (ranging between 50.000 to 1 million per substance), leading entities to gather in consortia to share costs. Another IFRIC member noted that the first couple of years will be particularly significant when companies have to register existing substances.

Many IFRIC members asked whether there was a distinguishing feature of REACH costs compared to general compliance costs and whether such a feature could be used for developing a wider principle for a wider range of situations. One IFRIC member noted that one such feature could be that the registration is specific to the contract. Members acknowledged that a wide range of such regulation schemes existed across the globe.

The Chairman reminded the IFRIC that addressing a jurisdictional matter without an underlying principle would lead to further submissions that could not be turned down because they are jurisdiction-specific.

There was some uncertainty around the table about the mechanism of REACH when a substance was actually registered. Some believed other market participants could then use the substance without further costs. Others opposed to this. The staff was asked to follow up on this.

The IFRIC then turned to the question on how to proceed with this issue. Some wanted to expand the scope of the issue others tried to narrow it down with the intent to find a consensus on a timely basis. It was agreed that any narrow scope should be 'natural' and not artificial.

The staff was asked to bring this issue back and find characteristics based on the REACH scheme that would be a starting point for the scope of a potential project. It was also asked to look at cost-sharing agreements in consortia and also whether an asset exists.

Discussion at the July 2009 IFRIC Meeting

At its July 2009 meeting, the IFRIC decided not to add the issue to its agenda. The IFRIC noted that IAS 38 includes definitions and recognition criteria for intangible assets that provide guidance to enable entities to account for the costs of complying with the REACH regulation. The IFRIC concluded that any guidance it could develop beyond that already given would be more in the nature of implementation guidance than an interpretation.