Negative low or new energy vehicle credits (IAS 37)

Date recorded:


The Committee received a submission asking whether an entity with negative low emission vehicle credits has a present obligation that meets the definition of a liability in IAS 37. If the answer to this question is "no", the submitter asked whether the Committee’s views would be different if the entity had entered into a binding contract to purchase positive new energy credits before the end of the reporting period the entity, but that contract is settled after the end of the reporting period.

In the fact pattern described, the entity is operating in a jurisdiction whose government has introduced measures to promote energy efficiency and reduce carbon emissions. Entities that produce or import passenger vehicles are required to sign commitments to comply with the measures. Under these measures, an entity receives positive credits at the end of a calendar year if it has produced or imported low energy vehicles and a higher number of new energy vehicles during that year. Conversely, an entity receives negative credits if it has produced or imported traditional energy vehicles or fewer new energy vehicles than the target number set by the government. An entity that receives both positive and negative credits may offset them. An entity with net negative credits is required to eliminate them by purchasing positive new energy credits from another entity. If an entity does not eliminate its negative credits by purchasing positive new energy credits, it must submit a remedial plan to the government. An entity that fails to eliminate its negative credits, although there is no direct financial penalties, may be prevented by the government from accessing the market.

Staff analysis

From the outreached performed, the respondents said that the fact pattern described is common in China, Canada, the European Union and the US but the schemes have different features. Some respondents said they expect similar fact patterns to emerge in their jurisdiction in the future. Regarding the materiality of negative energy credits arising from the scheme, there were mixed views. Many respondents commented that the accounting for such negative energy credits have diversity in practice. Some entities recognise a liability while others do not.

Based on the staff’s analysis, they conclude that in the fact pattern described in the submission an entity with net negative credits has a present obligation that meets the definition of a liability in IAS 37, except in (possibly rare) circumstances in which accepting the sanctions for non-compliance is a realistic alternative to settling the obligation.

The staff also concluded that the second question in the submission need not be considered—the existence of a binding contract does not affect the analysis, except insofar as it would provide evidence that accepting the sanctions is not a realistic alternative to settling the obligation. Entering into a binding contract to purchase credits from another party would create new rights and obligations for an entity—rights and obligations to exchange one resource (cash) for another resource (positive new energy credits). While the contract remains executory, the entity would not recognise those rights and obligations unless the contract were onerous.

Staff recommendation

For the reasons described above, the staff recommended that the Committee not add a standard-setting project to the work plan. They recommended that the Committee instead publish a tentative agenda decision that outlines whether an entity with negative low emission vehicle credits has a present obligation that meets the definition of a liability in IAS 37. In the staff’s view, the proposed tentative agenda decision (including the explanatory material contained within it) would not add or change requirements in IFRS Standards.


The discussion on whether there is a liability under IAS 37 was robust and insightful. Both proponents and opponents of the conclusion in the tentative agenda decision provided various arguments to support their views.

Most of the Committee members agreed that the entity's negative credits are generated from the past production (i.e. past event) and resulted in the entity having a present obligation owing to the society or the government. The agreed the fact pattern here is different from those in IFRIC 6 and IFRIC 21 in which the chargeable event has not yet occurred and the existence of obligation is dependent of future actions. To get to the conclusion whether there is a liability to recognise, the next question to ask is whether the entity can avoid settling the obligation. The proponents said regardless of whether the entity opts for purchasing the credit or submitting the remediation plan, there would be an outflow of resources to settle the obligation. The entity would not opt for accepting the sanction, which may result in not being able to access that market or even any activities with the government, negatively impacting their reputation or triggering going concern issues. The stakes would be too big that accepting the sanction is not a realistic alternative that an entity would take.

However, opponents of the conclusion in the tentative agenda decision of the view that the entity could avoid settling the obligation if an entity could generate positive credits naturally (i.e. the production that generates positive credits has already been planned and the entity has historically generated positive credits) through its continuous operation in the future to offset the negative credits. As at reporting period end, if the entity organically generates positive credits, the measurement of the liability would be zero and thus there would be no provision to recognise. The proponents disagreed with this and said that the ability of earning compensating credits cannot remove the current obligation. The future positive credits are like "special cash" to eliminate the negative credits. This is one kind of outflow of resources and is an opportunity cost for the entity. An entity would have to sacrifice the benefits that could be obtained from them (e.g. by selling the credits to the market).

In addition, some of the opponents said, besides the past event, the consequence (the economic compulsion in this fact pattern) should also be considered to assess whether a provision under IAS 37 is required. In the fact pattern, the government is only "allowed to" prevent the entity from accessing the market, the Committee members said the probability of such action is questionable. If the government has a chance but may not really enforce the sanction in most of the cases, the low likelihood of the government enforcing the sanctions may not be sufficient to result in a liability under IAS 37 because the criteria in IAS 37:14(b) are not met. The proponents did not agree with this argument, as they considered the ability (but not the probability) of the government to enforce the sanctions could be sufficient to result in recognising a provision.

There was also discussion about whether there is a legal or constructive obligation. Some Committee members said the obligation is only based on government guidance but not on a law established by legislation. Therefore, the enforceability of guidance is not comparable to the enforceability of law. However, Committee members and also the staff interpreted the term ‘legal obligation’ defined in IAS 37:10 more broadly. They considered that as long as the obligation derives from a contract or guidance announced by the government and the government can take action towards those not complying with it, it is considered a legal obligation. Some members said the distinction of "legal" vs "constructive" matters because the settlement method would be different in assessing the obligating event in IAS 37:17. For example, if it is considered as a legal obligation, when the government enforces the settlement and the entity chooses to exit the market, there would not be a present obligation if there is no penalty for that exit. But the staff commented that such a distinction would not affect the conclusion of whether a provision should be recognised in the fact pattern described.

The Committee decided with 12:1 votes not to add the matter to its standard-setting agenda. Also, by a vote of 13:0, the Committee members agreed with the suggested edits to the tentative agenda decision.

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