Negative low or new energy vehicle credits (IAS 37)

Date recorded:


In its November 2021 meeting, the Committee discussed 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.

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.

The staff concluded that an entity that has generated negative credits has an obligation that meets the definition of a liability in IAS 37, except in rare circumstances in which accepting sanctions for failing to eliminate those negative credits is a realistic alternative for that entity. Most Committee members broadly agreed with the staff conclusion. Some Committee members suggested refining the words in the tentative agenda decision and some members suggested providing an analysis of the implications of the consensus in IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment.

Staff analysis

The staff performed an additional analysis of the implications of the consensus in IFRIC 6 and concluded that it did not change their previous conclusion. The staff are of the view that the consensus in IFRIC 6, where an entity's obligation is linked solely to its market share in a future measurement and is unaffected by the entity's previous actions (production or sale of equipment), is different from the fact pattern in the submission, where the obligation is linked to the past production or import of vehicles whose average fuel emissions are higher than the government target and is the obliging event.

In addition, the staff had refined the draft tentative agenda decision taking into account comments made by the Committee members in its November 2021 meeting. The staff had: (i) clarified that the obliging event is the production or import activity, not the arrival at a negative credit position at the year-end; (ii) expanded the discussion of the nature of an entity's legal obligation and its enforceability; (iii) acknowledged that even if an entity does not have a legal obligation, it could have a constructive obligation that meets the definition of liability in IAS 37; (iv) removed the statement describing as "possibly rare" the circumstances in which accepting sanctions is a realistic alternative for an entity because they cannot be certain of that fact; (v) explained how the fact pattern differs from the fact patterns in Example 6 of IAS 37, IFRIC 6 and Example 2 in IFRIC 21; and (vi) stated explicitly that the Committee did not discuss the requirements relating to the recognition and measurement of liabilities arising from the measures.

Staff recommendation

The staff recommended publishing the tentative agenda decision with the proposed refinements to the wording.

Committee discussion

There was still a number of Committee members struggling to agree with the conclusion of the agenda decision in various aspects. They did not agree that the provision exists "independently of an entity's future action" because they considered it is the entity's decision to stay in the market (the future action) that compels the entity to pay for the obligation. Also, a few Committee members commented that the agenda decision is unclear on the interpretation of IAS 37:19 and asked whether "purely modifying future operation" could be a future action that avoids present obligation. The staff explained that it is the past event plus no realistic alternative other than settling the obligation that results in the provision. The future action only determines how the obligation is settled but does not affect whether there is a present obligation. 

In addition, regarding the analysis of "constructive obligation" under IAS 37:17, a Committee member considered it difficult to say the entity has a constructive obligation even if accepting sanctions is a realistic alternative, particularly after stating that the entity has no legal obligation. The staff replied that if the scope of enforceability is narrow, the sanction would be strong enough to compel the entity to settle the obligation, which results in a legal obligation when there is no realistic alternative to settle an obligation. Moreover, some Committee members had concerns on stating that a "public statement" is an action that has created valid expectations that the entity will eliminate negative credits to prove there is a "constructive obligation". It may result in an unintended broader implication (e.g. on public ESG measures) if it is interpreted that it is the public statement but not the past event which results in making a provision. The staff will revise the words to deliver the message that the constructive obligation is due to a past event instead of the "public statement".

A number of Committee members disagreed that the obligating event is the production or import activity throughout the year, the past event. They explained that even though negative credits appear, they could be offset by positive credits during the reporting period, and therefore only if the net balance is negative at the end of the reporting period would there be enforceability of the settlement.

A few Committee members did not agree with the "opportunity cost" approach in using future positive credits to offset the obligation. The staff responded that it would be amended to say "surrender the positive credits” rather than saying “used for another purpose”.

Regarding the query by Committee members on what is meant by "how to recognise" the obligation, the staff said the direction is not to address the measurement and will amend the wording to address this.

The remaining Committee members broadly agreed with the conclusion or made further suggestions to changes in wordings in the agenda decision.

Committee decision

The Committee decided, by a majority vote of 10, to finalise the agenda decision.

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