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 February 2022, a tentative agenda decision was published in response to the submission.

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 are 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 but gave some suggestions on drafting. The staff had edited the draftings according to some Committee members' suggestions and analysed the implications of the consensus in IFRIC 6 Liabilities arising from Participating in a Specific Market—Waste Electrical and Electronic Equipment in an appendix to the paper which was further discussed in the February 2022 meeting and the Committee decided to finalise the agenda decision with proposed refinements to the draftings.

21 comment letters were received. Most respondents agreed (or did not disagree) with the Committee’s conclusions and tentative decision not to add the matter to its standard-setting agenda but commented on various aspects of the analysis. Three respondents disagreed with the Committee's conclusion and tentative agendadecision.

Staff recommendation

The staff recommended finalising the agenda decision as published in IFRIC Update in February 2022 but redrafted based on suggestions from respondents.  

Committee discussion

Most of the Committee members considered that the paper is educational and well-drafted in addressing the difficult issue submitted. In particular, they appreciated the explanation of the need to distinguish between actions that create the obligation and actions that settle the obligation in the agenda paper because it makes the assessment clearer in going through the requirements in IAS 37. They also welcomed the reconciliation in the fact pattern submitted to IFRIC 6, IFRIC 21 and the Illustrative Examples 6 and 11B of IAS 37 as the material  is helpful in explaining that the application is consistent.

Some Committee members still disagreed or struggled to agree with the technical analysis that there must be a provision once there is an event creating the obligation. They considered "the ability to stop operations" or "accepting sanctions" could be alternatives in order to avoid outflow of economic resources. Therefore, what is laid out in the agenda decision could be one way but not the only way to interpret whether a provision should be recognised. Moreover, they were of the view that only when the sanction is robust enough to create an economic compulsion to settle the liability, a provision would be required. This is because the entity would need to settle the obligation when there is no realistic alternative. The staff responded that the assessment of whether accepting sanctions is a realistic alternative would require judgement and the agenda decision does not give the answer to this. It only states that there would be an obligation in a scenario where accepting sanctions is not a realistic alternative.

There was an extensive discussion on whether there is a liability in the interim periods if an entity has a negative credit balance at an interim period end but expected to generate positive credits in the remainder of the calendar year to achieve a net positive credit balance at the end of a calendar year. Some Committee members considered no provision should be made because the criteria "probable that an outflow of resources" under IAS 37:14 for a provision to be recognised is not met. However, other Committee members thought that the obligation exists whenever the entity generated a negative credit, while the subsequent generation of positive credits will settle the obligation created. Therefore, a provision should be recognised at any time as long as the event which creates the obligation occurs. One Committee member pointed out that in assessing whether a provision should be recognised at a certain point in time depends on whether the obligation to settle arises once a negative credit is created or on whether an entity is required to settle the cumulative net negative credit balances at the end of a calendar year. In the fact pattern submitted, the government is measuring the cumulative negative balance at the end of the calendar year. Therefore, the staff suggested the tentative agenda decision not to explicitly discuss the implication for interim period ends.

Committee decision

The Committee decided by a vote of 11 out of 14 to finalise the agenda decision and 12 out of 14 Committee members agreed with the amendments to the drafting of the agenda decision.

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