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IAS 38 — Compliance costs for REACH

Date recorded:

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.

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