IAS 38 — Compliance costs for REACH

Date recorded:

The staff said that IFRIC must decide whether a project on compliance costs for REACH (European Commission Regulation Concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals) should be added to IFRIC's agenda.

Following the March IFRIC meeting, to identify whether there is currently divergence in practice, the staff asked the IFRIC members and a national standard setter to provide information about experience in their own organisations and country networks. From the responses received (not available to observers) the staff concluded that divergence does not seem to exist.

Most companies expense REACH costs as incurred and do not capitalise. Some based this decision on materiality, and this conclusion may change in the future if the costs increase. Other types of registration costs seem to be expensed because they are not material. Entities are using judgement to determine whether costs should be expensed or capitalised in accordance with IAS 38.

The staff view is that IAS 38 provides a sufficiently clear intangible asset definition and recognition criteria to apply to costs incurred in relation to the REACH regulation, and meeting these criteria, including the requirement to demonstrate future economic benefits, is a matter of judgement.

One IFRIC member did not fully agree with not taking the issue onto the agenda on the basis of materiality reasons. Overall, the costs of compliance with REACH are huge. The IFRIC member thought that the IFRIC should develop some guidance, or alternatively be more specific in the rejection notice as this member did not believe that IAS 38 is clear. The Chairman noted that just because something is not material now doesn't mean that IFRIC wouldn't deal with the issue.

Another IFRIC member agreed that IAS 38 was not completely clear, and the rejection notice should include appropriate references so that people could understand why it is clear. Another IFRIC member supported this, stating that the IFRIC should be more specific in the rejection notice.

The staff responded by stating that agenda decisions should not provide guidance. To that end, they would not want to provide paragraph numbers; however, they agreed that the word 'clear' could be omitted from the agenda decision.

Another IFRIC member suggested that IFRIC should take the issue onto the agenda, as IAS 38 does not help distinguish internally generated versus existing physical assets and costs associated with these. As a result they thought divergence in practice would result.

Another IFRIC member then noted that paragraph 34 of the staff paper was making a big point. The paragraph states that:

'The staff is of the view that the registration costs for existing substances would also meet the asset recognition criterion when taking any of the views above, that is even if taking view 1, the costs do not have to be expensed as incurred.'

The IFRIC member said that this paragraph is making a leap because paragraph 20 of IAS 38 allows such capitalisation only 'rarely'. We are effectively obtaining a licence to do what we are already doing. The IFRIC member queried how has 'rare' been achieved? That is, if paragraph 20 is the correct paragraph to be referring to.

Another IFRIC member then asked how can the IFRIC say that IAS 38 is clear when we have spent months deciding if it is?

Other IFRIC members supported not taking the issue on to the agenda because it would be in the form of implementation guidance, rather than saying in the agenda decision that it is 'clear'. They suggested removing the words sufficient and clear. Others agreed with this suggestion. Another IFRIC member added that the notion that people would have to apply judgement to each circumstance should also be added to the agenda decision.

The Chairman asked for a vote as to whether anyone objected to not putting the issue on the agenda. Only two IFRIC members did.

It was noted that the staff paper was very well written and provided excellent background for the issue of how to account for REACH costs. It was noted that REACH may be an issue for the educational division for producing guidance. This would not affect the IFRIC's agenda decision, however.

Revised agenda decision wording will be circulated after the meeting.

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