IFRS IC agenda decision on negative low emission vehicle credits

The IFRS Interpretations Committee (IFRS IC) has published a final agenda decision (available here) on government measures to encourage reductions in vehicle CO2 emissions. It was ratified by the International Accounting Standards Board (IASB) in July.

Keywords: Mazars, Thailand, IFRS, Low Emission Vehicle Credits, CO2, IFRS IC, CO2, IASB, IAS 37

18 October 2022

The request submitted to the IFRS IC related to government measures that apply to entities that produce or import passenger vehicles for sale. The measures operate as follows:

  • if the entity has produced or imported vehicles over the calendar year whose average CO2 emissions are lower than the target set by the government, it receives positive credits. If the average CO2 emissions are higher than this target, it receives negative credits;
  • an entity that receives negative credits for the year must eliminate them:
    • either by purchasing positive credits from entities that have a surplus;
    • or by generating positive credits itself the following year;
  • if an entity does not eliminate its negative credits, the government can impose sanctions on it. The sanctions do not take the form of fines or financial penalties, but may limit the entity’s future opportunities, e.g. by restricting its access to the market.

The Committee was asked whether an entity that has received negative credits (which must be eliminated) has a present obligation that meets the definition of a liability set out in IAS 37 – Provisions, Contingent Liabilities and Contingent Assets.

To reach its final decision, the Committee drew on the existing rules set out in the standard, and particularly the definition of a liability set out in paragraph 10 (“a liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits”). The agenda decision addresses the questions that must be considered in order to determine whether the entity has a liability:

  • Is an outflow of resources embodying economic benefits necessary to settle the obligation to eliminate negative credits?
  • What event gave rise to the present obligation to eliminate negative credits?
  • Does the entity have a realistic alternative method of settling the obligation?

In answer to the first question, the Committee pointed out that if an entity receives negative credits, it will necessarily incur an outflow of resources embodying economic benefits, regardless of what form this takes, i.e. purchasing positive credits or generating positive credits the following year. The Committee explained that in the second scenario, the entity would have been able to use the positive credits for another purpose – e.g. selling them to other entities that themselves have negative credits – if it was not required to eliminate its own negative credits.

In answer to the second question, the Committee noted that the activity that gives rise to the present obligation to eliminate negative credits is the production or import of vehicles whose average CO2 emissions (for all vehicles produced or imported over the calendar year) are higher than the government target. It also pointed out that the obligation may arise at any moment, not merely at the end of the reporting period.

Furthermore, the Committee noted that the government’s right to impose sanctions derives from the law, and the sanctions are the means by which the measures can be enforced by law. Thus, the obligation to eliminate negative credits is an enforceable legal obligation, unless accepting the sanctions is a realistic alternative for the entity. On this point, the Committee emphasised that the use of judgement is required to determine whether accepting the sanctions is a realistic alternative, depending on the type of sanctions and the specific circumstances of the entity.

If the entity concludes that it does not have a legal obligation (because accepting the sanctions is a realistic alternative), it must still consider whether it has a constructive obligation to eliminate the negative credits. The entity may have created expectations in third parties, e.g. through sufficiently clear and specific public statements, that it will eliminate these negative credits.

The Committee concluded that the existing rules set out in IAS 37 are sufficient to determine whether such measures create an obligation that would require an entity to recognise a liability. However, it did not address the issue of how such a liability should be measured, simply referring back to the general principles of the standard.