1934 Chapter 27
the project to its research pipeline. The Board planned no immediate further work on
the project, but expected to carry out work on the project before the next agenda
consultation, which is expected in 2021.29
In the meantime, entities can either:
(a) apply IFRIC 3, which despite having been withdrawn, is considered to be an
appropriate interpretation of existing IFRS; or
(b) develop its own accounting policy for cap and trade schemes based on the
hierarchy of authoritative guidance in IAS 8.
A more detailed discussion of the issues and methods applied in practice is covered in
Chapter 17 at 11.2.
6.6
Green certificates compared to emissions trading schemes
Some countries have launched schemes to promote the production of power from
renewable sources based on green certificates – also known as renewable energy
certificates (RECs), green tags, or tradable renewable certificates.
In a green certificates system, a producer of electricity from renewable sources is
granted certificates by the government based on the power output (kWh) of green
electricity produced. These certificates may be used in the current and future
compliance periods as defined by the particular scheme. The certificates can be sold
separately. Generally the cost to produce green electricity is higher than the cost of
producing an equivalent amount of electricity generated from non-renewable sources,
although this is not always the case. Distributors of electricity sell green electricity at
the same price as other electricity.
In a typical green certificates scheme, distributors of electricity to consumers
(businesses, households etc.) are required to remit a number of green certificates based
on the kWh of electricity sold on an annual basis. Distributors must therefore purchase
green certificates in the market (such certificates having been sold by producers). If a
distribution company does not have the number of required certificates, it is required
to pay a penalty to the environmental agency. Once the penalty is paid, the entity is
discharged of its obligations to remit certificates.
It is this requirement to remit certificates that creates a market in and gives value to
green certificates (the value depends on many variables but primarily on the required
number of certificates that have to be delivered relative to the amount of power that is
produced from renewable sources, and the level of penalty payable if the required
number of certificates are not remitted).
There are similarities between green certificates and emission rights. However, green
certificates are granted to generators of cleaner energy as an incentive for ‘good’ production
achieved, irrespective of whether or not there is a subsequent sale of that cleaner energy to
an end consumer. For a distributor of energy, a green certificate gives a similar ‘right to
pollute’ as an emission right except that a distributor of energy under a green certificate
regime must acquire the certificates from the market (i.e. they are not granted to the
distributor by the government). As with emission rights, the topic of green certificates cuts
across a number of different areas of accounting, not just provisions. A more detailed
discussion of the issues and methods applied in practice is covered in Chapter 17 at 11.3.
Provisions, contingent liabilities and contingent assets 1935
6.7
EU Directive on ‘Waste Electrical and Electronic Equipment’
(IFRIC 6)
This Directive regulates the collection, treatment, recovery and environmentally sound
disposal of waste electrical or electronic equipment (WE&EE).30 It applies to entities
involved in the manufacture and resale of electrical or electronic equipment, including
entities (both European and Non-European) that import such equipment into the EU.
As member states in the EU began to implement this directive into their national laws,
it gave rise to questions about when the liability for the decommissioning of WE&EE
should be recognised. The Directive distinguishes between ‘new’ and ‘historical’ waste
and between waste from private households and waste from sources other than private
households. New waste relates to products sold after 13 August 2005. All household
equipment sold before that date is deemed to give rise to historical waste for the
purposes of the Directive. [IFRIC 6.3].
The Directive states that the cost of waste management for historical household
equipment should be borne by producers of that type of equipment that are in the
market during a period to be specified in the applicable legislation of each Member State
(the measurement period). The Directive states that each Member State shall establish
a mechanism to have producers contribute to costs proportionately ‘e.g. in proportion
to their respective share of the market by type of equipment.’ [IFRIC 6.4].
The Interpretations Committee was asked to determine in the context of the
decommissioning of WE&EE what constitutes the obligating event in accordance with
paragraph 14(a) of IAS 37 (discussed at 3.1.1 above) for the recognition of a provision for
waste management costs:
• the manufacture or sale of the historical household equipment?
• participation in the market during the measurement period?
• the incurrence of costs in the performance of waste management activities?
[IFRIC 6.8]
IFRIC 6 was issued in September 2005 and provides guidance on the recognition, in the
financial statements of producers, of liabilities for waste management under the EU
Directive on WE&EE in respect of sales of historical household equipment. [IFRIC 6.6].
The interpretation addresses neither new waste nor historical waste from sources other
than private households. The Interpretations Committee considers that the liability for
such waste management is adequately covered in IAS 37. However, if, in national
legislation, new waste from private households is treated in a similar manner to
historical waste from private households, the principles of IFRIC 6 are to apply by
reference to the hierarchy set out in IAS 8 (see Chapter 3 at 4.3). The IAS 8 hierarchy is
also stated to be relevant for other regulations that impose obligations in a way that is
similar to the cost attribution model specified in the EU Directive. [IFRIC 6.7].
IFRIC 6 regards participation in the market during the measurement period as the
obligating event in accordance with paragraph 14(a) of IAS 37. Consequently, a liability
for waste management costs for historical household equipment does not arise as the
products are manufactured or sold. Because the obligation for historical household
equipment is linked to participation in the market during the measurement period,
rather than to production or sale of the items to be disposed of, there is no obligation
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unless and until a market share exists during the measurement period. It is also noted
that the timing of the obligating event may also be independent of the particular period
in which the activities to perform the waste management are undertaken and the related
costs incurred. [IFRIC 6.9].
The following example, which is based o
n one within the accompanying Basis for
Conclusions on IFRIC 6, illustrates its requirements.
Example 27.19: Illustration of IFRIC 6 requirements
An entity selling electrical equipment in 2017 has a market share of 4 per cent for that calendar year. It
subsequently discontinues operations and is thus no longer in the market when the waste management costs
for its products are allocated to those entities with market share in 2019. With a market share of 0 per cent
in 2019, the entity’s obligation is zero. However, if another entity enters the market for electronic products
in 2019 and achieves a market share of 3 per cent in that period, then that entity’s obligation for the costs of
waste management from earlier periods will be 3 per cent of the total costs of waste management allocated
to 2019, even though the entity was not in the market in those earlier periods and has not produced any of the
products for which waste management costs are allocated to 2019. [IFRIC 6.BC5].
The Interpretations Committee concluded that the effect of the cost attribution model specified in the
Directive is that the making of sales during the measurement period is the ‘past event’ that requires
recognition of a provision under IAS 37 over the measurement period. Aggregate sales for the period
determine the entity’s obligation for a proportion of the costs of waste management allocated to that period.
The measurement period is independent of the period when the cost allocation is notified to market
participants. [IFRIC 6.BC6].
Some constituents asked the Interpretations Committee to consider the effect of the
following possible national legislation: the waste management costs for which a
producer is responsible because of its participation in the market during a specified
period (for example 2019) are not based on the market share of the producer during that
period but on the producer’s participation in the market during a previous period (for
example 2018). The Interpretations Committee noted that this affects only the
measurement of the liability and that the obligating event is still participation in the
market during 2019. [IFRIC 6.BC7].
IFRIC 6 notes that terms used in the interpretation such as ‘market share’ and
‘measurement period’ may be defined very differently in the applicable legislation of
individual Member States. For example, the length of the measurement period might be
a year or only one month. Similarly, the measurement of market share and the formulae
for computing the obligation may differ in the various national legislations. However, all
of these examples affect only the measurement of the liability, which is not within the
scope of the interpretation. [IFRIC 6.5].
6.8
Levies imposed by governments
When governments or other public authorities impose levies on entities in relation to
their activities, as opposed to income taxes and fines or other penalties, it is not always
clear when the liability to pay a levy arises and a provision should be recognised.
In May 2013, the Interpretations Committee issued IFRIC 21 to address this question.
[IFRIC 21.2, 7]. The Interpretation does not address the accounting for the costs arising out
of an obligation to pay a levy, for example to determine whether an asset or expense
should be recorded. Other standards should be applied in this regard. [IFRIC 21.3].
Provisions, contingent liabilities and contingent assets 1937
The Interpretation became mandatory for accounting periods beginning on or after
1 January 2014, although it permitted earlier application. [IFRIC 21.A1]. It requires that, for
levies within its scope, an entity should recognise a liability only when the activity that
triggers payment, as identified by the relevant legislation, occurs. [IFRIC 21.8].
6.8.1
Scope of IFRIC 21
A levy is defined as an outflow of resources embodying economic benefits that is
imposed by governments on entities in accordance with legislation, other than:
(a) those outflows of resources that are within the scope of other Standards (such as
income taxes that are within the scope of IAS 12); and
(b) fines or other penalties that are imposed for breaches of the legislation. [IFRIC 21.4].
In addition to income taxes (see Chapter 29) and fines, the Interpretation does not apply
to contractual arrangements with government in which the entity acquires an asset (see
Chapters 17 and 18) or receives services; and it is not required to be applied to liabilities
that arise from emission trading schemes (see 6.5 above). [IFRIC 21.5, 6]. Although IFRIC 21
does not apply to income taxes in scope of IAS 12, the Interpretations Committee
concluded in 2006 that any taxes not within the scope of other standards (such as
IAS 12) are within the scope of IAS 37. Therefore such taxes may be within the scope of
IFRIC 21. [IFRIC 21.BC4].
IFRIC 21 was developed to address concerns over the timing of recognition for
government-imposed levies in which the obligation to pay depended upon participation
in a particular market on a specified date. However, the definition of levy in IFRIC 21
has resulted in the scope of the interpretation being broader than entities might have
expected. The term ‘levy’ may not be widely used across jurisdictions, and may be
referred to as a charge, duty or a tax, for example. However, it is not the terminology,
but the nature of the payment, that should be considered when determining if it is in the
scope of IFRIC 21.
Entities should consider all payments imposed by governments pursuant to legislation
to determine whether they are in scope of IFRIC 21. The interpretation provides a broad
definition of government, including municipal, provincial, state, federal or international
governments or government agencies or organisations controlled or administered by
government. [IFRIC 21.4].
IFRIC 21 clarifies that both levies that give rise to a liability under IAS 37, and levies
whose timing or amounts are certain are within scope of the interpretation. [IFRIC 21.2].
Therefore, the scope of IFRIC 21 is broader than IAS 37. For example, a non-refundable
fixed fee imposed by government payable at a specific date may be a levy within the
scope of IFRIC 21.
In some cases, payments may pass through one or more non-governmental bodies or
entities before being received by the government. In our view, IFRIC 21 does not
distinguish between recipients of the payment; the key factor is whether the payment
is required by law. Therefore, as long as the payments are required by law, they are
generally considered to be imposed by the government. [IFRIC 21.4].
Some of the legislation relating to payments imposed by governments can be complex,
so entities should carefully analyse the facts and circumstances to determine whether a
1938 Chapter 27
payment falls within the scope of IFRIC 21. However, where entities are making
payments for any of the following items, it may be necessary to assess for any potential
IFRIC 21 impacts:
• taxes other than income taxes, e.g. property tax, land tax and capital-based tax;
• certain fees, concessions, contributions or royalty fees imposed on industries
which are regulated by government, e.g. telecommunications, mining, airline,
&nb
sp; banking, insurance, dairy produce and energy and natural resources; and
• transaction taxes based on activity in a specified market, e.g. banking and insurance.
6.8.2
Recognition and measurement of levy liabilities
For levies within the scope of the Interpretation, the activity that creates the obligation
under the relevant legislation to pay the levy is the obligating event for recognition purposes.
[IFRIC 21.8]. In many cases this activity is related to the entity’s participation in a relevant
market at a specific date or dates. The Interpretation states that neither a constructive nor
a present obligation arises as a result of being economically compelled to continue
operating; or from any implication of continuing operations in the future arising from the
use of the going concern assumption in the preparation of financial statements. [IFRIC 21.9, 10].
When a levy is payable progressively, for example as the entity generates revenues, the
entity recognises a liability over a period of time on that basis. This is because the
obligating event is the activity that generates revenues. [IFRIC 21.11]. If an obligation to pay
a levy is triggered in full as soon as a minimum threshold is reached, such as when the
entity commences generating sales or achieves a certain level of revenue, the liability is
recognised in full on the first day that the entity reaches that threshold. [IFRIC 21.12]. If an
entity pays over amounts to government before it is determined that an obligation to
pay that levy exists, it recognises an asset. [IFRIC 21.14].
Example 27.20: A levy is triggered in full as soon as the entity generates revenues
An entity with a calendar year end generates revenues in a specific market in 2019. The amount of the levy
is determined by reference to revenues generated by the entity in the market in 2018 although the levy is only
payable when revenues are generated in 2019. The entity generated revenues in the market in 2018 and starts
to generate revenues in the market in 2019 on 3 January 2019.
In this example, the liability is recognised in full on 3 January 2019 because the obligating event, as identified
by the legislation, is the first generation of revenues in 2019. The generation of revenues in 2018 is necessary,
but not sufficient, to create a present obligation to pay a levy. Before 3 January 2019, the entity has no
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