When companies need to recognize a provision for a net-zero commitment

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A company needs to consider the nature of its net zero commitment, how it will deliver it and the potential financial reporting impact.

In brief
  • Focus on connectivity between financial disclosures and net-zero reporting will add clarity to how sustainability matters feature in financial statements.
  • The IASB ratified an IFRS IC agenda decision on whether a company’s greenhouse gas emissions commitment creates a constructive obligation under IAS 37.

Many companies have publicly pledged to reduce their carbon footprint and achieve other sustainability goals. As they enhance their sustainability disclosures in the annual report and via other means, there is now a growing focus on the connectivity between sustainability information and financial information. In response to two submissions, the International Accounting Standards Board's (IASB) IFRS Interpretations Committee (the Committee) recently released an agenda decision on whether a company’s commitment to reduce or offset its greenhouse gas emissions creates a constructive obligation for it and, if so, whether that constructive obligation meets the criteria in IAS 37 Provisions, Contingent Liabilities and Contingent Assets for recognizing a provision. The agenda decision was ratified by the IASB in April 2024.

In the fact pattern submitted to the Committee, a manufacturer of household products publicly states its commitment to gradually reduce its annual greenhouse gas emissions by at least 60% of their current level by a specific year and to offset its remaining annual emissions in that year and subsequently, by buying carbon credits and retiring them from the carbon market.

To support its statement, the company publishes a transition plan setting out how it will gradually achieve the 60% reduction in its annual emissions by modifying and investing in more energy efficient manufacturing processes and sourcing alternative materials with a lower-carbon footprint. Management is confident that the company can make all of these modifications and continue to trade profitably. In addition to publishing the transition plan, the company takes several other actions that publicly affirm its intention to fulfil its commitments.

Existence of a constructive obligation

The Committee considered the definition of a constructive obligation in IAS 37 in its recent meetings. It observed that whether a company creates a valid expectation that it will fulfill a commitment to reduce or offset its emissions by stating its commitment, and hence, creating a constructive obligation to do so, will depend on the facts of the commitment and the circumstances surrounding it. This would include any actions the company has taken that publicly affirm its intention to fulfill the commitment. If the facts or circumstances change from one reporting date to the next, so too could the conclusion.

Management would apply judgement to reach a conclusion at each reporting date considering all relevant facts and circumstances existing at that date.  

Recognition of a provision

A company recognizes a provision under IAS 37 when it has a present obligation (legal or constructive) as a result of a past event and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. In addition, the amount of the obligation would need to be reliably estimable. Under IAS 37, no provision is recognized for costs that need to be incurred to operate in the future. Only those obligations arising from past events existing independently of a company’s future actions are recognized as provisions.


The Committee concluded that the company does not recognize a provision when it makes the statement. At that time, the constructive obligation is not a present obligation as a result of a past event. The costs that the company will incur to reduce its annual greenhouse gas emissions and to offset the greenhouse gases it emits, are costs that it will need to incur to operate in the future. Therefore, the obligations for those costs do not exist independently of the company’s future actions.


As the company carries out its transition plan to reduce emissions, it will receive other resources (such as fixed assets and inventories) in exchange, and will be able to use these resources to manufacture products it can sell at a profit. Settling the constructive obligation (if any) to reduce the company’s annual greenhouse gas emissions will not require an outflow of resources embodying economic benefits. Therefore, in this situation, the criteria to recognize a provision are not met. However, when the company has emitted the greenhouse gases it has committed to offset, settling that obligation will require an outflow of resources embodying economic benefits through buying and retiring carbon credits. The company will not receive any resources embodying economic benefits in exchange. In this situation, a provision is recognized only when other criteria have been fulfilled after the emission. 

The events that create a present obligation are those to which the law, policy or statement applies, and those events have not occurred at the time the company states its commitment.

Focus on connectivity

In light of expanding sustainability disclosures being made by companies, regulators, investors and other users of financial statements expect companies to be transparent about the impact of various sustainability issues on a company’s financial performance. An illustration of where a company needs to be transparent might be a transition plan to retire existing fixed assets earlier, which may shorten their remaining useful lives and may trigger impairment analysis. The cost of financing may also be tied to the company’s sustainability initiatives, subject to disclosures in the notes to the financial statements. While there are no specific accounting standards on sustainability under IFRS, sustainability is relevant across a large number of accounting standards and a company needs to appropriately reflect sustainability in the recognition, measurement, presentation and disclosures in the financial statements.

Monitor emerging accounting issues arising from sustainability matters

Sustainability developments in recent years have also highlighted emerging accounting issues including those related to net-zero commitments as discussed above. The agenda decision demonstrates that a commitment to reduce emissions is accounted for differently than a commitment to offset emissions. Management will need to monitor standard setting developments on these issues and follow related regulatory actions as sustainability looks set to remain a hot topic in the foreseeable future.


As businesses publicly give increasing prominence to their net-zero ambitions, so too the need for connectivity of sustainability information and financial information grows. The IFRS Interpretations Committee’s decision on whether a company’s statement of its commitment to cut or offset its future carbon emissions from their current level creates a constructive obligation for the company, and, if so, whether a provision needs to be recognized by the company will require judgement of facts and circumstances.

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