The IPSASB consults on accounting for natural resources

Currently, there is no international accounting standard for natural resources.  The IPSASB responded to requests for guidance on natural resources  because of the significance of these resources in many jurisdictions and growing public concerns for sustainable management of the natural environment.

As a first step in  developing this guidance, the IPSASB issued a Consultation Paper (CP) requesting ‘respondents’ views on principles relating to the recognition, measurement, presentation and disclosure of natural resources. The CP was approved by the IPSASB in March 2022, with the final publication expected in May 2022.  Comment on the CP will be closing at the end of October 2022.

What resources are within the scope of the project?

“Natural resources”   are generally understood to be resources that exist without  humankind’s actions   Resources such as sunlight, air, water, land, all minerals, all vegetation and animal life   can be part of natural heritage or be protected in nature reserves.

The CP explains that resources within the scope of this project should:

• be a resource, i.e. capable of generating economic benefits or having service potential for the entity;
• be naturally occurring; and
• need to remain in their natural state.

Based on these attributes, subsoil resources such as metalliferous ore (mineral and metal deposits), fossil fuels (petroleum, coal, and natural gas), water and living resources, that have not been subjected to human intervention are within the scope of the project.  Human intervention entails activities that  modify the quantity and/or quality of a natural resource, such as mineral extraction or cultivation.

Even though resources such as sunlight, air or the electromagnetic spectrum are considered to be natural resources, these resources are not tangible, and entities do not have right to access them.  As a result, they are excluded from the scope of the CP.

When is a natural resource recognised?  

When a natural resource is recognised  is one of the key questions that the CP addresses.  For an entity to recognise a natural resource as an asset in its financial statements, the resource must meet the recognition criteria in the IPSAS Conceptual Framework for General Purpose Financial Reporting (Conceptual Framework).  The recognition criteria are that an item (a) must satisfy the definition of an element – in this instance, an asset; and (b) can be measured in a way that achieves the qualitative characteristics and takes account of constraints on information in general purpose financial reports.

The key consideration of whether a natural resource meets the definition of an asset  is whether the entity presently controls the resource due to a past event.  If these criteria are met, the natural resource meets the definition of an asset.  It should then be considered whether the asset can be measured  to achieve the qualitative characteristics takes account of the constraints on information in the general purpose financial reports.  

Measurement uncertainty is uncertainty over the amount of service potential or economic benefits represented by the resource.  An entity needs to select an appropriate measurement basis.  The measurement basis must reflect the uncertainty inherent within the information available at the reporting date.  This is to ensure that the natural resource is measured  to achieve the qualitative characteristics and take into account constraints on the information.

Despite there being existence uncertainty, a natural resources is not recognised if the level of measurement uncertainty is so large that the measure’s ability to achieve the qualitative characteristics, becomes questionable. In this instance, the CP proposes that information about the natural resource should be provided.

Only if the entity concludes that the level of measurement uncertainty is sufficiently low so that the recognition and measurement of the natural resource does not become questionable, will the natural resource be measured in accordance with the measurement principles in the Conceptual Framework.  

What should be presented and disclosed about natural resources?

The CP applies the recognition and measurement requirements from the Conceptual Framework to subsoil resources, water, and living resources – the natural resources that are within the scope of the CP. Based on this assessment, certain resources may meet the criteria to be recognised as assets in the financial statements. Information about these natural resources is provided in the notes, such as:

• Entity-related factors that could influence judgements about reported information.
• If applicable, the basis for what is displayed, such as the accounting policy, the measurement methods, and any measurement uncertainties.
• Information about the disaggregation of amounts displayed on the face of the statements.

These disclosures will enable users to evaluate (a) the effects of natural resource assets on the entity’s financial position, financial performance, and cash flows; and (b) the nature of, and risk and opportunities associated with natural resource assets.

For those natural resources that do not meet the definition of an asset or the recognition criteria, or for which there are measurement uncertainties, information should still be presented that explains, for example:

• The difficulties to obtain a reliable measurement that prevented recognition.
• The significance of the unrecognised natural resource in the delivery of theentity’s objectives.
• The nature and costs of activities related to the natural resources.
• Where an entity acts as custodian of a natural resource, information about the nature of its custodial responsibility, including the legislation or similar means that establishes the custodial responsibility  for the resource.

Have your say…..

The Secretariat of the ASB will submit a staff comment letter on the proposals in the CP.  Even though the CP will not be issued as a local exposure draft, interested parties can access the CP on the IPSASB’s website if they want to comment on any of the proposals.

More information on this project can be accessed at https://www.ipsasb.org/consultations-projects/natural-resources.

Disclaimer

The article has been prepared by the Secretariat of the ASB for information purposes only.  It has not been reviewed, approved, or otherwise acted on by the Board.