ACCOUNTING OF E-WASTE OBLIGATION

The E-waste (Management) Rules, 2016 (“Rules”), as amended,
impose e-waste obligations on manufacturers of electrical and electronic goods
who have placed any goods in the market in the current financial year. The
collection, storage, transportation, segregation, refurbishment, dismantling,
recycling and disposal of e-waste shall be in accordance with the guidelines
published by the Central Pollution Control Board.

The purpose of this article is not to dive deep into the
legislation, but to explain the accounting consequences with a simplified
example.

Consider a refrigerator manufacturer that has been in
manufacturing for many years; it has the following e-waste obligations under
the Rules:

If the manufacturer participated in the market in the current
financial year (2018-19), its obligation is determined with reference to 10% of
the refrigerators sold in the preceding 10^th year (2008-09) and the
cost is estimated at Rs. 50 million. As can be seen from the above table, the
liability increases substantially over the years due to volume increases (i.e.,
the number of refrigerators sold each year keeps increasing) and the percentage
applied under the Rules also increases steeply. The question that arises is, is
a provision of Rs. 4,915 million required for the year end 2018-19?

The main argument for supporting a provision of Rs. 50
million is that the obligating event is the participation in the market for the
financial year 2018-19 (the measurement period), and the cost of fulfilling the
obligation is determined by reference to the year 2008-09 under the Rules. On
this basis, the cost of obligation is Rs. 50 million, and should be provided
for, unless it has already been expended and charged to P&L.

The main argument for supporting a provision of Rs. 4,915
million is that the obligating event is all the sales made in the past, rather
than participation in the market for the current financial year. A provision of
Rs. 4,915 million will ensure that cost related to all previous years’ sales
are provided for. Accordingly, any costs including future costs for sales
already made are recognised. Consequently, the sales and the accompanying cost
of those sales are matched and recognised in the same period, thereby ensuring
that matching principles are followed.

Appendix B, Liabilities arising from Participating in a
Specific Market – Waste Electrical and Electronic Equipment of Ind AS 37 Provisions,
Contingent Liabilities and Contingent Assets deals with the accounting and
is discussed below. At a global level this issue was discussed and led to
issuance of IFRIC 6 Liabilities arising from Participating in a Specific
Market – Waste Electrical and Electronic Equipment, on the basis of which
Appendix B was developed.

What constitutes the obligating event in accordance with
paragraph 14(a) of Ind AS 37 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?

Paragraph 17 of Ind AS 37 specifies that an obligating
event is a past event that leads to a present obligation that an entity has no
realistic alternative to settling. Paragraph 19 of Ind AS 37 states that
provisions are recognised only for “obligations arising from past events
existing independently of an entity’s future actions”.

Participation in the market during the measurement period is
the obligating event in accordance with paragraph 14(a) of Ind AS 37. As a consequence, a liability for waste
management costs for historical household equipment does not arise as the
products are manufactured or sold. Since 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 unless and until a market share exists
during the measurement period.

The International Financial Reporting Interpretations
Committee (IFRIC) considered an argument that manufacturing or selling products
constitutes a past event that gives rise to a constructive obligation.
Supporters of this argument emphasise the definition of a constructive
obligation in paragraph 10 of IAS 37 and point out that in determining whether
past actions of an entity give rise to an obligation, it is necessary to
consider whether a change in practice is a realistic alternative. These
respondents believed that when it would be necessary for an entity to take some
unrealistic action in order to avoid the obligation then a constructive
obligation exists and should be accounted for.

The IFRIC rejected this
argument, concluding that a stated intention to participate in a market during
a future measurement period does not create a constructive obligation for
future waste management costs. IFRIC felt that in accordance with paragraph 19
of Ind AS 37, a provision can be recognised only in respect of an obligation
that arises independently of the entity’s future actions. If an entity has no
market share in a measurement period, it has no obligation for the waste
management costs relating to the products of that type which it had previously
manufactured or sold and which otherwise would have created an obligation in
that measurement period. This differentiates waste management costs, for
example, from warranties, which represent a legal obligation even if the entity
exits the market. Consequently, no obligation exists for the future waste
management costs until the entity participates in the market during the
measurement period.

Some constituents asked
the IFRIC 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, 20X6) 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, 20X5). The
IFRIC noted that this affects only the measurement of the liability and that
the obligating event is still participation in the market during 20X6.

The IFRIC considered whether its conclusion is undermined by
the principle that the entity will continue to operate as a going concern. If
the entity will continue to operate in the future, it treats the costs of doing
so as future costs. For these future costs, paragraph 18 of Ind AS 37
emphasises that financial statements deal with the financial position of an
entity at the end of its reporting period and not its possible position in the
future. Therefore, no provision is recognised for costs that need to be
incurred to operate in the future.

On the basis of the above discussions, under Appendix B of
Ind AS 37, a provision of only Rs. 50 million is required in 2018-19 (unless
the amount is already expended), which should be charged to the P&L.