Commitments are items that are not reported as liabilities as of the balance sheet date. Some of these items are reported in the notes to the financial statements. Examples include non-cancelable (as at balance sheet date) binding contracts to rent space in the future or to purchase items at specified prices. Off-course the inception of the commitment is on or before balance sheet date.
A financial commitment is a commitment to an expense at a future date.
A capital commitment is the projected capital expenditure a company commits to spend on long-term assets over a period of time.
Financial statements should disclose the company or consolidated entity’s commitments that are not already included as liabilities on the balance sheet, including but not limited to:
- Long-term contractual obligations with suppliers for future purchases;
- Capital expenditure (intangible assets) commitments contracted for at the balance sheet date but not yet incurred (IAS 38 122(e));
- Capital expenditure (property plant and equipment) commitments contracted for at the balance sheet date but not yet incurred (IAS 16 74(c));
- Contractual obligations to others that will become liabilities in the future when the terms of those contracts or agreements are met;
- Unused letters of credit; and/or
- Obligations to reduce debt, maintain working capital, restrict future capital distributions, or other significant commitments arising from loan covenants.
- Commitments relating to immaterial joint ventures, disclosed in aggregate summarised financial information (IFRS 12 23)
Credit risk exposure
In addition, as part of the IFRS 7 disclosure requirements on the nature and extent of risks arising from financial instruments an entity may be exposed to credit risk on loan commitments that has to be disclosed separately for financial instruments:
- for which the loss allowance is measured at an amount equal to 12-month expected credit losses;
- for which the loss allowance is measured at an amount equal to lifetime expected credit losses and that are:
- financial instruments for which credit risk has increased significantly since initial recognition but that are not credit-impaired financial assets;
- financial assets that are credit-impaired at the reporting date (but that are not purchased or originated credit-impaired); and
- trade receivables, contract assets or lease receivables for which the loss allowances are measured in accordance with paragraph 5.5.15 of IFRS 9.
- that are purchased or originated credit-impaired financial assets. (IFRS 9 35M)
Related party transactions
If an entity has had related party transactions during the periods covered by the financial statements, it shall disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements. At a minimum, disclosures shall include:
- the amount of the transactions;
- the amount of outstanding balances, including commitments, and:
- their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and
- details of any guarantees given or received;
- provisions for doubtful debts related to the amount of outstanding balances; and
- the expense recognised during the period in respect of bad or doubtful debts due from related parties. (IAS 24 18)
Disclose the amount of its lease commitments for short-term leases accounted for applying IFRS 16 6 if the portfolio of short-term leases to which it is committed at the end of the reporting period is dissimilar to the portfolio of short-term leases to which the short-term lease expense disclosed applying IFRS 16 53(c) relates. (IFRS 16 55)
Commitments are distinct from contingencies since there is no uncertainty (so there is certainty) related to the existence of the obligation.
Examples from BHP Annual report 2018:
We have delivery commitments of natural gas and LNG in conventional petroleum of approximately 1,873 billion cubic feet through FY2031 (56 per cent Australia and Asia, 44 per cent Trinidad). We have crude and condensate delivery commitments of around 10.5 million barrels through FY 2019 (48 per cent United States, 38 per cent Australia and Asia and 14 per cent others) and LPG commitments of 271,974 metric tonnes through FY 2019. We have sufficient proved reserves and production capacity to fulfil these delivery commitments.
We have obligations for contracted capacity on transportation pipelines and gathering systems, on which we are the shipper. In FY 2019, volume commitments to gather and transport are 15 million barrels of oil and 24 million cubic feet of gas. The agreements with the gas gatherers and transporters have annual escalation clauses.
Note: applying IFRS 16 Leases would turn all these leases into on-balance liabilities.
Assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or sell goods or services are generally not recognised until at least one of the parties has performed under the agreement. For example, an entity that receives a firm order does not generally recognise an asset (and the entity that places the order does not recognise a liability) at the time of the commitment but, instead, delays recognition until the ordered goods or services have been shipped, delivered or rendered (IFRS 9.B3.1.2(b)).
If a firm commitment is a derivative instrument within the scope of IFRS 9, separate provisions apply (IFRS 9.B3.1.2(b)-(d)).
See also: https://www.ifrs.org