The introduction of the UK’s Extended Producer Responsibility (EPR) scheme has brought with it significant financial implications and a degree of regulatory uncertainty that businesses must now navigate. As the EPR scheme for packaging comes into effect, businesses are having to contend with operational compliance. But it is the financial reporting consequences that are raising some important questions for their finance teams. Whilst the environmental rationale for such a scheme is clear - the accounting treatment, particularly under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, is generating the most discussion. The treatment under Section 21 Provisions and Contingencies of FRS 102 will be the same as for IAS 37.

This article explores the foundation of the current accounting guidance and considers whether change may be on the horizon.

What is packaging EPR and which businesses are affected?

Packaging EPR transfers the financial responsibility of managing household packaging waste from local authorities to the businesses that place packaging on the market. Under these regulations, large producers are now responsible for covering the full net cost of managing household packaging waste.

To fall within the scope of the EPR regulations, a business must meet specific thresholds:

• Large producers: Turnover of £2m or more and handle 50 tonnes or more of packaging annually.
• Small producers: Turnover of £1m to £2m and handle 25 to 50 tonnes of packaging annually.

Large and small producers must report packaging data, but only the large producers are subject to disposal cost fees. These thresholds apply to the ‘producer year’ which runs from 1 January to 31 December.

The regulations are somewhat unclear, but the Department for Environment, Food and Rural Affairs (DEFRA) has confirmed that when a business meets the threshold criteria during a producer year, it will be required to submit packaging data. However, it will only be a ‘liable producer’ if it is still a ‘producer’ for any part of the ‘assessment year’ (the period 1 April to 31 March). A ‘liable producer’ is required to pay the disposal fees, which are based on the producer’s packaging data submitted for the previous producer year and costs as defined by the legislation.

Why should businesses pay attention to packaging EPR?

The financial impact of EPR is not limited to cash outflow. It also affects how and when a liability for the disposal fees is reflected in the financial statements, with the timing of the recognition requiring careful consideration. This can impact the reported performance of a business significantly.

When do businesses have an obligation to recognise disposal fees?

EPR is increasingly surfacing in our conversations, with many businesses saying that the timing of recognising the liability and costs is unclear.

At the heart of many of these conversations is the question: “when does the obligation arise?” with businesses wanting to understand when they are required to recognise the disposal fees.

IAS 37 sets out the criteria that must be met for a provision to be recognised. One of these requirements is that the business must have a ‘present obligation’. The ICAEW and others recently published views on the matter.

The consensus is that the triggering event for a present obligation is being a liable producer. This is based on the regulations and DEFRA’s confirmation that, to be liable for disposal fees relating to a producer year, the business must be a producer for some part of the assessment year.

This means that for most businesses, the obligation will arise on 1 April, the start of the assessment year, despite the packaging that was placed into the market in the previous producer year being an input to the amount of the obligation. This approach is consistent with the concept of a ‘present obligation’, especially as set out in IFRIC 21 Levies, an interpretation issued by the IFRS Interpretations Committee in 2013.

Are changes to IAS 37 on the horizon?

In July 2024, the International Accounting Standards Board issued an Exposure Draft proposing amendments to IAS 37. These changes aim to clarify the recognition of provisions, including replacing IFRIC 21 with a broader principle-based model.

The most significant aspects of the Exposure Draft for EPR are the revised guidance of what is a ‘present obligation’ and a general approach to recognising obligations based on the activity that gives rise to the responsibility.

The proposed amendments, as currently drafted, seem to result in recognising a provision not only when a future trigger date is reached, but to be more in line with the activity that creates the obligation. These amendments, if finalised as it is currently drafted, may result in a different conclusion for the timing of recognising the EPR provision.

How businesses should prepare for packaging EPR compliance

The debate on the accounting treatment of packaging EPR disposal fees has been a lively one and will likely continue as the amendments to IAS 37 are refined.

Under current guidance, the obligation to pay disposal fees is recognised only when a business becomes a liable producer, which is very likely on 1 April of the assessment year.

We hope to hear more from DEFRA in the coming months and recommend that businesses who qualify as large producers monitor any developments closely and engage with their auditors.

Stay ahead of EPR developments

If your business qualifies as a large producer under the new EPR regulations, now is the time to act. Closely monitor updates from DEFRA, engage proactively with your auditors, and ensure your data and reporting processes are robust. By preparing early, you can manage financial risk, demonstrate environmental responsibility, and position your organisation as a leader in sustainable packaging.

To discuss how these changes may impact your business, please contact Paul Merris, or speak to your usual RSM contact.

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