IAS 37/IFRIC 6 – Levies charged for participation in a market on a specified date
The Committee received a request for clarification as to whether, under certain circumstances, IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment should be applied by analogy to other levies charged for participation in a market on a specified date to identify the event that gives rise to a liability. The request focuses on the date of recognition of the liability and whether analogy to IFRIC 6 should be made. Four specific examples were provided in the submission: UK bank levies, feeds paid to the Federal Government by pharmaceutical manufacturers in the US, Hungarian bank levies, and the railway tax in France. These examples are thought to refer to the taxes being conditional on the entity existing or participating in a particular activity at a specified date (similar to the decommissioning liability discussed in IFRIC 6).
Following previous meeting decisions to add the issue of whether the obligating event is the participation in an activity on the date specified by the legislation, or whether other factors create an earlier obligation, to its agenda, the focus of September 2011 deliberations was to consider staff analysis of the accounting treatment applicable to levies charged for participation in a market on a specific date. The Committee was asked to consider when the liability for the obligation to pay a levy should be recognised and whether the liability for the obligation to pay a levy is associated with an asset or an expense.
The staff's analysis presented a general conclusion that a situation of an entity participating in a market in exchange for the payment of a levy is equivalent to that of a purchase of an operating license. This view resulted in three primary questions: is the transaction associated with the obligation to pay a levy executory, does the right to participate in the market meet the definition of an asset and when does the entity have a present obligation to pay the levy?
No tentative decisions were reached, as the Committee asked the staff to bring back further analysis. However, the Committee's deliberations were marked by three key findings / themes:
Committee members expressed general concern with generalising all 'levies' as a right for the entity to participate in a specific market for a specific period. For example, Committee members discussed bank levies not linked to participation as an effective punitive tax or fine as opposed to a right to participate in a specific market (e.g., a bank levy may strictly relate to a means of raising capital as opposed to the receipt of any participation right in a market). Thus, one Committee member suggested that the scope of levies considered by the Committee in this request should be limited to government-imposed obligations; contractual arrangements would be scoped out of this assessment. Likewise, the Committee member expressed a desire to scope out fines, taxes, or levies where there is not an exchange transaction. Thus, only 'licenses' (those payments in which an entity receives a recognisable benefit for a period of time) would be within the scope of the Committee's assessment. Many Committee members supported this view, but expressed a desire to consider the scope in a future meeting. Committee members also expressed a desire to consider other types of levies which may exist in practice to determine any unintended consequences resulting from any decision reached in scoping.
Spreading / recognition
Committee members discussed liability recognition considering guidance in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Many Committee members expressed a desire to spread costs over the period in which an entity receives a recognisable benefit, while other Committee members were focused on the timing of fulfilment of the performance obligation in recognition of a liability. The example discussed by the Committee was an annual levy imposed for participation in a specific market (e.g., in Fiscal 2011) in which measurement of the levy was based on financial data in the previous annual financial reporting period (e.g., Fiscal 2010) and it was virtually certain at the end of the previous annual financial reporting period that the entity would have to pay the levy. The question raised by the Committee was whether: the general operations of the entity in a particular market gives rise to a constructive obligation at the end of the measurement period (e.g., Fiscal 2010), the obligation is derived at a point of time (e.g., at first activity in Fiscal 2011) or the costs can be accrued throughout Fiscal 2011 being the period in which the entity benefits from the levy.
Many Committee members agreed that the obligating event is the participation in the market identified by the legislation for the levies (consistent with IFRIC 6 guidance in paragraphs 9 and BC10). That is, a stated intention to participate in a market during a future measurement period does not create a constructive obligation and a liability should be recognised when the entity benefits from the right to participate in the market and has a present obligation to pay the levy. However, others supported accruing the costs throughout the period of benefit, especially if a single payment supports rights for multiple years. One Committee member noted that the above example was indicative of two separate obligating events (participation in 2010 and participation in 2011) and wondered whether recognition should be spread according to the separate obligations. No tentative decision was reached on this topic and the Committee acknowledged that it would have to consider measurement of the liability at a future date.
Committee members immediately questioned whether the liability for the obligation to pay a levy is associated with an asset or an expense. Committee members outlined paragraphs 4.4 – 4.6 of the Conceptual Framework, as well as IAS 38 Intangible Assets, in assessing whether a right to participate in a market meets the definition of intangible asset, with many Committee members expressing concern with whether the 'right' was 'controlled by the entity' as outlined in IAS 38. Another Committee members noted that to the extent that an entity has received the right of participation and either paid or established a liability for the cost of that right but has not yet consumed all of the benefits, there is an economic benefit (akin to an asset) to the entity, which was discussed in the context of acquisition accounting in a business combination. The Committee members elected to focus on the obligating event (liability) first before concluding further on asset recognition (as the two topics are inter-related).