IAS 37/IFRIC 6 – Levies charged for participation in a market on a specified date
The Committee received a request to clarify 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 identify the event that gives rise to a liability for other levies charged for participation in a market on a specified date. 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). The concern relates to when a liability should be recognised and to the definition of a present obligation in IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
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 November 2011 deliberations was to consider when the liability for the obligation to pay a levy should be recognised. To this end, the Committee considered whether: economic compulsion creates a constructive obligation; the going concern principle affects the timing of recognition of the liability; there can be multiple obligating events and if so, which ones give rise to a liability; the recognition of a liability arising at a point in time or, in some circumstances, arises progressively over time; and a liability to pay a levy charged for participation in a specific market should be recognised when the entity is required to participate in that specific market in future periods.
The Committee considered certain principles in liability recognition before considering the specifics of the levies raised in the submission. Considering relevant principles, and with little debate, the Committee tentatively decided:
- an entity does not have a constructive obligation to pay a levy that arises from operating in a future period, even if the entity is economically compelled to continue operating in that future period
- the going concern principle does not lead to the recognition of a liability at a reporting date for levies that arise from operating in the future. As noted by one Committee member, recognition of a liability should not be linked to the future conduct of the business, but rather, should be recognised only when a constructive obligation arises as a result of an obligating event
- a liability should be recognised when the last of the necessary events to create the present obligation has occurred
- for levies charged for participating in a specific market, the obligating event is the participation in the market as identified by the legislation.
However, concerns were raised by the Committee when it considered circumstances in which a liability may be seen to arise progressively over time. While the staff presented an analysis of the guidance in IAS 37 in analysing this issue, its analysis was seen by many Committee members to confuse the concepts of recognition and measurement (i.e., is there one obligating event which gives rise to subsequent remeasurement of the liability or is there an activity which occurs over a period of time which collectively creates an obligation). This confusion was linked, in large part, to the staffs recommended guidance on recognising a liability progressively, which suggested that progressive recognition is appropriate if: (a) the obligating event occurs continuously over time because it is linked to the entity's activities and (b) the amount of the liability (i.e., the best estimate of the expenditure to incur at a reporting date) changes over time as a result of the entity's activity performed to date.
Committee members expressed specific concerns with (b) of the staff's recommended guidance. Committee members considered an example in which an obligation is created once CU 1.0 million in sales is reached. Applying the staff's model, Committee members were concerned that liabilities would not be applied progressively against sales until sales reached CU 1.0 million.
With this, one Committee member expressed a desire to revise the principle underlying progressive recognition of a liability to state: "an obligation arises progressively if the activity that creates the obligation occurs over a period of time." Committee members agreed with this recommendation.
Subsequent to deciding on the above principles, the Committee attempted to consider practical examples, including the UK bank levy. While Committee members were comfortable with the above underlying principles, there was a noticeable level of concern when the obligating event is triggered at a specific balance sheet date (such as the UK bank levy). Specifically, in applying the above principles, recognition of a liability would not be triggered until the last day of the fiscal year. However, many Committee members challenged this presentation as 'unfaithful', as they believed recognition of the liability should be recorded progressively throughout the fiscal year. Many possible 'solutions' were expressed by Committee members including:
- asking the IASB to explore non-exchange transactions as a separate project
- considering whether a limited-scope amendment of IAS 12 Income Taxes might be appropriate to include levies, or whether a methodology similar to IAS 12 could be developed for 'tax-like' levies since IAS 37 may not give a faithful representation of the item
- amending IAS 34 Interim Financial Statements to reflect these liabilities in the interim financial statements (although this would not resolve situations in which the applicable levy date differs from the fiscal year end date)
- considering whether 'in-substance' obligating events can arise before constructive obligations.
Given the differing views amongst Committee members, the Committee elected to have the staff perform further research on this topic, which considered Committee discussions, and bring back another paper at the January 2012 Committee meeting.