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IAS 37 and IFRIC 6 — Levies charged for participation in a specific market – date of recognition of liability

Date recorded:

The Committee has been considering 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. The examples provided in the submission 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 principles developed in previous Committee meetings (see November 2011 IFRIC Update), this meeting served to:

  • consider examples illustrating previously developed principles regarding how levies charged for participation in a specific market should be accounted for in the annual financial statements
  • determine the accounting for these transactions in the interim financial statements
  • analyse the impact of minimum thresholds (i.e. pay a levy if sales for the year exceed CU 1.0 million) on the accounting for levies charged for participation in a specific market.

Committee members generally agreed with application of the underlying principles in the examples. However, some concerns were expressed in relation to application of consistent principles in interim financial reporting. Specifically, Committee members expressed concern over the apparent difference in application between US GAAP and IFRSs in interim reporting (US GAAP was seen to allow allocation of annual operating costs that benefit more than one interim period to the other interim periods through the use of accruals or deferrals while IFRSs did not allow this possibility based on underlying principles established) and perceived inconsistencies in IFRSs in certain areas on allocating annual operating costs (whereby income taxes and contingent rent had what many considered to be unique application in interim reporting as compared to annual reporting – although others considered application differences to be the result of a threshold application difference as opposed to application of a unique principle).

When put to a vote, Committee members tentatively agreed that the same principles should be applied in both interim and annual reporting.

The Committee then considered the impact of minimum thresholds on the accounting for levies charged for participation in a specific market. The example considered was when an annual levy is due if Entity D generates revenues over CU 50 million in a specific year and the amount of the levy is determined by reference to the revenues over CU 50 million generated. Committee members considered whether the liability should be recognised progressively over the year as the entity generates revenues (assuming the threshold is expected to be reached) or only recognised after the threshold is reached.

Many Committee members expressed a preference to recognise a liability progressively as it more appropriately matched the economics of the transaction (as revenues before reaching CU 50 million contributed to the recognition of a liability), however, these Committee members acknowledged that this view contradicted the underlying principles developed in previous meetings. Other Committee members noted that no obligating event has occurred until the CU 50 million threshold is reached, and they preferred to defer liability recognition until the threshold is reached. The arguments suggest that the fundamental question is whether a threshold is a recognition event or a measurement event, and there was broad disagreement among Committee members.

One Committee member suggested that an interpretation be drafted on the broad issue but exclude from its scope the threshold issue so that the Committee can ask the Board how to proceed on that particular issue. Many Committee members agreed with this view. Thus, the staff was asked to begin work on an interpretation encompassing the principles previously developed but excluding from its scope the threshold issue at this stage.