IAS 37 and IFRIC 6 — Levies charged for participation in a specific market — date of recognition of liability
Draft interpretation and transition issues
The IFRS Interpretations Committee ('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 by public authorities 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.
At the November 2011 meeting, the Committee tentatively decided to set out the principles regarding the accounting for a liability to pay a levy charged for participation in a specific market within the scope of IAS 37 (refer to the November 2011 IFRIC Update).
At the January 2012 meeting, the Committee reviewed and agreed with some examples that illustrate the application of the principles identified above. The Committee also tentatively decided to develop an interpretation on the accounting for levies charged by public authorities on entities that participate in a specific market (refer to the January 2012 IFRIC Update).
At the March 2012 meeting, the Committee reviewed the draft interpretation prepared by the staff on the accounting for levies charged by public authorities that are within the scope of IAS 37. The consensus is based on the principles identified so far by the Committee. The draft interpretation includes the illustrative examples that the Committee agreed on at the January 2012 meeting but did not address the accounting for levies that are due only if a revenue threshold is met (see below). A few Committee members raised the issue whether the levies should be addressed through illustrative examples or application guidance rather than an interpretation. A few Committee members expressed concern around the scope and definition of levies and whether the characteristics noted in the draft interpretation were prescriptive or necessary indicators.
The Committee tentatively agreed that the draft interpretation should be amended to not include a definition of levy but to note that if the levies had the following core characteristics, they would be covered within the scope of the draft interpretation:
- they are resources transferred to public authorities in accordance with the legislation (i.e., laws and/or regulations);
- they are non-exchange transactions, i.e., the entity that pays the levy transfers resources to the public authority, without receiving any specific good or service directly in exchange;
- they are due when a specific event identified by the legislation occurs;
- and the calculation basis of the levy is based upon data for the current or a previous reporting period such as the gross amount of sales/revenues, assets or liabilities.
The Committee also tentatively agreed to using the word ‘activity´ (and not the word ‘event´) when defining the obligating event that gives rise to a liability to pay a levy (i.e., the obligating event is the activity that triggers the payment of the levy).
A number of Committee members had drafting comments/suggestions to the draft interpretation and basis of conclusion that they agreed to provide to the staff. The Committee intends to vote on the pre ballot/consensus draft at the next meeting.
The Committee tentatively decided that the interpretation should be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in accounting Estimates and Errors.
Proposed withdrawal of IFRIC 6
The staff recommended that IFRIC 6 be withdrawn because the new interpretation would address levies generally and as such the guidance in IFRIC 6 would no longer be needed. The Committee tentatively decided not to withdraw IFRIC 6 as a number of Committee members felt that IFRIC 6 contained useful guidance and was not inconsistent with the new draft interpretation.
Accounting for levies that are due only if a threshold is met
Previously with respect to levies that are due only if a minimum threshold is achieved, the Committee could not reach a consensus as to whether:
- the threshold is an obligating event (i.e., a recognition criterion) and the liability should be recognised at a point in time only after the threshold is met; or
- the threshold is a measurement criterion and the liability should be recognised progressively as the entity generates revenue (if the threshold is expected to be met).
At the February-March 2012 International Accounting Standards Board (IASB or the Board) meeting, the staff presented two different views for the accounting for levies when the legislation specifies that the levy is due only if a minimum threshold is achieved. Per Example 4 in the agenda paper, Entity D is a calendar year-end entity. An annual levy is due if Entity D generates revenues over CU50 million in a specific market in 20X1 and the amount of levy is determined by reference to revenues over CU50 million generated by Entity D in the market in 20X1. The question is whether the liability should be recognised only after the threshold is reached or not.
The Board tentatively agreed that the rationale developed in the example of IAS 34 contingent lease payment applies in both the interim and annual financial statements. As a result, the Board expressed support for recognising in the annual financial statements levies subject to a revenue threshold progressively as the entity makes progress towards the revenue threshold provided it is probable that the threshold will be met. The Board also tentatively confirmed that levies that are not based on taxable profits should be accounted for in accordance with IAS 37, and not IAS 12 Income taxes.
At the March 2012 meeting, the Committee still could not reach a consensus on the accounting for levies subject to a revenue threshold. As such, the Committee tentatively agreed not to include this aspect and Example 4 in the draft interpretation and to remain silent on this issue.