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IAS 12 — Interest and penalties

Date recorded:

Interest and penalties — Agenda Paper 6


In October 2015, the Interpretations Committee published a draft Interpretation Uncertainty over Income Tax Treatments. The draft Interpretation did not consider the accounting for interest and penalties related to uncertain tax treatments, and this omission drew concerns from some respondents to the consultation.

The Committee considered the comments received at its meeting in September 2016 and decided that the Interpretation should be finalised and apply to income taxes within the scope of IAS 12 Income Taxes but would not address interest and penalties. At the time, some Committee members expressed concerns that the absence of specific requirements for interest and penalties related to income taxes has led to diversity in practice. Accordingly, the Committee decided to consider whether it should add a separate project to its agenda to address how an entity accounts for interest and penalties, more generally.

Staff analysis

The staff undertook some research and identified that some entities apply IAS 12 and others apply IAS 37 to interest and penalties. Their assessment is that the concerns regarding the accounting for interest and penalties relate to possible diversity in the measurement of liabilities and the presentation of the related expense. However, they were not able to quantity or otherwise assess the significance of any potential effect.

The staff conclusion was that there is insufficient evidence to conclude that the absence of specific requirements on interest and penalties has resulted in materially different information being reported by entities for similar items. Consequently, they were not convinced that the potential benefits of undertaking a standard-setting project on interest and penalties would outweigh the costs of proposing an amendment.


The staff recommended that the Committee does not add this issue to its agenda.

Because this discussion was a consequence of comments received on a draft Interpretation, rather than from a request to the Committee, the staff also considered how the matter should be concluded. The staff recommended publishing a tentative agenda decision because it has the benefit of explaining the Committee’s rationale for not adding the issue to its agenda. The proposed wording was in Appendix A of the paper.


The IC agreed not to add this issue onto its agenda by a narrow margin. The Staff will update the tentative decision to emphasise the following points:

  1. An entity should look at all relevant facts and circumstances and apply judgement to determine whether the interest and penalties fall within the scope of IAS 12; if not, they should be accounted for in accordance with IAS 37.
  2. It is not an accounting policy choice to apply either IAS 12 or IAS 37.
  3. If this determination requires significant judgement, an entity should make the necessary disclosures in accordance with IAS 1 relating to significant judgements.
  4. Entities should make proper disclosures about material interest and penalties in accordance with the existing requirements in the relevant Standards.

There was significant debate on this issue. All members acknowledged that there is diversity in practice but they were split as to whether or not this issue should be taken onto the IC’s agenda. Those who supported not taking it one believed that the diversity reflects the different nature of the interests and penalties (which is jurisdictional-specific and entity-specific, sometimes it could even be a financing decision by management to delay paying tax rather than to borrow from a bank) and no rule could fit all the circumstances. Accordingly, they believed that management should be given room to apply judgement in this area, supplemented by appropriate disclosures.

The IC members who wanted to add this issue onto the agenda believed that the difference between applying IAS 12 and IAS 37 could be material and some guidance as to how one determines whether an interest or penalty charge falls under which standard should be given.

None of the Board members present in the room supported adding the item onto the IC’s agenda as they did not believe that this was a high priority item in the whole scheme of things.

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