IAS 12 — Interest and penalties

Date recorded:


In March 2017, the IC discussed whether it should add a project onto its agenda regarding how income tax-related interests and penalties should be accounted for. The research performed by the Staff then did not indicate widespread diversity in how such interests and penalties are accounted for, nor that it has a material effect on the amounts reported by entities. The IC concluded that it was not a high priority project and decided not to add this project onto its agenda.

Staff analysis on comment letters received

Five comment letters were received: three agreed with not adding the issue onto the IC’s agenda and two disagreed. Those who disagreed believed that the IC should address the diversity in practice. A few respondents also suggested that the IC provide guidance on assessing whether such an interest or penalty is an income tax that falls within the scope of IAS 12 (failing which such items would be accounted for under IAS 37), especially in instances when a single amount including tax, interest and/or penalty is agreed as a lump sum with the tax authorities and it is difficult to split them into the different components.

The Staff conducted further research and concluded that there was not sufficient evidence of a widespread diversity in practice, nor that the amounts recognised for these balances were material enough to warrant standard-setting activities. The Staff also noted that based on the feedback received from the 2015 Agenda Consultation, the Board decided not to add any project on IAS 12 onto its agenda (narrow-scope or a wider project) because it was not considered a high priority compared to other more pressing issues. The Staff also believed that adding any guidance on the assessment of whether such interests and penalties are income taxes would be beyond the scope of an agenda decision.

Staff recommendation

In light of the above, the Staff recommended that the IC not add a project onto its agenda regarding the accounting of income tax-related interests and penalties, and to finalise the agenda decision.


The IC agreed to finalise the agenda decision, subject to following more pertinent drafting changes:

  • To make an explicit statement that whether the interest or penalty is accounted for in accordance with IAS 12 or IAS 37 is not an accounting policy choice;
  • To refer to previous agenda decisions on discussions of what is an income tax; and
  • To clarify that the reference of this not being a high priority project is assessed in terms of the significance and pervasiveness of the matter to stakeholders, and not in terms of the availability of resources of the IC or the Board.

On the first point, one IC member noted that in the absence of any guidance on how an entity should assess whether a tax-related interest or penalty is an income tax, there would be no consistency in how such an assessment is made. This loophole could be exploited by entities as an accounting policy choice. However, the IC generally believed that the outcome of the assessment is highly dependent on local tax laws and that no generic guidance could capture the specific facts and circumstances of each case. The Staff also acknowledged that it is difficult to make this assessment and previous submissions have indicated the same problem.

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