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IFRS 16 — Non-refundable VAT on lease payments

Date recorded:

Background

The Committee received a submission about the accounting by a lessee for non-refundable value-added tax (VAT) charged on lease payments. In the fact pattern described, the lessee operates in a jurisdiction which requires sellers to collect VAT and remit the amounts to the government and generally allows purchasers to recover VAT charged on payments for goods and services. However, due to the nature of operations, the lessee can recover only a portion of the VAT charged, including those charged on lease payments. The submitter asked whether the lessee includes non-refundable VAT as part of the lease payments.

Staff analysis

During the outreach performed, most respondents said that it is common in many jurisdictions and in various sectors that VAT is charged on lease payments and a portion of the VAT cannot be recovered. Almost all respondents said lessees generally do not include non-refundable VAT as part of lease payments in practice. They considered that VAT payments are payments imposed by the government on the lessee instead of payments in exchange for the right to use the underlying assets. A few respondents commented that the accounting would depend on whether the lessor or lessee is the primary obligor of the VAT. If it is the lessee, the VAT is a levy on the lessee. If it is the lessor, the non-refundable VAT is a part of lease payment but it is a variable lease payment excluded from the measurement of lease liability. With regard to how entities account for non-refundable VAT on other goods and services, only a few respondents responded and said entities generally recognise and expense it applying IFRIC 21 or capitalise it as the cost of the asset under the applicable IFRS Standard, such as IAS 16 or IAS 2.

Although the outreach showed that the fact pattern described is common, the staff considered the results did not provide evidence that the non-refundable VAT amount involved is material nor there is diversity in the way lessees account for it. Moreover, differences in the applicable legislation could affect the accounting applied and lessees would exclude the non-refundable VAT from the measurement of the lease liability regardless of whether it is (i) a variable lease payment that is excluded from the measurement of the lease liability; or (ii) a levy within the scope of IFRIC 21. The staff did not consider to undertake further work at this stage.

Staff recommendation

In view of the above analysis, the staff recommended that the Committee should not add a standard-setting project, and instead publish a tentative agenda decision to explain the reasons as to why the issues is not being added to the standard-setting agenda.

Discussion

Only one Committee member disagreed with the exclusion of VAT on lease payments in calculation of lease liabilities because she considered it a part of the consideration paid for the ROU asset. The remainder of the Committee members agreed with the analysis that the VAT should be excluded from calculation of lease liabilities. However, some Committee members raised their concerns on the staff's analysis that no or limited evidence indicated that such matter is "material" or "widespread".

A number of Committee members commented that it is not sufficient to come to the staff's conclusion that the matter is not material nor widespread based on the limited outreach performed. Some Committee members considered such VAT payment could be material in some sectors or in some jurisdictions. They suggested the staff to wait for comment letters to gather more evidence/feedback.

Some Committee members recommended the staff develop a non-fact pattern specific decision tree as education material because it would be useful to give general guidance for the accounting of the VAT on lease payments. Also, indicating the prevalent accounting treatment for the VAT payment would help limit diversity in practice. However, the staff commented that it would be difficult to explain the prevalent accounting given that there was no extensive analysis at the moment and different scenarios may have different interpretations.

Other Committee members agreed with the staff's approach of not adding analysis to the fact pattern because it is a broader issue in which different jurisdictions may have different implications. Also, the critical factor to determine whether the VAT on lease payment is a levy or not to which IFRIC 21 applies depends on who the tax obligor is and this may vary case by case.

The Committee decided, by the vote of all, not to add the matter to the standard-setting agenda. Also, by a vote of 13:1, the Committee members agreed with the suggested edits to the tentative agenda decision.

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