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EFRAG discussion paper on levies

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

15 Aug 2014

The European Financial Reporting Group (EFRAG) has issued a further paper in its short discussion series. The latest paper focuses on possible changes to International Financial Reporting Standards that could achieve a different accounting treatment for levies whose obligating event occurs at a point in time.

The paper, EFRAG Short Discussion Series – Levies: what would have to be changed in IFRS for a different accounting outcome? responds to constituent concerns raised during the European Union endorsement of IFRIC 21 Levies. The paper does not reach conclusions on the best accounting treatment for such levies, but instead seeks to investigate alternatives to address the concerns raised.

In particular, concern was raised about the immediate expensing of some levies, which the paper expresses as follows:

Combined with the requirements in IAS 38 Intangible Assets, IFRIC 21 will often result in the immediate expense of levies charged on an periodic basis (i.e., annually), when the law indicates an activity that occurs at a point-in-time. Some have expressed concern with this outcome because they believe that the cost of a levy charged periodically should be recognised over the period it refers to. They believe the economic substance of a recurring levy is that the entity is paying to operate over an annual period, although the law may identify a different activity that triggers the payment (such as being in operation at a certain date).

In exploring these concerns, the paper revisits the amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets proposed in the exposure drafts issued in 2005 and 2010 in the IASB's project on non-financial liabilities, and concludes that in EFRAG's view, the proposals would not address the concerns. Other alternative approaches that could address the concerns are also explored:

  • amending the definition and recognition of a liability
  • developing guidance to assess if the entity is receiving an asset or a service in exchange for the payment of the levy
  • considering if other features of the law could affect when the obligating event occurs, beyond the date specified in the law
  • amending IAS 34 Interim Financial Reporting
  • applying the IAS 12 Income Taxes model
  • carrying out a research project for levies and other similar transactions.

The paper notes that a possible solution relies on the identification of an asset or a service when one or the other arises. When such identification is not possible, a progressive recognition might be achieved by requiring recognition as soon as the entity does not have a realistic alternative to payment and linking the obligation to an activity performed over time: either through modifying the definition of a liability or adding an illustrative example in IAS 34. EFRAG also believes that a research project focusing on all transactions with government authorities "holds promise to provide a robust solution for levies".

The discussion paper is open for comment until 15 December 2014. Click for press release and the full discussion paper on the EFRAG website.

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