IAS 37 and IFRIC 6 — Levies charged for participation in a specific market

Date recorded:

The Committee previously considered a request to clarify whether IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment should be applied by analogy to other levies charged for participation in a market on a specified date to identify the event that gives rise to a liability. The request for clarification relates to when a liability should be recognised for levies that are conditional on an entity participating in an activity on a specified date.

This issue has been discussed at multiple Committee meetings, with the most recent discussions occurring during the March 2012 meeting. At past meetings, the Committee developed certain underlying principles associated with recognition of a liability. The Committee noted that a constructive obligation to pay a levy that arises from operating in a future period is not created even if an entity is economically compelled to continue operating in that future period. Additionally, the going concern principle would not affect whether an entity recognises a liability at a reporting date for levies that arise from operating in future periods. The Committee noted that an obligating event is necessary to create the present obligation and an obligating event arises progressively if the activity that creates the present obligation occurs over a period of time (e.g., if the obligating event as identified by the legislation is the generation of revenues over a period of time). The Committee indicated that an entity would recognise an expense upon recognition of the liability, unless the levy is an exchange transaction in which the entity that pays the levy receives assets or future services in consideration for the payment of the levy.

At its May 2012 meeting, the Committee considered a ballot draft interpretation presented by the staff. The interpretation addresses the accounting for levies other than income taxes that are within the scope of IAS 12 Income Taxes, fines or other penalties imposed for breaches of legislation and contracts between a public authority and a private entity. The most significant changes to the draft interpretation since that provided by the staff during the Committee’s March 2012 meeting were the inclusion of core characteristics of levies within the scoping section of the draft interpretation and the addition of a Basis for Conclusions paragraph further describing that economic compulsion to continue operating in a future period does not create a constructive obligation to pay a levy.

One Committee member dissented to the draft interpretation; preferring instead that the IASB address the broad issue of payments to a governmental authority as part of a comprehensive project. She also noted that the interpretation fails to address the accounting for levies subject to a revenue threshold which she considered an important aspect of the project.

Other Committee members expressed support for moving forward with the issuance of an interpretation. However, a number of editorial comments were provided (both live and off-line). One such editorial correction was amending the draft interpretation to say that a liability to pay a levy is recognised progressively if the activity that creates the obligation occurs over a period of time (as opposed to saying a liability to pay a levy is recognised progressively if the obligating event occurs over a period of time, as was included in the ballot draft). No objections were raised by Committee members to this editorial change. The staff noted that it would handle any editorial comments during the evening and present a revised draft to the staff on Wednesday, 16 May.

On Wednesday, 16 May, the staff presented a revised draft interpretation (which was not made available to observers). One Committee member dissented to the release of the proposed interpretation, as outlined above, but no other objections were raised. According to the Committee’s Due Process Handbook, the draft interpretation will be provided to IASB members for negative assurance before being released for public comment.

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