IAS 37 Provisions, Contingent Liabilities and Contingent Assets - Payments relating to taxes other than income tax (Agenda Paper 7)

Background

The Committee received a request from the European Securities Market Authority (ESMA) to interpret IAS 37 in relation to payments relating to uncertain tax treatments that are outside the scope of IAS 12 Income Taxes (ie the payments are for taxes other than income tax).

The ESMA submission describes a situation in which an entity is in dispute with the tax authority.

The entity makes a voluntarily payment equal to the disputed amount to the tax authority in order to avoid possible penalties or interest. The payment could be held in escrow by the tax authority, depending on the jurisdiction, pending the resolution of the dispute. The tax authority will either return the payment to the entity or use it to settle the tax liability. ESMA’s question relates only to how the entity should account for the voluntary payment made by the entity. The entity determines that it is not probable that an outflow of future economic benefits will be required in relation to the disputed amount and therefore has not recognised a liability. ESMA is not asking the Committee about the appropriateness of not recognising a liability for the disputed tax amount.

ESMA thinks that the payment would be recognised as an asset or an expense, depending on how IAS 37 is interpreted. You could interpret the payment as creating an asset, which will either be refunded by the tax authority or used to settle the tax liability arising from the resolution of the dispute. There is no uncertainty about the existence of the asset. The uncertainty is only whether the entity will the asset will lead to a receipt of a refund or be applied to settle a future liability.

Alternatively, the amount paid could be considered a contingent asset of the entity. The uncertainty about the outcome of the dispute creates uncertainty about the existence of the asset, rather than only the means of recovery. The entity would recognise an asset only to the extent that reimbursement is virtually certain.

Staff analysis

The staff analysis is that the payment made by the entity meets the definition of an asset. On making the payment, the entity has the right to receive future economic benefits either in a form of cash or by using the payment to settle the tax liability. The payment is not a contingent asset as defined by IAS 37 because it is an asset, and not a possible asset, of the entity.

Staff recommendation

The staff are recommending that the Committee not add the item to its agenda, on the grounds that the requirements in IFRS Standards provide an adequate basis for an entity to account for payments relating to taxes other than income tax.

Discussion

The staff began by clarifying that in the paper they had referred to the change in definition of an asset in the new Conceptual Framework. When the new Framework takes effect there will be tow definitions an asset – the Framework and IAS 38. In following the IAS 8 hierarchy the staff said they would use the Framework definition rather than IAS 38 because IAS 38 considers intangible assets. The staff said they would bring that back to the next meeting to give the Committee the chance to comment on whether this is appropriate.

The two main issues were whether it mattered that the payment was voluntary of not and the link with the liability.  Some members thought it would be better to say that the payment was voluntary and not compelled by the tax authority. Other members thought that whether it was voluntary made no difference because expense recognition makes no sense if you base it on the timing of the payment. The expense is clearly linked to the liability. On that matter there was a concern that there could be a conflict with the uncertain tax position guidance. In the fact pattern a liability is not recognised and it seems to relate to an uncertain tax position. The fact pattern should be expressed to ensure that these matters are not confused.  

One member said the decision should state that once the money was in escrow this is not a financial asset.

The staff will bring this back at the next meeting. However, the Committee was asked if the direction the work was taking was appropriate and all members agreed.