By Paul Cooper, Corporate Reporting Manager, ACCA
At its recent quarterly meeting, ACCA’s Global Forum for Corporate Reporting discussed the likely impact of IFRIC 21 on levies, issued by the IASB in May 2013. This was an opportunity for an open discussion on a current reporting issue, and the Forum raised a number of practical concerns about the implementation of the new requirements from 1 January 2014.
In accordance with the IASB’s interpretation of IAS 37 covering provisions and contingencies, a levy will be recognised as a liability once a ‘triggering event’ occurs. An example of a ‘triggering event’ is where a levy due on 31 March 2014, but based on revenue for the year ending 31 December 2013, would be recognised in full on 31 March 2014. This is the point at which a levy legally becomes payable to government, and can be on a date which is in a different accounting period to that on which the levy is based.
It is not now possible (except in non-statutory management accounts) to anticipate the triggering event by making an accrual, or even (as ACCA has previously suggested to the IASB) by making a disclosure in interim financial statements. This treatment will feel at odds with supporters of the principles behind the matching concept.
The legislation imposing a levy does not, of course, have to follow the matching concept, or indeed any other accounting ‘logic’. This is evident in the case of banking levies in some jurisdictions. There may be a requirement to make interim estimated payments on account of a levy yet to be incurred in law, and consequently yet to be recognised under IFRIC 21. Furthermore, a levy can be imposed for a whole year on a bank, whether or not it has traded throughout the whole of that year. For a bank which ceases trading early in the year in question, the levy will inevitably appear disproportionate, but under IFRIC 21, it will not be recognised up to the date the trade ceases, if it is legally due after that date.
In addition, IFRIC 21 deals with the recognition of a liability, but leaves the entity to decide, in accordance with other Accounting Standards, the treatment of the corresponding debit entry. Intuitively, many entities will consider the debit to be entirely a charge against income, but this may not fully reflect economic reality. For example, an annual property tax, payable on a specified date, could be at least partly a recoverable asset, if the owner has the intention of selling the property. However, if this recovery is subject to negotiation with a purchaser, the asset is contingent on uncertain future events, raising questions about the timing of its recognition. Furthermore, it can be argued that IFRIC 21 does not prescribe the timing of the recognition of the debit for the levy, in contrast to the timing of the liability. These questions leave scope for diversity to arise in practice.
Another question is whether certain amounts payable to government are actually levies. Fines, and income taxes within the scope of IAS 12, are not within the definition of a levy, but other payments are included where no goods or services are received in exchange. It might not be straightforward to identify such liabilities: for example, part of a property tax may cover local services which directly benefit the entity.
Levies payable to governments feature in the trading of many entities, and in an increasingly-regulated world, their number and types are only likely to increase. Overall, the above concerns raise a question of whether IFRIC 21 is sufficiently broadly-written to cover, at least, most types of levy.
What do you think? Do you share the Forum’s concerns? Are you having concerns of your own about your own sector or industry? If you don’t have any concerns, why? The Forum wants to hear from you!