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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!



By Paul Cooper, corporate reporting manager, ACCA
Along with ACCA’s UK and Ireland-based members of its Global Forum for Corporate Reporting, I have been involved with our response to the Financial Reporting Council’s (FRC) consultation on its latest proposals on financial reporting by residential management companies (RMCs).

The FRC wants to clarify how RMCs account for expenditure from the service charge monies they hold for maintenance and other matters, such as repairs and gardening. Reflecting the legal position, a RMC’s financial statements would recognise this as service charge expenditure. At the same time, an equivalent amount of income would be recognised, representing drawings from the service charge monies received (i.e., a balancing figure). This means that to match the expenses it gives a net effect of nil, and shows the expenses are funded from the service charge receipts. These monies are held by the RMC in trust for the leaseholders, and cannot therefore be shown as an asset on the RMC’s balance sheet. The FRC proposes that the balance of the monies held is disclosed for information, along with the fact of its trust status.

While acknowledging that these proposals represent some progress by the FRC, ACCA is concerned that much more is needed to deliver authoritative guidance which fully meets the needs of leaseholders. The reporting envisaged by the FRC also has some, but not complete, common ground with the Summary of Costs, something that leaseholders can require under the Landlord and Tenant Act 1985. In consequence, there is potential for creating confusion.

Where, as is frequently the case, the leaseholders are the members of the RMC, their information needs are presently often satisfied by including all transactions and balances in the financial statements of the RMC. This methodology goes far beyond the FRC proposals by also recognising, for example, accrued expenses, service charge debtors and the balance of the sinking fund (reserves). As it satisfies the information needs of leaseholders, it is unlikely that a statutory Summary of Costs will also be required. However, this method of accounting is incorrect, particularly as the RMC is recognising assets and liabilities which are not its own.

A working group, which was devised by ACCA and other professional bodies, produced best practice guidance to encourage financial reporting by RMCs which is both appropriate, and attempts to meet the information needs of leaseholders. However, the guidance is not binding, tends not to be favoured by the leaseholders, and RMCs usually have no external stakeholder which could require them to adopt the correct method of financial reporting.

ACCA believes that the solution would be for the FRC to use its greater authority and endorse similar comprehensive guidance, rather than the partial solution which it currently proposes. A consultation process for such guidance would also enable the advisers of RMCs to provide their views, in order to accommodate the preferences of leaseholders as far as is possible. Legal and accounting terms need to be looked at together on this issue.

ACCA’s response can be read in full here

By Paul Cooper, Corporate Reporting Manager, ACCA

The IFRS Foundation’s review of its governance gives insight into how the IASB (International Accounting Standards Board) structures itself as an organisation.

The Foundation’s ‘Drafting Review’ proposes to formalise within its constitution a change which it has already made. The roles of the IASB Chair (principally responsible for standard-setting) and oversight (executive) functions are now held by different people. This is because the latter role might be seen to conflict with the functions of the Chair, such as with fund-raising.

Comments for the ‘Drafting Review’ were requested by 23 October 2012.

An executive director has already been appointed, so the Foundation wishes to change its constitution accordingly as soon as possible. The executive director has a staff role in the Foundation, and is not a member of the IASB.

The change was in fact a recommendation of an earlier review of the Foundation’s governance. ACCA’s response to the review in March 2011, supported the recommendation, but questioned the appropriateness of the title of the role, which at the time was to be chief executive officer.  The executive role reports to the IASB chair, so arguably the term ‘CEO’ is not entirely suitable.

ACCA’s response to the current consultation reiterates our support for the separation of the chair and executive functions, and support the title of executive director (rather than CEO) for the latter role.

The IASB also has a vice-chair now, part of whose role under the constitution is to represent the chair externally. The earlier governance review identified the matter of travel demands on the time of the IASB chair. As a solution, ACCA supported the appointment of a vice-chair.

The IASB positions referred to in this blogpost are currently held by the following people:

Chair – Hans Hoogervorst

Vice-Chair – Ian Mackintosh

Executive Director – Yael Almog