Comments from ACCA to the IFRS Interpretations Committee, International Accounting Standards Board
Introduction and summary
ACCA (the Association of Chartered Certified Accountants) is pleased to have the opportunity to comment on the above. During the preparation of our responses, we have consulted with the members of our Corporate Reporting Global Forum.
ACCA agrees with the key principle set out by the Interpretations Committee that an obligating event should be identified for the levy, at which point a liability will be recognised (and not earlier, through the recognition of a constructive obligation). As set out below, where the Interpretations Committee has been unable to reach a consensus, we believe that it would be helpful for the draft Interpretation (“DI”) to include a confirmation of the accounting treatments regarded as acceptable by the Committee.
We also agree with the inclusion of the statement that the DI does not encompass income taxes within the scope of IAS 12. As set out below, we have questioned whether the defining characteristics of a levy are sufficiently widely drawn, a question which might be resolved either through an explanation of the scope of the characteristics as stated, or by expanding the description of the characteristics.
Alternatively, the characteristics of a levy could be described in more sector-specific terms. This might be considered a more appropriate step, as we believe that the need for an interpretation is greater in certain sectors (particularly those involved in certain financial services) than in others, for which the existing provisions of IAS 37 are likely to be adequate.
When following the recognition principles set out in the DI, interim financial statements would not recognise the obligation to pay a levy evenly across the interim periods within a financial year. Whilst we do not believe that the Interpretations Committee should consider exceptions from the recognition principles, we suggest that disclosure of the situation in each set of interim financial statements should be encouraged, to assist the understanding by users.
As explained below, ACCA also supports the proposal for retrospective application of the Interpretation, with early implementation permitted.
Responses to specific questions in the draft interpretation
Do you agree with the scope proposed in the draft Interpretation? If not, what do you propose, and why?
The scope of the DI encompasses levies recognised in accordance with the definition of a liability in IAS 37. Specifically, the DI excludes taxes based on profit, fines (and similar) and levies which are due once a minimum revenue threshold is exceeded (Scope – sections 3 to 4).
The characteristics of levies within the scope of the DI include a legal or regulatory requirement to make payment to a public authority in a particular country, region or market, on a non-exchange basis. The levies are triggered by a specific activity, and are calculated on the basis of historic accounting data (Scope – section 5).
ACCA generally agrees with the scope of the DI, including the application of IAS 37 to it. However, in a minority of instances, it appears that certain liabilities which are akin to a levy would not be within the scope of the DI. An example of these would be where an entity is required to pay a flat-rate annual fee in a particular sector, to be able to operate within it. The fee may not be payable to a public body (or a third party on behalf of a public body), and so would not have the characteristics of a levy set out in section 5 (a) of the DI, as well as 5 (e) (as it is not calculated on the basis of the entity’s data).
In contrast to a fee providing membership benefits, the liability represented by the flat rate fee in the example above may, however, be a non-exchange transaction (a characteristic of a levy, as set out in section 5 (c)), such as a contribution to the funding of redress for complaints made against industry operators.
Whilst the accounting for liabilities such as the above is likely to be straightforward, we would welcome clarification in the DI. This might be done by expanding the stated characteristics of a levy, or through an explanation of why the characteristics set out in section 5 are quite restrictive.
As there is no specific definition of a levy, it would also be helpful for the DI to describe those which are commonplace internationally, such as those which are sales taxes, and those charged on specific industries such as banking and extraction. As the need for an interpretation appears to be greater in certain sectors (such as those involved in financial services), this would be both of practical assistance to preparers of financial statements, and would help in clarifying why the characteristics of a levy set out in the DI have the apparently narrow scope we have commented on above.
Furthermore, we note that the levies dependent on achieving a minimum threshold are excluded from the scope of the DI because the Interpretations Committee did not reach a consensus (Basis for Conclusions – para. BC7). It therefore appears that there is no guidance for levies of this nature.
We believe that it would assist preparers of financial statements if the DI would nevertheless indicate what is considered acceptable practice in the absence of a consensus. This might be achieved by a statement that either way of determining the obligating event is acceptable (in paras. BC7(a) and (b)), and that entities should disclose which method has been adopted, where the effect on the financial statements is material.
Do you agree with the consensus proposed in the draft Interpretation? If not, why and what alternative do you propose?
ACCA agrees with the principle of identifying an obligating event which gives rise to a liability to pay a levy, and that the timing of the recognition of this liability does not change according to whether the levy is based on data for the current period, or earlier (Consensus – section 7).
We also agree that an entity should not recognise a liability to pay a levy by identifying a constructive obligation through a necessity or intention to operate in the future, when the levy would be incurred by law or regulation at a future point (Consensus – sections 8 and 9).
Following the principles in the consensus, we agree that interim financial statements would not recognise a liability for that part of a levy covering the interim period, if the obligating event occurs after the end of the interim period (Illustrative Example 3). However, this information may well be useful to users of the interim financial statements, especially if it is material. ACCA recommends that the DI states that disclosure of the likely amount of the levy for the interim period is permitted in these circumstances, along with a statement that there has been no actual recognition of the liability, in accordance with the Interpretation.
Do you agree with the proposed transition requirements? If not, what do you propose and why?
IFRIC proposes that changes in accounting policies resulting from the initial application of the DI are accounted for retrospectively (Appendix A, para. A2), and that early application of the Interpretation is permitted.
ACCA agrees with the proposal for retrospective initial application of the DI. Otherwise, where an entity has provided for levies in an earlier period to that of the obligating event (by recognising a constructive obligation), there is the danger that the levy would be charged twice in the financial statements, over two accounting periods. Levies should be readily identifiable in entities’ accounting records and consequently, we believe that retrospective application is feasible for entities to apply.
ACCA also supports the option for earlier application of the Interpretation than the mandatory implementation date, with disclosure of this fact (Appendix A, para. A1). Entities for which early implementation is practical may find that this is relevant and useful for users of their financial statements.