IFRIC 21 Levies Impact on Financial Reporting

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Shannon Oliver
6 years ago
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1 June 2014

2 Scope International Financial Reporting Standards Interpretations Committee s (IFRIC) 21 provides guidance on the accounting for a liability to pay a levy that is within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets. IFRIC 21 is not applied to liabilities that arise from emissions trading schemes. A "levy" is an outflow of resources/economic benefits imposed by governments on entities in accordance with legislation, other than: Those within the scope of other standards (e.g. IAS 12 Income Taxes, IAS 19 Employee Benefits). Fines or other penalties that are imposed for breaches of the legislation. Payment for the acquisition of an asset, or rendering of services under a contractual agreement with a government, does not meet the definition of a levy. "Government" refers to government, government agencies and similar bodies whether local, national or international. Recognition What is the Obligating Event that Gives Rise to the Recognition of a Liability to Pay a Levy? Does the Recognition of a Liability to Pay a Levy Arise at a Point in Time, or Does it Arise Progressively Over Time (Prorata)? An entity is obligated to recognize a liability when the activity that triggers payment of the levy under the specified legislation occurs. This obligating event could occur at a point in time or over a specified time. The diagram below illustrates when to recognize a liability for various types of levies. Obligating event = activity that triggers payment of levy under specific legislation Obligating event = generation of revenue progressively over specified period Obligating event = generation of revenue in current period when levy due is measured based on revenues in prior periods Obligating event = generation of revenue or outputs produced to a specified minimum threshold Liability recognized gradually over specified period revenue is generated Liability fully recognized in period revenue is generated subsequent to prior periods when levy is measured Liability fully recognized once specified minimum threshold achieved 1

3 An entity does not recognize a liability at an earlier date than when the obligating event occurs, even if it has no realistic opportunity to avoid the triggering event. E.g. an entity required to pay a levy when a certain production threshold is reached may be economically compelled to exceed that threshold. The entity does not have a constructive obligation prior to reaching the threshold. The levy is only recognized when the threshold is reached. If a levy is prepaid before the triggering event arises, then an entity recognizes an asset for the prepayment. Are the Principles for Recognition of a Liability to Pay a Levy the Same in the Annual Financial Statements and in the Interim Financial Report? An entity shall apply the same recognition and measurement principles in the interim financial reporting that it applies in the annual financial statements. E.g. for a liability recognized at a point in time within the annual period, you cannot smooth the recognition over the quarters. The full liability will be recognized in the specific quarter in which the triggering event occurs. Canadian Application Property Taxes Historically in Canada property taxes have been consistently accounted for pro-rata over the calendar year to which the property taxes relate. Property taxes are levied by the municipality to provide general revenue for municipal operations throughout the year and to allow the municipality to increase certain municipal funds and reserves in that year. Usually the provincial legislation will only allow a municipality to set property tax rates once the municipality has an approved budget for the coming fiscal year (usually Jan 1 to Dec 31 for Canadian municipalities). While the property owner may expect to receive certain basic municipal services during the period, the property taxes are not paid under a contractual agreement between the specific property owner and the municipal government. Therefore, the property taxes remain a levy within the scope of IFRIC 21. Property tax legislation in Canada may be somewhat ambiguous as to what is the activity triggering payment and when it occurs. The legislation may contain certain clauses which point to property taxes being recognized at a point in time, while other clauses point to property taxes being recognized pro-rata over the year. Provincial acts and municipal bylaws may define property taxes as relating to a calendar year, while also defining a specific assessment date, imposition date, notice date, and payment date. Property taxes may be collectable from the entity who was the registered owner on a certain date. However, after a transfer of ownership the property taxes may continue to be collectible from both the former owner as well as the current property owner through a lien on the property. The acts and bylaws may require the municipality to be notified when there is a change in the assessed owner. Ambiguous language may be used regarding how a change in the assessed owner impacts the obligation. While not part of the legislation, Canadian common law practice sees a pro-rata distribution of property taxes between the seller and purchaser of a property. The acts and bylaws may set out specific incidents which would cause property taxes for the year to be prorated, such as the date that the property changes use from taxable to non-taxable (or vice versa), or the date that a major improvement is added to the land. The appeals, refunds, and adjustments processes in place may further create ambiguity in the determination. 2

4 The IFRS Discussion Group (IDG) assessed two views: point in time vs. pro-rata Point in Time This view is supported when the legislation clearly defines a single obligating event which gives rise to the owner being responsible to pay the levy. Pro-rata This view is supported when the legislation clearly defines that the obligating event occurs progressively over the year or when the legislation does not clearly define a single obligating event. E.g. when the legislation is ambiguous, a wider consideration of the assessment and taxation process could support that there is not a single obligating event, but rather that ownership over the taxation year is the progressive event which triggers responsibility for payment. The majority of IDG members supported pro-rata recognition; however, some members did see merit in the arguments supporting point in time recognition, particularly when the facts and circumstances support it. The IDG noted that the majority of financial statement preparers and auditors seem to support pro-rata recognition based on an understanding of the context in which property taxes are levied across Canada. The IDG noted that the legislation in foreign jurisdictions may differ significantly from Canada. All entities should review the specific property tax legislation to which they are subject and document an analysis to support the method of recognition applied. Workplace Safety and Insurance Board of Ontario (WSIB) Payments The WSIB plan is considered to be relatively consistent with similar plans across the other provinces. Payments are based on payroll costs (multiplied by a premium percentage determined by past injury experience). Premiums are required to be paid as long as the eligible employee is employed and is on payroll. Payments to such plans likely fall under the scope of IAS 19 Employee Benefits para. 4(b) as a "state plan", which are accounted for in the same way as a multi-employer plan under IAS 19. Therefore, such plans are likely outside the scope of IFRIC 21. The IDG noted that, even if such plans were within the scope of IFRIC 21, there would be no change in current accounting practice. The liability is recognized over time based on the payroll with the triggering event also occurring progressively over time. Effective Date and Transition IFRIC 21 is effective for annual periods beginning on or after January 1, Changes in accounting policies resulting from initial application of IFRIC 21 shall be accounted for retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. If your company makes material levy payments to governments, IFRIC 21 could impact the recognition of these liabilities. Companies need to perform an assessment to determine the activity which triggers the payment of the levy, as identified by the legislation. 3

5 Examples of levies to consider (non-comprehensive) includes: Property taxes Worker safety and insurance payments (WCB, WSIB, etc.) Levies on resource exploration or extraction Deposit insurance payments, capital taxes and other payments to regulators Payments to telecom and broadcasting regulators Resources In February 2014, the Chartered Professional Accountants of Canada (CPA Canada) issued a CPA Canada Financial Reporting Alert summarizing the requirements of IFRIC 21, possible business implications and action plans to implement the interpretation. This publication may be accessed by clicking here. In addition, a summary of the IFG s February 26 th, 2014 discussion on the application of IFRIC 21 can be found by clicking here. 4

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6 ABOUT MNP MNP is one of the largest chartered accountancy and business consulting firms in Canada, with offices in urban and rural centres across the country positioned to serve you better. Working with local team members, you have access to our national network of professionals as well as strategic local insight to help you meet the challenges you face every day and realize what s possible. Visit us at MNP.ca Praxity, AISBL, is a global alliance of independent firms. Organised as an international not-for-profit entity under Belgium law, Praxity has its administrative office in London. As an alliance, Praxity does not practice the profession of public accountancy or provide audit, tax, consulting or other professional services of any type to third parties. The alliance does not constitute a joint venture, partnership or network between participating firms. Because the alliance firms are independent, Praxity does not guarantee the services or the quality of services provided by participating firms.

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