IFRIC 21 ‘Levies’ – Bigger than it sounds?

07 February 2014

By John Hitchins

There has been a recent ground swell of discussion about IFRIC 21 and the effective date of 1 January 2014 seems to be catching a few people off guard. But why?

Well, for starters, the title ‘Levies’ implies a limited scope but the reality is quite the opposite. The interpretation captures a number of different obligations imposed by governments – some of which are not described as a ‘levy’. More importantly, IFRIC 21 is an interpretation of IAS 37, so similar principles apply to other obligations in the scope of IAS 37.

There are surprisingly few debates about the actual accounting. IFRIC 21 clarifies that the obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by legislation. So what is the ground swell all about?

Entities are starting to find that applying the principle in practice can result in accounting that is surprising and counter-intuitive. The guidance could result in a change to current practice for accounting for many non-income taxes across a number of jurisdictions. But what are companies doing about it?

Some are looking for deferral of the effective date. Why do today what you can do tomorrow? This seems like a hard sell as the interpretation has been out for nine months and under discussion for much more than that. It is clear however that some are only just catching on to the potential effects and the number of levies identified as subject to the interpretation has been increasing in some territories.

Others are looking at scope exceptions. IFRIC 21 scopes out transactions in exchange for an asset or service but the interpretation does not give any guidance on accounting for the ‘debit’. Entities are having to look elsewhere to see whether, for example, an intangible asset is received in exchange for payment. In many cases, however, these levies are similar to income taxes in that they cannot be attributable to a specific service or asset received from the government.

The consensus is that the scope is broad. And either way the principle in IFRIC 21 captures more than one would think; it is an interpretation of IAS 37 covering all liabilities that are not accounted for under another standard.

I have some sympathy for the current revolt against the interpretation and would support another look at IAS 37 as a whole. There could also be a case for a separate standard for “other” taxes – why should corporate taxes get special treatment when in many countries they are a relatively small part of what companies pay in total tax? And it is hard to argue that implementation won’t be challenging. Some obligations, for example property taxes, will require detailed analysis of legislation, which could be time consuming for large entities operating in multiple jurisdictions.

But the interpretation and IAS 37 are here to stay for at least the medium term, so it is time to get on with it. Do you agree? 

John Hitchins:
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