27 September 2012

EFRAG: Feedback statement from comment letters on 'Levies Charged by Public Authorities on Entities that Operate in a Specific Market'

EFRAG published its feedback statement from comment letters received on 'Levies Charged by Public Authorities on Entities that Operate in a Specific Market'. The feedback statement describes the main comments received and how those comments were considered by EFRAG during its technical discussions.

EFRAG finalised its final comment letter to the IASB on the IFRS Interpretations Committee Draft Interpretation “Levies Charged by Public Authorities on Entities that Operate in a Specific Market” on 10 September, 2012.

The feedback statement describes the arguments used by EFRAG’s constituents in favour and against the proposals in the Draft Interpretation. It explains EFRAG’s technical analysis of those arguments and why EFRAG decided not to reflect some of the concerns received in its final comment letter. EFRAG has also included some of the suggested alternatives provided by respondents, supported by specific reasoning.

Legal form and underlying substance of the levy

In the draft comment letter, EFRAG acknowledged that the consensus was consistent with the principles of related IFRS requirements and decided to ask constituents whether the Draft Interpretation resulted in decision-useful financial information.

Most respondents agreed with EFRAG that consensus was consistent with related IFRS requirements. However, a majority considered this draft interpretation a theoretical approach which did not always lead to useful information for users and that attention was needed to be given to the underlying substance of the levy and not merely its legal form. Particularly, levies charged on a recurring basis (e.g. annually) were considered related to a period of time and, consequently, a progressive recognition of an expense would be better understood by users. Respondents provided, however, mixed views on how to solve the accounting issue. Some considered the liability should be accounted for in full at the start of the period with a corresponding asset amortised over this period, relating the levy to the entity’s future activities or an exchange transaction. Others believed the liability, and related expense, should be accrued progressively, relating the levy to the entity’s past activities. Various arguments were provided to support such views: an entity had no realistic possibility of avoiding the obligation; levy was considered as a right to operate or prepayment; the matching concept should be applied.

It should be noted that a number of respondents agreed with the consensus as it would provide decision useful information.

Issuing interpretation guidance or amendments to reduce current diversity

In its draft comment letter, EFRAG acknowledged that there were requests for guidance on accounting for levies and that subsequent outreach activities identified that there was diversity in practice and the issue was widespread. Therefore, EFRAG thought that specific guidance in this case would contribute to consistency in accounting for levies.

Many respondents did not agree with the Draft Interpretation and believed it should not be finalised as it did not provide decision-useful financial information to users in all circumstances.

However, these respondents provided mixed views on how the IFRS Interpretations Committee should address this issue. Some suggested that a more comprehensive project on levies, covering all forms of taxes charged by public authorities, should be taken to the IASB. Others considered that IAS 34 should be amended to allow an exception to its main principle. There was as well the view that the underlying principle in IAS 37 should be referred to the IASB for review. Finally, some considered the IASB could incorporate this issue into a broader review of IAS 12 Income Taxes.

Contrary to that view, a number of respondents agreed with the Draft Interpretation as it would provide decision useful information and specific guidance in this case contributed to consistency in accounting for levies. However, one considered this a temporary solution as further consideration was needed.

Press release

Feedback statement from comment letters

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