22 August 2012

FRC response to IASB draft IFRIC Interpretation “Levies Charged by Public Authorities on Entities that Operate in a Specific Market”

The FRC agrees that there is some divergence in practice in how entities account for an obligation to pay levies charged by public authorities. Therefore, guidance in this instance has the potential for in achieving consistency in accounting. However, the FRC is concerned that: 

(a) Although the IFRIC consensus is a technically correct analysis of how IAS 37 should be applied to levies, in the FRC's view the resulting Interpretation does not lead to decision useful information for users of financial statements. Users of financial statements expect entities to comply with IAS 1 “Presentation of Financial Statements” which requires that “financial statements should present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework” (IAS 1.15). Whilst it is possible to justify the Interpretation technically, it does not result in the substance of the transaction being reported; for example it is difficult to justify that non-recognition of the UK bank levy as a liability in the interim financial statements is a faithful representation of its substance. In arriving at the accounting for such levies, users believe that the economic compulsion to continue to operate in a future period and the legal requirement to incur the levy if the entity does continue in business constitute sufficient grounds for concluding that a constructive obligation to pay the levy exists. However, even ignoring economic compulsion, it cannot be ignored that the liabilities at the interim are likely to be taxed at the year end.

(b) The requirements in IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”, form the basis of the conclusions in this draft Interpretation, and in IFRIC 6, “Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment”, lead to conclusions that do not reflect the substance of the underlying transaction. This indicates to the FRC that either there is a fundamental inconsistency between the requirements in IAS 1 and those in IAS 37 or the underlying principle in IAS 37 is wrong.

The FRC is concerned that accounting and reporting that diverges so significantly from the underlying substance of the transaction has the potential for bringing accounting into disrepute. As a result, the FRC would recommend that rather than issuing this IFRIC in final form, the underlying principle in IAS 37 should be referred to the IASB for review.

Comment letter

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