obligation. In other words, the activity that triggers the payment of the levy as identified by the legislation is
the first generation of revenues at a point in time in 2018. The generation of revenues in 2018 is not the
activity that triggers the payment of the levy. The amount of revenues generated in 2018 only affects the
measurement of the liability. [IFRIC 21.IE1 Example 2].
The table below summarises the illustrative examples that accompany IFRIC 21, which
provide guidelines on how to account for the timing of the recognition for the various
types of levies: [IFRIC 21.IE1]
Provisions, contingent liabilities and contingent assets 1939
Illustrative examples
Obligating event
Recognition of liability
Levy triggered
Generation of revenue Recognise progressively.
progressively as revenue in the specified period. A liability must be recognised
is generated in a
progressively because, at any point
specified period.
in time during the specified period,
the entity has a present obligation
to pay a levy on revenues
generated to date.
Levy triggered in full as
First generation of
Full recognition at that point in time.
soon as revenue is
revenue in subsequent Where an entity generates revenue
generated in one period, period.
in one period, which serves as the
based on revenues from
basis for measuring the amount of
a previous period.
the levy, the entity does not
become liable for the levy, and
therefore cannot recognise a
liability, until it first starts
generating revenue in the
subsequent period.
Levy triggered in full if
Operating as a bank at Full recognition at the end of the
the entity operates as a
the end of the
annual reporting period.
bank at the end of the
reporting period.
Before the end of the annual
annual reporting period.
reporting period, the entity has no
present obligation to pay a levy,
even if it is economically
compelled to continue operating as
a bank in the future. The liability is
recognised only at the end of the
annual reporting period.
Levy triggered if
Reaching the specified Recognise an amount consistent with
revenues are above a
minimum threshold.
the obligation at that point of time.
minimum specified
A liability is recognised only at the
threshold (e.g. when a
point that the specified minimum
certain level of revenue
threshold is reached. For example, a
has been achieved)
levy is triggered when an entity
generates revenues above specified
thresholds: 0% for the first
$50 million and 2% above
$50 million.
In this example, no liability is
accrued until the entity’s revenues
reach the revenue threshold of
$50 million.
1940 Chapter 27
As set out in the table above, when a levy is triggered progressively, for example, as the
entity generates revenues, the entity recognises a liability over the period of time on
that basis. Some examples of progressive-type levies are set out below.
Example 27.21: Recognising a liability for levies that are triggered progressively
Scenario 1: Minimums
The legislation prescribes that no levy is triggered until revenues reach a certain threshold. There is a 0% tax
rate on revenues until they reach $50 million, with a payment of 2% of revenues in excess of that amount.
For an entity that earns $49 million as at 30 June 2019, $51million as at 31 July 2019 and $100 million as at
31 December 2019, the following liabilities should be recognised:
30 June 2019 – No provision is recognised;
31 July 2019 – $20,000 provision is recognised (2% × $1 million); and
31 December 2019 – $1 million provision is recognised (2% × $50 million).
Scenario 2: Progressive tax rates
The legislation prescribes that the tax rate is escalating. There is a 2% tax rate on the first $50 million in
revenues and 3% for revenues in excess of $50 million.
For an entity that earns $49 million as at 30 June 2019, $51million as at 31 July 2019 and $100 million as at
31 December 2019, the following liabilities should be recognised:
30 June 2019 – $980,000 provision is recognised (2% × $49 million);
31 July 2019 – $1,030,000 provision is recognised ((2% × $50 million) + (3% × $1 million)); and
31 December 2019 – $2.5 million provision is recognised ((2% × $50 million) + (3% × $50 million)).
Scenario 3: Specified formula
The legislation prescribes that the levy is calculated based on a specified formula that does not match the
actual activity for the period. A calendar year-end entity has to pay a monthly levy based on 0.1% of a 12-
month rolling average of gross profit.
Under the legislation, the 12-month period which the rolling average of the gross profit would be based on
relates to the preceding 12 months, for example:
12 month rolling
Liability to be
Date
Preceding 12 months
average ($)
recognised ($)
30 June 2019
1 July 2018 – 30 June 2019
50 million
50,000
31 July 2019
1 August 2018 – 31 July 2019
60 million
60,000
31 December 2019
1 January 2019 – 31 December 2019 40 million
40,000
When the legislation provides that a levy is triggered by an entity operating in a market
only at the end of its annual reporting period, no liability is recognised until the last day
of the annual reporting period. No amount is recognised before that date in anticipation
of the entity still operating in the market. Accordingly, a provision would not be
permitted to be recognised in interim financial statements if the obligating event occurs
only at the end of the annual reporting period. [IFRIC 21.IE1 Example 3]. The accounting
treatment in interim reports is discussed in Chapter 37 at 9.7.5.
6.8.3
Recognition of an asset or expense when a levy is recorded
IFRIC 21 only provides guidance on when to recognise a liability, which is the credit
side of the journal entry. The interpretation specifically states that it does not address
Provisions, contingent liabilities and contingent assets 1941
whether the debit side of the journal entry is an asset or an expense, [IFRIC 21.3], except
in the case of prepaid levies. [IFRIC 21.14].
Prepayments may be fairly common in arrangements in which the legislation requires
entities to pay levies in advance and where the obligating events for these levies are
progressive. For example, property taxes that are paid in advance at a specified date
(e.g. 1 January) for an obligating event that relates to future periods (e.g. 1 January to
31 December). In such instances, the entity would recognise the prepaid levy as an a
sset.
[IFRIC 21.14]. In this scenario, the prepaid levy would then be amortised over the period.
Aside from prepaid levies, there are also instances when the assessment of expensing
the liability or recognising a corresponding asset requires the application of other
standards, such as IAS 2, IAS 16 or IAS 38. Given that levies are imposed by government
and arise from non-exchange transactions, there would not typically be a clear linkage
to future economic benefits. Consequentially, if the incurrence of the liability does not
give rise to an identifiable future economic benefit to the entity, the recognition of an
asset would be inappropriate as the definition of an asset would not be met. In such
cases, the debit side would therefore be to an expense account.
In the case where asset recognition is appropriate under other IFRS standards, levies
are generally not expected to give rise to a stand-alone asset in its own right, given that
payments for the acquisition of goods or services are scoped out of IFRIC 21. [IFRIC 21.5].
However, a levy may form part of the acquisition costs of some other asset, provided it
meets the asset recognition criteria in other IFRS standards. For example, an entity may
be required to pay an import duty to the government under legislation for any large
cargo trucks purchased from overseas. The entity uses the large cargo trucks as part of
their operations to transport their goods to customers locally and therefore capitalises
the trucks as part of property, plant and equipment under IAS 16. The import duty that
is payable under the legislation may give rise to an IFRIC 21 levy, which would also be
capitalised as part of the cost of the asset. [IAS 16.16(a)].
6.8.4
Payments relating to taxes other than income tax
As discussed at 6.8.1 above, IFRIC 21 does not apply to income taxes in scope of IAS 12.
However, the Interpretations Committee concluded in 2006 that any taxes not within
the scope of other standards (such as IAS 12) are within the scope of IAS 37. Therefore
such taxes may be within the scope of IFRIC 21. [IFRIC 21.BC4].
In 2018, the Interpretations Committee discussed a fact pattern where an entity is in
dispute with a tax authority in respect of a tax other than income tax. The entity
determines that it is probable that it does not have an obligation for the disputed amount
and consequently, it does not recognise a liability applying IAS 37. The entity
nonetheless pays the disputed amount to the tax authority, either voluntarily or because
it is required to do so. The entity has no right to a refund of the amount before resolution
of the dispute. Upon resolution, either the tax authority returns the payment to the
entity (if the outcome of the dispute is favourable to the entity) or the payment is used
to settle the tax liability (if the outcome of the dispute is unfavourable to the entity).
In March 2018, the Interpretations Committee observed that the payment made by the
entity gives rise to an asset as defined in the Conceptual Framework that was in issue at
the time. The Conceptual Framework (2010) defines an asset as a resource controlled
1942 Chapter 27
by the entity as a result of past events and from which future economic benefits are
expected to flow to the entity. [CF(2010) 4.4(a)]. On making the payment, the entity has a
right to receive future economic benefits either in the form of cash or by using the
payment to settle the tax liability. The payment is not a contingent asset as defined in
IAS 37 because it is an asset, and not a possible asset, of the entity. The entity therefore
recognises an asset when it makes the payment to the tax authority.31
Also in March 2018, the IASB issued a revised Conceptual Framework for Financial
Reporting. The revised framework became effective immediately for the IASB and IFRS
Interpretations Committee and is effective from 1 January 2020 for entities that use the
Conceptual Framework to develop accounting policies when no IFRS standard applies to
a particular transaction. Paragraph 4.3 of the revised Conceptual Framework defines an
asset as a present economic resource controlled by the entity as a result of past events. In
May 2018, the Interpretations Committee considered whether the new Conceptual
Framework would change its observation that the payment made by the entity gives rise
to an asset, and not a possible asset (contingent asset), of the entity. The Committee
tentatively concluded that the new Conceptual Framework would not change its previous
observation. The Committee also noted that this matter had raised questions about the role
of the new Conceptual Framework and decided to consult the Board on these questions.32
6.9
Dilapidation and other provisions relating to leased assets
As discussed at 5.2 above, it is not appropriate to recognise provisions that relate to
repairs and maintenance of owned assets. However, the position can be different in the
case of obligations relating to assets held under leases. Nevertheless, the same principles
under IAS 37 apply:
(a) provisions are recognised only for obligations existing independently of the entity’s
future actions (i.e. the future conduct of its business) and in cases where an entity
can avoid future expenditure by its future actions, for example by changing its
method of operation, it has no present obligation; [IAS 37.19]
(b) financial statements deal with an entity’s position at the end of the reporting period
and not its possible position in the future. Therefore, no provision is recognised
for costs that need to be incurred to operate in the future; [IAS 37.18] and
(c) for an event to be an obligating event, the entity must have no realistic alternative
to settling the obligation created by the event. [IAS 37.17].
Leases often contain clauses which specify that the lessee should incur periodic charges
for maintenance, make good dilapidations or other damage occurring during the rental
period or return the asset to the configuration that existed as at inception of the lease.
These contractual provisions may restrict the entity’s ability to change its future conduct
to avoid the expenditure. For example, the entity might not be able to transfer the asset
in its existing condition. Alternatively, the entity could return the asset to avoid the risk
of incurring costs relating to any future damage, but would have to make a payment in
relation of dilapidations incurred to date. So the contractual obligations in a lease could
create an environment in which a present obligation could exist as at the reporting date
from which the entity cannot realistically withdraw.
Provisions, contingent liabilities and contingent assets 1943
Under principle (b) above, any provision should reflect only the conditions as at the
reporting date. This means that a provision for specific damage done to the leased asset
would merit recognition, as the event giving rise to the obligation under the lease has
certainly occurred. For example, if an entity has erected partitioning or internal walls in
a leasehold property and under the lease these have to be removed at the end of the
term, then provision should be made for this cost (on a discounted basis, if material) at
the time of putting up the partitioning or the walls. In
this case, an equivalent asset would
be recognised and depreciated over the term of the lease. This is similar to a
decommissioning provision discussed at 6.3 above. Another example would be where
an airline company leases aircraft, and upon delivery of the aircraft has made changes
to the interior fittings and layout, but under the leasing arrangements has to return the
asset to the configuration that existed as at inception of the lease.
What is less clear is whether a more general provision can be built up over time for
maintenance charges and dilapidation costs in relation to a leased asset. It might be argued
that in this case, the event giving rise to the obligation under the lease is simply the passage
of time, and so a provision can be built up over time. However, in our view the phrase ‘the
event giving rise to the obligation under the lease’ indicates that a more specific event has to
occur; there has to be specific evidence of dilapidation etc. before any provision can be
made. That is, it cannot be assumed that the condition of a leased asset has deteriorated
simply because time has passed. However, in practice, it will often be the case that
dilapidations do occur over time, in which case a dilapidations provision should be
recognised as those dilapidations occur over the lease term. Example 27.12 at 5.2 above dealt
with an owned aircraft that by law needs overhauling every three years, but no provision
could be recognised for such costs. Instead, IAS 37 suggests that an amount equivalent to the
expected maintenance costs is treated as a separate part of the asset and depreciated over
three years. Airworthiness requirements for the airline industry are the same irrespective of
whether the aircraft is owned or leased. So, if an airline company leases the aircraft, should
a provision be made for the overhaul costs? The answer will depend on the terms of the lease.
For an entity reporting under IAS 17 and leasing an aircraft under an operating lease, if the
lease requires the lessee to maintain the airworthiness of the aircraft and to return the
aircraft at the end of the lease in the same condition as it was taken at inception of the
lease, i.e. the aircraft has to be overhauled prior to its return, then the lessee should make
provision. In this case the overhaul of the aircraft is a contractual obligation under the
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 383