IFRIC 21, or: I wasn’t elected to be perfect…

Although financial reporting has brought a miraculous amount of clarity and structure to the world, it’s also responsible for a colossal volume of wasted time….

A recent manifestation of this is IFRIC Interpretation 21 Levies, effective for annual periods beginning on or after January 1, 2014. IFRIC 21 was driven by requests for guidance on the accounting for levies imposed by governments, defining a levy for its purposes as “an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation” (excluding things like income taxes that are already addressed elsewhere, and fines or penalties imposed for breaches of legislation).

It concludes among other things 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 the legislation” and provides the following example: “if the activity that triggers the payment of the levy is the generation of revenue in the current period and the calculation of that levy is based on the revenue that was generated in a previous period, the obligating event for that levy is the generation of revenue in the current period.” For a levy based on something like revenue, the obligating event would usually occur over a period of time, and so the liability would be recognized progressively, as the revenue is generated.

IFRIC 21 and property taxes

That all no doubt sounds reasonable enough, and we can only hope that the originators of the requests to IFRIC feel their problems were adequately solved. But IFRIC 21 blunders into one of the most irritiating and reputationally damaging traps of standard-setting: it reopens a whole category of established practices that everyone was happy with, and that there was no rational need to reexamine. In Canada, in particular, it affects the accounting for property taxes, which clearly seem to be levies as defined above. But then there’s a problem, as laid out in a recent meeting report of the IFRS Discussion Group: “the relevant Canadian municipal legislation is often somewhat ambiguous as to what the triggering event is for property taxes and at what point they become unavoidable. The legislation also varies from place to place within Canada.

Consequently, the IDG and others have spent much time discussing whether, and if so under what circumstances, liabilities for property taxes should be recognized in a single amount (which depending on the wording of the legislation might perhaps be on January 1 of each year, or on the date of assessment, or on some other date) rather than rateably throughout the year, as the great majority of enterprises presumably do at present. Theoretically then, IFRIC 21 might affect the pattern of income recognition and the relative magnitude of working capital at different times of year, along with requiring changes to systems and procedures.

The majority of the IDG members seemed to think the existing rateable approach would continue to be appropriate in most Canadian property tax scenarios, while emphasizing that “the determination of the appropriate view should not be an accounting policy choice but rather should be based on an interpretation of the specific facts and circumstances relating to the relevant Canadian property tax legislation.” The Group also discussed various other kinds of items that might fall within the scope of IFRIC 21, laying out something of a “roadmap” for applying the interpretation. Since the Interpretation only addresses the accounting for the liability and not the other side of the entry, it might sometimes give rise to a second difficulty: whether to recognize a newly-recognized expense as an asset rather than an expense.

Does it matter?

Presumably, the great majority of entities could conclude with little detailed analysis that it doesn’t matter how they account for these items – the timing of recognition of property taxes or whatever other levies might be imposed on them will never be significant to any reader’s assessment of anything. Put another way, if property taxes and other levies constitute such a material burden that changes to the timing of recognition would make a difference to a reader, then that should likely already be visible in the disclosure in some way – certainly in the MD&A, if not also somewhere in the notes to the financial statements. But it’s hard to think what kind of entity that would be (surely not a very attractive one to investors…)

The point is though that entities and auditors don’t have the choice of shrugging the whole thing off as I just tried to. Although we all know about materiality and we all claim (presumably honestly) to keep it high in our minds as we go through all this, new pronouncements always draw additional focus and scrutiny and neurosis, just as too many societal resources in general are spent fretting about flashy new risks (Internet privacy, texting while driving and suchlike) rather than dealing with boring but much more consequential old ones (decaying infrastructure, environmental catastrophe, take your pick). Like Toronto’s wretched mayor Ford, IFRIC 21 has been taking up a lot of space while doing nothing to advance our real common good. Still, also like him, we can hope and probably assume they’ll both be largely forgotten (except as blackly comic horror stories) a year from now…

The opinions expressed are solely those of the author

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