When is something an asset versus a contingent asset?
Here’s an item from a recent IFRIC update:
- The Committee received a request about how to account for deposits relating to taxes that are outside the scope of IAS 12 Income Taxes (ie deposits relating to taxes other than income tax). In the fact pattern described in the request, an entity and a tax authority dispute whether the entity is required to pay the tax. The tax is not an income tax, so it is not within the scope of IAS 12. Any liability or contingent liability to pay the tax is instead within the scope of IAS 37. Taking account of all available evidence, the preparer of the entity’s financial statements judges it probable that the entity will not be required to pay the tax—it is more likely than not that the dispute will be resolved in the entity’s favour. Applying IAS 37, the entity discloses a contingent liability and does not recognise a liability. To avoid possible penalties, the entity has deposited the disputed amount with the tax authority. Upon resolution of the dispute, the tax authority will be required to either refund the tax deposit to the entity (if the dispute is resolved in the entity’s favour) or use the deposit to settle the entity’s liability (if the dispute is resolved in the tax authority’s favour)…
- The Committee observed that if the tax deposit gives rise to an asset, that asset may not be clearly within the scope of any IFRS Standard. Furthermore, the Committee concluded that no IFRS Standard deals with issues similar or related to the issue that arises in assessing whether the right arising from the tax deposit meets the definition of an asset. Accordingly, applying paragraphs 10–11 of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, the Committee referred to the two definitions of an asset in IFRS literature—the definition in the Conceptual Framework for Financial Reporting issued in March 2018 and the definition in the previous Conceptual Framework that was in place when many existing IFRS Standards were developed. The Committee concluded that the right arising from the tax deposit meets either of those definitions. The tax deposit gives the entity a right to obtain future economic benefits, either by receiving a cash refund or by using the payment to settle the tax liability. The nature of the tax deposit—whether voluntary or required—does not affect this right and therefore does not affect the conclusion that there is an asset. The right is not a contingent asset as defined by IAS 37 because it is an asset, and not a possible asset, of the entity.
- Consequently, the Committee concluded that in the fact pattern described in the request the entity has an asset when it makes the tax deposit to the tax authority.
- …The Committee concluded that the requirements in IFRS Standards and concepts in the Conceptual Framework for Financial Reporting provide an adequate basis for an entity to account for deposits relating to taxes other than income tax. Consequently, the Committee decided not to add this matter to its standard-setting agenda.
Readers may not find much revelation in here (one commenter said it “seems to be such a common-sense outcome that it is difficult to see why it came to the Committee.”). Still, an alternative view appears to have existed in practice:
- “The amount paid is considered a contingent asset of the entity applying paragraph 10 of IAS 37. The uncertainty about the outcome of the dispute creates uncertainty about the existence of the asset, rather than only the means of recovery. The entity would recognize an asset only to the extent that reimbursement is virtually certain.”
This analysis depends in part on noting that once the amount has been deposited, it’s out of the entity’s control whether or when it will be reimbursed, and whether it will be able to access the future economic benefits. IFRIC dismissed this approach though, noting that “the entity has paid an amount to the tax authority and any uncertainty relates to the tax obligation, and not to the existence of the asset” (as noted above, even if the deposit gets used in satisfying a tax liability, that still provides an economic benefit to the entity, by eliminating an obligation it would otherwise have to satisfy out of other resources). This treatment avoids, of course, the significant choppiness that would result from expensing the amount at the time of the deposit (even if one expects to get it back) and then recognizing the same amount as income later.
So even if it’s not the most complex issue that IFRIC’s ever addressed, it’s one that might be helpful in thinking through matters relating to other kinds of deposits and their related uncertainties, in part by underlining the multiplicity of ways in which an asset’s economic benefit may be realized…
The opinions expressed are solely those of the author