As we covered here, the IASB recently called for stakeholder feedback to inform its review of the accounting standard for revenue from contracts with customers, IFRS 15.

This is part of the regular post-implementation review process “to assess whether the effects of applying the new requirements on users of financial statements, preparers, auditors and regulators are those the IASB intended when it developed the requirements.” We already looked at some feedback relating to the areas of “principal vs. agent,” “negative revenue,” and collaborative arrangements. Here’s another one. IFRS 15.47 specifies that amounts collected on behalf of third parties, such as some sales taxes, are excluded from the determination of the transaction price, but doesn’t define in detail how to make that determination. It’s possible that the revenue reported by one entity might include certain taxes which another entity excludes, with a presumably corresponding increase in expenses. US GAAP provides entities a policy choice to exclude all sales taxes (as defined) from the revenue line, without needing to worry about whether they fall strictly within the governing definition. The IASB decided not to provide a similar policy choice, noting among other things the potential adverse impact on comparability. Against that backdrop, this is from PricewaterhouseCoopers:

• In our view the guidance in IFRS 15 for accounting for sales-based taxes is insufficient. We believe that the impact of this is pervasive (particularly in certain industries such as tobacco and alcoholic beverages), creates diversity in practice, and the impact is material. The only guidance in IFRS 15 that deals with obtaining consideration on behalf of another party is the principal versus agent guidance. However, the principal versus agent guidance is not suitable for this assessment as it focuses on whether the reporting entity takes control of the underlying good or service before transferring the good or service to the customer. In the case of sales-based taxes, the transaction with the tax authority is a non-reciprocal transaction. That is, the tax authority never has control of the underlying good or service, and as such an assessment of whether the reporting entity takes control from the tax authority cannot be performed. Therefore we think that the Standard is not operating as intended in this regard.

PWC note that when the issue is material, entities sometimes use alternate performance measures to present revenue, including a gross revenue / sales line item on the face of the income statement, followed by a line item to deduct excise duties, and then a line item for net revenues / sales; a single line item for revenue on the face of the income statement, with a footnote that states that the revenue presented in the income statement is net of excise duties (stating the amount of excise duties that have been deducted); and a gross revenue line on the face of the income statement which includes ‘duty’ – the level of duty then being quantified on the face of the income statement within a boxed presentation which shows the equal amount contained within cost of sales. They note though that the entities “do not typically provide a clear basis for how the underlying assessment has been performed or the judgements inherent regarding which taxes have been included or excluded from revenue.”

But on the other hand, the other big three accounting firms didn’t mention the issue in their comment letters at all. Others who did include the European Securities and Markets Authority, which noted “divergent practice among European entities in different industries regarding the inclusion of certain sales taxes in the transaction price and revenue,” and commented that it “considers it important to include in IFRS 15 guidance and examples that would help entities to assess whether those payments are collected on behalf of third parties.” Similar to PWC, the International CFO Alliance placed the issue in the context of the principal versus agent determination, noting that “the final question often comes down to one of credit risk – one of the indicators pre-IFRS 15 but one that equally was diminished in importance under IFRS 15 where the Board concluded in deliberations that both principals and agents face credit risk exposure.”  The issue was also the main one to be highlighted by Chartered Accountants Ireland:

• IFRS 15 specifies that some sales-based taxes, including digital taxes, are excluded from the determination of the transaction price. As entities are required to determine which sales-based taxes are excluded and which are included in the transaction price we believe that mixed practice has developed in the accounting for sales-based taxes. The guidance on principal versus agent is often used in analyzing the appropriate accounting for sales-based taxes, however as there is no transfer of control, we suggest that this guidance is not suitable.

Even so, it may seem that the comments I made previously in the context of collaborative arrangements should apply here again: one can entirely acknowledge the occasional challenges and complexities and variation in practice in this area, while also noting that the standard is working well overall, and that companies should by now have an established approach to identifying and presenting with sales taxes, imperfect as it may be. As such, a principle-based approach to standard-setting arguably not only justifies but perhaps even requires avoiding any further elaboration by the IASB….

The opinions expressed are solely those of the author.