Invitation to comment Draft IFRIC Interpretation DI/2012/1 Levies Charged by Public Authorities on Entities that Operate in a Specific Market

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1 Ernst & Young Global Limited Becket House 1 Lambeth Palace Road London SE1 7EU Tel: +44 [0] Fax: +44 [0] International Financial Reporting Standards Interpretations Committee 30 Cannon Street London EC4M 6XH 5 September 2012 Dear Interpretations Committee Members Invitation to comment Draft IFRIC Interpretation DI/2012/1 Levies Charged by Public Authorities on Entities that Operate in a Specific Market The global organisation of Ernst & Young is pleased to submit its comments on the above Draft Interpretation (DI). The lack of accounting guidance on the recognition and measurement of levies has resulted in diversity in practice and we support the Committee s decision to provide interpretive guidance on this matter. In general, we believe that the proposed interpretation is consistent with the principles in IAS 37 Provisions, Contingent Liabilities and Contingent Assets and the Conceptual Framework, however, we have concerns regarding the scope of the DI, subjectivity in determining a levy to be a non-exchange transaction and the accounting treatment for levies in interim financial statements as highlighted below. Scope We are concerned that the scope of the DI is very broad and may capture more examples of payments to public authorities in non-exchange transactions than is intended (e.g. carbon taxes, stamp duties arising from asset acquisitions and production levies such as dairy production and wine grape levies). Whilst such levies might not give rise to assets in their own right, they can be incurred as an incidental cost of acquiring other assets, such as in the case of stamp duties on property acquisitions. The requirement in this interpretation that the levy gives rise to an expense would conflict with the provisions in other standards which allow duties paid on asset acquisitions to be capitalised as part of the cost to acquire the asset. We recommend that the Committee consider an amendment to the requirement for recognition of an expense to align this interpretation to standards that allow for capitalisation as part of the cost of an asset. For levies that are due only if a minimum revenue threshold is met, we anticipate that the lack of guidance for levies with such a feature would result in diverse accounting treatment for similar transactions. Further, there is a lack of clarity as to whether the committee only intended to exclude revenue thresholds or all thresholds. We strongly recommend that the Committee address the accounting for such levies within the final interpretation. Furthermore, we believe that the rationale in Basis for Conclusions (BC) paragraph 8 would be applicable to such levies, and is consistent with the recognition principles under IAS 37 and the Framework. Ernst & Young Global Limited is a company limited by guarantee registered in England and Wales. No

2 2 Determining what is a Non-exchange transaction We believe that the determination of whether a levy payment is of a non-exchange nature (and hence within scope of this DI) or gives rise to a right, is highly subjective in some circumstances. Therefore it would be helpful if the final interpretation includes application guidance as to what are considered to be non-exchange transactions. Interim financial statements The DI clarifies (see IE Example 3) that a levy is only accrued in the interim period in which it is triggered. Whilst this conforms to the year-to-date basis in IAS 34, it is not clear how this is consistent with existing examples in IAS 34 relating to the treatment of employer taxes and contingent lease payments (see IAS 34 Illustrative Examples B1 & B7). Furthermore, B1 could be interpreted to fall into the scope of this interpretation, resulting in a conflict with the guidance in IE Example 3. The committee needs to consider the principles in these examples and their applicability to all levies in interim periods. Please find our responses to the specific questions for respondents set out in the appendix to this cover letter. Should you wish to discuss the contents of this letter with us, please contact Leo van der Tas on or James Luke on +44 (0) Yours faithfully

3 3 Appendix Responses to the questions in the Draft IFRIC Interpretation DI/2012/1 Levies Charged by Public Authorities on Entities that Operate in a Specific Market Question 1 Scope The draft Interpretation addresses the accounting for levies that are recognised in accordance with the definition of a liability provided in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Levies that are within the scope of the draft Interpretation are described in paragraphs 3 5. Do you agree with the scope proposed in the draft Interpretation? If not, what do you propose and why? As mentioned in the cover letter, we believe that the scope of the interpretation is very broad and may capture more than is intended. Consequently, levies such as stamp duties and other taxes that arise from acquisitions that might be scoped into this interpretation would have to be expensed. Such treatment may conflict with the cost capitalisation requirements in standards such as IAS 2 Inventories, IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets, IAS 39 Financial Instruments: Recognition and Measurement and IAS 40 Investment Properties,IAS 41 Agriculture which allow duties paid on asset acquisitions to be capitalised as part of the cost to acquire the asset. See our response to Question 2 for further discussion. In addition, we have the following specific comments on the Scope section of the DI: Reference in DI EY Comments Paragraph 4(a) We propose the following amendment: income taxes that are within the scope of IAS 12 Income Taxes, ie taxes based on a taxable profit (ie a net amount of revenues and expenses); We believe it is clear that the intention of the DI is to scope out taxes that are within the scope of IAS 12, and the description of taxable profit is firstly unnecessary, and secondly inconsistent with IAS 12. Paragraph 4(b) When referring to revenue threshold, [emphasis added], it is not clear to us whether it is the Committee s intention to include levies that are due based on other non-revenue and non-financial thresholds. For example, an entity that is subject to a carbon tax when a specified level of carbon emissions is reached would be

4 4 Reference in DI EY Comments Paragraphs 4(c), 5(b), 7, 10; IE Examples 1, 2, 3; and BC 9, BC11 and BC20 Paragraph 4(d) Paragraph 5 Paragraph 5(b) Paragraph 5(c) Paragraph 5(e) included in the scope of this DI. We request that the Committee provide further clarification. The reference to the legislation, [emphasis added], should only be legislation, unless the DI is referring to specific legislation. The reference to contracts could be clarified further. We suggest that further explanation and examples be provided as to what the Committee expects contracts to encompass. It would be clearer if paragraph 5 is amended to state that Levies within the scope of this [draft] Interpretation have all the following characteristics. We find the example in the parentheses for a specific market to be circular. We suggest clarifying the example to say such as a specific country, a specific region or a specific industry in a specific country, as currently worded, a specific market in a specific country does not explain what a specific market is. From the discussions of the Committee during its meetings, we understand that the objective of paragraph 5(c) is to ensure that payments which would give rise to a licence/right of use would not be in the scope of this interpretation. As currently worded, this is not entirely clear. We suggest that explicit explanation as to what is considered to be a non-exchange transaction should be provided in the DI. For example, did the Interpretations Committee consider that the right to use a road when paying a toll would be excluded from the DI? In some transactions involving intangible rights, determining whether an asset has been obtained may be very subjective. It is unclear whether the Committee intended to include levies that are calculated based solely on financial variables, or on non-financial variables as well. The confusion arises as BC 2 refers to the calculation of levies based on financial data when discussing the submission for guidance. We understand the DI would include levies calculated based on non-financial metrics (e.g. number of workers), but clarification would be helpful. We recommend that levies be clearly defined in the final interpretation as we have observed confusion from various jurisdictions as to what is considered to be a levy, and would fall within the scope of this interpretation. For example, some jurisdictions have interpreted levies to extend to and encompass taxes, penalties, tolls, tariffs, duties, mining royalties and

5 5 government imposed obligations on an entity to incur certain social expenditures (e.g. to provide welfare and community benefits). One of the key characteristics of a levy is the payment by an entity that operates in a specific market as identified by legislation. We suggest that the interpretation elaborate on what legislation encompasses (ie laws and regulations). We believe this would also further clarify the scope of the interpretation. Question 2 Consensus The consensus in the draft Interpretation (paragraphs 7 12) provides guidance on the recognition of a liability to pay a levy. Do you agree with the consensus proposed in the draft Interpretation? If not, why and what alternative do you propose? As previously mentioned in the cover letter, we believe that the consensus proposed is consistent with current principles in IAS 37 and the Framework. In addition, reiterating our comment in the cover letter on levies due only if a minimum specified threshold (financial or non-financial threshold) is achieved, we believe that this type of levy should be included in the final interpretation, and the rationale in BC 8 would apply to such levies as well as levies already addressed by the DI. Under paragraph 11 of the Consensus section, the DI requires that when an entity recognises the levy liability, the entity must also recognise an expense, and only an expense. Due to the non-exchange nature of the levy, recognition of an asset would not be permitted. In most transactions, the recognition of an expense is appropriate. However, as previously mentioned, when a levy is incurred as part of an asset acquisition, this may qualify as part of the cost of the asset under other IFRSs. Therefore we are concerned that the requirement to recognise an expense may impact on other IFRS. We recommend that the Committee consider amending paragraph 11 as follows: The liability to pay a levy that is within the scope of this draft Interpretation gives rise to an expense unless it qualifies for inclusion in the cost of an asset in terms of another IFRS. Question 3 Transition Entities would be required to apply the draft Interpretation retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Do you agree with the proposed transition requirements? If not, what do you propose and why? We support the retrospective application of the Interpretation, in order for levies to be recorded in the correct period.