IFRS Discussin Grup Reprt n the Public Meeting February 26, 2014 The IFRS Discussin Grup is a discussin frum nly. The Grup s purpse is t assist the Accunting Standards Bard (AcSB) regarding issues arising n the applicatin f Internatinal Financial Reprting Standards (IFRSs) in Canada. The Grup cmprises members with varius backgrunds wh participate as individuals in the discussin. Any views expressed in the public meeting d nt necessarily represent the views f the rganizatin t which a member belngs r the views f the AcSB. The discussins f the Grup d nt cnstitute fficial prnuncements r authritative guidance. This dcument has been prepared by the staff f the AcSB and is based n discussins during the Grup s meeting. Cmments made in relatin t the applicatin f IFRSs d nt purprt t be cnclusins abut acceptable r unacceptable applicatin f IFRSs. Only the IFRS Interpretatins Cmmittee r the Internatinal Accunting Standards Bard can make such a determinatin. (Fr a full understanding f the discussins and views expressed at the public meeting, listen t the audi clips). Items Presented and Discussed at the February 26, 2014 Meeting IFRIC 21: Levies Prperty Taxes in Canada IFRIC 21: Levies Cnsideratin f Levies Other than Prperty Taxes
Reprt n Public Meeting n February 26, 2014 Nn-authritative material ITEMS PRESENTED AND DISCUSSED AT THE FEBRUARY MEETING IFRIC 21: Levies Prperty Taxes in Canada IFRIC 21 Levies prvides guidance n accunting fr levies in accrdance with the requirements f IAS 37 Prvisins, Cntingent Liabilities and Cntingent Assets. This Interpretatin is effective fr annual perids cmmencing n r after January 1, 2014 and is applied retrspectively. IFRIC 21 requires that an entity recgnizes a liability fr a levy when the triggering event as specified in the legislatin ccurs. An entity des nt recgnize a liability at an earlier date, even if it has n realistic alternative t avid the triggering event. Cnsequently, the ptential impact f IFRIC 21 is ne f timing f recgnitin f the liability. In Canada, municipalities have the pwer thrugh legislatin t levy prperty taxes. Prperty taxes are generally levied n a prperty situated within the bundaries f a municipality and are determined with reference t the underlying prperty s value. Given that prperty taxes are nn-reciprcal charges impsed by a gvernment, in accrdance with legislatin, and are based n prperty value (and as such are nt within the scpe f IAS 12 Incme Taxes r any ther standard), prperty taxes appear t be within the scpe f IFRIC 21. The Grup cnsidered when a liability t pay prperty taxes shuld be recgnized in accrdance with IFRIC 21 based n sme f the typical features fund in Canadian municipal tax legislatin. The Grup als cnsidered the accunting fr the debit side f the entry in relatin t Canadian prperty taxes. Issue 1: Timing f recgnitin f a liability t pay prperty taxes Tw alternatives have been identified with regard t the apprpriate timing f recgnitin f a liability fr prperty tax under IFRIC 21 in Canada. The different alternatives are a result f the fact that the relevant Canadian municipal legislatin is ften smewhat ambiguus as t what the triggering event is fr prperty taxes and at what pint they becme unavidable. The legislatin als varies frm place t place within Canada. View 1A The liability t pay prperty taxes shuld generally be recgnized at a pint in time. Under this view, the bligating event is the wnership f the prperty n a specific date. Canadian municipal legislatin may have clauses that impse prperty taxes n the wner f a prperty n, r as f, a specific date (r dates) in the year. Sme general clauses that have been seen in Canadian municipal legislatin nte that prperty taxes are deemed t be impsed n January 1 st f each year. Additinally, the municipality may be able t recver thse taxes frm either the current wner f the prperty r the riginal wner wh wned the prperty at the time the prperty taxes were impsed. Under this view, when a prperty is wned thrughut the year, a liability fr annual prperty taxes shuld be recgnized n the later f January 1 st (the impsitin date ) and the date f the assessment. In this scenari, ne wuld need t determine what is meant by assessed and the timing f the assessment in rder t determine the specific date n which the liability t pay the prperty tax levy shuld be recgnized. 2
Reprt n Public Meeting n February 26, 2014 Nn-authritative material Once recgnized, the liability wuld be based n the prperty wner s estimate f the prperty tax fr the year and wuld be adjusted nce the amunt f the levy is finalized. View 1B The liability t pay prperty taxes shuld generally be recgnized ratably thrughut the year. Under this view, the bligating event ccurs ratably thrughut the year. Prperty tax legislatin in varius jurisdictins in Canada des nt clearly define a single bligating event that gives rise t a liability t pay the annual levy. The relevant municipal legislatin may nt specify a single date at which ne is bligated fr an entire year s prperty taxes and, as such, at any date within the year, the nly amunt f prperty taxes that an wner can reasnably estimate they are liable fr is a pr rata estimate f annual prperty taxes based n the number f days f wnership. Under this view, wider cnsideratin f the assessment and taxatin prcesses that cmprise the typical Canadian prperty tax system is required, including, fr example, the relevant municipal Assessment Act and the assciated appeals prcess fr refunds in certain circumstances, such as a change in the cnditin r use f the prperty, as well as the mechanisms available in the municipal legislatin itself relating t refunds, adjustments and relief frm prperty taxes. Such cllective cnsideratin f the prperty tax system wuld als supprt that there is nt a single date at which the bligatin is unavidable. The Grup s Discussin Based n the facts and circumstances described abve, a majrity f the Grup members supprted View 1B, which represented sme f the requirements that may be fund in Canadian municipal prperty tax mechanics. Hwever, sme members did see merit in the arguments supprting View 1A, particularly when ther facts and circumstances exist. Grup members nted that it is difficult t apply IFRIC 21 t Canadian prperty tax legislatin. Members bserved that the determinatin f the apprpriate view shuld nt be an accunting plicy chice but rather shuld be based n an interpretatin f the specific facts and circumstances relating t the relevant Canadian prperty tax legislatin. Grup members nted that it is the varying degrees f ambiguity acrss multiple aspects f the pieces f legislatin underlying the Canadian prperty tax system that makes it difficult t justify ne view as mre apprpriate than the ther. Grup members cmmented that it appears that diversity in practice is unlikely t ccur at this pint because many preparers and auditrs seem t supprt View 1B, based n their understanding f the cntext in which prperty taxes are levied acrss Canada. Grup members nted that freign jurisdictins have different legislatin, which may specify that prperty tax bligatins arise at a specific pint in time, r specify that the tax bligatin arises rateably ver the perid. Detailed analysis f the specific pieces f legislatin by preparers and auditrs will be necessary. Grup members reminded preparers and auditrs that it is imprtant t keep up t date n this issue as ther jurisdictins begin t apply IFRIC 21. Preparers will have t identify, and perfrm an analysis f, the applicable legislatin in the relevant Canadian and freign jurisdictins t fully assess the impact f IFRIC 21. One Grup member cmmented that it is imprtant that Crwn crpratins take int accunt the specific terms f the Payments in Lieu f Taxes Act and any related Orders in Cuncil applicable t the 3
Reprt n Public Meeting n February 26, 2014 Nn-authritative material Crwn crpratin t determine if the analysis f these payments wuld align with the discussin abve. Grup members als cmmented that the real estate industry shuld cnsider the effect f the relevant view (r views) applicable t their rganizatin regarding the timing f recgnitin f the prperty tax liability n the determinatin f fair value if they are applying the fair value mdel. Grup members als nted that under View 1A in the real estate industry, there culd be a discnnect in the recgnitin f the prperty tax liability in relatin t the timing f recgnizing prperty tax recveries frm tenants under the terms f cmmercial leases. Issue 2: Accunting fr the debit side f the entry IFRIC 21 nly prvides guidance n when t recgnize a liability it des nt address whether the debit side is an asset r an expense. Hwever, paragraph 14 f IFRIC 21 requires that an entity recgnize an asset if it has prepaid a levy but des nt yet have a present bligatin t pay that levy. As such, under View 1B abve, ne wuld recrd a prepaid asset nly when prperty taxes have been paid t the municipality in excess f the amunt f the bligatin based n the pr rated number f days f wnership during the year. Under View 1A abve, when a liability fr a full annual prperty tax levy is triggered n a specific date, the issue arises as t where the debit side f the entry wuld be recrded at the time the liability is recrded. Tw ptential views have been expressed: View 2A Prperty taxes shuld generally be expensed (unless recgnized as an asset in accrdance with anther standard, such as prperty plant and equipment under cnstructin). Under this view, prperty taxes shuld be expensed because there is n clear future ecnmic benefit t be received by an wner as a result f paying the prperty taxes. Therefre, the recgnitin f an asset wuld be inapprpriate because the definitin f an asset has nt been met. View 2B Recgnize a right t use asset. Under this view, ne wuld recrd a liability fr prperty tax n a specific date but als recrd an asset in relatin t the right t use the prperty fr the remainder f the year. Under this view, the payment f prperty taxes is cnsidered t prvide the wner with the cntinuing right t use the prperty ver the year. As such, an intangible asset wuld be recrded when the liability t pay prperty taxes is recrded and amrtized ver the remainder f the year. Grup Discussin The majrity f Grup members supprted View 2A and cncluded that it is difficult t supprt the view that the payment f prperty taxes generates an asset because it is a nn-reciprcal transactin. Grup members cnsidered whether a frmal recmmendatin shuld be made t the AcSB t refer these issues t the IASB r the IFRS Interpretatins Cmmittee. Althugh the Grup s discussin demnstrated the practical difficulties in applying IFRIC 21 t prperty taxes, members culd nt identify what part f IFRIC 21 culd be clarified and, cnsidering the discussins as a whle, did nt believe the general criteria fr a submissin t IFRIC was met. The Grup decided that n frmal actin shuld be taken at this time. 4
Reprt n Public Meeting n February 26, 2014 Nn-authritative material IFRIC 21: Levies Cnsideratin f Levies Other than Prperty Taxes IFRIC 21 Levies prvides guidance n accunting fr levies in accrdance with the requirements f IAS 37 Prvisins, Cntingent Liabilities and Cntingent Assets. This Interpretatin is effective fr annual perids cmmencing n r after January 1, 2014 and is applied retrspectively. The Grup discussed levies, ther than prperty taxes, which are paid by Canadian cmpanies t lcal and freign gvernments that may be within the scpe f IFRIC 21 and cnsideratins that Canadian entities shuld apply in analyzing the ptential effect f IFRIC 21. The analysis under IFRIC 21 f Canadian prperty taxes, a specific type f levy, is addressed in a separate paper. An issue with IFRIC 21 is that its scpe is ptentially brader than many preparers might expect. The term levies is nt ne that is widely used in Canada but it is imprtant t remember that it is nt what an item is called that determines whether r nt it falls within the scpe f IFRIC 21. Rather, the key issue is whether r nt the item, whatever it may be called, meets the definitin f a levy under IFRIC 21. As such, Canadian cmpanies shuld cnsider all payments impsed by, and/r paid t, gvernment pursuant t legislatin r regulatin, rather than by cntract, t determine if they are within the scpe f IFRIC 21. Items that are cnsidered t be levies within the scpe f IFRIC 21 may be referred t as a levy r as sme ther term in the underlying legislatin. Examples f items that may be levies under IFRIC 21 include rents, ryalties, taxes, cntributins and fees. The first questin that Canadian cmpanies shuld cnsider, nce they have identified all such payments impsed by gvernment, is whether they are within the scpe f IFRIC 21: Is the payment impsed by a gvernment in accrdance with legislatin? Is the payment nn-reciprcal? (That is, a payment made fr the acquisitin f an asset, r fr the rendering f services under a cntractual agreement with a gvernment, des nt meet the definitin f a levy.) Is the payment nt within the scpe f anther standard (fr example, IAS 12 Incme Taxes, IAS 19 Emplyee Benefits, etc.)? Is the payment nt a fine r penalty impsed fr breach f the legislatin? If the answer is yes t all fur questins, the payment is a levy within the scpe f IFRIC 21. When determining whether payments are impsed by a gvernment, payments made t all levels and types f gvernment shuld be cnsidered municipal, prvincial, federal, First Natins and rganizatins cntrlled by gvernment (such as Crwn crpratins and gvernment agencies). Levies are als nt cnfined t Canada an entity must cnsider payments impsed by gvernments in all freign jurisdictins as well. Fr this purpse, the definitin f gvernment in IAS 20 Accunting fr Gvernment Grants and Disclsure f Gvernment Assistance and IAS 24 Related Party Disclsures is applicable. When assessing whether payments are nn-reciprcal, judgment may be required t determine if the payment f a levy results in the acquisitin f an asset, depending n the nature f the levy and the activity that gives rise t the bligatin. 5
Reprt n Public Meeting n February 26, 2014 Nn-authritative material Once a levy has been identified as being within the scpe f IFRIC 21, the next cnsideratin is whether the guidance in IFRIC 21 wuld significantly change the current accunting fr the levy. This step may require Canadian cmpanies t cnsider the fllwing: What is the activity that triggers the payment f the levy as identified in the legislatin? The activity which triggers payment in the legislatin is the bligating event, which determines the pint at which the liability fr payment f the levy is recgnized. Fr example, a levy may be a: Prgressive levy an entity may be bligated under the legislatin t pay a levy calculated as a percentage f revenues in the current year. Under IFRIC 21, the bligatin t pay that levy wuld generally be recgnized prgressively as the revenues are earned. Pint in time levy an entity may be bligated under the legislatin t pay a levy in full n a particular date (fr example, if the entity is perating in a specified industry r in a specified manner at the end f the annual reprting perid). Under IFRIC 21, the bligatin t pay the levy wuld generally be recgnized in full n the particular date identified. Even if the liability is recgnized prgressively, there may be sme features f the levy that may change the timing f recgnitin f the liability. Fr example: Minimums If the legislatin prescribes that n levy is triggered until revenues reach a certain threshld (such as a zer per cent tax rate n revenues until revenues reach $50 millin, and then the payment is tw per cent f revenues after that pint). Prgressive tax rates If the legislatin prescribes that the tax rate is escalating (such as tw per cent n the first $x millin in revenues, three per cent fr revenues in excess f $x millin). Specified frmula If the legislatin prescribes that the levy is calculated based n a specified frmula that des nt match the actual activity fr the perid. Certain levies may be calculated as a fixed percentage times a twelve-mnth rlling average f a specified perfrmance measure (such as grss prfit). The current methd f accunting fr the levy, bth annually and fr interim perids, shuld be cnsidered t determine whether the guidance in IFRIC 21 wuld change the timing f the liability and, therefre, pssibly affect the timing r amunt f recgnitin f the expense. Fr example, IFRIC 21 addresses the fllwing questins: Des ecnmic cmpulsin t cntinue t perate in a future perid create a cnstructive bligatin t pay a levy that will be triggered by perating in that future perid? Paragraph 9 f IFRIC 21 states: An entity des nt have a cnstructive bligatin t pay a levy that will be triggered by perating in a future perid as a result f the entity being ecnmically cmpelled t cntinue t perate in that future perid. Des the ging cncern assumptin imply that an entity has a present bligatin t pay a levy that will be triggered by perating in a future perid? 6
Reprt n Public Meeting n February 26, 2014 Nn-authritative material Paragraph 10 f IFRIC 21 states: The preparatin f financial statements under the ging cncern assumptin des nt imply that an entity has a present bligatin t pay a levy that will be triggered by perating in a future perid. There are many types f legislatin r regulatin that result in payments t which IFRIC 21 may apply. Canadian cmpanies are subject t a range f gvernment-impsed regulatins and legislatin. Majr industries that are affected include, but are nt limited t, financial services (banking, insurance, etc.), bradcast/telecm/wireless spectrum, transprtatin, envirnment, fd and agriculture, health, energy and natural resurces. The Grup s Discussin Grup members nted the cmplexity f applying the guidance in IFRIC 21. Grup members bserved that the term levy in IFRIC 21 is causing cnfusin because there are numerus items within its scpe that are nt called a levy (fr example, ryalties, taxes, etc.). Grup members bserved that this cnfusin may lead preparers t cnclude prematurely that IFRIC 21 des nt apply t their circumstances. Grup members emphasized the imprtance fr preparers t review all clauses in the relevant legislatin when applying IFRIC 21 t avid missing vital pieces f infrmatin that culd affect the ultimate analysis. Grup members cmmented that the cnsideratins and steps described in the summary abve prvide a radmap fr applying IFRIC 21. Grup members had previusly discussed the alternate views abut the timing f recgnitin f the debit side f the entry when the liability is recgnized fr the bligating event in the discussin f: Levies Prperty Taxes in Canada. Grup members suggested that preparers and auditrs stay up t date n this tpic since additinal interpretive guidance and clarificatins may becme available. Grup members nted that this item was intended t raise awareness f IFRIC 21 and hw Canadian entities may be impacted by this Interpretatin. The Grup decided that n ther frmal actin shuld be taken at this time. 7