PwC Comments on Draft Interpretation DI/2012/1: Levies charged by public authorities on entities that operate in a specific market

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PwC comment letter (IASB) 09/12/2012 by Global accounting consulting services

The PwC network global network of firms believes that the application of the conclusions in the draft interpretation will result in accounting that does not reflect the economic substance of many levies.

Comment letter


4 September 2012

International Accounting Standards Board
30 Cannon Street
London EC4M 6XH
United Kingdom

Re: Draft IFRIC interpretation DI/2012/1– Levies charged by public authorities on entities that operate in a specific market

We are pleased to respond to the invitation by the IASB to comment on the Draft IFRIC Interpretation, ‘Levies charged by public authorities on entities that operate in a specific market’ (the ‘draft interpretation’) on behalf of PricewaterhouseCoopers. Following consultation with members of the PricewaterhouseCoopers network of firms, this response summarises the views of those member firms that commented on the exposure draft.
PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Overview

We do not support the draft interpretation. We understand how some might believe that the existing guidance in IAS 37 and IFRIC 6 supports the conclusions in the draft interpretation, but we believe the application of these conclusions will result in accounting that does not reflect the economic substance of many levies.

The substance of many levies is an annual charge similar to annual licences or fees, which are best reflected in the financial statements by an even pattern of expense recognition over the period covered by the levy. The accounting proposed by the draft interpretation will, in some cases, result in an uneven pattern of expense recognition. This will not provide useful information to the users of financial statements. We are also concerned that the recognition of the liability will be determined in some cases by non-substantive conditions, such as making sales or being in business on a specific date.

There are many levies imposed on entities operating in different jurisdictions around the world. We are concerned that the draft interpretation proposes a specific accounting model that would be applied across a wide range of levies with different economic characteristics. We acknowledge that there might be diversity in practice in the accounting applied today, but this might reflect different economic characteristics of different levies. We believe that the accounting should be determined by the economic substance of each levy.

We do not believe the Committee should proceed with this interpretation for the reasons described above. We acknowledge that there might be some diversity in practice; we therefore suggest that, instead of proceeding with the draft interpretation, the Committee recommend to the Board that the existing definition of an obligating event in IAS 37 is reassessed in the context of levies when the Board initiates a project to revise IAS 37.

We recommend that, if the Committee decides to proceed with an interpretation, it should not prescribe the pattern of expense recognition because this is beyond the scope of an interpretation of IAS 37. The draft interpretation is an interpretation of IAS 37, which addresses the recognition and measurement of provisions. IAS 37 does not address the pattern of expense recognition.

We are also concerned that the proposed scope of the interpretation is very broad and might capture a wide range of taxes, such as annual property taxes, licences and emissions charges. There is also no clear definition of a levy. We recommend that if the Committee decides to proceed with an interpretation, it should define a levy and reconsider and narrow the scope of the guidance.

We have commented specifically on the questions raised in the draft interpretation in the appendix to this letter.

If you have any questions, please contact John Hitchins, PwC Global Chief Accountant (+44 207 804 2497) or Tony de Bell (+44 207 213 5336).

Yours faithfully,


Appendix

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?


We do not believe the Committee should proceed with this interpretation for the reasons described in the attached covering letter. However, if the Committee decides to proceed with an interpretation, we recommend that the scope of the guidance should be reconsidered and narrowed.

The proposed scope is very broad, and the draft interpretation might apply to more charges than many anticipate. For example, it would apply to a non-refundable annual property tax triggered by owning a property on a particular date or to a payment triggered by carbon emissions above a specific threshold. The interpretation might therefore have unintended consequences and change the accounting for transactions where there is currently no diversity in practice. The scope should therefore be revised and narrowed.

The draft proposals include a list of the characteristics of levies but no definition of a levy. We believe that it is difficult to determine the scope of the draft interpretation in the absence of a clear definition. We recommend that the Committee develop a definition of a levy before proceeding with an interpretation. This would allow the Committee to define the scope of the interpretation clearly and exclude a wide range of charges where there is no reason to change the current accounting.

If the Committee decides to proceed with the interpretation it should also:

  • explain what distinguishes a fine or penalty from a levy. For example, is a charge on carbon emissions above a certain level a fine for exceeding the threshold or a levy for emitting? We agree that the interpretation should not apply to fines and penalties, but levies that have the same substance should also be outside the scope. A clear explanation of the differences is therefore necessary;
  • explain what differentiates a levy from a non-refundable payment for an annual operating licence. The economic substance of an annual licence payment is identical to the payment of an annual levy for being on a specific market; the accounting should therefore be the same. We believe the interpretation should not apply to annual licences, but many levies have the same substance and should also be outside the scope. A clear explanation of the differences is therefore necessary;
  • explain the reference to ‘specific market’. The draft interpretation appears to apply to a wide range of charges, not just those applied to a specific industry or country. The characteristics in paragraph 5 (b) and (d) duplicate each other and do not limit the scope of the interpretation; and 
  • clarify the term ‘public authority’. This term should be interpreted consistently with the definition of government in IAS 20 and IAS 24, but this should be stated explicitly

We believe the scope of the draft interpretation should be narrowed; however, excluding levies with a minimum revenue threshold from the scope is inconsistent with the principle in the draft interpretation and will not reduce diversity in practice. We are also aware that some levies are subject to different thresholds − for example, volumes − so it is not clear why the scope exclusion applies only to levies subject to a revenue threshold. We suggest the Committee reconsiders the approach to levies that are subject to any threshold and, if it decides to proceed with an interpretation, requires the same accounting to be applied to all levies.

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?


We do not support the draft interpretation for reasons described in the attached covering letter. We understand how some might believe the existing guidance in IAS 37 and IFRIC 6 supports the conclusions in the draft interpretation, but we believe the application of these conclusions will result in accounting that does not reflect the economic substance of many levies. We believe that the accounting should be determined by the economic substance of each levy.

The substance of many levies is an annual charge similar to an annual licence or fee. This substance is best reflected in the financial statements by an even pattern of expense recognition over the period covered by the levy. The accounting proposed by the draft interpretation will, in some cases, result in an uneven pattern of expense. It will also result in different accounting for levies that are economically similar but are triggered by different non-substantive conditions. For example, economically identical annual levies for operating in 2012 might be triggered in one market on 1 January 2012, in another market on 31 December 2012, and in another market on 1 January 2013. The draft interpretation would require different patterns of expense recognition in different periods for each levy, although the economic substance of the three levies is the same.

We do not believe the Committee should proceed with this interpretation. We acknowledge that there might be some diversity in practice and we therefore suggest that, instead of proceeding with the draft interpretation, the Committee recommend to the Board that the existing definition of an obligating event in IAS 37 is reassessed in the context of levies when the Board initiates a project to revise IAS 37.

We recommend that, if the Committee decides to proceed with an interpretation, it should not prescribe the pattern of expense recognition because this is beyond the scope of an interpretation of IAS 37. The draft interpretation is an interpretation of IAS 37, which addresses the recognition and measurement of provisions. IAS 37 does not address the pattern of expense recognition.

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 agree with the proposed transition requirements, if the Committee decides to proceed with the interpretation.