IFRIC 21, or International Financial Reporting Interpretations Committee 21, provides guidance on accounting for levies imposed by governments on entities. Levies are usually in the form of taxes, duties, or similar obligations that are imposed by governments to fund specific activities such as environmental protection, social welfare, or infrastructure development. IFRIC 21 sets out the definitions, explanations, examples, and case studies related to accounting for levies in accordance with International Financial Reporting Standards (IFRS).
Definitions:
IFRIC 21 provides the following key definitions related to levies:
Levy: A levy is an imposition by a government on an entity that requires the entity to pay a specified amount, usually in the form of a tax or duty, based on the entity’s activities, such as generating revenue, production, or usage of resources.
Enforceable: A levy is considered enforceable when the government has the power to impose the obligation and has demonstrated the intent to enforce it.
Explanations:
IFRIC 21 provides detailed explanations related to accounting for levies:
Recognition:
An entity should recognize a liability for a levy when it meets the definition of a liability as per the IFRS Framework, and the obligation to pay the levy is enforceable. The recognition of the liability should be at the earlier of the date the entity receives the levy-related notice or when the levy is imposed.
Measurement:
The amount recognized as a liability for a levy should be the best estimate of the amount expected to be paid to settle the obligation at the reporting date. If the entity has a legal right to a refund of the levy, then the liability should be measured at the net amount after considering the expected refund.
Changes in the obligation:
If there is a change in the obligation related to a levy, such as a change in the levy rate or the entity’s activities, the entity should adjust the liability accordingly in the period of the change.
Presentation:
The entity should disclose the nature and amount of the levy recognized in the financial statements. If the entity expects to recover the levy from customers or other parties, it should disclose that fact as well.
Examples:
IFRIC 21 provides examples to illustrate the application of the guidance:
Example 1:
XYZ Ltd, a manufacturing company, operates in a country where the government imposes an environmental protection levy on entities that generate waste. The government has recently increased the levy rate, and XYZ Ltd has estimated that it will incur a liability of $100,000 based on its waste generation. XYZ Ltd should recognize a liability of $100,000 for the environmental protection levy in its financial statements.
Example 2:
ABC Corp, a telecommunications company, is subject to a levy imposed by the government to fund a national broadband infrastructure project. ABC Corp has a legal right to a refund of the levy if it meets certain conditions. Based on its assessment, ABC Corp expects to receive a refund of $50,000 from the government. Therefore, ABC Corp should recognize a liability of $50,000 net of the expected refund in its financial statements.
Case Studies:
IFRIC 21 provides case studies to further illustrate the application of the guidance:
Case Study 1:
MNO Inc, a mining company, operates in a country where the government imposes a mining levy based on the production volume of minerals. MNO Inc has estimated that it will incur a liability of $500,000 for the mining levy in the current reporting period. However, during the reporting period, the government announced a change in the mining levy rate, resulting in a decrease in the estimated liability to $400,000. MNO Inc should adjust its liability for the mining levy to $400,000 in its financial statements.
Case Study 2:
PQR Ltd, a construction company, operates in a country where the government imposes a levy on construction activities to fund infrastructure projects. PQR Ltd has received a notice from the government imposing a levy of $200,000 on its current construction project. PQR Ltd should recognize a liability of $200,000 for the levy in its financial statements as it meets the definition of a liability and the obligation to pay the levy is enforceable.
However, PQR Ltd believes that it has a high probability of obtaining an exemption from the levy as its construction project qualifies for a specific exemption criterion. Based on its assessment, PQR Ltd estimates that it has a 90% chance of obtaining the exemption and, therefore, the net liability for the levy should be reduced to $20,000 ($200,000 multiplied by 90%) in its financial statements.
Conclusion:
IFRIC 21 provides guidance on the accounting for levies imposed by governments on entities. It sets out definitions, explanations, examples, and case studies to help entities understand how to recognize, measure, and disclose levies in accordance with IFRS. Entities should carefully assess the enforceability of the obligation to pay the levy, estimate the amount of the liability based on the best available information, and disclose relevant information in their financial statements. Proper application of IFRIC 21 ensures that entities accurately account for levies and comply with the relevant financial reporting requirements.