Agenda decision on IAS 37
The IFRS IC agenda decision discusses a fact pattern in which an entity and a tax authority dispute whether the entity is required to pay a tax that is not within the scope of IAS 12 (liabilities, contingent liabilities and contingent assets relating to this tax thus fall within the scope of IAS 37).
Keywords: Mazars, Thailand, IFRS, IAS 37, IAS 12, IFRS IC, IFRIC 23, Tax, Deposit
18 March 2019
Although the entity is disputing the tax authority’s decision, it has paid a deposit to the authority, either voluntarily in order to avoid penalties, or because it was required to do so under the tax dispute process. Upon resolution of the dispute, the tax authority will be required to either refund the deposit to the entity (if the dispute is resolved in the entity’s favour) or use the deposit to settle the entity’s liability (if the dispute is resolved in the tax authority’s favour). The entity believes it is more likely than not that the dispute will be resolved in its favour.
The question related to whether or not the deposit paid to the tax authority should give rise to the recognition of an asset in the entity’s financial statements.
The IFRS IC noted that if the tax deposit gives rise to an asset, that asset may not be clearly within the scope of any existing IFRS Standard, and moreover, no IFRS Standard deals with any similar issues. Thus, following the hierarchy of sources set out in IAS 8.10-11, the IFRS IC concluded that the right arising from the deposit meets the definitions of an asset set out in the Conceptual Framework published in March 2018 and in the previous Conceptual Framework. No matter what the outcome of the dispute, the entity has a right to obtain future economic benefits (either by receiving a refund of the deposit or by using the deposit to settle the tax liability). This right is an asset and not a contingent asset, so it does not fall within the scope of IAS 37 (as a reminder, IAS 37 sets a high threshold for distinguishing between contingent assets and assets: the realisation of income must be “virtually certain” for the asset not to be classified as contingent). The IFRS IC also clarified that the right is not affected by whether the tax deposit is voluntary or required; the entity would draw the same conclusion whether or not it is required to make such a deposit under local legislation.
Having established this principle, the IFRS IC went on to observe that the issues relating to the recognition, measurement and presentation of this asset, and the disclosures required in the notes, may be similar or related to those that arise for a monetary asset (i.e. a right to receive a fixed or determinable number of units of currency – e.g. a receivable). Consequently, the entity’s management must make use of judgement to develop an accounting policy with reference to the requirements in IFRS standards that address these issues for monetary assets.
Readers will remember that an interpretation of IAS 12, published in June 2017 and effective for financial periods commencing on or after 1 January 2019, sets out the accounting treatment for taxes within the scope of IAS 12 when there is uncertainty over income tax treatments (IFRIC 23 – Uncertainty over Income Tax Treatments). If an entity were engaged in a similar dispute relating to a tax within the scope of IAS 12, the outcome would be the same (i.e. the entity would recognise an asset).