IFRIC 5 Rights to Interests arising from Decommissioning, Restoration and Environmental Rehabilitation Funds

IFRIC 5 – background

IFRIC 5 deals with the accounting, in the financial statements of the contributor, for interests in decommissioning, restoration and environmental rehabilitation funds established to fund some or all of the costs of decommissioning assets or to undertake environmental rehabilitation. Contributions to such funds may be voluntary or required by law. Funds may be established by a single contributor, or they may be established by multiple contributors. Such funds are generally separately administered by trustees. Entities make contributions that are invested on behalf of the fund by the trustees. The contributors retain the obligation to pay decommissioning costs, but they are able to obtain reimbursement from the fund up to the lower of the decommissioning costs incurred and the contributor’s share of the assets of the fund. The contributors may have restricted access or no access to any surplus of assets of the fund over those used to meet eligible decommissioning costs.

The issues under consideration in IFRIC 5 are:

• how should a contributor account for its interest in a fund; and
• when a contributor has an obligation to make additional contributions (e.g. in the event of the bankruptcy of another contributor), how should that obligation be accounted for?

Note that the scope of IFRIC 5 is restricted to funds with separately-administered assets, when the contributor’s right to access the assets is restricted. A residual interest in a fund that extends beyond a right to reimbursement, such as a contractual right to distributions once all the decommissioning has been completed or on winding up the fund, may be an equity instrument within the scope of IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39), and is not within the scope of IFRIC 5.

Assessing the relationship between the contributor and the fund

The contributor is required to assess whether it has control or joint control of, or significant influence over, the fund, in accordance with relevant IFRS Standards, and to account for its interest by consolidation or the equity method, as appropriate under those Standards.

Accounting for the obligation to pay decommissioning costs

The contributor’s obligation to pay decommissioning costs should be recognised as a liability, separately from its interest in the fund, unless its contributions to the fund have extinguished its obligation to pay decommissioning costs (even in the event that the fund fails to pay). Therefore, when an entity remains liable for expenditure, a provision should be recognised, even when reimbursement is available.

When a contributor has an obligation to make potential additional contributions (e.g. in the event of the bankruptcy of another contributor, or if the value of the investments held by the fund decreases to an extent that they are insufficient to fulfil the fund’s reimbursement obligations), this obligation is a contingent liability that is accounted for under IAS 37. The contributor will recognise a liability only if it is probable that additional contributions will be made.

Accounting for the contributor’s interest in the fund

In the absence of control, joint control or significant influence, the contributor’s right to reimbursement from the fund is accounted for in accordance with the rules set out in IAS 37 in respect of reimbursements. Therefore, if the reimbursement is virtually certain to be received when the obligation is settled, it should be treated as a separate asset.

The reimbursement should be measured at the lower of the amount of the decommissioning obligation recognised, and the contributor’s share of the fair value of the net assets of the fund attributable to contributors. Therefore, recognition of an asset in excess of the recognised liability is prohibited. For example, rights to receive reimbursement to meet decommissioning liabilities that have yet to be recognised as a provision are not recognised.

Changes in the carrying amount of the right to receive reimbursement other than contributions to and payments from the fund should be recognised in profit or loss in the period in which those changes occur.

Disclosure

Contributors are required to disclose the nature of interests in funds, and any restrictions on access to the assets in the funds. In addition, when the arrangements give rise to contingent liabilities or reimbursement rights that are accounted for under IAS 37, the relevant disclosure requirements of IAS 37 apply.

IFRIC 21 Levies

Scope

IFRIC 21 addresses the accounting for a liability to pay a levy if either:

• the liability is within the scope of IAS 37 (i.e. the timing or amount of the levy is uncertain); or
• both the timing and the amount of the levy are certain.

IFRIC 21 does not address the appropriate accounting for the costs that arise from recognising a liability to pay a levy; the determination as to whether the recognition of such a liability gives rise to an asset or an expense is made in accordance with other IFRS Standards.

For the purposes of IFRIC 21, a levy is defined as “an outflow of resources embodying economic benefits that is imposed by governments on entities in accordance with legislation (ie laws and/or regulations), other than:

(a) those outflows of resources that are within the scope of other Standards (such as income taxes that are within the scope of IAS 12); and

(b) fines or other penalties that are imposed for breaches of the legislation.

‘Government’ refers to government, government agencies and similar bodies whether local, national or international.”

IFRIC 21 covers a broad range of levies; in considering the appropriate accounting on this topic, the specific examples considered by the IFRS Interpretations Committee included the United Kingdom bank levy, fees paid to the Federal Government by pharmaceutical manufacturers in the United States, a bank levy in Hungary, and the railway tax in France.

Any ‘levy’ imposed by a government that meets the definition of an income tax is accounted for in accordance with IAS 12 rather than in accordance with IFRIC 21.

Amounts that are collected by entities on behalf of governments and remitted to governments (e.g. value added taxes) are not an ‘outflow of resources’ for the entity collecting and remitting those amounts. Consequently, they do not fall within the scope of IFRIC 21.

Note that:

• a payment made by an entity for the acquisition of an asset, or for the rendering of services, under a contractual agreement with a government, does not meet the definition of a levy because it is not ‘imposed’ by the government; and
• an entity is not required to apply IFRIC 21 to liabilities that arise from emissions trading schemes.

Obligating event that gives rise to the recognition of a liability to pay a levy

The obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation.

If the activity that triggers the payment of the levy is the generation of revenue in the current period and the calculation of that levy is based on the revenue that was generated in a previous period, the obligating event for that levy is the generation of revenue in the current period. The generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation.

Example A levy is triggered in full as soon as the entity generates revenue Entity B has an annual reporting period that ends on 31 December. In accordance with legislation, a levy is triggered in full as soon as an entity generates revenue in 20X1. The amount of the levy is calculated by reference to revenue generated by the entity in 20X0. Entity B generated revenue in 20X0 and in 20X1 starts to generate revenue on 3 January 20X1. In this example, the liability is recognised in full on 3 January 20X1 because the obligating event, as identified by the legislation, is the first generation of revenue in 20X1. The generation of revenue in 20X0 is necessary, but not sufficient, to create a present obligation to pay a levy. Before 3 January 20X1, Entity B has no present obligation to pay a levy. In other words, the activity that triggers the payment of the levy, as identified by the legislation, is the point at which Entity B first generates revenue in 20X1. The generation of revenue in 20X0 is not the activity that triggers the payment of the levy and the recognition of the liability. The amount of revenue generated in 20X0 only affects the measurement of the liability. In the interim financial report (if any), the liability is recognised in full in the first interim period of 20X1 because the liability is recognised in full on 3 January 20X1.

The date on which the levy is paid does not affect the timing of recognition of the liability to pay a levy, because the obligating event is the activity that triggers the payment of the levy, and not the payment of the levy itself.

Economic compulsion to continue to operate does not result in a constructive obligation

An entity does not have a constructive obligation to pay a levy that will be triggered by operating in a future period as a result of the entity being economically compelled to continue to operate in that future period.

When drafting IFRIC 21, the Interpretations Committee considered an argument that, if it would be necessary for an entity to take unrealistic action in order to avoid an obligation to pay a levy that would otherwise be triggered by operating in the future, then a constructive obligation to pay the levy exists and a liability should be recognised. However, the Committee rejected this argument, noting that if this rationale were applied, many types of future expenditure within the scope of IAS 37 would be recognised as liabilities. The Interpretations Committee noted that, in accordance with IAS 37.

• no provision is recognised for costs that need to be incurred to operate in the future; and
• it is only those obligations arising from past events existing independently of an entity’s future conduct of its business that are recognised as provisions.

The Basis for Conclusions on IFRIC 21 further emphasises that there is no constructive obligation to pay a levy that relates to the future conduct of the business, even if:

• it is economically unrealistic for the entity to avoid the levy if it has the intention of continuing in business;
• there is a legal requirement to incur the levy if the entity does continue in business;
• it would be necessary for an entity to take unrealistic action to avoid paying the levy, such as to sell, or stop operating, property, plant and equipment;
• the entity made a statement of intent (and has the ability) to operate in the future period(s); or
• the entity has a legal, regulatory or contractual requirement to operate in the future period(s).

Example A levy is triggered in full if the entity operates as a bank at a specified date Entity C is a bank and has an annual reporting period that ends on 31 December. In accordance with legislation, a levy is triggered in full only if an entity operates as a bank at the end of the annual reporting period. The amount of the levy is calculated by reference to the amounts in the statement of financial position of the entity at the end of the annual reporting period. The end of the annual reporting period of Entity C is 31 December 20X1. In this example, the liability is recognised on 31 December 20X1 because the obligating event, as identified by the legislation, is Entity C operating as a bank at the end of the annual reporting period. Before that point, Entity C has no present obligation to pay a levy, even if it is economically compelled to continue to operate as a bank in the future. In other words, the activity that triggers the payment of the levy, as identified by the legislation, is the entity operating as a bank at the end of the annual reporting period, which does not occur until 31 December 20X1. The conclusion would not change even if the amount of the liability is based on the length of the reporting period, because the obligating event is the entity operating as a bank at the end of the annual reporting period. In the interim financial report (if any), the liability is recognised in full in the interim period in which 31 December 20X1 falls because the liability is recognised in full on that date.

The preparation of financial statements under the going concern assumption does not imply that an entity has a present obligation to pay a levy that will be triggered by operating in a future period.

Obligating event that occurs over a period of time

The liability to pay a levy is recognised progressively if the obligating event occurs over a period of time (i.e. if the activity that triggers the payment of the levy, as identified by the legislation, occurs over a period of time). For example, if the obligating event is the generation of revenue over a period of time, the corresponding liability is recognised as the entity generates that revenue.

Example A levy is triggered progressively as the entity generates revenue Entity A has an annual reporting period that ends on 31 December. In accordance with legislation, a levy is triggered progressively as an entity generates revenue in 20X1. The amount of the levy is calculated by reference to revenue generated by the entity in 20X1. In this example, the liability is recognised progressively during 20X1 as Entity A generates revenue, because the obligating event, as identified by the legislation, is the generation of revenue during 20X1. At any point in 20X1, Entity A has a present obligation to pay a levy on revenue generated to date. Entity A has no present obligation to pay a levy that will arise from generating revenue in the future. In the interim financial report (if any), the liability is recognised progressively as Entity A generates revenue. Entity A has a present obligation to pay the levy on revenue generated from 1 January 20X1 to the end of the interim period.

Levy triggered when a minimum threshold is reached

If an obligation to pay a levy is triggered when a minimum threshold is reached, the principles discussed in the previous sections should be applied. For example, if the obligating event is the reaching of a minimum activity threshold (such as a minimum amount of revenue or sales generated or outputs produced), the corresponding liability is recognised when that minimum activity threshold is reached.

Example A levy is triggered in full if the entity generates revenue above a minimum amount of revenue Entity D has an annual reporting period that ends on 31 December. In accordance with legislation, a levy is triggered if an entity generates revenue above CU50 million in 20X1.(a) The amount of the levy is calculated by reference to revenue generated above CU50 million, with the levy rate at 0 per cent for the first CU50 million revenue generated (below the threshold) and 2 per cent above CU50 million revenue. Entity D’s revenue reaches the revenue threshold of CU50 million on 17 July 20X1. In this example, the liability is recognised between 17 July 20X1 and 31 December 20X1 as Entity D generates revenue above the threshold because the obligating event, as identified by the legislation, is the activity undertaken after the threshold is reached (ie the generation of revenue after the threshold is reached). The amount of the liability is based on the revenue generated to date that exceeds the threshold of CU50 million revenue. In the interim financial report (if any), the liability is recognised between 17 July 20X1 and 31 December 20X1 as Entity D generates revenue above the threshold. Variation: Same fact pattern as above (ie a levy is triggered if Entity D generates revenue above CU50 million in 20X1), except that the amount of the levy is calculated by reference to all revenue generated by Entity D in 20X1 (ie including the first CU50 million revenue generated in 20X1). In this example, the liability for the payment of the levy related to the first CU50 million revenue is recognised on 17 July 20X1 when the threshold is met, because the obligating event, as identified by the legislation, for the payment of that amount is the reaching of the threshold. The liability for the payment of the levy related to revenue generated above the threshold is recognised between 17 July 20X1 and 31 December 20X1 as the entity generates revenue above the threshold, because the obligating event, as identified by the legislation, is the activity undertaken after the threshold is reached (ie the generation of revenue after the threshold is reached). The amount of the liability is based on the revenue generated to date, including the first CU50 million revenue. The same recognition principles apply in the interim financial report (if any) as in the annual financial statements. (a) In this Interpretation, currency amounts are denominated in ‘currency units’ (CU).

Levy subject to a pro rata activity threshold as well as an annual activity threshold – example Entity Q operates in a jurisdiction in which its activities are subject to a carbon tax. The tax becomes payable once emissions exceed a threshold of 25,000 tonnes of carbon dioxide equivalent greenhouse gases (carbon gases) in a calendar year. If an entity does not participate in the relevant activity for all of a calendar year, the annual threshold is reduced pro rata to the number of days in the year that the entity participated in the activity. Entity Q is preparing its annual financial statements for the year ended 31 March 20X1. Between 1 January 20X1 and 31 March 20X1, Entity Q emitted 10,000 tonnes of carbon gases. Entity Q did not exceed the annual threshold in the calendar year ended 31 December 20X0. The carbon tax meets the definition of a levy for the purposes of IFRIC 21. At 31 March 20X1, Entity Q is not required to accrue a liability for carbon tax. In the circumstances described, Entity Q has not reached the annual threshold of 25,000 tonnes and consequently, in accordance with IFRIC 21, it should not recognise a liability for the carbon tax. No liability should be recognised even though Entity Q has exceeded the ‘pro rata’ threshold (i.e. it has exceeded the threshold that would have been applied had it ceased the relevant activity on 31 March 20X1).

 The conclusion has been confirmed by the IFRS Interpretations Committee (see IFRIC Update, March 2014). The Interpretations Committee noted that in circumstances such as those described, the payment of the levy is triggered by the reaching of the annual threshold as identified by the legislation. The Interpretations Committee also noted that there is a distinction between a levy with an annual threshold that is reduced pro rata when a specified condition is met and a levy for which an obligating event occurs progressively over a period of time as described in IFRIC 21:11; until the specified condition is met, the pro rata reduction in the threshold does not apply.

Levy prepaid in advance of present obligation

An entity should recognise an asset if it has prepaid a levy but does not yet have a present obligation to pay that levy.

Recognising a liability to pay a levy in an interim financial report

An entity is required to apply the same recognition principles in the interim financial report that it applies in the annual financial statements. As a result, in the interim financial report, a liability to pay a levy:

• should not be recognised if there is no present obligation to pay the levy at the end of the interim reporting period; and
• should be recognised if a present obligation to pay the levy exists at the end of the interim reporting period.

Waste electrical and electronic equipment

IFRIC 6 Liabilities arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

IFRIC 6 addresses the recognition of liabilities for waste management under the European Union’s Directive on Waste Electrical and Electronic Equipment (the WE&EE Directive). Specifically, the Interpretation deals with waste from private households arising from products sold on or before 13 August 2005. It does not apply to waste from sources other than private households, nor to household waste arising from products sold after 13 August 2005.

The Interpretation is therefore quite narrow in scope. The general principles in IAS 37 should be applied to determine the appropriate recognition point for other remediation and recycling obligations. However IFRIC 6 states that “if, in national legislation, new waste from private households is treated similarly to historical waste from private households, the principles of the Interpretation apply by reference to the hierarchy in IAS 8”. Therefore, before determining an accounting policy for ‘new’ household waste, entities will need to determine how the WE&EE Directive has been transposed into local law. The Interpretation will also be a source of authoritative guidance on the appropriate accounting for obligations that are imposed by similar cost attribution models.

Under the WE&EE Directive, the obligation to contribute to waste management costs is allocated proportionately to producers of the relevant type of equipment who participate in the market during a specified period (the measurement period). The IFRIC (now the IFRS Interpretations Committee) was asked to determine what constitutes the obligating event for the recognition of a provision for the waste management costs.

The IFRIC decided that the event that triggers liability recognition is participation in the market during a measurement period (and not the production of the equipment, nor the actual incurrence of waste management costs).