What is a levy? Accounting for government levies
A levy is defined as an outflow of resources (embodying economic benefits) that is imposed by governments (including government agencies and similar bodies whether local, national or international) on entities in accordance with legislation (i.e., laws and/or regulations)1.
When do I record a liability to pay a levy? Accounting for government levies
- 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.
- The activity that triggers payment may occur “over time” (e.g., revenue generating activities occurring during a year) or be at a “point-in-time” (e.g., a specified date or when a transaction occurs). In particular:
- The recognition of a levy liability occurs progressively so long as the obligating event itself occurs over a period of time.
- If the levy is subject to a minimum threshold, recognition of a liability to pay the levy occurs only at the point the minimum threshold is reached, and not before.
- A liability to pay a levy is not recognized at an earlier date, even if the entity has no realistic opportunity to avoid paying the levy.2
- The timing of liability recognition will depend on the precise wording of the relevant legislation.
- Here are some illustrative examples to provide practical guidance.
Would the cost of the levy be recorded as an asset or expense? Accounting for government levies
- IFRIC 21 only provides guidance about when to recognize a liability.
- Other IFRSs should be applied to determine if the cost (i.e., the debit side of the entry) is an asset or an expense. However, most levies will be recorded as an expense for the reporting entity, similar to taxes, allocated to the period or corresponding trigger they relate to.
Do the same accounting principles apply in both annual and interim financial statements? Accounting for government levies
Yes, the same recognition principles must be applied in the annual and interim financial statements, even if such recognition results in “uneven” recognition over the course of the year.