International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 618
30 June 2019:
Nil
30 September 2019:
CU5,000 (CU10 million × (6/12 months) × 0.1%)
31 December 2019:
CU5,000 (CU10 million × (6/12 months) × 0.1%)
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Based on discussions by the IFRS Interpretations Committee during their March 2015 meeting, the threshold
for determining the entity’s liability would only be reduced (or pro-rated) if, and only if, the entity stops the
relevant activity before the end of the annual assessment period.8 This means that the pro-rated annual
threshold would only apply from the date the entity stops the relevant activity in the market.
At 31 March 2019 and 30 June 2019, the bank has not ceased operations and the annual threshold remains at
CU10 million. Since the revenue generated as at 31 March 2019 and 30 June 2019 did not meet the annual
threshold, no liability is recognised under IFRIC 21 – Levies – on both dates.
In contrast, the bank ceased operation from 1 July 2019. Hence, the annual threshold would have been pro-
rated and reduced to CU5 million at that date.
For the quarters as at 30 September and 31 December 2019 a liability of CU5,000 should thus be
recognised accordingly.
In many countries, property taxes are levied by municipalities or other local government
bodies on the owner of a property. Such taxes are relevant and may be material to entities
in certain sectors (e.g. real estate). Even within a single jurisdiction, there could be several
different property tax mechanisms. Generally, each property tax arrangement must be
assessed on its own merits. To facilitate such assessments, we have explored some
illustrative fact patterns of property tax mechanisms in the following examples:
Example 37.21: A levy is triggered in full as soon as the entity holds the property
at a specified date
In accordance with the legislation, property tax is imposed on the registered owner of the property as at
1 April each year. The amount payable is calculated based on 0.1% of the appraised value estimated by the
tax authorities as at 1 April each year. Payments are to be made in arrears in instalments on June, September,
December and March month-end dates and any unpaid instalments remain as the liability of the registered
owner of the property as at 1 April.
The law also states that if the property is sold during the year, there will be no refund from the government
to the seller. The new property owner will only be liable to pay the property tax on 1 April of the coming
year, subsequent to the date of purchase.
An entity has a calendar year-end and prepares quarterly interim financial reports. It holds a property as at
1 April 2019, which has an appraised value of CU50 million. On 30 June 2019, it sold the property to another entity.
In this example, the liability is recognised in the interim financial report as follows:
31 March 2019:
Nil, since the obligating event is not until 1 April, assuming that all previous
year instalments have been paid on time
1 April 2019:
CU50,000 (CU million × 0.1%), i.e. the liability is recognised in full
For the subsequent interim period’s reports as at 30 June, 30 September and 31 December, the liability recognised
in the statement of financial position would be CU50,000 less the instalment payments made during the year.
If in a variation to the above fact pattern, the seller is able to obtain a refund of a proportionate share of the
paid property tax (i.e. CU 37,500) from the buyer of the property and this refund will form part of the sales
price of the property based on the sales contract between the buyer and the seller, it would not change the
accounting under IFRIC 21.
Yet another situation arises where a levy is triggered progressively.
Example 37.22: A levy is triggered progressively as the entity holds the asset
through a specified period of time
In accordance with the legislation, property tax is imposed on the registered owner of the property as at
1 April each year. The amount payable is calculated based on 0.1% of the appraised value estimated by the
Interim financial reporting 3121
tax authorities as at 1 April each year. Payments are to be made in instalments at every March, June,
September and December month-end.
The law does not explicitly state that the property tax relate to a period of time. However, if the property is
sold during the year, the amount of property tax will be pro-rated for the period from 1 April to the date of
sale, and any excess will be refunded to the entity by the government. The new property owner will only be
liable to pay the property tax upon the date of purchase, for the period from the date of purchase.
An entity has a calendar year-end and prepares quarterly interim financial reports. It holds a property as at 1 April
2019 to 31 March 2020, which has an appraised value of CU50 million as at 1 April 2019. Prior to 1 April 2019
the entity did not hold any property. For simplicity, assume that the appraised value does not change year on year.
In this example, although the law does not explicitly state that the property tax relates to the entity holding the
property over a period of time, it is evident that the obligating event occurs rateably over the 12-month period
from 1 April to 31 March. This is because the law allows for a pro-rated refund to be given to the entity for the
period whereby the entity no longer holds the property. This implies that it is a time-based progressive levy.
As such, the levy is triggered over a 12-month period and the liability is recognised rateably over the 12-month
period. In contrast with Example 37.21, it is not the ownership of the property at a specified date that is the obligating even. Rather, it is the continued holding of the property throughout the period that gives rise to the obligating event.
As such, the liability is recognised in the interim report as follows:
31 March 2019:
Nil
30 June 2019:
CU12,500 (CU50,000 divided by 4), less any instalment payments made
30 September 2019:
CU25,000 (cumulative portion of the prior quarter and current quarter), less
any instalment payments made
31 December 2019:
CU37,500 (cumulative portion of the prior two quarters and current quarter),
less any instalment payments made
31 March 2020:
CU50,000 (cumulative portion of the prior three quarter and current quarter),
less any instalment payments made
The impact on interim reports for the various types of levies is summarised below:
Illustrative examples
Obligating event
Recognition of liability in interim
reports
Levy triggered progressively as
Generation of revenue
Recognise progressively based on
revenue is generated in specified
in the specified period
revenue generated
period
Levy triggered in full as soon as
First generation of
Recognise only if first revenue
revenue is generated in one
revenue in subsequent
generated in interim period
period, based on revenues from a
period
previous period
Levy triggered in full if entity
Operating as a bank at
Recognise only if interim p
eriod
operates as a bank at the end of
the end of the reporting
includes the last day of the annual
the annual reporting period
period
reporting period specified in the
legislation. Otherwise, a provision
would not be permitted to be
recognised in interim reports
Levy triggered if revenues are
Reaching the specified
Recognise only where the minimum
above a minimum specified
minimum threshold
threshold has been met or exceeded
threshold (e.g. when a certain
during the interim period. Otherwise,
level of revenue has been
a provision would not be permitted to
achieved)
be recognised in interim reports
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These requirements provide a clear demonstration of what is meant by the concept of
the ‘year-to-date’ basis in IAS 34 and discussed at 8 above.
9.8
Earnings per share
Earnings per share (EPS) in an interim period is computed in the same way as for annual
periods. However, IAS 33 – Earnings per Share – does not allow diluted EPS of a prior
period to be restated for subsequent changes in the assumptions used in those EPS
calculations. [IAS 33.65]. This approach might be perceived as inconsistent to the year-
to-date approach which should be followed for computing EPS for an interim period.
For example, if an entity, reporting quarterly, computes diluted EPS in its first quarter
financial statements, it cannot restate the reported diluted EPS subsequently for any
changes in the assumptions used. However, following a year-to-date approach, the
entity should consider the revised assumptions to compute the diluted EPS for the six
months in its second quarter financial statements, which, in this case would not be the
sum of its diluted EPS for first quarter and the second quarter.
10
USE OF ESTIMATES
IAS 34 requires that the measurement procedures followed in an interim financial report
should be designed to ensure that the resulting information is reliable and that all material
financial information that is relevant to an understanding of the financial position or
performance of the entity is appropriately disclosed. Whilst estimation is necessary in both
interim and annual financial statements, the standard recognises that preparing interim
financial reports generally requires greater use of estimates than at year-end. [IAS 34.41].
Because the standard accepts a higher degree of estimation by the entity, the measurement
of assets and liabilities at an interim date may involve less use of outside experts in
determining amounts for items such as provisions, contingencies, pensions or non-current
assets revalued at fair values. Reliable measurement of such amounts may simply involve
updating the previously reported year-end position. The procedures may be less rigorous
than those at year-end. The example below is based on Appendix C to IAS 34. [IAS 34.42].
Example 37.23: Use of estimates
Inventories
Full stock-taking and valuation procedures may not be required for
inventories at interim dates, although it may be done at year-end. It may
be sufficient to make estimates at interim dates based on sales margins.
Classifications of current
Entities may do a more thorough investigation for classifying assets and
and non-current assets
liabilities as current or non-current at annual reporting dates than at interim
and liabilities
dates.
Provisions
Determining the appropriate provision (such as a provision for warranties,
environmental costs, and site restoration costs) may be complex and often
costly and time-consuming. Entities sometimes engage outside experts to
assist in the annual calculations. Making similar estimates at interim dates
often entails updating of the prior annual provision rather than the
engaging of outside experts to do a new calculation.
Interim financial reporting 3123
Pensions
IAS 19 requires an entity to determine the present value of defined benefit
obligations and the fair value of plan assets at the end of each reporting
period and encourages an entity to involve a professionally qualified
actuary in measurement of the obligations. As discussed at 9.3.3 above,
market values of plan assets as at the interim reporting date should be
available without recourse to an actuary, and reliable measurement of
defined benefit obligations for interim reporting purposes can often be
extrapolated from the latest actuarial valuation.
Income taxes
Entities may calculate income tax expense and deferred income tax
liability at annual dates by applying the tax rate for each individual
jurisdiction to measures of income for each jurisdiction. Paragraph 14 of
Appendix B (see 9.5.1 above) acknowledges that while that degree of
precision is desirable at interim reporting dates as well, it may not be
achievable in all cases, and a weighted-average of rates across jurisdictions
or across categories of income is used if it is a reasonable approximation
of the effect of using more specific rates.
Contingencies
The measurement of contingencies may involve the opinions of legal
experts or other advisers. Formal reports from independent experts are
sometimes obtained for contingencies. Such opinions about litigation,
claims, assessments, and other contingencies and uncertainties may or may
not also be needed at interim dates.
Revaluations and fair
IAS 16 allows an entity to choose as its accounting policy the revaluation
value accounting
model whereby items of property, plant and equipment are revalued to fair
value. Similarly, IAS 40 – Investment Property – requires an entity to
measure the fair value of investment property. An entity should revalue at
the end of the interim reporting period, but may choose not to rely on
professionally qualified valuers to the extent that is required at year-end.
Intercompany
Some intercompany balances that are reconciled on a detailed level in
reconciliations
preparing consolidated financial statements at year-end might be
reconciled at a less detailed level in preparing consolidated financial
statements at an interim date.
Specialised industries
Because of complexity, costliness, and time, interim period measurements
in specialised industries might be less precise than at year-end. An
example is calculation of insurance reserves by insurance companies.
Attention is given to items that are recognised at fair value. Although an entity is not
required to use professionally qualified valuers at interim reporting dates, and may only
update the previous year-end position, the entity is required to recognise impairments
in the proper interim period.
11
EFFECTIVE DATES AND TRANSITIONAL RULES
11.1 First-time presentation of interim reports complying with IAS 34
IAS 34 does not contain any general transitional rules. Therefore, an existing IFRS
&n
bsp; reporting entity must apply the requirements of IAS 34 in full and without any
transitional relief when it first chooses (or is required) to publish an interim financial
report prepared under IFRS.
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For example, an entity that has already published annual financial statements prepared
under IFRS and either chooses (or is required) to prepare interim financial reports in
compliance with IAS 34 must present all the information required by the standard for
the current interim period, cumulatively for the current year-to-date, and for
comparable periods (current and year-to-date) of the preceding year. [IAS 34.20]. The
absence of any transitional provisions requires such entities to restate previously
reported interim financial information to comply with IAS 34 and to present
information relating to comparative interim periods, such as in respect of segment
disclosures or in relation to asset write-downs and reversals thereof, which might not
previously have been reported.
11.1.1
Condensed financial statements in the year of incorporation or when
an entity converts from its local GAAP to IFRS
The standard defines ‘interim period’ as a financial reporting period shorter than a full
financial year, [IAS 34.4], and requires the format of condensed financial statements for
an interim period to include each of the headings and subtotals that were included in
the entity’s most recent annual financial statements. [IAS 34.10].
However, IAS 34 provides no guidance for an entity that either is required or chooses to
issue interim financial statements before it has prepared a set of IFRS compliant annual
financial statements. This situation might arise in the entity’s first year of its existence or
in the year in which the entity converts from its local GAAP to IFRS. Whilst the standard
does not prohibit the entity from preparing a condensed set of interim financial
statements, it does not specify how an entity would interpret the minimum disclosure
requirements of IAS 34 when there are no annual financial statements to refer to.
The entity should consider making additional disclosures to recognise that a user of this
first set of interim financial statements does not have the access otherwise assumed by
the standard to the most recent annual financial report of the entity. Accordingly, the