Recent agenda decisions of the IFRS Interpretations CommitteeIFRS Interpretations Committee (the Committee) agenda decisions are those issues that the Committee decided not to take onto its agenda. Although not authoritative guidance, in practice they are regarded as being highly persuasive, and all entities reporting under IFRS should be aware of these decisions because they could impact the way particular transactions and balances are accounted for.
At its September 2021 meeting, the IFRS Interpretations Committee (Committee) issued two final agenda decisions dealing with the following issues, which are discussed, in more detail below:
- Issue 1: Non-refundable value added tax (VAT) on lease payments (IFRS 16 Leases)
- Issue 2: Accounting for warrants that are classified as financial liabilities on initial recognition (IAS 32 Financial Instruments: Presentation).
Issue 1: Non-refundable value added tax (VAT) on lease payments (IFRS 16)
Lessee operates in a jurisdiction that charges VAT on goods and services.
VAT is charged when the lessor issues an invoice for payment to the lessee (e.g., each month if payments are due monthly).
The invoice therefore comprises two amounts – the monthly lease payment plus VAT.
The applicable VAT legislation generally requires the seller (lessor) to collect the VAT and remit it to the government, and allows the purchaser (lessee) to recover VAT paid back from the government.If the lessee’s operations are such that it cannot recover any VAT, or can only recover a portion of VAT (e.g., because the lease is for the purpose of making an input-taxed supply), the whole or a portion of the VAT may be non-refundable.
When calculating the lease liability under IFRS 16, do the lease payments include any non-refundable VAT?
|Rationale for agenda decision:
|Outreach conducted by the Committee revealed limited evidence that non-refundable VAT on lease payments is material to affected lessees.
It also revealed limited evidence of diversity in practice in the way lessees account for non-refundable VAT on lease payments.
The matter is not widespread and is not expected to have a material effect on lessees. The Committee therefore decided not to add a standard-setting project to its work plan.
In a rare instance where non-refundable VAT on lease payments may be material to a lessee, the Committee’s conclusion is not helpful. However, BDO's IFRS in Practice (IFRS 16), example 18 (see extract below) provides two possible approaches, with Approach 1 being the easiest to apply in practice.
Fact patternA lessee enters into a lease of a property for 10 years for annual lease payments of $3 million, payable quarterly in advance. In addition, the lessee will pay a 10% value-added tax (VAT) to the lessor, who must remit the tax to the applicable government. As the lessee operates in a specific industry, based on the applicable tax law, 50% of the VAT is non-recoverable.
Approach 1The payment of the VAT to the lessor could be viewed as not being a ‘lease payment’ as it is not a payment relating to the right to use an underlying asset; it is a charge levied by a government relating to goods and services with the lessor acting as collection agent for the government. Under this approach, the VAT can be viewed as being within the scope of IFRIC 21 Levies, as it is a payment imposed by a government. The VAT would not be included in the measurement of the lease liability or right-of-use asset. The refundable portion of the VAT is therefore recognised as a receivable from the government when the VAT is paid, or as an expense if it is non-refundable.
Approach 2The VAT is an initial direct cost of the right-of-use asset. However, the obligation to pay the VAT would only arise at the related tax point (often the invoice date), meaning that only the first quarter’s VAT would be capitalised.
Issue 2: Accounting for warrants that are classified as financial liabilities on initial recognition (IAS 32)
A warrant provides the holder with a right to buy a fixed number of shares of the issuer for a price to be fixed at a future date.On initial recognition, the warrant is classified as a financial liability because of the variability in the exercise price (i.e., it fails the ‘fixed for fixed’ test).
When the exercise price is fixed at a future date as per the original contractual terms, is the warrant reclassified from financial liabilities to equity, given that the ‘fixed for fixed’ test would be met at that date?
|Rationale for agenda decision:
|IAS 32 does not contain requirements for reclassifying financial liabilities and equity after initial recognition if the contractual terms are unchanged.
Similar questions about reclassifications arise in other circumstances.Reclassification by the issuer is a practice issue the Board will consider addressing in its Financial Instruments with Characteristics of Equity (FICE) project.
This fact pattern is too narrow for the Board or the Committee to address in a cost-effective manner.
The Board should consider the matter as part of its broader discussions on the FICE project.The Committee therefore decided not to add a standard-setting project to its work plan.
For more on the above, please contact your local BDO representative.
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