IFRS 16 - VAT

[Aga]

Can VAT, which the company cannot deduct, increase the value of the liability and fixed assets recognized according to IFRS 16, or should it be included in P&L right away?

[Marek Muc]

It so happened that I was at an IFRS conference today (organised by EY), and this question was discussed there. The conclusion was that non-recoverable VAT should be excluded from lease accounting as VAT payments are not made to lessor in exchange for the right to use an underlying asset. Instead, they are levies imposed by the government and are in the scope of IFRIC 21 Levies and should be recognised when they are due under the tax law (mostly when the invoice is issued). They should be expensed in P/L immediately as they are recognised.

This is an interesting point and I need to add it to our knowledge base!

[Aga]

Thank you very much for detailed answer.

[marea]

Regarding this topic, it it seems that different approaches are applied regarding non-refundable VAT. See the last item on the agenda and the attached paper with the discussion.

https://www.ifrs.org/news-and-events/ca ... committee/

[exIFRS]

I read the paper slightly differently, or at least, to say there are different approaches might lead people to think there is diversity in practice when there really isn't.

Para 17 of the paper states that: "Almost all respondents said lessees do not—or generally do not—include non-refundable VAT as part of lease payments"

And the proposed agenda decisions states "the research indicated that there is little diversity in the way lessees account for non-refundable VAT on lease payments."

So I would not be inclined to emphasise different approaches? The approach outlined in the knowledge base is the one taken by the vast majority and it seems the IFRIC is comfortable with this?

[Marek Muc]

Thanks marea for the link, I'm linking this paper in the knowledge base
I agree with exIFRS as to the conclusion of the paper.

But I'm disappointed that the agenda decision won't take a position as to the merit of the case. This matter does have a widespread effect as the research showed, i.e. it concerns many preparers

[marea]

Thank you exIFRS
Maybe I used the word approach incorectly, and should have used the word "view". I understand that there are two views on how to account for non-refundable VAT, explained on page 12-17.
I understand that even if there is little diversity in accounting for non-refundable VAT, both views are acceptable, or am I wrong?

[exIFRS]

I think for me the difference is pages 12 - 17 were provided by the submitter, not produced by the IFRIC. So the two views were the two views of the submitter, the IFRIC found little evidence of diversity, most entities use only one approach and the IFRIC choose not to say this was wrong. So certainly I would be hesitant if a client wanted to use the alternative approach, yes there may be companies doing it, but reading between the lines I don't think it is a strongly supported position (on basic facts).

The way the IFRIC works is it only steps in if there is a big problem and diversity, I read this as, the matter is immaterial, most entities are doing it the way we think it should be done, so we choose not to make a comment.

So personally I might not go as far as to say both are generally acceptable, but rather say at this point the IFRIC feels it doesn't need to take a strong position.

But this is just a personal view.

[marea]

Note 4 emphasizes where such differences could arise. As also Marek mentioned, I was also wondering why does the Committee not take a clear position (or maybe I was not able to identify it). They mention that differences may arise, but they do not explicitly state that they only support one view of accounting for non-refundable VAT.

[exIFRS]

The IFRIC don't want to get swamped with minor details I guess, and they definitely don't want to become a "help desk". So unless they see a significant problem they tend to stay out. I have sat in meetings where they have concluded a submission is clearly wrong, but still decided not to say anything, at least publicly, sometimes they will go back quietly to the submitter.

[marea]

Thank you exIFRS for your input. It is helpful to know how things work
However, sometimes having a clear guidance helps a lot - from the preparer´s point of view .