Intricacies of taxing tour operators - 3

Shabu Maurus, Tax partner, Auditax International.The tourism value chain is complex and involves several players, products and services. Most tourists prefer their tour experience to be arranged for them and the arrangement may involve travel agents, tour operators and tour guides. The tour operators make it possible for tourists to purchase bundles of several services or product (packages). A package, for example, may include a return ticket, ground transfers, accommodation, tour guide, porter, meals and drinks, park entry fees, sporting activities, entertainment, and clothes. And these packages, in most cases are prepaid (partly or fully). That is the tourist pays for the package well in advance, say six months before his trip. The complex network of tour operators (and other players), the packages and the methods of payments, all make the taxation of the industry very complex.

In this article, we continue with the discussion on the intricacies of taxing tour operators in Tanzania. Specifically, the value-added tax (VAT). Last week we indicated the uncertainties around defining the tax base. What exactly the operators supply? A single supply of package or resale of multiple supplies constituting the package. Also attached to that is the status of operators as suppliers. Whether they are agents or principals. Absence of clarity of these elements in the law and practice is likely to lead to inadvertent non-compliance by the tour operators.

One thing is important to point out is that the VAT complexity on tour operators is not only in Tanzania. Similar challenges face other countries with VAT when it comes to taxing the tourism sector. But what is lacking in Tanzania is guidance.

In South Africa, for example, the South African Revenue Service (“SARS”) issued an Interpretation Note 42 in 2007 to clarify guide the application of VAT on the supply of goods or services by the travel and tourism industry. Part of Note reads “this Note provides guidance to local entrepreneurs in applying current VAT legislation to the supply of tour packages and related goods or services to non-resident tourists and foreign tour operators…...". The Note explains the principles and uses several possible supply scenarios to guide the application of VAT. It is a good administrative practice that, in Tanzania, the Tanzania Revenue Authority (TRA) can emulate. Yes, there are some differences in the VAT laws of Tanzania and South Africa, but most of the VAT principles are the same.

Probably, the only VAT complexity that South Africa may not have but exists in Tanzania is the Union. In Tanzania, VAT is not one of the union matters. And so is the tourism sector itself. There are two VAT laws. One for Mainland Tanzania and the other one for Zanzibar. And the two are not very harmonious. There are several glitches when it comes taxing the intraunion businesses, including the tourism sector.

So, perhaps, a leaf can be borrowed from the European Union (EU). Articles 306 to 310 of the EU VAT Directive specially deal with taxing tour operators and travel agents generally.  This Special Scheme aimed at simplification and efficient revenue allocation between the EU Member States. The Special Scheme has been in place for over 40 years. But the world has changed significantly. Over the years, there has enormous growth in international travel, changes in technology, deregulation in the airline industry, and disruptive business models that have led to new ways of conducting business. The EU commissioned a study in 2016 (“Study on the review of the VAT Special Scheme for travel agents and options for reform”) and a report issued in 2017. There are several lessons Tanzania can learn from this EU report. At least the importance accorded to the matter.

By Shabu Maurus, Tax Partner, Auditax International.

Tips for preparing Transfer Pricing Documentation

The Tax Administration (Transfer Pricing) Regulations, 2018 require a person who has transactions with associates to prepare contemporaneous transfer pricing documentation 

In this first of a series of tax tips, we highlight the key contents required when preparing transfer pricing documentation.

  •  The Tax Administration (Transfer Pricing) Regulations, 2018 require a transfer pricing documentation to be submitted with the income tax return for a year of income by a person whose total transactions with associates amounts to or is above ten billion Tanzanian shillings.                                                                                                                                                                                
  • It should also be prepared before the date for filing the return of income for the year of income and should be provided to the tax authority within 30 days when requested for other persons with total controlled transactions of less than ten billion Tanzanian shillings.                                                                                                                                                          
  • Non-compliance with transfer pricing documentation requirement attracts a penalty of not less than 3,500 currency points.

Below are the tips of what should be included in the transfer pricing documentation:

1. Organizational structure-covering group and operational structure, roles and shareholding %.                                       

2. Nature of the business/industry and market conditions.

3. Description of the controlled transactions-covering volumes and values involved.

4. Strategies and assumptions that influences setting of pricing policies.

5. Computations workings to establish transfer prices.

6. Functions performed, assets used and risks assumed by persons to the controlled transaction.

7. Comparability analysis.

8. Selection and application of the transfer pricing method, tested party and the financial indicator; financial statements for the parties to the controlled transaction-to include where tested party has been selected from outside the country.

9. Documents supporting/referred in establishing transfer pricing analysis.

10. Index to document.

11. Attach any other information, data/document deemed relevant. 

If you require support, kindly reach us through info@auditaxinternational.co.tz

Intricacies of taxing tour operators - 2

 The tourism value chain is complex and involves several players, products and services. Most tourists prefer their tour experience to be arranged for them and the arrangement may involve travel agents, tour operators and tour guides. The tour operators make it possible for tourists to purchase bundles of several services or product (packages). A package, for example, may include a return ticket, ground transfers, accommodation, tour guide, porter, meals and drinks, park entry fees, sporting activities, entertainment, and clothes. And these packages, in most cases are prepaid (partly or fully). That is the tourist pays for the package well in advance, say six months before his trip. The complex network of tour operators (and other players), the packages and the methods of payments, all make the taxation of the industry very complex. It deserves special attention. 

Every tax has four essential elements. One is the tax base. The ‘thing’ which is being taxed. Clarity of this and the other three elements in the tax law is very crucial if both tax compliance and tax administration are to be successful. This article will focus on the first element, the tax base for VAT purposes.

Section 14 of the VAT Act (Mainland Tanzania) requires that where a supply consists of more than one element, five criteria shall be considered when determining how VAT should apply: (1) every supply shall normally be regarded as distinct and independent; (ii) a supply that constitutes a single supply from an economic, commercial, or technical point of view, shall not be artificially split; (iii) the essential features of the transaction shall be ascertained in order to determine whether a customer (in this case a tourist) is being supplied with several distinct principal supplies or with a single supply; (iv) there is a single supply, if one or more elements constitute the principal supply, in which case the other elements are ancillary or incidental supplies, which are treated as part of the principal supply; or (v) a supply shall be regarded as ancillary or incidental to a principal supply if it does not constitute for customers an aim in itself but is merely a means of better enjoying the principal thing supplied.

Yes, we have said that a package sold by a tour operator may include a range of distinct products. But it is unlikely that the tour operator will be able to provide all the services in the package as a principal supplier. In most cases, what the tour operator does is to arrange for these services to be supplied to the tourist by the principle suppliers of each distinct service. Arguably, therefore, a typical tour operator only supplies facilitation services. But the question is to who are the facilitation services supplied? Is the tour operator acting as an agent of the tourist or the underlying service supplier (say a Hotel)? Or acting in his capacity as a principal supplying the package as a single supply? This is a question of the agency and principal models. It is an important distinction as it has a huge impact on the way VAT needs to be accounted for by tour operators.

The VAT is, in many respects, both a tax on transactions as well as a tax that applies within a geographical area. The impact of the former is that not only is it necessary to identify the various types of transactions that may be undertaken within the industry but also the relationships that arise as a result of the transactions, i.e. are the parties acting as ‘agent' or ‘principal'?

By Shabu Maurus, Tax Partner, Auditax International.

Understanding the intricacies of taxing tour operators

Recently I was in Arusha for a tax seminar hosted by Auditax International. Among the seminar participants were some tour operators. During one session of the seminar, a discussion arose on some unresolved practical tax challenges facing the tourism sector in Tanzania. The most pressing being compliance with VAT law. From the discussion, I picked up some few lessons. One is that the tourism business is much more complex than I originally thought. And second is that taxing the sector appropriately needs special attention. This may minimise possible tax leakage that may come from deliberate non-compliance with tax laws or unintentional non-compliance as a result of complexities and unresolved practical challenges.

The tourism value chain is complex and involves several players, products and services. There are several and distinct tourist attractions. Think of the safaris, beaches, cultural, hunting, archaeological, mountaineering, diving and several others. And these often cut across countries. There are also several support services and products. Transportation both international and local which may include airlines (scheduled or chartered), car hire, taxis, ship, rail, buses and many other possible alternatives. Importantly also are accommodation services such as hotels, hostels, guest houses, tents and resorts. The tourists also need food, beverage and entertainment which call players such as the clubs, bars, restaurants, open-air food stalls and music bands. A tourist may also need shopping services for clothes, gifts, souvenirs, books, personal care, medicines, cosmetics and photography. For foreigners at entry and exit points, services may include customs, immigration, communication services, shops (duty-free or otherwise), transit and bureau de change.

But most tourists prefer their tour experience to be arranged for them. This call in the services of travel agents, tour operators and tour guides. And these can be distinct, related or a single enterprise. They are the packagers. They make it possible for tourists to purchase bundles of several services or products they might need for their trips and vacations. A package, for example, may include a return ticket, ground transfers, accommodation, meals and drinks, sporting activities, entertainment, and clothes. When these services can not be practically differentiated, are taxed differently or are supplied in multiple jurisdictions, it becomes a big practical tax problem. Think of a tourist whose trip includes Kenya, Zanzibar and Mainland Tanzania under one package organised by a chain of tour operators in London, Nairobi and Arusha. Tanzania Mainland, Zanzibar, Kenya and UK each have different VAT law.

The problem becomes even more complicated because most of these packages are prepaid. Should the receipt of prepayment (booking) trigger a tax liability? How should the prepayment be split (among the services and products in the package and the different tour operators in different countries)? Sometimes the booking is done even a year or more before the actual tour is made. How should cancellations or changes of packages be managed for tax purposes? Importantly also is knowing how the income from package sales is split among the different players in and outside the country. Is there any tax leakage or tax base erosion?

Every tax has four essential elements. One is the tax base. The ‘thing’ which is being taxed. The second element is the tax rate. Any tax must have someone to pay it. The taxpayer. And finally, the tax point. That is when tax is due and payable. Clarity of these elements in the tax law is very crucial if both tax compliance and tax administration are to be successful. In the next article, I will discuss some of these elements in the context of the tourism industry. 

By Shabu Maurus, Tax Partner, Auditax International.

What your banker must give you monthly

What your banker must give you monthly

Shabu Maurus, Tax Partner, Auditax International.Taxing services has never been simple. For example, applying value-added tax (VAT) on financial services has been a practical nightmare. And when services and transactions are provided electronically, the problem becomes even worse. Think of transfer of your money from your bank account to your mobile money wallet and vice versa. Or withdrawing cash from ATM.

From 2015, Tanzania made some VAT reforms to start collecting VAT on fees charged by financial services providers to their customers. However, the implementation of it has seen several glitches. With the advent of e-commerce and the emergence of new business models, some provisions of the tax laws are becoming redundant or practically unsuitable. The VAT system in Tanzania is dependent on tax invoices and fiscal receipts. These are mainly physical in nature. When you transfer money from your bank account to mobile money wallet using your phone (mobile banking) or online (internet banking), there is VAT on the fee that a bank charges you. But, practically how do you get an EFD receipt (a piece of paper) for that electronic transaction? Also, the number of financial transactions happening electronically makes the issuance of physical EFD receipts practically impossible. But the VAT law requires customers to support their VAT claims by using fiscalised tax invoices or EFD receipts.

Last year the Minister of Finance issued regulations that clarified some of these questions. The Value Added Tax (General) (Amendment) Regulations, 2018. Recently (on 23rd August 2019), TRA also issued a notice that emphasizes compliance with those regulations by financial institutions and their customers. The VAT regulations, among other things, require financial institutions to issue “periodic statements” to its customers.

What are “Periodic Statements”?

Ideally, the periodic statements are intended to serve the same functions as “tax invoices”. According to the VAT Regulations, “periodic statement” means a statement issued every month by a supplier of financial services. The VAT Regulations makes it mandatory for financial institutions to issue periodic statements to its customers who are registered for VAT within ten days after the month-end. For customers who are not registered for VAT, issuance of periodic statements is optional.

Mandatory contents

The VAT Regulations prescribe the contents of the periodic statements. The required contents make periodic statements fundamentally different from the traditional “bank statements”. In addition to the standard contents such as a date, the periodic statements need to have name, address, TIN and VAT number (VRN) of both the customer and the financial institution. The periodic statement also needs to show all transactions, the value of each transaction excluding VAT, the VAT rate applied, the amount of VAT charged and the total amount payable by the customer. So, the concept here is pretty much the same as a tax invoice.

Implications for financial institutions

To comply with the new regulations, financial institutions need to know the VAT status of all its customers. Both existing and new. The new requirements may also call for some system changes. Changes that will enable them to issue the periodic statements with the prescribed contents.

Implications to customers

According to the VAT Regulations, a customer of a financial institution who is registered for VAT will not be entitled to claim VAT charged by a financial institution unless such VAT is supported by a periodic statement at the time of filing the monthly VAT return. Under the new regulations, a periodic statement is deemed to be a tax invoice. So, if you are VAT registered, you should demand a periodic statement from your banker

By Shabu Maurus, Tax Partner, Auditax International.

Tax Compliance Behaviour

Why some people don’t pay taxes - (3)

Is non-compliance with tax laws necessarily deliberate? My previous two articles highlighted some of the major factors that influence tax compliance. Both economic and behavioural factors. But both the economic and behavioural models assume that non-compliance by taxpayers is a deliberate action. But this is partly true.  Tax non-compliance can occur due to deliberate connivance or just ignorance.

Broadly tax obligations can be clustered into four groups: (a) registration in the system or deregistration from it (think of VAT for example); (b) timely filing or lodgement of requisite taxation information (filing tax returns for example); (c) reporting of complete and accurate information (incorporating good record keeping); and (d) payment of tax on time. If you abide by these, you are tax compliant. You breach any, you are non-compliant. Regardless of whether it is intentional or unintentional. A taxpayer may intentionally evade some of his or her obligations while unintentionally being non-compliant in other respects.

When it comes to administering penalties for non-compliance it is very difficult to distinguish whether a non-compliance action or inaction is deliberate or simply unintentional.  But in practice, inadvertent non-compliance with tax laws is widespread, especially within the SMEs and more so within the informal sector. So, what contributes to inadvertent non-compliance with tax laws? Of course, there are several possible reasons or factors.

Absence of tax management

Yes, just like any other aspect of your enterprise or organisation, you also need to manage your taxes. Tax management includes the understanding of the taxes that you are expected to comply, identifying the tax risks and putting in place effective controls to reduce both the possibility of non-compliance and the impact of non-compliance.  It is a process to respond to the tax risks and continuously evaluate the responses for improvement. For example, how you approach non-routine transactions will make a huge difference as far as tax compliance is concerned. Are you organised in such a way that you have enough time to prepare, review and pay tax liabilities? How does the board of directors of an organisation ensures that the tax affairs of their organisations are managed properly? Does the board know all taxes that their organization is obliged to comply? It is not uncommon to find out that some organizations do not even know all the taxes that they are required to comply. Arguably, most of the reasons for inadvertent non-compliance emanates from a lack of effective tax management.

Lack of requisite tax knowledge or information

Knowledge about taxes influences a taxpayer’s ability to comply with tax rules. As indicated earlier, the economic and behavioural models on tax compliance take tax knowledge as given, which may be grossly misleading. In practice, there is enough evidence that unintentional non-compliance is directly related to ignorance about and lack of understanding of tax laws.

The complexity of tax laws and rules

Tax complexity also influences non-compliance by causing misinterpretation of rules, omissions and unintentional errors. Making the tax system less complicated will lead to a reduction of tax non-compliance. Uncertainty from the interpretation of tax law is very common and may lead to unintentional non-compliance even for experienced tax experts.

Poor record-keeping

Inability to keep proper business records or lack of appropriate records about the business may lead to incorrect determination of the tax base and hence the tax liability. Due to lack of record, a taxpayer may end up paying less tax than they owe. Or even worse pay more than what is legally due. Lack of appropriate records also leads wrong, incomplete or misleading tax returns.

By Shabu Maurus, Tax Partner, Auditax International.

Tax Compliance Behaviour

Why some people don’t pay taxes - (2)

The higher the relative financial tax burden, the more likely a taxpayer may default. The costs associated with tax compliance, over and above the actual tax liability may also deter some taxpayers from compliance. Penalties, interest and fines for non-compliance may work but only for some time. Incentives for being compliant may have a longer positive effect. But it's not only the monetary or financial effects to a taxpayer that matters. Numerous behavioural factors also tend to influence tax compliance behaviour.

 

Individual differences: While many taxpayers comply with their tax obligations, some do not. Individual factors influencing behaviour include gender, age, education level, moral compass, industry, personality, circumstances, and personal assessment of risk. In his research on business tax compliance, economic psychologist Paul Webley found that those who do not comply tend to be male, younger, arrogant and have positive attitudes towards tax evasion and negative attitudes towards taxation authorities. Webley suggests that education about the taxation system has a direct impact on reducing the propensity to evade.

 

Social norms: Is tax non-compliance an acceptable norm? The “But everyone else is doing it” attitude.  If a taxpayer believes that non-compliance with taxes is widespread, they are much more likely not to comply themselves. Hence some studies indicate that if taxpayers can be made to have an accurate understanding of the good tax compliance behaviour of others, it is likely to reduce non-compliant behaviour.

 

Perceived inequity: Some taxpayers may believe ‘the system’ is unfair or they have personal experiences of ‘unfair’ treatment (dissatisfaction with tax authorities). Or that the system treats them unfairly compared to others, and that the government is doing too little with the revenue it collects. These taxpayers are less likely to comply with taxes.  In his research, Webley found a positive correlation between belief by taxpayers that the revenue authority is inefficient or unhelpful and the likelihood of their non-compliance.

 

Risk-taking: Some taxpayers view tax avoidance as a game to be played and won. They like to test their tax avoidance skills. Also, if a taxpayer has the opportunity not to comply and thinks that there is only a minimal risk of being detected, he or she will take the risk. Under-reporting of certain types of income is a typical example. Employment incomes (salaries and wages) are usually highly ‘visible’ to a tax authority because of employer reporting under the PAYE system. However, other forms of income may be much less visible and therefore subject to more ‘creative’ accounting.

 

There is no firm answer to what influences taxpayer behaviour either towards compliance or non-compliance. Hence an Australian academic Dr Valerie Braithwaite suggested that some economic and behavioural factors combine to cause individual taxpayers (individuals or businesses) to adopt sets of values, beliefs and attitudes that he described as motivational postures. There are four of them. Those who either deliberately evade their responsibilities or choose to opt-out (“The disengaged”). Also, some don't want to comply but who will comply if they can be persuaded that their concerns are being addressed (“Resisters”). But some are positive and are willing to comply but have difficulty in doing so and don’t always succeed (“Triers”). And lastly, there are those who are always willing to do the right thing (“Supporters”). Dr Braithwaite further cautions that an individual taxpayer can adopt any of these attitudes at different times. Or adopt all the attitudes simultaneously to different issues. Hence these attitudes are not fixed characteristics of a person or group.

By Shabu Maurus, Tax Partner, Auditax International.

Tax Compliance Behaviour

Why some people don’t pay taxes

What makes you pay your taxes voluntarily? Apart from tax payment, there are several tax compliance obligations under the tax laws. Broadly tax obligations can be clustered into four groups: (a) registration in the system or deregistration from it (think of VAT for example); (b) timely filing or lodgement of requisite taxation information (filing tax returns for example); (c) reporting of complete and accurate information (incorporating good record keeping); and (d) payment of tax on time. If you abide by these, you are tax compliant. You breach any, you are non-compliant.

But what sort of factors influence tax compliance (or non-compliance)? Understanding taxpayers behaviours and factors that influence compliance behaviour are crucial for a successful tax administration. But there are no hard and fast rules. The question has been a subject of numerous researches and it does not appear there is any firm consensus. Broadly the research literature identifies two broad approaches to the problem of compliance. Economic and behavioural approaches. Under these two, several factors emerge as significant in explaining or influencing tax compliance behaviours. I start with economic factors.

How big is the financial burden?

There appears to be a relationship between the amount of tax liability and taxpayer compliance behaviour. If a business owner or an individual has a tax liability that can easily be paid, likely, they may be willing to comply. But if the liability is perceived to be huge by the taxpayer and potentially threatening the viability of the business there is a good chance that the owner may avoid paying the tax. Avoiding the whole tax liability is one possibility. Another is to fraudulently adjust the data (for example, reducing sales or increasing expenses) such that a lesser amount of tax is paid.

What is the cost of compliance?

Taxpayers may face several costs of having to comply with their tax obligations over and above the actual amount of tax they pay. These include the time taken to comply with tax obligations, the cost of hiring and relying on accountants and tax consultants and the indirect costs associated with the complexity of tax laws. These can include ‘psychological’ costs such as stress that comes from not being certain that they have met all the tax rules or even knowing what those rules are. Record keeping and maintenance of documents may also be costly. The available methods of effecting tax payments may also come with a cost.  Also, taxpayers especially small businesses often express resentment about being ‘tax collection agents’ for taxes such as withholding tax and VAT. Think of when VAT is due for payment but as a taxpayer you have not or for some reasons you cannot collect the same from your customer.

Carrots or sticks?

Incentives: Are there rewards for being tax compliant? Some studies have shown that giving taxpayers incentives may have a positive effect on compliance behaviour (i.e. taxpayers becoming more compliant). I recall some few years back, TRA used to organize Taxpayers’ Day. Among other things, those who were considered as best taxpayers in various categories were rewarded. The RRA in Rwanda still has a similar practice.

Disincentives: The potential amount of interest, penalties or fines for non-compliance also tends to influence taxpayer compliance behaviour. Also, those who are compliant tend to want those who are non-compliant to be punished. However, studies of the impact of these financial deterrents as well as the threats of prosecution(s), suggest that they may have a time-limited effect on compliance behaviour of taxpayers.

By Shabu Maurus, Tax Partner, Auditax International.

IPSASB Publishes Exposure (ED) Draft 69

International Public Sector Accounting Standards Board has published ED 69 Amendment to IPSAS 41 Financial Instruments

Summary

On 27th August 2019, the International Public Sector Accounting Standards Board (IPSASB) issued an Exposure Draft (ED) 69 proposing some amendments to be made to IPSAS 41 Financial Instruments. The proposed amendment aims at ensuring representativeness and comparability of the information that a reporting entity provides in its financial statements.

Specific Matters for Comments

This ED does not cover statutory receivables and payables because they are considered to be non-financial instruments due to lack of contractual element. Further, it recognizes that concessionary loans and financial guarantee contracts issued through non-exchange transactions were addressed in the application guidance in IPSAS 41, therefore they do not form part of this ED.

In a nutshell, this ED covers monetary gold, currency in circulation, IMF quota subscriptions and Special Drawing Rights by proposing the following areas for comments;

1.    Monetary gold: Is gold bullion a financial instrument (like cash) or is it a commodity? Is monetary gold a financial instrument (like cash)?

IPSASB Perspective: IPSASB proposes that gold bullion is not a financial asset because it has no contractual right to receive cash although bullion is highly liquid. On the other hand, despite the fact that monetary gold also lack contractual rights to receive cash IPSASB considers them as financial assets since they meet many characteristics of financial assets.

2.    Currency in circulation: Does issuing currency as legal tender create a financial liability for the issuer?

IPSASB Perspective: IPSASB proposes that in determining whether financial liability is created or not, entities should consider existence of contractual obligation of which it shall be based on substance of arrangement rather than legal form. In addition to that, the said currency should be issued to evidence that two willing parties have agreed to the terms of the arrangement. That is to say unissued currency does not meet the definition of a financial instrument.

3.    Special Drawing Rights: Do Special Drawing Rights Holdings meet the definition of a financial asset? Do Special Drawing Rights Allocations meet the definition of a financial liability?

IPSASB Perspective: IPSASB proposes that both Special Drawing Rights Holdings (SDRH) and Special Drawing Rights Allocations (SDRA) meet the definition of financial assets and liability respectively on the ground that SDRH represent claims on currencies and liquidity is guaranteed by a mechanism requiring participants to deliver cash in exchange for SDRs. Similarly, SDRA represents a contractual obligation to deliver cash provided that SDR holdings are distributed to members.

Conclusion

Comments on the proposed changes are to be received by 31 December 2019.

For details on the exposure draft, see: Exposure Draft 69

IASB Issues an Exposure Draft on Disclosure of Accounting Policies

International Accounting Standards Board (IASB) has issued an exposure draft (ED) proposing some amendments to be made to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2.

Summary

The ED proposes amendments in IAS 1 by amending the requirement for reporting entities to provide disclosure regarding their ‘significant’ accounting policies and instead they shall only provide disclosure of ‘material’ accounting policies.

That is to say, the proposed amendments requires reporting entity to identify and disclose all material accounting policies that are more useful to primary users of financial statements and eliminate all immaterial accounting policies from the financial statements.

Further, IASB through exposure draft has provided guidance on applying materiality by introducing two new examples that highlight the need to focus on information that is material and useful to users of financial statements and demonstrate how the application of the four-step materiality process can address the issues of providing generic information or repeating the requirements of IFRSs on disclosure of accounting policies.

Disagreement

Although the proposed amendments are considered to be consistent with the application of materiality to other financial information, Mr Martin Edelmann one of the board member, voted against the publication of this exposure draft on the grounds that, provision of accounting policies disclosure are made to assist users of financial statements in understanding how transactions, other events and conditions are reflected in the reported financial statements. Further he argued that, not all primary users of financial statements are accounting experts hence the disclosure of accounting policies could help them to better understand an entity’s reported financial performance and financial position even if such accounting policies are not important enough to be assessed as material because they would not be expected to influence the investment decisions of users.

Therefore, according to Mr Martin Edelmann, consideration of materiality in disclosing accounting policies might lead to a loss of important information and hence impede users’ understanding of the financial statements.

Conclusion

Comments on the proposed changes are to be received by 29 November 2019.

For details on the exposure draft, see IASB proposes amendments to IFRS Standards to improve accounting policy disclosures

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