Imagine you run a major European bank. Every year, your government imposes substantial levies—sometimes amounting to hundreds of millions of euros—calculated based on your bank’s assets or activities as measured on a “reference date,” which often falls before the year in which the levy is charged (the “levy year”). Under current accounting rules, you recognize these costs in your financial statements when they become due—typically in the levy year, if your bank is still operating.

Now, new accounting rules under discussion could require you to recognize the entire annual levy much earlier, such as immediately after the reference date, even though your banking business for the levy year has yet to begin and the obligation to pay isn’t final. This lack of alignment between when the cost is recognized and when the banking activity actually occurs is at the heart of ongoing discussions between European banks, regulators, and the International Accounting Standards Board (IASB) over proposed changes to IAS 37, the standard that governs how companies recognize provisions for future costs.

As summarized in the IASB’s review of stakeholder feedback, several stakeholders in the European banking sector[1] expressed concerns that under the proposed amendments, some levies would need to be recognized as provisions earlier than under the current requirements, potentially immediately after the reference date rather than over the year to which the levy relates. This earlier recognition was considered to not reflect the economic substance of the levies, which arise as banks conduct their activities throughout the levy year [IASB Staff Paper - Exposure Draft feedback — Present obligation criterion-past-event condition, June 2025].

To understand the matter in detail, we need to go over the basics.

What Are Provisions and Why Do They Matter?

A provision is essentially a company's acknowledgment that it will need to spend money in the future because of something that has already happened or is happening now. It's like setting aside money for a known future expense, even when you don't know the exact amount or timing.

Common examples help illustrate the concept:

• Warranty costs: A car manufacturer knows some vehicles will need repairs, so it sets aside money for expected warranty claims.
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• Environmental cleanup: An oil company drilling offshore knows it will eventually need to remove the platform and restore the seabed. The provision reflects this future cost, even though cleanup might be decades away.
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• Legal settlements: A company facing lawsuits may provide for expected settlement costs based on legal advice and historical outcomes.
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• Government levies: Banks and other institutions may face regular government-imposed fees or levies.

The timing of when these provisions appear on financial statements significantly affects how profitable a company appears in any given period. Recognize a large provision too early, and profits look artificially low. Recognize it too late, and you may mislead investors about future cash flows.

How Levy Provisions Currently Work: The IFRIC 21 Framework

Under existing IFRS accounting rules, specifically IFRIC 21 (an interpretation of IAS 37), companies recognize levy provisions when the "obligating event" occurs—the moment when they become legally required to pay.

Consider, for example Bank A, a European bank preparing its financial statements at year-end. The government of the jurisdiction in which Bank A operates has imposed legislation requiring that any entity operating as a bank on 1 January 2026 must pay a levy based on its assets held as at 31 December 2025.

This regulation creates two distinct elements: (1) the reference date, i.e., 31 December 2025, which serves to measure the levy amount, but does not, by itself, create an obligation to pay, and (2) the levy year, namely 2026, which is the year for which the government charges the levy and in which the obligation to pay arises, conditional on Bank A’s continued operation on 1 January 2026.

Under current rules based on IFRIC 21, for Bank A, this means:

• The obligating event occurs on 1 January 2026, when the bank’s operating status is met.
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• No provision is recognized on 31 December 2025 as it is merely a measurement date - no obligation exists yet.
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• Bank A recognizes the full levy provision on 1 January 2026, once the obligating event has occurred and it is legally required to pay.
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• If Bank A ceases operations before 1 January 2026, it incurs no levy payment or expense, because the obligating event never occurred.

The Proposed Changes: A New Recognition Model

The IASB's proposed amendments would fundamentally change this approach. Driven by the goal of improving conceptual consistency, the Board's proposal seeks to ensure liabilities are recognized as soon as an entity has no practical way to avoid a payment, addressing what it views as a flaw in the current rules.

Instead of asking "when does the legal obligation arise?", the new rules focus on "when does the company have no practical ability to avoid the obligation?" – a seemingly subtle shift with dramatic consequences.

The proposed test has three conditions:

Obligation condition: This test involves assessing three vital elements. (1.1) Is there a mechanism (law, contract, established practice) that creates responsibility when you obtain benefits or take actions? (1.2) Do you owe that responsibility to an external party? (1.3) Do you have a practical ability to avoid discharging the responsibility?

Transfer condition: Will you likely have to transfer economic resources to another party?

Past-event condition: Have you obtained benefits or taken actions that create the obligation?

The implications become clear when applying these conditions to Bank A’s situation.

Under the proposed amendments to IAS 37, the action that triggers the past-event condition and creates a present obligation could be interpreted more broadly than under IFRIC 21. For Bank A, this might include not only operating as a bank on 1 January 2026, but also the prior action of operating during 2025 and holding the assets that form the levy base as at 31 December 2025.

This creates a fundamentally different recognition pattern. For Bank A, the three conditions can be analyzed as follows:

• The obligation condition is satisfied because:
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• Mechanism exists: Government legislation creates a responsibility to pay a levy upon continued operation on 1 January 2026.

External party: The bank owes this responsibility to the government.

No practical ability to avoid: While the legislation technically requires operation on 1 January 2026, Bank A has no practical ability to avoid this obligation given that exiting the market before that date would create economic consequences far more adverse than paying the levy itself.

• Transfer condition is satisfied because:

The bank will be required to transfer economic resources (cash) to the government to settle the obligation.

• Past-event condition is deemed satisfied because:

Drawing from the IASB's illustrative examples, stakeholders interpret "actions taken" broadly to include not only operating on 1 January 2026, but also the preceding actions of operating during 2025 and holding the assets that determine the levy's tax base. Under this interpretation, by continuing to operate as a bank during 2025 and holding the relevant assets at 31 December 2025 — combined with having no practical ability to avoid the obligation — Bank A is considered to have undertaken the actions that create the present obligation.

Accordingly, under the proposed amendments, Bank A may recognize a provision at 31 December 2025, reflecting that the past-event condition is satisfied earlier than under IFRIC 21. This results in a different recognition pattern compared to current rules, where no liability would be recognized until 1 January 2026.

This shift from recognizing the levy provision only when the obligating event legally occurs, to potentially requiring earlier recognition based on broader interpretations of "past events" and "no practical ability to avoid," introduces significant uncertainty and misalignment between accounting and actual business reality—a source of profound concern for European banks and stakeholders, whose practical and conceptual objections are explored below.

The Real Concerns: What European Stakeholders Actually Said

Based on the IASB's comprehensive feedback analysis, European banks and their representatives raised specific concerns that go well beyond simple timing preferences. Their feedback highlights conceptual, operational, and comparability issues that could undermine the usefulness of the proposed amendments.

1. Ambiguity in Recognizing Levies

The most persistent concern relates to the uncertainty around when the “past event condition” is met for recognizing levies. For recurring European levies like the EU Single Resolution Fund, the Bank of England levy, and French bank levies - stakeholders highlighted that the proposal leaves it unclear what specific action or event should trigger recognition. Is it the mere holding of assets at a reference date, the act of operating as a bank, or some more substantive activity?

Stakeholders noted that the IASB’s illustrative examples in the exposure draft are unhelpful in resolving this uncertainty and risk undue complication.

2. Concerns over Increased Costs and Diversity in Practice

There is a fear that applying the proposals as drafted would increase compliance costs because determining when to recognize levies would be complex and time-consuming, leading to lengthy debates between preparers and auditors. Moreover, divergence in practice could result in inconsistent timing of expense recognition across banks, reducing comparability between European banks’ financial statements—undermining one of the core objectives of IFRS.

3. Front-Loading of Expenses

A pivotal aspect of the objections is the risk of front-loading expense recognition. As drafted, the amendments could force banks to recognize the full annual expense of certain levies immediately at the start of the levied period—or worse, even before the period has commenced. Stakeholders cautioned that this would misrepresent the economic substance of levies, which are designed as a means for a government to appropriate value as entities operate over the year.

As highlighted in the exposure draft feedback:

“Respondents say that recognising a recurring annual levy at a point in time, especially before the year of charge, does not faithfully represent the substance of a levy. They say that in substance, a levy is the means through which a government appropriates a portion of the benefits an entity obtains from undertaking an activity or using an asset over the year for which the levy is charged… The substance of a levy would be more faithfully represented by recognising the levy expense over the period in which the entity obtains the benefits the government is seeking to appropriate” [IASB Staff Paper - Exposure Draft feedback — Present obligation criterion-past-event condition, June 2025].

• Measurement Uncertainty and Subjectivity

Stakeholders highlighted that applying the proposed amendments could increase estimation uncertainty and subjectivity. Determining the timing and amount of levy recognition involves significant judgment, particularly for recurring levies with complex tax bases. This could lead to inconsistent interpretations between banks and auditors, complicating audit reviews and potentially reducing the reliability of reported financial information.

• Commercial and Negotiation Impact 

Some stakeholders cautioned that accelerated recognition could have unintended commercial consequences. For example, if banks are perceived as having already absorbed levy costs, their ability to negotiate with governments or regulators on the design, timing, or rates of levies could be weakened.

The Stakeholder Response: Searching for Solutions

Faced with these challenges, European banking stakeholders have proposed several alternatives to the proposed IAS 37 amendments.

• Simplified, Principle-Based Approach:
  Many respondents requested a shift toward simpler, principle-based requirements in IAS 37 itself. They advocate for guidance that is easy to interpret and apply to recurring levies, rather than rules that depend on technical interpretations of legal “actions” or “obligating events.”
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• Progressive Recognition Over the Levy Period:
  A leading suggestion is to recognize levies progressively during the period in which the entity generates the benefits that the government seeks to tax—typically over the relevant year—rather than at a single date or upon the occurrence of an arbitrary “action.” Stakeholders argue this approach better reflects the economic substance of levies and aligns expense recognition with business activity.
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• Scope Exclusion or Standalone Guidance:
  Some, including banks and European associations, propose either:
  • Scoping levies out of the main IAS 37 standard and applying a separate, dedicated standard; or
  • Codifying the principles of IFRIC 21 (which is widely seen as clear and practical for levies).
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• Clearer Guidance and Illustrative Examples:
  There is a strong call for more robust, principle-based definitions regarding what constitutes “action,” clearer explanations for recurring levies, and better illustrative examples tailored to European levy complexities.

Where We Stand: An Ongoing Process

As of September 2025, the IASB has received extensive feedback but hasn't announced its final decision.

What happens next:

• The IASB will likely announce its final position by late 2025;
• If unchanged, banks must prepare for significant changes to financial reporting systems;
• Early application is expected to be permitted once the amendments are finalized.

The Bottom Line: Why This Matters to Everyone

The European banking sector's response to the IAS 37 amendments highlights a fundamental challenge in modern standard-setting: the tension between conceptual elegance and practical application. The IASB's efforts to align provisions guidance with the Conceptual Framework are theoretically sound, but the specific challenges raised by European banking stakeholders demonstrate that economic realities often resist neat theoretical categorization.

This isn't merely a technical accounting debate—it reflects deeper questions about:

• Whether accounting standards should prioritize conceptual consistency or practical outcomes;
• How to balance global standardization with industry-specific realities;
• The role of professional judgment versus bright-line rules in complex situations.

As the IASB continues its deliberations, the ultimate resolution may warrant careful compromise. The European banking stakeholders’ detailed feedback demonstrates that well-intentioned improvements may yield outcomes that differ from those originally envisaged when applied to complex, real-world scenarios.

The challenge facing the IASB is significant: how to preserve the conceptual improvements embedded in the proposed amendments while addressing appropriate concerns about practical application.

As this story continues to unfold, it serves as a reminder that accounting standards are not abstract technical documents—they are practical tools that shape how businesses report their performance and how markets interpret that information. Getting them right requires both theoretical rigor and real-world wisdom.

The final chapter of this story remains unwritten, but its resolution will significantly influence not only how European banks report their obligations but also how the global accounting profession approaches the eternal challenge of balancing conceptual purity with practical necessity.

[1] Banks: BNP Paribas, Erste Group Bank AG;

Banking Associations: AFME (Association for Financial Markets in Europe), ESBG (European Savings and Retail Banking Group), EACB (European Association of Co-operative Banks), Febelfin (Belgian Financial Sector Federation), French Banking Federation (FBF), Italian Banking Association (ABI);

National Accounting Standard Setters and Associations: Autorité des Normes Comptables (ANC, France), Accounting Standards Committee of Germany (ASCG/DRSC), Dutch Accounting Standards Board (DASB), AccountancyEurope, European Accounting Association;

European Regulatory Bodies: European Securities and Markets Authority (ESMA), European Financial Reporting Advisory Group (EFRAG), UK Endorsement Board;

Other Organizations with relevance: BusinessEurope, European CFO Network.

References:
IASB Staff Paper "Exposure Draft feedback—Present obligation criterion: Past-event condition" June 2025, https://www.ifrs.org/content/dam/ifrs/meetings/2025/june/iasb/ap22b-present-obligation-past-event.pdf

IASB Staff Paper “Exposure Draft feedback – Present obligation criterion-overall” June 2025, https://www.ifrs.org/content/dam/ifrs/meetings/2025/july/asaf/ap1a-ed-feedback-present-obligation-overall.pdf

IASB Staff Paper "Cover Paper" September 2025, https://www.ifrs.org/content/dam/ifrs/meetings/2025/september/iasb/ap22-cover-paper.pdf

This analysis draws from comprehensive stakeholder feedback submitted to the IASB through March 2025, including detailed submissions from European banks, standard setters, and accounting firms. As developments continue, preparers and users should monitor IASB announcements for updates on timing and final requirements.