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Why Europe’s Banking Stakeholders Are ConcernedAboutProposedAmendments to IAS 37 - Provisions By Kowshika ROBINSON, Senior Manager at Haca Partners, Consulting (IFRSAdvisory) I magine you run amajor European bank. Every year, your govern- ment imposes substantial levies—sometimes amounting to hundreds of millions of euros—cal- culated based on your bank’s as- sets or activities as measured on a “reference date,” which often falls before the year inwhich 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, newaccounting rules under discussion could requireyoutorecognizetheentireannuallevymuch earlier, such as immediately after the reference date, even thoughyour bankingbusiness for the levyyear has yet to begin and the obligation to pay isn’t final. This lack of alignment betweenwhen the cost is rec- ognized andwhen the banking activity actually oc- curs 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 reviewof stakeholder feedback, several stakeholders in the European banking sector (1) expressed concerns that under the proposed amendments, some levieswould need to be recognized as provisions earlier than under the current requirements, potentially immediatelyafter the referencedate rather thanover theyear towhich the levy relates. This earlier recognitionwas consid- ered to not reflect the economic substance of the levies, which arise as banks conduct their activities throughout the levy year [IASB Staff Paper - Expo- sure Draft feedback—Present obligation criterion- past-event condition, June 2025]. To understand the matter in detail, we need to go over the basics. WhatAre Provisions and WhyDo TheyMatter? Aprovision is essentiallya company’s acknowledg- ment that it will need to spendmoney in the future because of something that has alreadyhappenedor 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 vehicleswill need repairs, so it sets asidemoney for expectedwarranty claims. - 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 cleanupmight be decades away. - Legal settlements : A company facing lawsuits mayprovide for expected settlement costs basedon legal advice and historical outcomes. - Government levies : Banks and other institutions mayfaceregulargovernment-imposedfeesorlevies. The timing of when these provisions appear on fi- nancial statements significantly affects how prof- itable a company appears in any given period. Recognize a large provision too early, and profits look artificially low. Recognize it too late, and you maymislead investors about future cash flows. HowLevy Provisions CurrentlyWork: 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 inwhich BankA op- erates has imposed legislation requiring that any en- tity operating as a bank on 1 January 2026must pay alevybasedonitsassetsheldasat31December2025. This regulation creates twodistinct elements: (1) the referencedate , i.e., 31December 2025,which serves tomeasure 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 gov- ernment charges the levy and in which the obliga- tion topayarises, conditional onBankA’s continued operation on 1 January 2026. Under current rules basedon IFRIC21, for BankA, this means: - The obligating event occurs on 1 Jan- uary 2026, when the bank’s operating status ismet. - No provision is recognized on 31 De- cember 2025 as it is merely a measure- ment date - no obligation exists yet. - Bank A recognizes the full levy provision on 1 January 2026, once the obligating event has occurred and it is legally required to pay. - If BankA ceases operations before 1 January 2026, it in- curs no levy payment or ex- pense, because the obligating event never oc- curred. The Proposed Changes: ANewRecognitionModel The IASB’s proposed amendments would funda- mentally 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, addressingwhat 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 companyhave nopractical ability to avoid the obli- gation?” – a seemingly subtle shift with dramatic consequences. The proposed test has three conditions: 1.Obligationcondition : This test involves assessing threevital elements. (1.1) Is there a mechanism (law, contract, established practice) that creates responsi- bilitywhenyouobtainbenefits or take actions? (1.2) Doyouowe that responsibility toan external party ? (1.3) Do you have a practical ability to avoid dis- charging the responsibility? 2. Transfer condition :Will you likelyhave to trans- fer economic resources to another party? 3. Past-event condition :Haveyouobtainedbenefits or taken actions that create the obligation? The implications become clearwhenapplying these conditions to BankA’s situation. Under the proposed amendments to IAS 37, the ac- tion that triggers the past-event condition and cre- ates a present obligation could be interpretedmore broadly thanunder IFRIC21. ForBankA, thismight 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: 1. The obligation condition is satisfied because: -Mechanismexists : Government legislationcreates a responsibility to pay a levy upon continued oper- ation on 1 January 2026. - External party : The bank owes this responsibility to the government. -Nopractical ability to avoid :While the legislation technically requires operation on 1 January 2026, BankA has no practical ability to avoid this obliga- tion given that exiting the market before that date would create economic consequences far more ad- verse than paying the levy itself. 2. Transfer condition is satisfied because: The bank will be required to transfer economic re- sources (cash) to the government to settle the obli- gation. 3. Past-event condition is deemed satisfied be- cause: Drawing from the IASB’s illustrative examples, stakeholders interpret “actions taken”broadly to in- cludenot onlyoperatingon1 January2026, but also the preceding actions of operating during 2025 and holding the assets that determine the levy’s taxbase. Under this interpretation, by continuing to operate as a bank during 2025 and holding the relevant as- sets at 31 December 2025—combinedwith 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, BankAmay recognize a provision at 31 December 2025, reflecting that the past-event condition is sat- isfied 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 poten- tially requiring earlier recognitionbasedonbroader 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 StakeholdersActually Said Based on the IASB’s comprehensive feedback anal- ysis, European banks and their representatives raised specific concerns that gowell beyond simple timing preferences. Their feedback highlights con- ceptual, 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 uncer- tainty around when the “past event condition” is met for recognizing levies. For recurring European levies like the EUSingle Resolution Fund, the Bank of England levy, andFrenchbank levies - stakehold- ers highlighted that the proposal leaves it unclear what specific action or event should trigger recog- nition. 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 IncreasedCosts andDiversity 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 betweenpreparers andauditors.Moreover, divergence in practice could result in inconsistent timing of expense recognition across banks, reduc- ing comparability betweenEuropeanbanks’ finan- cial statements—undermining one of the core objectives of IFRS. 3. Front-Loading of Expenses Apivotal 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 leviedperiod—orworse, evenbefore the period has commenced. Stakeholders cautioned that this would misrepresent the economic sub- stance of levies, which are designed as a means for a government to appropriate value as entities op- erate over the year. As highlighted in the exposure draft feedback: “Re- spondents 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 en- tity 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]. 4. Measurement Uncertainty and Subjectivity Stakeholders highlighted that applying the pro- posed amendments could increase estimation un- certainty and subjectivity. Determining the timing andamount of levy recognition involves significant judgment, particularly for recurring levies with complex tax bases. This could lead to inconsistent interpretations between banks and auditors, com- plicatingaudit reviews andpotentially reducing the reliability of reported financial information. 5. Commercial andNegotiation Impact Some stakeholders cautioned that acceleratedrecog- nition could have unintended commercial conse- quences. For example, if banks are perceived as having already absorbed levy costs, their ability to negotiatewithgovernments or regulators on thede- sign, 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-BasedApproach: Many respondents requesteda shift towardsimpler, 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 de- pend on technical interpretations of legal “actions” or “obligating events.” - Progressive RecognitionOver the Levy Period: A leading suggestion is to recognize levies progres- sively during the period in which the entity gener- ates the benefits that the government seeks to tax— typicallyover the relevant year—rather thanat a sin- gle date or upon the occurrence of an arbitrary “action.” Stakeholders argue this approach better reflects the economic substance of levies and aligns expense recognitionwith business activity. - Scope Exclusion or Standalone Guidance: Some, including banks and European associations, propose either: - Scoping levies out of themain IAS37 standardand applying a separate, dedicated standard; or - Codifying the principles of IFRIC 21 (which is widely seen as clear and practical for levies). - Clearer Guidance and Illustrative Examples: There is a strong call for more robust, principle- based definitions regarding what constitutes “ac- tion,” clearer explanations for recurring levies, and better illustrative examples tailored to European levy complexities. WhereWe Stand: AnOngoing Process As of September 2025, the IASB has received ex- tensive feedback but hasn’t announced its final decision. What happens next: - The IASBwill 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 BottomLine: Why ThisMatters 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 alignprovisions guidancewith the Conceptual Frameworkare 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; -Howtobalanceglobal standardizationwith indus- try-specific realities; - The role of professional judgment versus bright- line rules in complex situations. As the IASB continues its deliberations, theultimate resolution may warrant careful compromise. The European banking stakeholders’ detailed feedback demonstrates that well-intentioned improvements may yield outcomes that differ from those origi- nally envisaged when applied to complex, real- world scenarios. The challenge facing the IASB is significant: how to preserve the conceptual im- provements embedded in the proposed amend- ments while addressing appropriate concerns about practical application. As this story continues to unfold, it serves as a re- minder that accounting standards are not abstract technical documents—they are practical tools that shapehowbusinesses report their performance and how markets interpret that information. Getting them right requires both theoretical rigor and real- worldwisdom. 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 ap- proaches the eternal challenge of balancing concep- tual puritywith practical necessity. 1) Banks: BNPParibas,ErsteGroupBankAG; BankingAssociations: AFME (Association for FinancialMarkets in Europe), ESBG (European Savings and Retail Banking Group), EACB(EuropeanAssociationofCo-operativeBanks),Febelfin(Belgian Financial Sector Federation), French Banking Federation (FBF), Italian BankingAssociation(ABI); NationalAccountingStandardSettersandAssociations: Autorité des Normes Comptables (ANC, France),Accounting Standards Com- mitteeofGermany(ASCG/DRSC),DutchAccountingStandardsBoard (DASB),AccountancyEurope,EuropeanAccountingAssociation; EuropeanRegulatoryBodies: EuropeanSecuritiesandMarketsAu- thority (ESMA), European Financial Reporting Advisory Group (EFRAG),UKEndorsementBoard; Other Organizations with relevance: BusinessEurope, European CFONetwork. References: - IASB Staff Paper “Exposure Draft feedback—Present obli- gation criterion: Past-event condition” June 2025, https://short.do/ZReP8Z - IASB Staff Paper “Exposure Draft feedback – Present obliga- tion criterion-overall” June 2025, https://short.do/6-xNQo - IASB Staff Paper “Cover Paper” September 2025, https://short.do/4Jy0SA Thisanalysisdrawsfromcomprehensivestakeholderfeedbacksubmitted to the IASB throughMarch 2025, including detailed submissions from European banks, standard setters, and accounting firms. As develop- ments continue, preparers and users should monitor IASB announce- ments forupdatesontimingandfinalrequirements. When Banking MeetsAccounting Standards AGEFI Luxembourg 16 Octobre 2025 Wealth management