• Added to the IASB agenda September 2002 IASB Meeting
• Discussed at April 2003 IASB Meeting
• Discussed at July 2003 IASB Meeting
• Discussed at March 2004 IASB Meeting
• Discussed at June 2004 IASB Meeting
• Discussed at September 2004 IASB Meeting
• Discussed at October 2004 2005 IASB Meeting
• Discussed at January 2005 IASB Meeting
• Discussed at March 2005 IASB Meeting
• Discussed at April 2005 IASB Meeting
• Discussed at the April 2005 Joint 2004 IASB-FASB Meeting
• Discussed at June 2005 IASB Meeting
• Discussed at July 2005 IASB Meeting
• Discussed at October 2005 Joint IASB-FASB Meeting
• Discussed at December 2005 IASB Meeting
• Discussed at February 2006 IASB Meeting
• Discussed at January 2007 IASB Meeting
• Discussed at April 2007 IASB Meeting
• Discussed at July 2007 IASB Meeting
• Discussed at July 2008 IASB Meeting
• Discussed at January 2009 IASB Meeting
• Exposure Draft ED/2009/2 published 31 March 2009 (Click for Details)
  Comment deadline on the exposure draft is 31 July 2009

Timetable

• Click for IASB Project Timetable

Background

The objective of the overall convergence project is to eliminate a variety of differences between International Financial Reporting Standards and US GAAP. The project, which is being done jointly by FASB and IASB, grew out of an agreement reached by the two boards in September 2002.

Click here for general information about the Convergence Project.

Discussion at April 2003 Meeting

The project manager pointed out that the main difference between the liaison countries with regard to deferred tax accounting was concept of either a temporary or timing approach. As convergence between these two approaches was considered to be a major project, the project manager proposed to address only convergence issues arising from application of the temporary approach. The Board directed the staff to clarify the scope of a convergence project.

At its April 2003 meeting, the Board discussed the following issues arising from a comparison of IAS 12 and FASB Statement 109, Accounting for Income Taxes, with a view to determining what changes could be made to move closer to convergence:

• Exceptions to the basic principles.
• Measurement criteria for deferred tax assets.
• Recognition criteria for deferred taxes.
• Allocations to shareholders' equity ("backwards tracing").
• Balance sheet classification of deferred tax assets and liabilities.

Exceptions to the Basic Principle of Recognising Deferred Taxes for All Temporary Differences

General exemption. The Board agreed to remove from IAS 12 the general exception to the basic principle of recognising a deferred tax liability or asset for taxable temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not (i) not a business combination, and (ii) at the time of the transaction affects neither accounting profit nor taxable profit. The Board noted that the staff would provide further details at a later date as to how these resultant deferred tax assets or liabilities should be accounted for.

Leveraged lease. The Board noted that FASB Statement 109 contained an exemption to the basic principle for leveraged leases. The Board agreed that IAS 12 should not contain a similar exemption.

Goodwill. The Board agreed that IAS 12 should not be amended to remove the exemption in respect of goodwill and negative goodwill.

Investments in subsidiaries, branches, associates, and interests in joint ventures. After discussion the Board generally leaned toward retaining the exemption in respect of subsidiaries but removing it respect of associates and equity accounted joint ventures. The Board agreed that the staff should draft various examples detaining the various options for further discussion at a later meeting. The Board agreed to clarify the meaning of branches within the exemption and to specify that it is a separate taxable entity.

Measurement Criteria for Deferred Tax Assets

The Board agreed to clarify that 'substantially enacted' in respect of tax rates means 'virtually certain'. The Board further agreed to retain the use of the undistributed profit rate in measuring deferred tax balances.

Recognition Criteria for Deferred Tax Assets

The Board agreed that probable means 'more likely than not' and does not intend to go to the valuation allowance approach of SFAS 109.

Allocations to Shareholders' Equity ('Backwards Tracing')

The Board agreed to retain the provision in IAS 12 that requires the allocation of current and deferred taxes directly to equity where the tax relates to items that were taken directly to equity in the current or a previous period.

Balance Sheet Classification of Deferred Tax Assets and Liabilities

The Board agreed to amend IAS 12 to converge with FASB Statement 109, which classifies deferred taxes and liabilities as either current or non-current based on the balance sheet classification of the related non-tax asset or liability.

Goodwill and negative goodwill

The staff recommended that deferred taxes be recognised for goodwill and negative goodwill. Both US GAAP and IAS 12 prohibit the recognition of deferred taxes on goodwill and negative goodwill. The Board decided to leave IAS 12 as it is because (a) it is already converged with US GAAP, (b) of the practical difficulties with tracking goodwill into perpetuity, and (c) there may not in many cases be a difference between the tax base and the carrying amount.

Investments in subsidiaries, branches, associates, and interests in joint ventures

Discussion at the Board's July 2003 Meeting

At its July 2003 meeting, the Board considered whether a deferred tax liability should be recognised on undistributed earnings of subsidiaries.

The Board agreed (vote 12-2) that an entity should provide deferred taxes for future income taxes payable on the undistributed earnings of subsidiaries. The Board agreed to view a subsidiary as an investment and not as consolidated assets and liabilities that should be treated at a group level. Moreover, it was specified that the deferred tax is neither linked to the control notion nor to the distribution of dividends. Therefore a liability exist and should be raised based on the difference between the carrying value of the subsidiary and the expected recoverable amount of the investment, this include retained earnings.

The Board discussed another three related issues:

1. Accounting for withholding taxes for distributions within the consolidated group. The staff clarified "withholding taxes" for distribution within a consolidated group would encompass "additional taxes that a subsidiary will have to pay on a distribution to the parent company".

2. The Board's decision in April that an entity shall measure deferred tax assets and liabilities at the rate applicable to undistributed profits. The Board agreed that a deferred tax should be recognised, and it should be measured by use of the rate at which the distribution will be taxed.

3. Investments in associates, branches, and interests in joint ventures. The Board agreed to eliminate the exemptions in IAS 12.39.

The staff will address disclosure, tax equity, and foreign subsidiaries issues at a future meeting.

Intercompany transfers

US GAAP and IAS 12 require recognition of deferred taxes on the difference between an asset's tax base and its carrying amount if the carrying amount is adjusted as a result of an intercompany transfer within a consolidated group. However, the deferred tax is measured using the buyer's tax rate under IAS 12 and using the seller's tax rate under US GAAP. The Board agreed (7-6, one abstention) with the Staff recommendation to leave IAS 12 as is. The Board asked the staff to liaise with the FASB to seek convergence on the rate to be used.

Foreign non-monetary assets and liabilities

The staff asked the Board to decide whether a deferred tax should be recognised in the consolidated financial statements when the assets or liabilities are remeasured locally (in a foreign subsidiary) due to the change of the foreign currency. The Board decided that a deferred tax should be recognised by a vote of 11 to 3. Therefore IAS 12 will be not amended, and a difference with US GAAP will remain. The Board asked the staff to liaise with the FASB to seek convergence.

At the October 2003 joint meeting of the FASB and the IASB, the IASB staff identified the following general areas where differences exist between IAS 12 and Statement 109:

• Scope - exceptions to the basic principle
• Measurement criteria for deferred tax assets and liabilities
• Recognition criteria for deferred tax assets
• Allocations to shareholders' equity ("backwards tracing")
• Balance sheet classification of deferred tax assets and liabilities
• Disclosure requirements
• Deferred tax on equity instruments

The IASB has reached the following tentative conclusions which still need to be debated by FASB:

Discussion at March 2004 IASB Meeting

The Board discussed how to account for the tax effects of acquisitions of assets that are not accounted for as a business combination where the amount paid is different from the tax base of the asset acquired.

The staff noted that this issue is currently dealt with under the 'initial recognition exemption' and that the Board had previously tentatively agreed to eliminate this exemption.

The Board discussed three different views:

View A: Recognise the deferred tax asset or liability as the difference between the consideration paid and the tax base multiplied by the tax rate; the resulting deferred tax benefit or expense is recognised immediately in profit or loss;

View B: Allocate the consideration paid between the asset and the related deferred tax asset or liability using the simultaneous equations method; and

View C: Allocate the consideration paid between the asset and the related deferred tax asset or liability using the simultaneous equations method; however, any tax benefit in excess of the cost of the related asset is recognised immediately in profit or loss.

The staff recommended View C but noted that even if the IASB and FASB agreed to adopt View C, due to differences in other areas of accounting (primarily differences in the impairment models), full convergence will not be achieved.

The Board supported the staff's recommendations but acknowledged that it was not a perfect solution in all scenarios.

The Board discussed how this would impact assets that have no tax deduction if the asset is used but has a deduction of cost if the asset is sold. Certain Board members stated that the intention, in drafting IAS 12, was that the tax base was the amount deductible on sale but that this was not clear. The staff stated that they were intending to propose changing the definition of tax base to adopt this view.

Discussion at the June 2004 IASB Meeting - Definition of 'Tax Base'

The staff provided a brief update on the income tax convergence project. Both the FASB and the IASB have yet to discuss the allocation of tax items to shareholders' equity, issues relating to investments in subsidiaries, branches, associates and joint ventures, and disclosure issues. The staff noted that the FASB has yet to discuss certain issues already agreed by the IASB including scope exceptions that currently exist in SFAS 109 for inter-company transfers of inventory, accounting for foreign non-monetary asserts, and certain criteria for measuring deferred tax assets and deferred tax liabilities, such as the use of enacted rates versus substantially enacted rates. The staff noted that all these issues will have been discussed by both Boards by the end of October.

The Board agreed to amend the definition of tax base so that it reads as follows:

Tax base is a measurement attribute. It is the measurement under existing tax law applicable to a present asset, liability or equity instrument recognised for tax purposes as a result of one or more past events. That asset, liability or equity instrument may or may not be recognised for financial reporting purposes.

The Board agreed that examples of tax base should be included as application guidance to a revised IAS 12. The Board agreed that an entity should only recognise deferred tax assets and liabilities for basis differences that will result in taxable or deductible amounts where the reported amount of the asset or liability is recovered or settled. The Board agreed to eliminate the guidance in IAS 12 relating to the way in which management intent as to how the carrying amount of an asset or liability will be recovered can impact the tax base of that asset or liability.

The Board agreed that additional guidance should be provided to support the notion of a 'tax balance sheet' in order to clarify to constituents that this is a balance sheet that would be presented if tax law was used as the basis for accounting.

Discussion at the September 2004 IASB Meeting

Backwards Tracing

As part of the short-term convergence project, the IASB and FASB have been considering differences between IAS 12 Income Taxes and FASB Statement 109 Accounting for Income Taxes, and developing tentative conclusions with the goal of achieving convergence on these two standards. One of the issues that is being considered as part of this project is the issue of 'backwards tracing'

Backwards tracing is a slang term that refers to the process of remeasuring, in the current year, the after-tax amounts of gains and losses that occurred and were reported in prior years. For instance, an available-for-sale security had an unrealised appreciation of $100 and was reported in other comprehensive income (a separate component of shareholders' equity) net of tax (assuming a 40% rate) as a $60 increase in year 1. Assuming no changes in market value of the security and a tax rate change to 45%, backwards tracing would result in the $5 incremental tax effect to be allocated to comprehensive income in year 2. With no net of tax reporting, the issue of backwards tracing does not arise.

Recognising that the IASB and the FASB will be required to agree on the way forward at the October meeting, the staff were asked to prepare two papers for that meeting:

1. A joint paper, amongst other issues, seeking agreement between the two Boards on the fact that this issue should be converged.

2. An IASB paper assuming the FAS 109 position (of using income from continuing operations as a control number) and thereby setting out how the other items would be dealt with it terms of backwards tracing.

No decisions were made during this discussion.

Update on Decisions

The staff updated the IASB on decisions made to date by both the IASB and FASB. The IASB decided to add into the convergence project the topic of when tax benefits should be recognised (a similar issue to the proposed FASB Interpretation of FAS 109). No further decisions were made.

Discussion at the Board's October 2004 Meeting

Backwards Tracing

The IASB and FASB staff have been jointly working on the 'backwards tracing' issue. Backwards tracing refers to the process of remeasuring, in the current year, the after-tax amounts of gains and losses that occurred and were reported in prior years. In researching the differences between IAS 12 and SFAS 109 on the backwards tracing issue, the Staffs identified that backwards tracing was a subset of a bigger difference between the two Standards, namely intraperiod allocation (i.e. the manner in which the two Standards allocate income taxes to different components of comprehensive income). The Board had an educational session on this issue, consequently, no decisions were made.

During discussions and consideration of the examples prepared by the Staff, the point was made that FAS 109 and IAS 12 requirements are quite similar although the two Standards use different terminology.

There was general consistency of views in that Board members seemed to favour an approach that resulted in items other than income/loss from continuing operations attracting the discrete rate of income tax and the residual being allocated to the continuing operations result.

In concluding, the staff suggested that they prepare a joint paper for consideration at the next meeting, by both the IASB and the FASB, dealing with both intraperiod allocations and backwards tracing with a "simple" solution recommended.

Foreign Subsidiary Exceptions

The issue discussed was whether the foreign unremitted earnings exceptions in SFAS 109 and IAS 12 should be retained. Taxation experts gave a presentation to both Boards on the functioning of the US Foreign Tax Credit. After some discussion, citing the complexity of this issue, the Boards agreed to follow the staff recommendation to retain the current exceptions in the standards. In addition, to achieve convergence, the Boards agreed to amend the language in IAS 12 so that it is similar to that in SFAS 109 and US APB Opinion 23 on unremitted foreign earnings.

Staff were also asked to bring to the Boards a paper setting out disclosure suggestions that would enhance the current requirements.

Discussion at the Board's January 2005 Meeting

The Board considered a number of issues relating to the deferred taxes project, which had been considered by the FASB at their meeting on Wednesday 19 January 2005.

Enacted vs. Substantially Enacted

At its meeting in April 2003 the Board had decided to retain the phrase 'substantially enacted' (when determining which aspects of tax law to take into account) so that the changes to tax law need to be virtually certain before being taken into account. However, staff of FASB and IASB had proposed that this should be altered to state that changes in tax law should be taken into account only when remaining steps in the process were considered perfunctory. At its meeting the FASB had suggested that 'ceremonial' might be more appropriate than 'perfunctory'.

The Board noted that in the US, the signature of the president would be necessary for the 'virtually certain' criteria to be met, whereas in other jurisdictions, the giving of 'royal assent' would not be necessary for the virtually certain criteria to be met. The Board noted that the requirement should focus on the process of passing tax law rather than the probability of law being passed. The Board agreed to retain the principle of 'substantively enacted' and 'virtually certain' - clarifying that this means changes in tax law should be recognised when the process of making the law is complete - that is the remaining steps in the process will not change the outcome. The basis for conclusions will clarify that in the US environment this criterion is only met following the signature of the president.

Undistributed rate vs. Distributed rate

In April 2003 the Board agreed that the undistributed rate should be used in recognising tax in the consolidated accounts, as distribution is the trigger for the applicability of the distributed rate, and until the distribution occurs (or at least is declared), it is not possible to claim that the distributed rate will be applicable. However, the FASB believe that the distributed rate should be used because the event giving rise to the tax is the earning of the income, and this is consistent with how we account for other rights that give rise to assets (the right to distribute and thereby apply a more favourable tax rate is an asset of the company). The IASB did not agree with this logic, particularly as in some cases solvency requirements may prevent the payment of a dividend, and it seemed counter-intuitive to recognise an asset that the entity is unable to realise. The majority of the Board favoured using the undistributed rate, and therefore this item will be brought to the joint meeting of the Boards in April 2005 for debate.

Should a parent company always use the same rate as its foreign subsidiaries?

The Board then considered whether subsidiaries should use the distributed rate in their accounts, as they had previously agreed should occur, and whether this was consistent with the decision above. The Board agreed that it is reasonable to assume that profits will be distributed within the group, but not to assume that they will be outside of the group. It was noted that potential payment of dividends to external shareholders does not give rise to a temporary difference - to recognise a deferred tax asset for this is to recognise based on a supposition of one alternative as to what the entity might do with the money. Conversely, in the group situation, it is necessary for the entity to provide for all taxes that would need to be paid in order for the group as a whole to benefit from the earnings. Therefore the use of the distributed rate in subsidiary accounts is not inconsistent with the above conclusion.

The FASB had noted the exemption from the use of the distributed rate that applies to situations where money is permanently reinvested in foreign subsidiaries. They had expressed concerns about the use of distributed rate for subsidiaries not meeting this criterion, because this would lead to inconsistent assumptions between subsidiaries.

The Board reaffirmed its decision that the distributed rate should be used for subs, with the exemption for permanent reinvestment simply being a practicality exemption rather than a technical exception. The Board agreed that comprehensive examples should be brought to the joint meeting in April for debate.

Probable

The FASB noted the decision of the IASB to continue to use the word 'probable' in the criteria for recognising deferred tax assets, but to clarify the meaning of probable is 'more likely than not' (the words used in the US standard). No further issues were raised in relation to that decision.

Other items

The Board considered the following additional differences between SFAS 109 and IAS 12 that might need to be scoped into the project:

• Accounting for deferred taxes where graduated tax rates apply (the FASB had noted that it would be nice to use the same words on this issue, but that this was not a big issue); and
• Accounting for tax attributes of an acquirer that become realisable as a result of the acquisition (the Boards both agreed this should rather be resolved in the joint project on business combinations).

The Board agreed that any guidance that is currently in SFAS 109 that is not in IAS 12 should be considered by the Board for inclusion in the Exposure Draft. The Board agreed that a joint ED should be issued, and the same wording should be used as far as possible for amendments being made to the existing standards; but the fundamental structure of the existing standards need not be changed.

Discussion at the Board's February 2005 Meeting

Enacted and substantively enacted

At the January meeting, the Board deliberated the use of 'enacted' or 'substantively enacted' tax rates. The Board discussed whether the notion of substantially enacted should be based on probability of enactment or on the process of enactment and the Board decided that reaching a specified stage in the process should be required. In terms of the stage, the process of enactment would be complete when the remaining steps 'will not change the outcome'.

The purpose of this session was for the Staff to provide additional information to the Board on the implementation and operation of substantively enacted tax rates. The processes in a number of jurisdictions were considered and the Board discussed the Staff proposals of when substantive enactment was considered to have occurred. Some Board members noted that the US GAAP guidance refers to 'enactment' therefore setting the point later (e.g. when the President signs the legislation) compared to 'substantively enacted' which could be prior to that point depending on the legislative process.

The Board was supportive of the 'substantive enactment' principle on the basis that it would be achieved when the steps remaining in the process 'will not change the outcome'.

The Board agreed to proceed with this issue by providing the analysis of each jurisdiction in the Basis for Conclusions, and request specific comments from constituents. National Standard Setters would be allowed to review this information prior to the exposure draft being issued.

Uncertain tax positions

The purpose of this session was for the FASB staff to update the IASB members about the FASB's current deliberations on the initial recognition, initial and subsequent measurement, derecognition, classification and disclosures of uncertain tax positions. In addition, the feedback covered interim reporting, interest and penalties, comment period, transition method and the effective date. No decisions were taken by the IASB.

Discussion at the March 2005 IASB Meeting

Short-term Convergence – Income Taxes

At its January 2005 meeting, the Board decided to consider whether to include in IAS 12, guidance on certain areas that are covered in SFAS 109. The staff recommended that guidance on the following areas be included in IAS 12:

• computation process for determining deferred taxes
• special deductions
• alternative minimum taxation requirements
• impact of a change in an entity's tax status on current and deferred taxes - the timing of recognition of the tax effects of a change in tax status
• measuring the realisability of deferred tax assets
• allocation of current and deferred taxes for a group that files a consolidated tax return.

The staff did not recommend the inclusion of guidance on the following areas:

• income statement recognition requirements following a business combination
• regulated entities

Generally, the Board agreed with the staff recommendations for the reasons outlined in the Board papers.

The Board considered the difference in approach between the IASB and the FASB as regards use of the distributed or undistributed rate of income tax. The Board decided to discuss this issue at the joint meeting of the two Boards in April. Some Board members tentatively indicated that they were not convinced with the FASB position (the distributed rate approach).

Discussion at the April 2005 IASB Meeting

FASB staff provided feedback to the Board indicating that the FASB had agreed with the IASB approach on this project.

On the issue of establishing when substantive enactment occurs, the Board appeared to agree that the guidance should only deal with the principle together with an example of the US system where the President has the power of veto, such that substantive enactment only occurs when the President signs the relevant legislation. However, the guidance would make it clear that the issue of when substantive enactment occurs is one for each jurisdiction to consider as the Board is not competent to consider the legalities of each legislative process.

The Board went on to discuss the intraperiod allocation issue and the subset thereof, commonly referred to as 'backwards tracing'. Some Board members questioned the exception in IAS 12 that requires the taxation effect of a transaction to be recorded where the transaction is recorded (for instance, IAS 16 revaluation of PP&E and the tax effect thereof is accounted for in equity).

Others stated a preference for one taxation amount accounted for in profit or loss regardless of the transaction and where that transaction is accounted for. Some believe the current requirements in IAS 12 should be retained provided recycling to profit or loss is not allowed, as in the case of an IAS 16 revaluation of PP&E, but with the effect of tax rate changes taken to profit or loss when they occur. The requirement to take the effect of the tax rate change to profit or loss would be supported on the basis that depreciation of a revalued asset is charged through profit and loss.

The Board did not seem to agree on the existence of any concepts underpinning the provisions in IAS 12.

The Board considered not converging with US GAAP on this issue but tentatively decided that convergence was the best way to proceed as recommended by the staff. The Board asked the staff to prepare examples using material discussed by the FASB for consideration. It was mentioned that the examples would certainly present an 'ordering' problem which may require an arbitrary decision as to what the 'anchor' number should be.

Discussion at the April 2005 Joint IASB-FASB Meeting

The staff gave an introductory briefing on the issues of intraperiod tax allocation being the allocation of the total tax expense or benefit for the period to various components of comprehensive income (for example, continuing operations and discontinued operations, other comprehensive income[OCI]) and capital items). The staff detailed the current reconciling item between IAS 12 and Statement 109. The tax effect arising in the year relating to gains and losses of the year recognised in OCI or capital is, under both standards, recognised in OCI or capital. However, the effect of changes in tax rates, tax law, tax status and most changes in valuation allowances attributable to gains and losses recognised in OCI or capital in previous years is recognised in OCI or capital under IAS 12 but in income from continuing operations under Statement 109

The Boards then discussed the various options set out by the staff (and option C set out by the FASB), namely:

Option A: Do not converge on intraperiod allocation at this time. The FASB and IASB Boards could separately deliberate intraperiod allocation if either Board believes improvements in their standard is advisable.

Option B: Converge the intraperiod allocation principles in IAS 12 with the detailed intraperiod allocation requirements in Statement 109. This would effectively result in retaining the intraperiod allocation guidance in Statement 109, amended to require allocation to the components of income, OCI or capital of changes in (1) tax rates, (2) tax laws, (3) tax status of an entity and (4) valuation allowances.

Option C: Converge the intraperiod allocation principles in IAS 12 with the detailed intraperiod allocation requirements in Statement 109. This would effectively result in retaining the intraperiod allocation guidance in Statement 109.

The Boards discussed the following points in the ensuing discussion:

• In the course of this project there is a need to bear in mind the earlier decision to introduce one single statement of comprehensive income.
• The merits of convergence between US GAAP and IFRS and whether the cost of converging is outweighed by the benefits should be considered throughout the project.
• Tax is a cost and should be included in calculating net income
• The difficulty of recycling tax and the need to ensure that recycling is treated in the same manner as other recycled items (for example cash flow hedging) so there is a need to identify the specific line items in equity to which the tax relates.

After discussion, the Boards voted in favour of Option C above which would result in convergence of IFRS with the current treatment in US GAAP statement 109.

Discussion at the June 2005 IASB Meeting

The Board was informed that the staffs of both the FASB and IASB are working towards a joint exposure draft of amendments to FAS 109 and IAS 12, such that constituents will be able to see where either Board is making amendments to its standards.

Disclosure

(a) Components of income tax expense

The Board agreed to retain the specific example in paragraph 80(b) of IAS 12.

The Board agreed to add to IAS 12 the examples in paragraphs 45(g) and 45(f) of FAS 109

(b) Contingent assets and liabilities

The forthcoming exposure draft of proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains the following:

The Board agreed to propose deleting this requirement in the Income Taxes ED, noting that IAS 10 would capture this information.

(c) Intercompany asset transfers

The Board agreed to include disclosures to address the following matters:

• Expand the disclosure requirements of FAS 109, paragraph 43 to include the component of deferred tax assets and liabilities that represents the impact of an intercompany transfer of an asset between taxing jurisdictions with different effective tax rates.
• Require disclosure of any such impact recognized as part of income tax expense (benefit) in the income statement for interim or annual periods. This could pertain to all transfers or be limited to transfers whose timing or terms are not customary for the consolidated entity.
• Require disclosure of tax effects of any modifications, including unwinding (reversal), of terms of such transfers.

(d) Nature of deferred tax assets

The Board agreed to eliminate the disclosure requirement in IAS 12 paragraph 82.

(e) Public entities not subject to tax

The Board agreed to add to IAS 12 the disclosure requirement in FAS 109 paragraph 43, but to extend this to all companies, not just public ones:

A public enterprise that is not subject to income taxes because its income is taxed directly to its owners shall disclose that fact and the net difference between the tax bases and the reported amounts of the enterprise's assets and liabilities.

(f) Reconciliation between tax expense and pre-tax accounting profit

By a majority (12 in favour; 2 opposed), the Board agreed that the tax rate reconciliation would require the use of the domestic rate of the parent company.

(g) Amounts and expiry dates of operating loss and tax credit carryforwards and deductible temporary differences

The Board agreed to defer their discussion of this topic.

(h) Consolidated tax returns

The Board agreed to add to IAS 12 the disclosure requirements of FAS 109 paragraph 49:

(i) Disclosure of dividends and unremitted earnings

• The Board agreed to retain the disclosures required by IAS 12 paragraphs 82A, 87A, 87B and 87C.
• The Board agreed that when a preparer makes a post balance-sheet disclosure of dividends declared, the tax effects, if any, of that dividend also be disclosed
• The Board decided not to add guidance similar to that in paragraph 44(a) of FAS 109 to IAS 12, which requires an entity to disclose the types of events that would cause temporary differences that have not been recognized to become taxable. This was contrary to the staff recommendation. This matter will be re-debated as a sweep issue.
• The Board (in common with the FASB) did not agree with a staff recommendation to require all entities to disclose a foreign earnings table. Instead, the Board agreed (8 in favour; 6 opposed/ indifferent) to require a continuity schedule for foreign unremitted earnings and to raise a question in the Invitation to Comment about the usefulness of this disclosure.

Uncertain tax positions

The Board agreed that:

• An enterprise must establish that it is probable in the Statement 5 context (meaning that "the future event or events are likely to occur") that a position taken (or expected to be taken) regarding a tax deduction, credit, or filing position would be sustained if challenged by taxing authorities prior to the tax benefit from that position being recognised as a benefit or reduction of tax expense in the financial statements.
• An enterprise must presume that a taxing authority will review a tax position when evaluating whether the position is probable of being sustained. Therefore, consideration of the risk of detection is inappropriate.
• The enterprise shall recognise the tax position in any subsequent period that it becomes probable that the tax position will be sustained.

The Board agreed that initial measurement should be based in the entity's best estimate of the settlement amount. The guidance in FASB Concepts Statement 7 would be useful.

After a discussion on derecognition, the Board asked the staff to return to the next meeting with a paper discussing the interaction of IAS 12 and the proposed amendments to IAS 37.

Discussion at the July 2005 IASB Meeting

Commenting on the project timetable, the staff indicated their intention to have a pre-ballot draft exposure draft by the time of the October meeting.

At this meeting, the Board was asked to consider and confirm a summary of its decisions as well as to indicate any alternative views. Three Board members noted that they would like to read the draft before indicating whether they would dissent or provide alternative views. The main issue that would affect the Board member's position would be whether an overall improvement is made to IAS 12 by this project given that the Board has dealt with only some issues in the Standard. The Board also discussed whether IAS 12 should be re-written at this point and issued as an IFRS. Some Board members disagreed with this suggestion as they had not reconsidered all of the principles in IAS 12 as part of this project. Nevertheless, the Staff was asked to consider ways of improving the layout and structure of IAS 12 during the drafting process.

The Board's decisions were grouped into the following topics, and details pertaining to each of these are available in the Observer notes. Only the issues discussed by the Board at this meeting are detailed below:

Definition of tax base

The Board agreed to the following definition of tax base:

Exceptions from the temporary difference approach

Investment in subsidiaries, branches and associates, and interests in joint ventures

The Board decided that an entity should recognise the income tax consequences of all temporary differences arising in the consolidated financial statements. An implication of this decision is that an entity should take into account any taxes payable by a subsidiary on the distribution of earnings to the parent in determining the tax rate to be used to measure its consolidated deferred tax liability. The practical difficulties of doing this for foreign subsidiaries are addressed below. In addition, the Board decided to eliminate from IAS 12 the notion of 'branches'.

At the joint meeting in October 2004, the boards decided to retain the exceptions in and IAS 12 and SFAS 109 for the recognition of deferred tax liabilities for certain investments in foreign subsidiaries (or foreign corporate joint ventures) because of the practical difficulties in measuring the liabilities. The IASB agreed to move to the SFAS 109 wording for the exception.

The Board asked the staff not to characterise this issue as an exception, but rather to include this guidance in the application guidance of the Standard. Some Board members asked the Examples to be clarified regarding whether certain information was assumptions or derivations.

The Board appeared to agree with the rest of the summary.

Guidance on tax bases

At its June 2004 meeting, the Board decided to amend the definitions of tax base and temporary difference in IAS 12 Income Taxes. As a result of the amendments to these definitions, the Board also decided to include additional guidance and examples of tax base in IAS 12. The Board considered a paper dealing with guidance on tax bases. In that paper, the staff recommended the following:

• an introductory discussion on how to derive a tax balance sheet. This would be implementation guidance.
• guidance on the tax base when different deductions are available depending on whether an asset is used or sold. The principle would be in the standard, with illustrative examples in implementation guidance.
• guidance on the tax rate to use when different rates are applicable depending on whether an asset is used or sold. The principle would be in the standard, with illustrative examples in implementation guidance.
• guidance on the tax base when different deductions are available depending on whether an asset is sold individually or as a single-asset entity. The principle would be in the standard, with illustrative examples in implementation guidance.
• procedures for the computation of deferred taxes. This would be implementation guidance.

The staff also recommended that the descriptions of cost and fair value in IAS 16, IAS 38 and IAS 40 be amended to clarify that cost (on initial recognition) means fair value assuming full deductibility for tax purposes.

The Board generally agreed with the staff recommendations. After some discussion around the issue of which tax rate to use for an asset that may be sold separately or when the entity itself is sold, the Board asked for additional guidance covering jurisdictions that are taxed on a consolidated basis.

Regarding Example 3 dealing with assets and liabilities arising from finance leases, the Board decided to make it clear that deferred tax arises on these transactions. This is consistent with the removal of the initial recognition exclusion.

Special deductions

At its March 2005 meeting, the Board considered whether to include guidance in IAS 12 that is already included in SFAS 109. One of the areas discussed related to special deductions. The Board concluded that IAS 12 could not converge with the wording of SFAS 109 on special deductions as it would be inappropriate for IAS 12 to include a list of jurisdiction-specific special deductions, as is included in SFAS 109. The Board decided that a general principle for special deductions that is consistent with the requirements of SFAS 109 should be developed and agreed with the FASB staff.

The Board considered a paper that discusses the principle that could be developed for special deductions. Board members indicated that a principle could not easily be developed as the underlying issue was specific to one jurisdiction only. Consequently, the Board decided not to develop a principle at this time but to consider the issue again once the issue of 'uncertain tax positions' had been looked at.

Discussion at the October 2005 Joint IASB-FASB Meeting

The FASB has noted significant diversity in practice in the treatment of uncertain tax positions. The FASB has had to move quite quickly to produce an ED that will be made into a standard. Unfortunately, the IASB would be forced to reach a different conclusion from that presented in the Exposure Draft because of the proposed amendments to IAS 37 and the absence of any probability recognition threshold. Under the proposed amendments to IAS 37, the additional tax liability would be recognised at the average of the likely outcomes, assuming in those calculations that the transaction would come under scrutiny by the tax authority. Under the FASB proposals tax assets would be derecognised when it was clear they were unsustainable, and liabilities would be recognised subject to the application of the entities own specified confidence level. The Boards agreed to continue to monitor each other's projects in this respect but agreed that this topic would not and should not cause delays to either project.

The Boards had previously agreed that in calculating deferred tax assets and liabilities the rate applicable to undistributed earnings would be used unless the entity had recognised a liability for the distribution. The staff drew to the Boards' attention that this will have particularly significant implications in certain industries, particularly real estate investment companies and co-operatives, most notably in the United States. Staff recommended that the ED should clearly articulate the impact of this change.

Previously under US GAAP such entities had been exempted from disclosing tax expense, which had the effect of their being treated as in-substance tax exempt entities, and therefore not recognising deferred tax assets or deferred tax liabilities. Not all Board members agreed that this had been the intention of the exemption, some believing that it was only ever intended as a disclosure exemption.

To change the IASB's ED to be consistent with this, a concept of being 'in-substance tax exempt' would need to be introduced. Alternatively the use of the distributed rate could be extended to those entities which are legally required to distribute earnings, or required to do so by their articles of association, constitution, or similar, or by a binding decision of the directors. It was noted that even this amendment may not assist co-operative entities.

It was agreed that the staff should prepare a draft ED, and the covering memo to the Boards should explain how this issue has been addressed. The Boards reiterated that they did not want this effort to disrupt their earlier conclusion that the use of the undistributed rate is appropriate.

The IASB noted that they hope to issue their short term convergence ED by March 2006.

Discussion at the December 2005 IASB Meeting

The following issues arose from drafting the amendments to IAS 12:

1. The treatment of assets and liabilities that have a tax base that differs from their initial carrying amount

The staff recommended that all assets and liabilities that have a tax base different to the amount at which they would initially be recognised should be recognised at fair value assuming a tax base equal to fair value. Having established this principle for initial recognition, the staff would extend it to all assets and liabilities that are remeasured at fair value, so that they are remeasured at fair value assuming a tax base equal to fair value.

The Board agreed with the staff recommendation but asked that this be clarified in the drafting as the point being made is that the tax base is that which the market would consider at any point in time (generally equal to the cost of purchase, and therefore fair value on that date) and may differ with the tax base of the entity that acquired a similar asset at a prior date. Considering this, when an asset is remeasured to fair value, the tax base is not that which was previously determined by the entity, but rather the current tax base the market attaches to the asset. Given the potential for misunderstanding, the Board agreed to include an example in the literature.

2. The recognition of deferred tax assets and liabilities arising on the initial recognition of goodwill

Requiring the recognition of a deferred tax liability for a taxable temporary difference arising on the initial recognition of goodwill would remove an exception from the temporary difference approach in IAS 12 and SFAS 109. One of the objectives of the income taxes convergence project has been to eliminate as many as possible, exceptions from the temporary difference with the aim of making it more transparent.

The staff recommended that the Board remove the prohibition in IAS 12 from recognising a deferred tax liability on the initial recognition of goodwill, consistent with its decision on the recognition of deferred tax assets in the Business Combinations project.

The Board's view was that it was pointless to create a reconciling item with US GAAP over an issue related to goodwill. Consequently, the Board decided that it would be guided by the FASB on this issue.

Two additional issues were brought before the Board. These issues relate to concerns raised by commentators:

1. Allocation of tax to components of profit or loss and equity

IAS 12 and SFAS 109 both include requirements on the allocation of tax to components of profit or loss and equity. The SFAS 109 requirements are more detailed. The two sets of requirements give similar answers except in respect of changes in tax that was originally recognised in equity. Under IAS 12, those changes are also recognised in equity; under SFAS 109, they are recognised in profit or loss.

Some Board members questioned whether this issue was only specific to the US jurisdiction. After some discussion the Board decided not to amend IAS 12. However, the Board also decided to include in the exposure draft an example illustrating the potential complexity of this issue and seek specific comments thereon.

2. Intra-group transfers of assets

An intercompany transfer of assets (such as the sale of inventory or depreciable assets) between tax jurisdictions is a taxable event that establishes a new tax base for those assets in the buyer's tax jurisdiction. The new tax base of those assets is deductible on the buyer's tax return as those assets are consumed or sold to an unrelated party. US GAAP requires taxes paid by the seller on intercompany profits to be deferred and prohibits the recognition of a deferred tax asset for the difference resulting from tax base differences between the jurisdictions. IAS 12 does not provide a similar exception. The Board has previously decided not to amend IAS 12 to provide for this exception and the FASB has decided to amend SFAS 109 to eliminate this exception.

The Board noted that when such a transfer of assets occurs, there is no accounting event that requires accounting for in the consolidated financial statements, however there is a tax event which changes the amount of taxes payable. The difficulties of tracing individual assets within a group across various jurisdictions until sold to a third party would create undue complexity. The Board also discussed the tax regime in Japan in which the transferee is required to pay in taxes, only the excess above that which was paid by the transferor. The Board reiterated its position that IAS 12 is correct and does not require amendment.

Discussion at the February 2006 IASB Meeting

Exemption related to investments in subsidiaries, associates and joint ventures

The Board discussed a staff proposal that the exception from recognising deferred taxes on undistributed earnings of foreign subsidiaries and joint ventures currently proposed in the draft ED be changed to an exception for subsidiaries and joint ventures in jurisdictions in which intragroup distributions have taxable consequences. This proposal was made as a result of an analysis of costs and benefits undertaken by the staff.

The Board disagreed with the staff proposal, which would create rather than remove an IFRS/US GAAP difference. The Board did agree to ask a question in the Invitation to Comment accompanying the ED about whether it had reached the right conclusion on removing the exemption currently in IAS 12 paragraph 39.

Transition

The Board discussed staff proposals for transition. The Board modified the staff proposals such that there would be two sets of transitional requirements, depending on whether the entity was an existing IFRS user or a first-time adopter.

(a) Existing preparers

The Board agreed that existing users be required to apply the amendments to the assets and liabilities in the opening balance sheet for the first period starting after the publication of the standard and to all events and transactions thereafter. In applying the amendments to the assets and liabilities in that first opening balance sheet:

• i. a re-analysis of the cumulative amounts recognised through profit or loss or directly in equity should not be allowed and
• ii. assets and liabilities that currently fall under the initial recognition exemption should be treated as if they had been acquired for their carrying amount at the balance sheet date. In other words they would be grossed up to create (i) a new carrying amount and (ii) a deferred tax balance calculated in accordance with IAS 12 with the sum of (i) and (ii) equalling the previous carrying amount.

(b) First-time adopters

The Board modified the staff recommendation such that first-time adopters whose date of transition to IFRSs is later than a specified date shortly after the publication of the final standard should apply the amendments retrospectively except that:

• i. the requirements for the allocation of tax across components of profit or loss and equity should be applied prospectively to events and transactions after the date of transition to IFRS. The cumulative tax effect of transactions recognised directly in equity is also recognised in equity on the transition date and
• ii. the carrying amount of assets and liabilities that would currently fall under the initial recognition exception is determined as if they had been acquired for their carrying amount at the balance sheet date. In other words they would be grossed up to create (i) a new carrying amount and (ii) a deferred tax balance calculated in accordance with IAS 12 with the sum of (i) and (ii) equalling the previous carrying amount.

The Board also agreed that first-time adopters whose date of transition to IFRSs is before date specified above should apply the amendments retrospectively except in those situations in which data is required before the date of adoption that would have required assumptions using contemporaneous judgements. In such situations, the current version of IAS 12 would be used. This approach is similar to that adopted in the transitional approach to amendments to IAS 39.

Board members were asked whether any of them would be presenting Alternative Views in the ED. Two Board Members stated that they might do so, but that both would read the draft ED before committing themselves.

Uncertain tax positions

FASB staff led the IASB through the FASB's recent discussions and redeliberations of their ED Accounting for Uncertain Tax Positions-an interpretation of FASB Statement No. 109, issued in July 2005.

Scope

No discussion.

Recognition

The IASB noted that during their redeliberations, the FASB had reduced the recognition threshold to more likely than not. (The term more likely than not in US GAAP is similar to the term probable as used in IFRS.) The IASB welcomed that decision, which resulted in a common recognition point for all tax assets.

Measurement

The IASB had a wide-ranging discussion on a possible approach to measurement of uncertain tax positions. There was no real conclusion, except that the FASB are interested in the IASB's 'expected outcome' model being developed in the revisions to IAS 37.

Subsequent recognition and measurement

The Board noted that during their redeliberations that the FASB had concluded that the best estimate at the reporting date would be based on all information available to management at that reporting date. Absolute certainty of the resolution of the tax position or finality of the outcome was not necessary. However, changes in estimates about recognition and measurement would be based on new information available to the enterprise, not on a new interpretation of old or previously available information.

The IASB voted (8 in favour; 2 opposed; 2 abstained) to incorporate the FASB's conclusion (in particular that any subsequent recognition and measurement changes be based on new information) in the forthcoming IASB ED.

Changes in judgement

The IASB noted that during redeliberations, the FASB concluded that interim period accounting should follow the guidance in Opinion 28 and Interpretation 18, which currently prescribes changes in judgments in interim periods.

Interest and penalties

The Board noted that during redeliberations, the FASB had concluded that interest and penalties should be recognised in the period they are deemed to be incurred, based on the provisions of the tax law. Interest should be accrued on the full difference between the tax return and the financial statements. In addition, the classification of interest and penalties should be treated as an accounting policy election, and that the election should be disclosed as well as the amount of interest and penalties recognised in the financial statements.

Several Board Members voiced objection to some or all of the FASB's conclusions. However, after a vigorous debate they agreed to include the FASB's conclusions in the IASB ED.

Classification

The Board noted that the FASB had affirmed their conclusions in their ED that the difference between the amounts recognised in the financial statements, and the amounts reported in the tax returns should be classified as a current liability to the extent that amounts are anticipated to be paid within the next 12 months or the operating cycle, if longer.

Additionally, amounts would not be classified as a deferred tax liability unless they resulted from a taxable temporary difference, as defined in Statement 109.

The Board appeared to support a similar approach in the forthcoming IASB ED.

Transition

The Board noted that the FASB had concluded that transition should be made using the cumulative effect of a change in accounting principle. The change in net assets as a result of applying the provision would be treated as an adjustment to the beginning balance of retained earnings. Retroactive application would not be permitted.

The Board agreed to adopt the same approach in their ED.

Effective date

The IASB's ED would not include a proposed effective date.

Discussion at the January 2007 IASB Meeting

The Board discussed the accounting for investment allowances in the context of a specific tax regime's requirements. A national standard-setter and securities regulator had approached the IFRIC staff for guidance on how to apply IAS 12 to a tax allowance in their jurisdiction. The allowance is given as an incentive to entities to encourage investment/ expenditure on qualifying projects and activities. Under the tax rules, an entity would be able to claim 60 per cent of qualifying expenditures as an additional deduction under certain conditions. If the asset acquired as a result was disposed of within two years of the date of its acquisition, the allowance would be refundable. (Further details are available in Observer Note 6, available on the IASB Website.)

The Board debated whether the tax allowance would be reflected in the asset's tax basis and concluded that, at initial recognition, it should not. The entity would have to reflect the possible obligation to return the additional deduction until such time as the deduction was non-refundable. Although the accounting effect looked like a basis adjustment, it was not. One Board member noted that the solution to the problem was to fix the definition of tax basis such that everything else that does not create a temporary difference should be reflected in the current period.

The Board agreed that a sub-group of Board members and staff should consider this point, in conjunction with the FASB staff, and report to the Board within a reasonably short time period.

Discussion at the April 2007 IASB Meeting

The IASB redeliberated two issues discussed by the FASB in its recent meeting.

Should the existing exception to the temporary difference approach in IAS 12 Income Taxes prohibiting the recognition of deferred tax liabilities on the initial recognition of goodwill be removed?

In December 2005 the IASB tentatively decided to remove this exception and to require deferred tax liabilities as well as deferred tax assets to be recognised for temporary differences arising on the initial recognition of goodwill. However, the Board noted that it did not wish to diverge with the FASB on this issue.

Since the FASB had decided to retain the exception the Board revised its tentative decision and unanimously decided to also retain the exception.

Treatment of acquired assets and assumed liabilities that have a tax base different from their initial carrying amount, both in a business combination and outside a business combination

In December 2005 the IASB tentatively decided that, in such cases, an asset should be recognised at 'fair value assuming full deductibility for tax purposes'. The corresponding deferred tax asset or liability should be recognised as the difference between the fair value of the asset and its tax base multiplied by the tax rate. Any difference between the consideration paid and the sum of the so determined fair value of the asset and the recognised deferred tax amount is recognised as a purchase discount or premium on the deferred tax. In addition, the Board decided to extend this principle to all assets and liabilities that are remeasured at fair value.

One Board member noted that the decision in December 2005 was based on the question how to measure an asset at fair value when the tax basis of 'somebody else' has to be considered. The Board unanimously decided that the concept of hypothetical tax deductibility should be limited to these cases. Accordingly, in all other cases the fair value should represent the amount that market participants would pay in the respective jurisdiction.

Discussion at the July 2007 IASB Meeting

The Board held a brief discussion of three issues noted for resolution before the joint FASB/IASB exposure draft on income taxes is issued.

Tax credits and investment tax credits

The Board agreed that, to be consistent with the scope exclusion in SFAS 109, 'investment tax credits' should be defined as tax credits that are directly related to the acquisition of depreciable assets.

Special deductions

SFAS 109 has explicit requirements for certain 'special deductions' that are a feature of the US tax system. IAS 12 does not address the issue at present. The Board agreed that IAS 12 should continue to be is silent on special deductions. The Board and staff are not aware of any problems in practice arising, although this does not mean that there is consistent treatment in practice or that problems will not arise in the future.

Weighted probability approach to determine the applicable rate

The Board agreed that the rate used to measure deferred tax assets and liabilities should continue to be simply the rate expected to apply. This was not an expected value notion, but rather a best guess of the rate that would be applied, given the nature of the related income.

The use of the undistributed or distributed rate

The Board discussed the situation of certain entities (such as Real Estate Investment Trusts) that qualify for a special tax rate (often significantly lower than the normal corporate income tax rate) provided that the Trust distributes a given percentage of its income as a dividend on an annual basis.

The Board agreed that an entity should use the rate that it expects will applying when measuring current or deferred tax assets or liabilities. The Board acknowledged that this was a change in its previous decisions but thought the concept of requiring the rate that is expected to apply was a concept already contained in both Statement 109 and IAS 12. Some Board members were very unhappy about the consequences of this decision, but were not willing to dissent from the proposal package because of it.

Discussion at the July 2008 IASB Meeting

FASB staff joined the meeting by video link.

The Board discussed various 'sweep issues' arising from their review of a pre-ballot draft of an Exposure Draft (ED) that would replace IAS 12 Income Taxes. The pre-ballot draft had been sent to various external parties and tax accounting experts as well for their review and comment.

Income tax consequences of equity instruments issued

The Board confirmed that the ED will propose that equity instruments issued by an entity should not be regarded as having a tax basis that is compared with the carrying amount of the equity instrument to assess the tax consequences of repurchasing the instrument or derecognising the carrying amount in some other way. Rather the tax consequences related to equity instruments issued that will occur without any change to the carrying amount in equity should be regarded as the tax basis of those items.

Exception for foreign subsidiaries and joint ventures

In an extended debate, the Board disagreed with a staff proposal related to the exception brought in from SFAS 109 for foreign subsidiaries and joint ventures. The ED is likely to propose that a deferred tax liability shall not be recognised for a temporary difference arising from the difference between the carrying amount and the tax basis of an investment in a foreign subsidiary or a foreign joint venture to the extent that it is essentially permanent in duration. The phrase 'to the extent that' is intended to accommodate remittance of retained earnings to the parent (on which remittance the tax consequences would be recognised) without tainting the whole of the investment balance.

In addition, the exemption for deferred tax assets related to investments in foreign subsidiaries and foreign joint ventures will be based on the same principles as other deferred tax assets: that a deferred tax asset should be recognised (or a valuation allowance against a previously recognised deferred tax asset reduced) when it is probable (that is, more likely than not) that those benefits will be realised.

The Board agreed that specific requirements in SFAS 109 related to foreign subsidiaries ceasing to be subsidiaries or foreign investments becoming subsidiaries should be replaced by requirements consistent with the treatment of disposals and step-acquisitions in IFRS 3.

The wording of the requirements on tax allocation

The Board agreed to retain the approach proposed in the pre-ballot draft, essentially the approach in FAS 109 as reworded by the combined FASB and IASB staff. In doing so, the intra-period allocation would be subject to a practicability exception. Board members noted that attempting to do 'backwards tracing' was often complex and required scheduling of reversals of temporary differences, something the Boards were told frequently was impracticable. The Board wanted to be honest about how it phrased the exception and that it was a practicability issue.

Guidance on substantive enactment

The Board agreed that the Application Guidance on substantive enactment should be amended as follows:

An entity shall regard tax rates as substantively enacted when future events required by the enactment process historically have not affected the outcome and are highly unlikely to do so.

The Board rejected a staff proposal that substantive enactment was a matter on which national standard setters might usefully give guidance. No mention of this matter will be made in the ED, the Basis, or other accompanying documents. Any issues of what constitutes 'substantive enactment' in a given situation should be referred to the IFRIC.

Disclosures arising from the financial statement presentation project

The Board agreed to clarify that a balance sheet to balance sheet numerical analysis for each type of temporary difference, unused tax loss, and tax credit would be required.

Disclosures related to the effect of distributions

The Board confirmed that entities should disclose the entity's assumptions about future distributions and their effect on the tax rate used to measure deferred tax assets and liabilities.

Disclosures on tax uncertainties

The Board agreed not to extend the disclosures already agreed with respect to tax uncertainties.

Wording of the Core Principles

The Board noted that the staff was working with Board Members to develop a short paragraph that sets out a principle without discussing the methodology. A preliminary draft wording was presented to the meeting but not discussed.

Temporary differences that arise on the initial recognition of assets and liabilities

The pre-ballot draft application guidance included requirements for the treatment of temporary differences that arise on the initial recognition of assets and liabilities. Some Board members and subject matter experts expressed concern that the requirements were complex and confusing. The Board noted that there was no viable alternative to the approach in the ED other than immediate recognition in comprehensive income. No changes to the guidance were made.

The role of expectation in the recognition and measurement of deferred tax assets and liabilities

The Board noted that in accordance with the proposed amendments, the entity's expectations do not affect the tax basis. The proposed approach is justified on the grounds that the tax basis is a matter of fact that determines whether or not a deferred tax asset or liability exists. That is not affected by the entity's expectations about the manner of recovery or settlement of an asset or liability.

There was some discussion of 'sale versus use rate' assets and dual-use assets. The Board agreed that the Basis for Conclusions accompanying the ED should discuss the Board's reasoning on this matter and that the staff should discuss drafting issues with those who found them confusing to find ways of improving them.

The analysis between the recognition and measurement of deferred tax assets

The Board agreed to retain the 'two-step' approach (recognise the full amount of a deferred tax asset and a related valuation allowance against that asset to the extent that it is more likely than not that there will not be sufficient taxable profit to utilise the asset). However, they encouraged the staff to improve the drafting to clarify the approach.

Discounting deferred tax assets arising from unused tax losses and tax credits

The Board confirmed that discounting deferred tax amounts should be prohibited. Discounting implied detailed scheduling, something constituents repeatedly told standard-setters they could not do.

Allocation of the effect of changes in uncertain tax positions

The ED will propose that the effects of changes in uncertain tax positions should be recognised in continuing operations, regardless of the component of comprehensive income or equity in which the related tax assets and liabilities were originally recognised. The Board agreed to retain this approach, but to ask a question on this proposal in the Invitation to Comment.

Interest and penalties

By a very narrow majority (7-6), the Board agreed that the ED should be explicit that an entity has an accounting policy choice on how to classify interest and penalties payable to tax authorities. Those objecting felt strongly that interest and penalties imposed by the taxing authority should not be presented as a component of income taxes.

Transition for first-time adopters

The Board agreed that that first-time adopters with a transition date before the date of issue of the revised standard (but a first IFRS reporting period after the date of issue) should have the option to apply the revised standard to all periods presented in the financial statements to which the revised standard first applies.

Structure and internal references

The Board had a brief discussion about the structure of the ED and internal references in particular. The staff was instructed not to refer from the Standard part of the ED to non-mandatory guidance (for instance, draft Illustrative Examples); references from the draft Illustrative Examples to the draft Standard were permitted.

Description of the document

The Board agreed that the ED would be presented as a Draft IFRS rather than an amendment to IAS 12.

Alternative Views

Board members were asked whether any intended to present an Alternative View in the ED. Mr Garnett indicated that he might because he was concerned that the text of the pre-ballot draft had not reflected his understanding of what the Board had agreed.

Discussion at the January 2009 IASB Meeting

The staff brought back an issue that arose during the balloting phase of the upcoming ED on income taxes. The ballot draft proposed that current tax should be discounted. The staff asked the Board whether the ED should contain guidance on discounting. The Board debated different aspects of discounting current tax, including discount rate and IAS 20 implications.

There seemed to be agreement, where the deferral of payment is allowed by law, discounting was not appropriate. However, if an entity specifically negotiates a payment schedule for its tax liability, discounting would be applicable if material. However, Board members pointed out that this is more akin to settlement of a tax liability, and not in itself a tax issue. It was decided not to address discounting of current tax in the ED.

Exposure Draft ED/2009/2 Published 31 March 2009

On 31 March 2009, the IASB issued for comment an exposure draft proposing to replace IAS 12 Income Taxes with a new standard titled Income Tax. The proposed standard retains the basic IAS 12 approach to accounting for income tax, known as the temporary difference approach. The objective of that approach is to recognise now the future tax consequences of past events and transactions, rather than waiting until the tax is payable or recoverable. Although the proposed standard retains the same principle, the IASB proposes to remove most of the exceptions in IAS 12, to simplify the accounting and strengthen the principle in the standard. In addition, the IASB proposes a changed structure for the standard that will make it easier to use. The proposal also more closely aligns international standards with FASB Statement 109 Accounting for Income Taxes. Comments on the exposure draft are due by 31 July 2009. Click for IASB Press Release on Income Tax (PDF 101k).

Proposals to change IAS 12 include:

• A new definition of tax basis. 'The measurement under applicable substantively enacted tax law of an asset, liability, or other item'.
• New definitions. New definitions 'tax credit' and 'investment tax credit'
• Determination of tax basis. Tax basis determined assuming recovery of the carrying amount of the asset by sale, rather than management expectation of sale or use.
• Initial recognition exemption. On initial measurement, assets and liabilities that have tax bases different from their initial carrying amounts are disaggregated into (a) an asset or liability excluding entity-specific tax effects and (b) any entity-specific tax advantage or disadvantage. An entity would recognise and measure the former in accordance with IFRSs and recognise a deferred tax asset or liability for any resulting temporary difference between the carrying amount and the tax basis. If the consideration paid or received differs from the total recognised amounts of the acquired assets and liabilities (including deferred tax), an entity recognises the difference as an allowance against, or premium on, the deferred tax asset or liability. Deferred tax is not recognised on initial recognition of an asset or liability whose recovery or settlement will have no effect on taxable profit.
• Exceptions for investments in subsidiaries and related entities. The exception from recognising a deferred tax asset or liability arising from investments in subsidiaries, branches, associates and joint ventures will be restricted to investments in foreign subsidiaries, joint ventures or branches (no exception for associates).
• Deferred tax asset recognition. Deferred tax assets would be recognised in full, with a valuation allowance to reduce the carrying amount to the highest amount that is more likely than not to be realisable. This is the FASB SFAS 109 approach. Under IAS 12 currently these are netted.
• Uncertain tax positions. Uncertainty would be reflected by measuring current and deferred tax assets and liabilities using the probability-weighted average amounts of possible outcomes assuming that the tax authorities will examine the amounts reported to them by the entity and have full knowledge of all relevant information.
• Tax rate – effect of distributions. Where different tax rates apply to distributed and undistributed profits, current and deferred tax assets and liabilities would reflect the entity's expectations of future distributions.
• Classification of deferred taxes. Deferred tax assets and liabilities would be classified as either current or non-current based on how the related non-tax asset or liability is classified. This would amend IAS 1, which currently treats all deferred tax to be classified as non-current.
• Intraperiod allocation of taxes. Income tax expense would be allocated to the components of comprehensive income and equity using a SFAS 109 approach.
• Recording subsequent changes in deferred taxes. Change in the allocation guidance to replace 'backwards tracing' with an approach similar to that required by FASB Statement 109.

Heads Up Newsletter on the Exposure Draft

Delolitte (United States) has published a Heads Up Newsletter (PDF 98k) highlighting the significant changes proposed for income tax accounting under IFRSs and comparing the proposals with existing practice under US GAAP.

IAS Plus Update Newsletter on the Exposure Draft

Deloitte's IFRS Global Office has published an IAS Plus Update Newsletter – Changes Proposed for Income Tax Accounting (PDF 102k) discussing the IASB's Exposure Draft Income Tax published on 31 March 2009.