Income Taxes - Short-term Convergence
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.