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Income Taxes — Backwards Tracing

Date recorded:

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 taken during this discussion.

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