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Convergence — Income Tax

Date recorded:

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.


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.

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