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Short-term Convergence — Income Taxes

Date recorded:

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 PPE, 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.

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