Short-term Convergence — Income Taxes
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.