Short-term Convergence — Income Taxes
Commenting on the project timetable, the staff indicated their intention to have a pre-ballot draft exposure draft by the time of the October meeting.
At this meeting, the Board was asked to consider and confirm a summary of its decisions as well as to indicate any alternative views. Three Board members noted that they would like to read the draft before indicating whether they would dissent or provide alternative views. The main issue that would affect the Board member's position would be whether an overall improvement is made to IAS 12 by this project given that the Board has dealt with only some issues in the Standard. The Board also discussed whether IAS 12 should be re-written at this point and issued as an IFRS. Some Board members disagreed with this suggestion as they had not reconsidered all of the principles in IAS 12 as part of this project. Nevertheless, the staff was asked to consider ways of improving the layout and structure of IAS 12 during the drafting process.
The Board's decisions were grouped into the following topics, and details pertaining to each of these are available in the observer notes. Only the issues discussed by the Board at this meeting are detailed below:
Definition of tax base
The Board agreed to the following definition of tax base:
Tax base is a measurement attribute. It is the measurement under existing tax law applicable to a present asset, liability, or equity instrument recognised for tax purposes as a result of one or more past events. That asset, liability, or equity instrument may or may not be recognised for financial reporting.
Exceptions from the temporary difference approach
Investment in subsidiaries, branches and associates, and interests in joint ventures
The Board decided that an entity should recognise the income tax consequences of all temporary differences arising in the consolidated financial statements. An implication of this decision is that an entity should take into account any taxes payable by a subsidiary on the distribution of earnings to the parent in determining the tax rate to be used to measure its consolidated deferred tax liability. The practical difficulties of doing this for foreign subsidiaries are addressed below. In addition, the Board decided to eliminate from IAS 12 the notion of 'branches'.
At the joint meeting in October 2004, the boards decided to retain the exceptions in and IAS 12 and SFAS 109 for the recognition of deferred tax liabilities for certain investments in foreign subsidiaries (or foreign corporate joint ventures) because of the practical difficulties in measuring the liabilities. The IASB agreed to move to the SFAS 109 wording for the exception.
The Board asked the staff not to characterise this issue as an exception, but rather to include this guidance in the application guidance of the Standard. Some Board members asked the Examples to be clarified regarding whether certain information was assumptions or derivations.
The Board appeared to agree with the rest of the summary.
Guidance on tax bases
At its June 2004 meeting, the Board decided to amend the definitions of tax base and temporary difference in IAS 12 Income Taxes. As a result of the amendments to these definitions, the Board also decided to include additional guidance and examples of tax base in IAS 12. The Board considered a paper dealing with guidance on tax bases. In that paper, the staff recommended the following:
- An introductory discussion on how to derive a tax balance sheet. This would be implementation guidance.
- Guidance on the tax base when different deductions are available depending on whether an asset is used or sold. The principle would be in the standard, with illustrative examples in implementation guidance.
- Guidance on the tax rate to use when different rates are applicable depending on whether an asset is used or sold. The principle would be in the standard, with illustrative examples in implementation guidance.
- Guidance on the tax base when different deductions are available depending on whether an asset is sold individually or as a single-asset entity. The principle would be in the standard, with illustrative examples in implementation guidance.
- Procedures for the computation of deferred taxes. This would be implementation guidance.
The staff also recommended that the descriptions of cost and fair value in IAS 16, IAS 38 and IAS 40 be amended to clarify that cost (on initial recognition) means fair value assuming full deductibility for tax purposes.
The Board generally agreed with the staff recommendations. After some discussion around the issue of which tax rate to use for an asset that may be sold separately or when the entity itself is sold, the Board asked for additional guidance covering jurisdictions that are taxed on a consolidated basis.
Regarding Example 3 dealing with assets and liabilities arising from finance leases, the Board decided to make it clear that deferred tax arises on these transactions. This is consistent with the removal of the initial recognition exclusion.
At its March 2005 meeting, the Board considered whether to include guidance in IAS 12 that is already included in SFAS 109. One of the areas discussed related to special deductions. The Board concluded that IAS 12 could not converge with the wording of SFAS 109 on special deductions as it would be inappropriate for IAS 12 to include a list of jurisdiction-specific special deductions, as is included in SFAS 109. The Board decided that a general principle for special deductions that is consistent with the requirements of SFAS 109 should be developed and agreed with the FASB staff.
The Board considered a paper that discusses the principle that could be developed for special deductions. Board members indicated that a principle could not easily be developed as the underlying issue was specific to one jurisdiction only. Consequently, the Board decided not to develop a principle at this time but to consider the issue again once the issue of 'uncertain tax positions' had been looked at.