IFRS for Small and Medium-sized Entities
Deferred taxes on initial recognition of goodwill
Paragraph 15 of IAS 12 Income Taxes establishes a general principle that a deferred tax liability should be recognised for all taxable temporary differences. However, subparagraph (a) of that paragraph provides a special exception from that general principle for the initial recognition of goodwill. As a result of that exception, a deferred tax liability is not recognised.
Based on a tentative Board decision in September 2006, the pre-ballot draft of an Exposure Draft of an IFRS for SMEs that was sent to the Board in December 2006 proposed the same general principle as in paragraph 15 of IAS 12 but without the subparagraph (a) special exception.
In their comments on that pre-ballot draft, a number of Board members noted that the issue of whether, and in what amount, deferred tax should be recognised on initial recognition of goodwill is under study in the IASB's current convergence project on accounting for income taxes and also in the current business combinations phase two project. They suggested that it is premature to reach a decision on the issue for SMEs alone.
Consequently, in early January, when staff sent a Ballot Draft of the Exposure Draft to the Board, staff asked Board Members whether they wished to reconsider the matter. A majority of the Board asked that the issue be discussed at the January 2007 Board meeting.
On the basis of that discussion, the Board decided to propose in the SME Exposure Draft the same special exception as is in IAS 12.15(a). That is, an entity shall not recognise a deferred tax liability for taxable temporary differences associated with the initial recognition of goodwill.
The Board also decided to require disclosure of the aggregate amount of temporary differences associated with the initial recognition of goodwill for which deferred tax liabilities have not been recognised.