Short-term Convergence — Income Taxes
The IASB redeliberated two issues discussed by the FASB in its recent meeting.
Should the existing exception to the temporary difference approach in IAS 12 Income Taxes prohibiting the recognition of deferred tax liabilities on the initial recognition of goodwill be removed?
In December 2005 the IASB tentatively decided to remove this exception and to require deferred tax liabilities as well as deferred tax assets to be recognised for temporary differences arising on the initial recognition of goodwill. However, the Board noted that it did not wish to diverge with the FASB on this issue.
Since the FASB had decided to retain the exception the Board revised its tentative decision and unanimously decided to also retain the exception.
Treatment of acquired assets and assumed liabilities that have a tax base different from their initial carrying amount, both in a business combination and outside a business combination
In December 2005 the IASB tentatively decided that, in such cases, an asset should be recognised at 'fair value assuming full deductibility for tax purposes'. The corresponding deferred tax asset or liability should be recognised as the difference between the fair value of the asset and its tax base multiplied by the tax rate. Any difference between the consideration paid and the sum of the so determined fair value of the asset and the recognised deferred tax amount is recognised as a purchase discount or premium on the deferred tax. In addition, the Board decided to extend this principle to all assets and liabilities that are remeasured at fair value.
One Board member noted that the decision in December 2005 was based on the question how to measure an asset at fair value when the tax basis of 'somebody else' has to be considered. The Board unanimously decided that the concept of hypothetical tax deductibility should be limited to these cases. Accordingly, in all other cases the fair value should represent the amount that market participants would pay in the respective jurisdiction.