The Board discussed various 'sweep issues' arising from their review of a pre-ballot draft of an Exposure Draft (ED) that would replace IAS 12 Income Taxes. The pre-ballot draft had been sent to various external parties and tax accounting experts as well for their review and comment.
Income tax consequences of equity instruments issued
The Board confirmed that the ED will propose that equity instruments issued by an entity should not be regarded as having a tax basis that is compared with the carrying amount of the equity instrument to assess the tax consequences of repurchasing the instrument or derecognising the carrying amount in some other way. Rather the tax consequences related to equity instruments issued that will occur without any change to the carrying amount in equity should be regarded as the tax basis of those items.
Exception for foreign subsidiaries and joint ventures
In an extended debate, the Board disagreed with a staff proposal related to the exception brought in from SFAS 109 for foreign subsidiaries and joint ventures. The ED is likely to propose that a deferred tax liability shall not be recognised for a temporary difference arising from the difference between the carrying amount and the tax basis of an investment in a foreign subsidiary or a foreign joint venture to the extent that it is essentially permanent in duration. The phrase 'to the extent that' is intended to accommodate remittance of retained earnings to the parent (on which remittance the tax consequences would be recognised) without tainting the whole of the investment balance.
In addition, the exemption for deferred tax assets related to investments in foreign subsidiaries and foreign joint ventures will be based on the same principles as other deferred tax assets: that a deferred tax asset should be recognised (or a valuation allowance against a previously recognised deferred tax asset reduced) when it is probable (that is, more likely than not) that those benefits will be realised.
The Board agreed that specific requirements in SFAS 109 related to foreign subsidiaries ceasing to be subsidiaries or foreign investments becoming subsidiaries should be replaced by requirements consistent with the treatment of disposals and step-acquisitions in IFRS 3.
The wording of the requirements on tax allocation
The Board agreed to retain the approach proposed in the pre-ballot draft, essentially the approach in FAS 109 as reworded by the combined FASB and IASB staff. In doing so, the intra-period allocation would be subject to a practicability exception. Board members noted that attempting to do 'backwards tracing' was often complex and required scheduling of reversals of temporary differences, something the Boards were told frequently was impracticable. The Board wanted to be honest about how it phrased the exception and that it was a practicability issue.
Guidance on substantive enactment
The Board agreed that the Application Guidance on substantive enactment should be amended as follows:
An entity shall regard tax rates as substantively enacted when future events required by the enactment process historically have not affected the outcome and are highly unlikely to do so.
The Board rejected a staff proposal that substantive enactment was a matter on which national standard setters might usefully give guidance. No mention of this matter will be made in the ED, the Basis, or other accompanying documents. Any issues of what constitutes 'substantive enactment' in a given situation should be referred to the IFRIC.
Disclosures arising from the financial statement presentation project
The Board agreed to clarify that a balance sheet to balance sheet numerical analysis for each type of temporary difference, unused tax loss, and tax credit would be required.
Disclosures related to the effect of distributions
The Board confirmed that entities should disclose the entity's assumptions about future distributions and their effect on the tax rate used to measure deferred tax assets and liabilities.
Disclosures on tax uncertainties
The Board agreed not to extend the disclosures already agreed with respect to tax uncertainties.
Wording of the Core Principles
The Board noted that the staff was working with Board Members to develop a short paragraph that sets out a principle without discussing the methodology. A preliminary draft wording was presented to the meeting but not discussed.
Temporary differences that arise on the initial recognition of assets and liabilities
The pre-ballot draft application guidance included requirements for the treatment of temporary differences that arise on the initial recognition of assets and liabilities. Some Board members and subject matter experts expressed concern that the requirements were complex and confusing. The Board noted that there was no viable alternative to the approach in the ED other than immediate recognition in comprehensive income. No changes to the guidance were made.
The role of expectation in the recognition and measurement of deferred tax assets and liabilities
The Board noted that in accordance with the proposed amendments, the entity's expectations do not affect the tax basis. The proposed approach is justified on the grounds that the tax basis is a matter of fact that determines whether or not a deferred tax asset or liability exists. That is not affected by the entity's expectations about the manner of recovery or settlement of an asset or liability.
There was some discussion of 'sale versus use rate' assets and dual-use assets. The Board agreed that the Basis for Conclusions accompanying the ED should discuss the Board's reasoning on this matter and that the staff should discuss drafting issues with those who found them confusing to find ways of improving them.
The analysis between the recognition and measurement of deferred tax assets
The Board agreed to retain the 'two-step' approach (recognise the full amount of a deferred tax asset and a related valuation allowance against that asset to the extent that it is more likely than not that there will not be sufficient taxable profit to utilise the asset). However, they encouraged the staff to improve the drafting to clarify the approach.
Discounting deferred tax assets arising from unused tax losses and tax credits
The Board confirmed that discounting deferred tax amounts should be prohibited. Discounting implied detailed scheduling, something constituents repeatedly told standard-setters they could not do.
Allocation of the effect of changes in uncertain tax positions
The ED will propose that the effects of changes in uncertain tax positions should be recognised in continuing operations, regardless of the component of comprehensive income or equity in which the related tax assets and liabilities were originally recognised. The Board agreed to retain this approach, but to ask a question on this proposal in the Invitation to Comment.
Interest and penalties
By a very narrow majority (7-6), the Board agreed that the ED should be explicit that an entity has an accounting policy choice on how to classify interest and penalties payable to tax authorities. Those objecting felt strongly that interest and penalties imposed by the taxing authority should not be presented as a component of income taxes.
Transition for first-time adopters
The Board agreed that that first-time adopters with a transition date before the date of issue of the revised standard (but a first IFRS reporting period after the date of issue) should have the option to apply the revised standard to all periods presented in the financial statements to which the revised standard first applies.
Structure and internal references
The Board had a brief discussion about the structure of the ED and internal references in particular. The staff was instructed not to refer from the Standard part of the ED to non-mandatory guidance (for instance, draft Illustrative Examples); references from the draft Illustrative Examples to the draft Standard were permitted.
Description of the document
The Board agreed that the ED would be presented as a Draft IFRS rather than an amendment to IAS 12.
Board members were asked whether any intended to present an Alternative View in the ED. Mr Garnett indicated that he might because he was concerned that the text of the pre-ballot draft had not reflected his understanding of what the Board had agreed.