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Income Taxes - limited amendments to IAS 12

Date recorded:

The Board discussed several practice issues that might be considered as part of a limited scope project to amend IAS 12 Income Taxes.

Objective of such a limited scope project

The Board agreed that it would undertake a limited scope project to amend IAS 12. The objective of the project would be to resolve problems in practice under IAS 12, without changing the fundamental approach under IAS 12 and preferably without increasing divergence from US GAAP.

While many Board members were unhappy with adding yet another project to its already heavy workload, there was also an acknowledgement that the project would be attempting to address a market need, even if some of the likely conclusions would create further divergence from US GAAP. In particular, the accounting for uncertain tax positions was a significant issue in the assessment of IFRS for use in the US.

Board members noted that a full reconsideration of income tax accounting would take years and was something that would need to be considered and prioritised after June 2011.

The Board agreed to include the following topics in the project:

Practice issues (these would require an exposure draft)

  • Uncertain tax positions (awaiting the final revision of IAS 37)
  • Deferred tax on property revaluation
  • Distributed vs. undistributed tax rate in real estate investment trusts and similar entities

Improvements proposed in ED/2009/2

  • Introduction of an initial step to consider whether recovery of an asset or settlement of liability will affect taxable profit
  • Recognising a deferred tax asset in full and an offsetting valuation allowance to the extent necessary
  • Guidance on assessing the need for a valuation allowance
  • Guidance on substantive enactment
  • Allocation of current and deferred taxes within a group that files a consolidated tax return

In agreeing this list, several Board members were concerned that, while some of the matters could be addressed and finalised easily, others were more difficult. Board members thought that they might be able to complete the amendments proposed in ED/2009/2 quickly: the Board had invited comments on the proposals, there was a high degree of agreement on the proposals and the Board would be in a position to proceed to final amendments. The staff was split on this: one thought that the improvements exposed in ED/2009/2 could be finalised quickly; another senior member of staff did not advise that approach and thought that re-exposure would be a more cautious approach. In any event, the staff will bring proposals to the Board in the third quarter 2010. It was thought possible to discuss all the issues and issue an exposure draft containing those issues that required exposure by the end of 2010.

Property revaluation

The Board discussed but did not approve a proposal that would have added an exception to IAS 12 such that an entity would not recognise deferred tax on temporary differences on assets and liabilities if:

  • the assets and liabilities were measured at fair value; and
  • a market participant acquiring the asset or assuming the liability for its fair value would have the same temporary differences.

Several Board members were highly critical of the staff proposal. The proposal addressed a problem in some, but not all, IFRS jurisdictions. If the Board proceeded with this proposal, it would unleash a torrent of comments from other jurisdictions asking for their circumstances to be addressed. In addition, the proposal sought to address the wrong issue: the real problem was the definition of 'tax basis.' In addition, the confusion created by IAS 12.51 (measurement of deferred taxes reflects the tax consequences of the expected manner of recovery [assets] or settlement [liabilities]) was as much a culprit in the IAS 40 situation.

A Board member suggested an alternative approach that would restrict any exception to the requirement to recognise deferred tax on temporary differences on assets and liabilities to investment property accounted for at fair value through profit and loss under IAS 40. In addition, the rate to be applied to those temporary differences would reflect the 'least cost' approach. Such an approach would be limited to assets for which the voluntary election in IAS 40 has been made. It would not apply to the initial recognition of investment property acquired in a business combination. It was acknowledged that this approach would put significant strain on IFRS 3, but (in the absence of addressing the definition of tax basis) that could not be avoided.

The staff was asked to develop this approach and return to the Board with proposals that reflected it.