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Income taxes – Recovery of underlying assets

Date recorded:

The staff presented the Board with a summary of the responses received on the Exposure Draft ED/2010/11 Deferred Tax: Recovery of Underlying Assets published in September 2010.

Scope of exception

The staff explained that respondents were generally supportive of the Board's efforts to provide guidance where the application of IAS 12 is difficult or subjective in practice. However, there were mixed views on whether the proposal in the ED was the best way to address the issue. Some respondents were supportive of the ED in its entirety, while others argued that application or implementation guidance would be a more appropriate way to address the issue. Others felt that no revisions to IAS 12 were necessary or that the issue should be addressed as part of a comprehensive project re-examining the entire standard.

Those that were supportive of the proposal were of the opinion that the proposed exception would address the issue of double counting that is present when tax effects are counted both in the valuation of an asset and in the measurement of the related deferred taxes when it is calculated on an expected recovery through use.

The respondents that did not support the proposed exception did so on the basis that the exception would be too prescriptive, would represent a rules-based bright-line inconsistent with principles-based standards and would not have a conceptual basis.

The staff presented the Board with the following three alternatives to consider when finalising the proposals:

  • A: an exception as originally proposed in the ED;
  • B: a narrow scope exception limited only to investment property measured using the fair value model in IAS 40; or
  • C: application guidance on recovery of revalued property and investment properties carried at fair value.

Several Board members were supportive of alternative B. It was clear from the responses received that most jurisdictions were having practical issues relating to investment property measured at fair value. Alternative B would solve these practical issues in most jurisdictions, apart from New Zealand and would have the least unintended consequences. Under alternative B, SIC 21 would be retained but investment properties measured at fair value would be excluded from its scope.

A few Board members had a preference for alternative A as there is no conceptual solution to the practice issues. According to them, deferred tax is a method based on historical cost accounting. In a fair value model, deferred tax would be included in the fair value. Moreover, in accordance with IAS 16, the revaluation of property, plant and equipment is not based on the underlying circumstances, but is a mere accounting policy choice made by the entity. As there appears to be no conceptually sound solution, it would be better to solve the practice issues.

When put to a vote, only one Board member did not vote in favour of alternative B, although this Board member indicated that alternative B would be acceptable.

The staff highlighted that although respondents from New Zealand was supportive of the proposals in the ED, they requested further amendment or extension of the scope of the exception to asset using the cost model. Due to recent tax law changes, prohibiting tax depreciation for buildings with expected lives of 50 years or more, entities lost the tax base of those buildings and were forced to recognise large amounts of deferred tax liabilities based on their expectation to recover these assets through use.

The Board was of the opinion that the primary issue in New Zealand does not relate to the difficulty and subjectivity in determining the expected manner of recovery but relates to the discounting of deferred taxes and the double counting of tax effects. The Board acknowledged that alternative B would not address the double counting issue but as the responses were received rather close to the comment deadline, there was not enough time to investigate the issue. The Chairman suggested that the Board (via one of the Board members) liaise with the respondents from New Zealand and see whether they can suggest a solution that would be quick and easy to implement. If they can formulate such a solution, the Board could consider that and expose a limited amendment to IAS 12. If such a solution cannot be found, then the matter would be considered when the Board conducts a comprehensive review of IAS 12 in future.

Effective date

With regards to the effective date, the Board agreed on retrospective application for annual periods beginning on or after 1 January 2012, with early adoption permitted. The staff would circulate the ballot draft during the week of the next Board meeting and plans to publish the final standard by the end of the year.

This concluded the meeting on income taxes.