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IAS 12 — Recognition of deferred tax assets for unrealised losses (IASB only)

Date recorded:

In May 2012, the IASB issued for public comment Exposure Draft ED/2012/1 Annual Improvements to IFRSs: 2010-2012 Cycle, which proposes amendments to 11 IFRSs under its annual improvements project. One of the proposed amendments was to IAS 12 clarifying:

  • the assessment of whether to recognise the tax effect of a deductible temporary difference (DTD) as a deferred tax asset should be made as a combined assessment of all temporary differences that, when they reverse, will give rise to deductions against the same type of taxable income;
  • taxable profit against which an entity assesses a deferred tax asset for recognition is the amount preceding any reversal of deductible temporary differences; and
  • only actions that create or increase taxable profit are representative of tax planning opportunities.

At its November 2012 meeting, the Committee considered constituent feedback to this proposed amendment. The Committee acknowledged questions from constituents regarding whether: an unrealised loss on a debt instrument measured at fair value gives rise to a DTD when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all the contractual cash flows; and an entity can assume recovery of an asset for more than its carrying amount when estimating probable future taxable profits against which DTDs can be utilised.

The Committee expressed concern regarding whether these issues could be addressed within the confines of the annual improvements process, or rather, should be undertaken as a narrow-scope amendment to IAS 12, and therefore, decided to consult with the IASB regarding the most appropriate course of action.

At the December IASB meeting, the Committee staff summarised the results of the Committee’s discussion, while also providing an analysis of the issues the Committee concluded required clarification before any clarification of the accounting for deferred tax assets for unrealised losses on debt instruments can be made. Those questions included:

  • Does an unrealised loss on a debt instrument measured at fair value give rise to a DTD when the holder expects to recover the carrying amount of the asset by holding it to maturing and collecting all the contractual cash flows?

The staff believed that DTDs could result from the unrealised loss on an available-for-sale debt instrument, if the unrealised loss reverses because the entity expects to recover the carrying amount of the debt instrument by holding it to maturity and collecting all the contractual cash flows (i.e., DTDs recognised on holding), although the Committee did not conclude on this issue.

  • Which adjustments need to be made to taxable profits as defined in paragraph 5 of IAS 12 for assessing the recognition of deferred tax assets?

The staff recommended that all tax deductions resulting from the reversal of DTDs should be added back to taxable profit when assessing deferred tax assets for recognition, although the Committee did not conclude on this issue.

  • Can an entity assume recovery of an asset for more than its carrying amount when estimating probable future taxable profits against which DTDs can be utilised?

The staff recommended that an entity should assume that it will recover an asset for more than the carrying amount when estimating future taxable profits against which DTDs can be utilised, provided that the recovery for more than the carrying amount is probable.

  • Are deductible temporary differences resulting from unrealised losses on available-for-sale debt instruments assessed separately from other DTDs for utilisation, or in combination with other DTDs of the entity?

The staff recommended the retention of the proposals in the exposure draft that clarify that the utilisation of deductible temporary differences has to be assessed only on the basis of tax law (i.e., the grouping is determined by tax law and only by tax law).

In seeking Board views regarding the staff’s analysis and whether these issues should be addressed in a separate narrow-scope project to amend IAS 12, many Board members expressed support for the staff’s proposals. However, a few comments and concerns were raised, including:

  • The timeliness of resolution of a narrow-scope project to amend IAS 12. Many Board members expressed concern that a narrow-scope project could not be completed timely. Therefore, some suggested that some of the less contentious issues should be addressed through the annual improvements project, while other issues should be considered as part of the narrow-scope amendment. However, other Board members expressed concern with this view for a variety of reasons including: a fear with addressing accounting issues ‘piecemeal’; and a fear that even the less contentious issues may not meet the annual improvements criteria.
  • Whether the response in the staff paper responds to the question raised in the submission. Those questions included whether: an unrealised loss on a debt instrument measured at fair value gives rise to a DTD when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all the contractual cash flows; and an entity can assume recovery of an asset for more than its carrying amount when estimating probable future taxable profits against which DTDs can be utilised. The staff noted that it would consider this feedback in future discussions with the Committee.
  • Divergence in views between the IASB and FASB. The staff summarised recent discussions of the FASB regarding the need for a valuation allowance related to deferred tax assets (DTAs) arising from unrealised losses recognised in other comprehensive income (OCI) on debt instruments classified and measured at fair value through other comprehensive income (FVTOCI debt instruments). Among the FASB’s proposals was that an entity should evaluate the need for a valuation allowance on deferred tax assets related to debt instruments classified and measured at FVTOCI separately from its evaluation of other deferred tax assets, and that separate assessment should only apply to deferred tax assets related to losses on FVTOCI debt instruments that have been recognised in OCI. Deferred tax assets that relate to losses that have been recognised in net income are assessed in combination with other deferred tax assets. Many Board members expressed concern that the FASB’s proposed approach differed from that of IAS 12 requirements.

Ultimately, the IASB tentatively decided that the accounting for deferred tax assets for unrealised losses on debt instruments should be clarified by a separate narrow-scope project to amend IAS 12. The Board noted that the issue of whether an entity can assume that it will recover an asset for more than its carrying amount when estimating probable future taxable profits should be addressed in a separate narrow-scope project and such a project is broader in scope than an annual improvement.

The IASB also tentatively agreed with the Committee that clarifying this issue requires addressing the question of whether an unrealised loss on a debt instrument measured at fair value gives rise to a deductible temporary difference when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all the contractual cash flows.

The staff intends to prepare an analysis of the different approaches to account for deferred tax assets for unrealised losses which will be discussed at a future Committee meeting.