IAS 12 — Accounting for market value uplifts on assets that are to be introduced by a new tax regime
At its March 2012 meeting, the Committee considered a request to clarify the accounting for market value uplifts introduced in a proposed jurisdictional tax regime (which has since completed its passage through Parliament).
The request included a specific fact pattern where entities, in calculating taxable profit under the proposed tax regime falling within the scope of IAS 12 Income Taxes, would be permitted to calculate tax depreciation for certain mining assets using the fair value of the assets as of a particular date as the ‘starting base allowance’, rather than the cost or carrying value of the assets. If there is insufficient profit against which the annual tax depreciation can be used, it is carried forward and is able to be used as a deduction against taxable profit in future years.
At that meeting, the Committee noted that the starting base allowance, including the fair value uplift portion, is attributed to the related assets under the tax regime and will become the basis for depreciation expense for tax purposes. Consequently, the market value uplift forms part of the related asset’s ‘tax base’, as defined in paragraph 5 of IAS 12. The Committee observed that IAS 12 requires an entity to reflect an adjustment to the tax base of an asset that is due to an increase in the deductions available as a deductible temporary difference. Therefore, the Committee noted that a deferred tax asset should be recognised to the extent it meets the recognition criteria in paragraph 24 of IAS 12.
On the basis of this analysis, the Committee tentatively decided not to add this issue to its agenda.
At its July 2012 meeting, the staff presented comment letter analysis with respect to the tentative agenda decision; noting three comment letters in which all three supported the decision not to take the issue onto the Committee’s agenda, but one letter suggested that the agenda decision should make clear that the Committee’s analysis of the proposed tax regime was developed on the basis that the proposed tax falls within the scope of IAS 12.
While the staff noted that the original request did not explicitly state that they assume the proposed tax regime is an income tax under IAS 12, the staff assumed that the proposed tax was an income tax under IAS 12 when issuing the tentative agenda decision given that the fair value uplift forms part of the related asset’s ‘tax base’ (as stated in the submittal). Therefore, the staff recommended that the agenda decision clarify that the proposed tax regime falls within the scope of IAS 12 to clarify the rationale and approach taken by the Committee in arriving at its tentative decision.
The Committee, with little deliberation, reaffirmed its decision not to add this issue to its agenda, but with changes to the wording of the tentative agenda decision as discussed during this meeting.