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IAS 12 — Recognition of deferred taxes for a single asset in a corporate entity

Date recorded:

The Committee had previously received a request to clarify the accounting for deferred tax in the consolidated financial statements of the parent when the subsidiary has only one single asset within the entity and the parent expects to recover the carrying amount of the asset inside by selling the shares in the subsidiary. The Committee noted significant diversity in practice in accounting for deferred tax when tax law attributes separate tax bases to the asset inside and the parent’s investment in the shares and each tax base is separately deductible for tax purposes (i.e. tax law considers the asset inside and the parent’s investment in the shares to be two separate assets). The divergent treatments included that some follow the tax perspective and recognise deferred tax related to both the asset inside and the shares, others recognise only the deferred tax related to the shares, and still others determine deferred tax by comparing the carrying amount of the asset inside the entity with the tax base of the shares and using the tax rate that applies if the parent recovers the carrying amount of the shares.

During the November 2011 Committee meeting, the Committee noted that IAS 12 requires the parent to recognise both the deferred tax related to the asset inside and the deferred tax related to the shares, if tax law considers the asset inside and the shares to be two separate assets and asked the staff to consider whether this issue could be addressed through annual improvements.

The staff believes that paragraphs 51 and 51A of IAS 12 are not sufficiently clear and propose to add paragraph 38A and an example and amend paragraph 51A to clarify the issue through the annual improvements process.

One of the Committee members raised a concern with the computations in the example while another Committee member questioned whether the example was necessary. The Committee members had mixed views on the staff proposal to amend through the annual improvements process.

To move the issue forward, the Committee chair suggested three potential alternatives. The first alternative was to proceed with the staff proposal to address through annual improvements. The second alternative was to approach the Board suggesting a limited amendment to IAS 12. The third alternative is to reject the issue with the view that IAS 12 is too big of an issue to attempt dealing with this narrow scope issue.

The Committee members were fairly even split between proceeding with an annual improvement or approaching the Board with a limited scope amendment. While proceeding with an annual improvement had a slight majority, because of the lack of consensus the Committee tentatively decided to further explore approaching the Board for a limited scope amendment to IAS 12.

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