IASB proposes a new income tax standard

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31 Mar 2009

The IASB has invited comment an exposure draft proposing to replace IAS 12 'Income Taxes' with a new standard.

The proposed standard (set out in ED/2009/2 Income Tax) retains the basic IAS 12 approach to accounting for income tax, known as the temporary difference approach. The objective of that approach is to recognise now the future tax consequences of past events and transactions, rather than waiting until the tax is payable or recoverable. Although the proposed standard retains the same principle, the IASB proposes to remove most of the exceptions in IAS 12, to simplify the accounting and strengthen the principle in the standard. In addition, the IASB proposes a changed structure for the standard that will make it easier to use.
Comments on the exposure draft are due by 31 July 2009. The proposal also more closely aligns international standards with FASB Statement 109 Accounting for Income Taxes. Click for IASB Press Release on Income Tax (PDF 101k).

Proposals to change IAS 12 include:

  • A new definition of tax basis: 'the measurement under applicable substantively enacted tax law of an asset, liability, or other item'.
  • Tax basis determined assuming recovery of the carrying amount of the asset by sale, rather than management expectation of sale or use.
  • Deferred tax not recognised on initial recognition of an asset or liability whose recovery or settlement will have no effect on taxable profit.
  • Revised definitions of tax credit and investment tax credit.
  • On initial measurement, assets and liabilities that have tax bases different from their initial carrying amounts are disaggregated into (a) an asset or liability excluding entity-specific tax effects and (b) any entity-specific tax advantage or disadvantage. An entity would recognise and measure the former in accordance with IFRSs and recognise a deferred tax asset or liability for any resulting temporary difference between the carrying amount and the tax basis. If the consideration paid or received differs from the total recognised amounts of the acquired assets and liabilities (including deferred tax), an entity recognises the difference as an allowance against, or premium on, the deferred tax asset or liability.
  • The exception from recognising a deferred tax asset or liability arising from investments in subsidiaries, branches, associates and joint ventures will be restricted to investments in foreign subsidiaries, joint ventures or branches (no exception for associates).
  • Deferred tax assets would be recognised in full, with a valuation allowance to reduce the carrying amount to the highest amount that is more likely than not to be realisable. This is the FASB SFAS 109 approach. Under IAS 12 currently these are netted.
  • Uncertainty would be reflected by measuring current and deferred tax assets and liabilities using the probability-weighted average amounts of possible outcomes assuming that the tax authorities will examine the amounts reported to them by the entity and have full knowledge of all relevant information.
  • Where different tax rates apply to distributed and undistributed profits, current and deferred tax assets and liabilities would reflect the entity's expectations of future distributions.
  • Income tax expense would be allocated to the components of comprehensive income and equity using a SFAS 109 approach.
  • Deferred tax assets and liabilities would be classified as either current or non-current based on how the related non-tax asset or liability is classified. This would amend IAS 1, which currently treats all deferred tax to be classified as non-current.

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