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IFRS implementation issues

Date recorded:

Background

The IFRS Interpretations Committee received a request to clarify an issue relating to the application of the requirements in IAS 12 Income Taxes. The issue relates to where to present any income tax consequences of payments on, and issuing costs of, financial instruments classified as equity.

The Interpretations Committee discussed the issue in November 2015 and March 2016 and recommended that the Board address the issue by proposing an amendment to IAS 12.

The purpose of this session is to discuss the staff analysis and recommendations.

Staff analysis

When the Interpretations Committee discussed the issue in November 2015 (agenda paper 8) the outreach indicated that the issue is common and that the predominant accounting was to present the income tax consequences described in the submission in equity.

But about one-third of the respondents said that there is at least some diversity in practice. Some of those respondents thought that some form of clarification would be helpful because the requirements in IAS 12 are unclear with respect to this issue.

The Interpretations Committee reached general agreement that an entity presents directly in equity income tax arising from the costs of issuing financial instruments classified as equity and that the IASB should amend IAS 12 to clarify that the presentation requirements in paragraph 52B apply beyond the circumstances described in paragraph 52A of IAS 12.

The Interpretations Committee also discussed the distinction between what is, and is not, a distribution of profits.  They agreed that this was the key question in applying the proposed amendment and one that would often require judgement. If the payments are distributions of profits, then paragraph 52B of IAS 12 applies to any income tax consequences of such payments whereas if they are not then any income tax consequences are presented directly in equity, applying paragraphs 57 and 61A of IAS 12. However, the committee concluded that amending IAS 12 to define or describe a distribution of profits would be too broad and have implications beyond IAS 12.

The staff analysis supports the recommendations of the interpretations committee, and accordingly, the staff recommends:

  • Amend IAS 12 to clarify that the presentation requirements in paragraph 52B of IAS 12 apply beyond the circumstances described in paragraph 52A of IAS 12, i.e. an entity would apply the presentation requirements in paragraph 52B to any income tax consequences of dividends;
  • The amendments should be made as an annual improvement;
  • The proposed amendment does not address the distinction between what is, and is not, a distribution of profits; and
  • The proposed amendment should be applied retrospectively and earlier application should be permitted.

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