Income taxes

Date recorded:

IAS 12 Income Taxes research project- Income Taxes Education Session- Agenda paper 19A


The purpose of this session was to hold an educational session to discuss the analysis prepared by the staff on: (i) the main application issues in IAS 12; and (ii) possible ways to move forward. The Board was not asked to make technical decisions. The agenda paper included background information related to (i) history of the project; and (ii) summary of principles of IAS 12.

The staff also prepared additional supporting analyses as follows: (i) various accounting models for income tax (Agenda paper 19B); (ii) feedback from the Investor Outreach (Agenda paper 19C); (iii) Investor Survey Questionnaire (Agenda paper 19D); and (iv) Income Taxes feedback from the 2015 Agenda Consultation (Agenda paper 19E).

Application issues in IAS 12

The staff analysed tax issues referred to the Interpretations Committee, as well as the income tax topics that the Board discussed in the convergence project in 2009 and 2010. The staff have summarised in this paper those issues that are unresolved and seem to have a material impact on the financial statements.

  • Type one:The current model in IAS 12 produced information that some people considered was not particularly relevant and causes an accounting mismatch.  The staff noted that while IAS 12 based its principles on the ‘balance sheet liability approach’, a number of people still believed that another approach would reflect the economics of income taxes more faithfully. These people often prefered an ‘income approach’.  The staff identified the following specific issues:
    1. intercompany transfer of assets; 
    2. tax base denominated in a currency which is not the functional currency; and
    3. tax effect of share-based payment.
  • Type Two: the current version of IAS 12 might not fit well with more recent IFRS Standards or more recent tax laws across the globe. This was especially the case when the related assets and liabilities were measured at fair value. The staff identified the following specific issues: (i) fair value measurement (including corporate wrapper); (ii) tax effect of dividends; and (iii) issues relating to the scope of income tax accounting.
  • Type Three:income taxes were very complex and existing disclosure might be insufficient to explain what drives the amount of income taxes reported. The staff identified the following specific issues:
    1. tax disclosures;
    2. discounting current tax and deferred tax; and
    3. other issues including intra-period tax allocation and interim financial statements.

The agenda paper explored these issues in detail and also provided examples.

Staff analysis

The staff proposed the following approaches to move forward:

  • Option 1: Fundamental change of the main principle in IAS 12 — The staff suggested that the Board could undertake a project to consider whether to fundamentally change the main principle currently used in IAS 12. The staff indicated that this option would be a major project, taking a number of years and requiring considerable resources. The staff also noted that the results from the 2015 Agenda Consultation and the Investors Survey did not indicate support for this option.
  • Option 2: Narrow-scope amendments to address some practice issues — The staff suggested that the Board could undertake narrow scope amendments to address several of the issues that arise in practice. The staff cautioned that moving towards this path could cause the creation of many scope exceptions in IAS 12. Such situation would cause difficulties in applying the main principle. The staff suggested that if the Board considers that many scope exceptions would be created, then the Board instead could pursue a fundamental review of IAS 12.
  • Option 3: Improvement of tax disclosures — The staff suggested that improving the quality of the disclosures in IAS 12 would make the information more understandable. The improvements could focus on all issues identified as type one, two and three. The staff considered that the Board could consider the actions being taken by the OECD to prevent tax avoidance and improve transparency.
  • Option 4: Development of educational materials — The staff suggested that the Board could undertake a project to develop educational materials to assist with the application of IAS 12 in relation to specific issues. The staff considered that the areas that could be covered with more educational material were: (i) the nature of the information produced by the temporary difference approach; (ii) guidance on assessing recoverability of a deferred tax asset (or valuation allowance) when an entity had a history of tax losses incurred in the past; (iii) guidance on the meaning of substantive enactment of tax law; (iv) allocation of current and deferred taxes within a group that files a consolidated tax return; and (v) the introduction of an initial step to consider whether the recovery of an asset or settlement of liability will affect taxable profit.
  • Option 5: No further work — The staff suggested that the Board could decide not to do any additional work on accounting for income taxes. The staff considered that if the Board elected this option the Interpretations Committee would continue to deal with practical income taxes issues, provide guidance where possible, and refer to the Board only issues that are difficult to address.


This was an education session.   

The discussion started with comments on the high level summary provided by the staff and then it moved to the issues identified in this agenda paper, which had been classified as Type 1 (relevance), Type 2 (conflicts)   and Type 3 (complexity) problems. There was no discussion on the remaining agenda papers, or on the proposals of the staff regarding how to move ahead.  The comments provided by the Board were mostly aimed at understanding the issues presented by the staff.

The comments on the high level summary were:

  • In relation to the scope, the staff was asked whether they identified issues in jurisdictions with different taxes and particularly whether users struggled to determine whether those taxes were in the scope of IAS 12. The staff indicated that they did not identify this issue from users but it was identified from preparers and accounting firms. The staff noted that after the issuance of IAS 12 there were many new kinds of taxes introduced around the world.
  • The staff confirmed that when asked to identify problems, users mostly identified type 3 issues whereas preparers identified type 1 or 2 issues. The staff noted that users might not be aware of issues other than type 1 given the complexities in IAS 12.
  • In relation to the information analysed and required by investors, some Board members noted that investors usually did not analyse income tax information unless they were aware of any specific issue. Another comment was that investors would need to have deep knowledge of the tax laws in each jurisdiction to understand the income tax information. The staff noted that investors used some tax information to estimate future cash out flow from a company; also investors considered the information about existing tax loss carry-forwards and the fact that the entity would not pay tax in the following years. The staff also noted that investors in general ignored tax disclosures because: (i) disclosures are perceived as being too aggregated; (ii) tax reconciliations do not provide sufficient information about tax incentives and/or arrangement/negotiations with governments; (iii) they do not provide information about the key drivers that affect the effective tax rate; and (iv) do not provide information about the sustainability of current tax law situation and about the total picture of tax loss carry-forwards. The staff noted that those issues could be solved by requiring more disaggregation in the tax reconciliation. The staff mentioned that the FASB issued an ED related to disclosures about government assistance (including tax incentives) by which companies would be required to disclose specific arrangements with local governments.  Many Board members also asked whether requiring country by country information could solve those concerns. The staff noted that investors were not expecting information about all jurisdictions but at least from those that explained the main drivers of the company’s effective income tax rate.
  • In relation to the income tax consequence of intercompany transfers the following comments were made:
    • There was discussion about whether an intercompany transfer represented an economic event. Some Board members indicated that they believed that from a tax perspective there was an economic event. Those Board members indicated that the fact that the transaction was eliminated at consolidation level would not mean that the tax implications should be ignored.
    • There were concerns raised about the significant differences in income tax rates between countries which made the issue of intercompany transfers more relevant; and
    • The staff was asked about the FASB ED in which it was proposed to eliminate the exception for not recognising deferred taxes on intercompany transfers. The staff noted that it would be potentially an alignment with IFRS.  Nevertheless, the staff was not aware of what was driving the proposal. The staff also noted that the feedback received so far indicated that there were mixed views about it.
  • In relation to relevance and foreign currency issues, there was general agreement that although the issues did have IAS 12 implications, they are primarily related to IAS 21. It was also pointed out that those issues were pervasive in Latin America given the fact that there were large exporters in a functional currency different from the local currency.  As a consequence there are significant foreign exchange differences.
  • In relation to the interactions with other standards, the following comments were made:
    • There was general agreement that the issue was much broader than corporate wrapper; and
    • There was some debate regarding whether once any new Standard or debate was introduced, if there should be consequential amendments to IAS 12; it was pointed out that IAS 12 provided an appropriate framework and consequential amendments should be considered when it was necessary.


There was no discussion regarding the rest of the agenda papers.


IAS 12 Income Taxes research project-Appendix A: Various Accounting Models for Income Taxes- Agenda paper 19B

In this agenda paper the staff described different approaches on accounting for income tax. The analysis was based on research conducted by the staff on discussion papers or research papers produced by national standard-setters or academics. The agenda paper provided detailed information of those approaches.

The summary of the different approaches identified by the staff are as follows:

(a)      The current tax approach (also known as the ‘flow through approach’ or ‘tax payable approach’): The staff explained that under this approach, only the current tax assessed on profit of the current period was recognised in the financial statements. Deferred tax information needs to be disclosed in the footnotes. There were mixed views as to whether this method met the definitions of a liability under the Conceptual Framework.

(b)     The timing difference approach (also known as the ‘income approach’): The staff explained that under this approach, deferred tax was recognised for timing differences, but not permanent differences. The staff noted two alternatives:

  1. Deferral method: The objective of the deferral method was to match the tax expense with the underlying related income and expenses so that they were recognised in the same period. If current tax effects lead to timing differences that originate in the current period and would reverse in the future, those current tax effects were deferred until the reversal occurred. If current tax effects arised in future periods, on the reversal of timing differences that originated in the current period, those current tax effects were recognised in the period when the timing difference.
  2. Liability method: The objective of the liability method was to recognise as assets and liabilities those tax balances that met the definition of, and the recognition criteria for, assets and liabilities in the Conceptual Framework.

Under the timing difference/ income approach, the tax effect of all timing differences was generally recognised as a deferred tax liability or a deferred tax asset (i.e. Comprehensive Allocation). However, in a variation of this approach, the tax effect was recognised for only some timing differences (i.e. Partial Allocation). In the partial allocation method, deferred tax was recognised only those timing differences that are expected to reverse.

Accruals approach: The staff explained that under this approach the reported tax expense reflected the tax effect of all transactions and events that were reported in the period. There was no distinction between current and deferred tax. This difference with this approach and the income approach was that some temporary differences (such as those arising on the initial recognition in a business combination of an asset at an amount in excess of its tax basis) were not timing differences, and accordingly no tax effect is recognised for such items.

(d) The balance sheet liability approach (also known as the ‘temporary difference approach’: The staff explained that this was the approach applied in IAS 12 (and also under USGAAP). Under this approach, deferred tax liabilities and deferred tax assets were recognised for temporary differences.

 (e) The valuation adjustment approach (also known as the ‘net of tax approach’): The staff explained that this approach was based on the premise that timing differences (or temporary differences) did not give rise to deferred tax assets or deferred tax liabilities but they affected instead the carrying amount of underlying assets or liabilities. For example, when accelerated depreciation was claimed for tax purposes, the right to receive tax benefits was consumed more quickly than the asset’s potential to provide service. Consequently, when the entity consumed some of the right to receive tax benefits, the entity should reflect that consumption by reducing the carrying amount of the underlying asset, rather than by recognising a separate deferred tax liability.


Income Taxes- Appendix B: Feedback from Investor Outreach- Agenda paper 19C


The staff presented in this agenda paper the result of the outreach activities with investors in relation to income tax.  As part of these activities, the staff designed a global investor survey. The questionnaire was included in Agenda paper 19D.

Summary of the feedback obtained by the staff

The staff indicated that the majority of respondents believed that there were no reasons to fundamentally change IAS 12. However, respondents indicated that they would prefer improvements in tax disclosures, including tax strategies, tax risks; and tax cash flow. Other suggestions included providing more information on: (i) uncertain tax positions; (ii) tax incentives; (iii) tax loss carryforwards; (iv) detail of tax drivers; and (v) country by country analysis.

Respondents have mixed views regarding discounting of income taxes; and also had concerns about the complexity when fair value accounting is involved.


IAS 12 Income Taxes research project- Appendix D: Income Taxes feedback from the 2015 Agenda Consultation- Agenda paper 19E


The purpose of this agenda paper was to provide the Board information about the feedback received from the Agenda Consultation on income tax. The Board was not asked to make technical decisions. The objective of the income taxes research project was to identify whether the application problems of the existing Standard could be solved by narrow-scope amendments or whether, instead, a fundamental change in principle was needed.

Feedback received from the 2015 Agenda Consultation

The staff noted that in terms of priorities, the majority of respondents ranked the project as high or medium importance. The reasons provided to rank the project as high or medium priority were: (i) difficulties found by investors to make assumptions about future taxes; (ii) recurrence of application issues; (iii) the time value of money not being reflected under the current Standard; (iv) different measurement basis in IAS 12; (v) interaction with other Standards; (vi) need to align disclosures with public concerns with BEPS; (vi) complexity in deferred tax accounting; and (vii) need to expand the scope of IAS 12 to include all mandatory fiscal payments.

The staff indicated that the majority of respondents identified issues either at application level or at a fundamental level.

The concerns raised by those respondents that asked for a fundamental review were: (i) IAS 12 is inconsistent with the Conceptual Framework; (ii) IAS 12 generates inappropriate results; (iii) Narrow-scope amendments to IAS 12 have not effectively solved problems identified.  Respondents suggested that the Board should include the following areas: (i) Interaction with IFRS 2 Share-based Payment, IFRS 3 Business Combinations and IFRS 13 Fair Value Measurement; (ii) Scope of the standard to be expanded to include all mandatory fiscal payments; and (iii) Discounting of deferred tax assets and liabilities.

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