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Items for continuing consideration

Date recorded:

IAS 12 Income Taxes: Recognition of deferred taxes for a single asset in a corporate entity

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.

IAS 16 Property, Plant and Equipment, IAS 38 Intangible Assets and IAS 17 Leases: Purchase of right to use land

During the March 2012 Committee meeting, the Committee discussed a request from a specific jurisdiction for clarification on the purchase of a right to use land and whether it should be accounted for as a purchase of property, plant and equipment, a purchase of an intangible asset or a lease of land. In this jurisdiction, entities are not allowed to own freehold title to land but instead purchase the right to exploit or build on the land.

The Committee identified characteristics of a lease in the fact pattern submitted and observed a right to use land is generally accounted for under IAS 17. However, the Committee noted the current Leases project is silent on whether a right of use asset is a tangible or intangible asset and that based on the tentative decisions to date in that project long term leases of land would not be excluded from the scope of that project.

The Committee asked the staff to prepare a tentative agenda decision. The agenda decision notes that the Committee identified characteristics of a lease in the fact pattern and that a lease could be indefinite with extensions or renewals and therefore the existence of an indefinite period does not itself prevent the right to use from being accounted for as a lease in accordance with IAS 17.  But because the fact pattern is specific to a certain jurisdiction, the Committee decided not to take the issue on to its agenda.

All Committee members agreed to the draft agenda decision not to take the issue on to the Committee’s agenda.

IFRIC 15 Agreements for the Construction of Real Estate: Clarification of the meaning of continuous transfer

Several times during 2011 the Committee discussed requests for clarification of the notion of continuous transfer or a good. During the November 2011 meeting, the Committee referred the topic to the Board for direction. The Board discussed this topic in February 2012 and the Board had varying views. Some thought that agenda paper 5A from the Committee’s November meeting should be included in a revised IFRIC 15 as an example to illustrate the application, but a majority did not support this inclusion.

The Board’s advice to the Committee is to retain IFRIC 15 as drafted and the Board noted that a careful assessment needs to be made of the facts and circumstances of individual transactions when applying IFRIC 15.

The Committee had no comments or deliberations on this topic following the staff summary.

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