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IAS 12 — Recognition of deferred tax for a single asset in a corporate wrapper

Date recorded:

In March 2014, the Committee published a tentative agenda decision not to add to its agenda 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 it (the asset inside) and the parent expects to recover the carrying amount of the asset inside by selling the shares in the subsidiary (the shares).

The objective of the paper was to provide an analysis of the comments received on the tentative agenda decision, make a recommendation, and set out the wording for the final agenda decision.

The Committee members were asked whether they agreed with the staff recommendation that the Committee should finalise its decision not to add this issue to its agenda, and whether they had any comments on the proposed wording in Appendix A for the final agenda decision.

The Project Manager introduced the paper and asked the Committee members whether they agreed with the staff recommendation in the paper, and whether they had any comments on the proposed wording of the final agenda decision.

One Committee member noted that she disagreed with the agenda decision.  She believed the Committee had not properly addressed the issue, and noted that the issue was one of unit of account, and was relevant to both IAS 12 Income Taxes and IFRS 13 Fair Value Measurement, and how fair value was measured in a situation where an investment property (single asset) was buried in a corporate shell.  She noted that it was known that taxes had consequences in the determination of fair value and that a problem arose by day 2 depending on whether the asset was considered within the corporate shell or measured separately.  She noted that the agenda decision provided one possible treatment, but she believed that there were other views – where the corporate wrapper and single asset were considered to be one unit of account, being what was assessed for tax purposes for determining the tax base and the tax rate, and which often better reflected the economic substance of the transaction.  Accordingly, she reiterated that she disagreed with the proposed agenda decision and that she believed clarification of the unit of account was necessary.

Several other Committee members noted that they continued to support the agenda decision.  One Committee member noted that he understood there were other issues, as expressed by the previous Committee member, but noted that he believed that IAS 12 as it stood, lead clearly to this conclusion and required consideration of both the inside and the outside basis difference.  Two further Committee members also noted that they believed IAS 12 was clear that there were two units of account – the asset and the shares.  One of the Committee members noted that he would be happy for the Committee to suggest to the IASB that they could look at this issue on a faster track than the broader research project on income taxes.

The ESMA representative present expressed concern that in some instances the Committee seemed to be willing to address issues relating to the way the standards were written, such as in the earlier discussion on agenda paper 5 where the Committee decided to propose a change to IAS 19.  He noted that this issue was a problem that was quite widespread and that the outcome of the accounting treatment did not make sense.  He noted that if the issue was referred to the IASB to address as part of the research project then it would be a number of years before there was an answer to this problem. As a result, ESMA was of the view that it would be possible to refer this to Board but with an invitation to make a small amendment related to this very specific topic to avoid waiting for years for an answer.

In response to the preceding comment, the Director of Implementation Activities noted that he would contrast this issue with the IAS 19 issue as he did not believe that with this issue there was consensus that the standard gave the wrong answer.  He noted that some believed that this communicated valid information about 2 tax consequences, and that was why both of those tax consequences should be reflected in the deferred tax accounting.

Another Committee member noted that he disagreed with the agenda decision.  He noted that it was one reading of IAS 12 but there were alternative readings that would result in different answers, some of which had been adopted by entities because they gave more sensible accounting in the situations where there was a single asset inside a corporate wrapper, and they also dealt with the IFRS 13 issue.  He noted that he believed that in one sense, it would be okay for the Committee to finalise the agenda decision as it was probably the better reading of IAS 12, but cautioned that the Committee should contemplate the consequences of putting out something stating this was the accounting – when it expected that to result in follow up questions and difficulties that entities are dealing with in practice today. Accordingly, he was not supportive of finalising the agenda decision in its current form.  He noted that the IASB should have taken this on as something to fix when the concerns were raised by the Committee a number of years ago, and they decided not to do that, and accordingly, he noted that he did not think the Committee should move forward and finalise the agenda decision.

The Chairman asked the Committee members whether or not they agreed with the agenda decision as drafted.  Eleven Committee members agreed.

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