IAS 12 — Income tax consequences of interest payments on, and issuing costs of, financial instruments that are classified as equity

Date recorded:

New issue — Accounting for income tax consequences of interest payments on, and issuing costs of, financial instruments that are classified as equity

The Interpretations Committee has received a request to clarify the accounting for the income tax consequences income tax consequences of “interest payments” to holders of equity instruments, and the costs of issuing such instruments. 

In general, IAS 12 requires that the tax consequences follow the primary transaction or event. Accordingly, if an item is recognised directly in equity the deferred tax that relates to that item is also recognised directly in equity. However, IAS 12.52B states that the income tax consequences of dividends are recognised in profit or loss, unless the dividends relates to transactions recognised outside of profit or loss or a business combination.

The submitter is seeking clarity as to whether instruments such as perpetual bonds that provide interest payments at the discretion of the entity, which are deductible for tax purposes by the entity, should be recognised (and therefore presented) in profit or loss or directly in equity. They are also seeking the same clarity for issue costs of this type of instrument.

Staff recommendation

The staff recommendation to the Committee is that the issue not be added to its agenda. The staff believe that a conclusion can be reached drawing on existing principles in IAS 12.

Most of the staff analysis relates to the interest payments. The tax accounting for the costs of issuing the instrument seem less contentious, with the recommendation being that the tax consequences be recognised directly in equity “consistently with the presentation of the transactions that create those income tax consequences” (Staff paper, paragraph 48(b)). 

On the interest payments, the staff argue that whereas dividends are “generally distributed from retained earnings” interest payments on equity instruments “are not associated with anything other than the interest payments themselves, and therefore, the income tax consequences are not linked to past transactions or events” (sic) (Staff paper, paragraph 31). By implication, the staff have concluded that these discretionary interest payments are not distributions. (Staff paper, paragraph 29). On this basis the staff conclude that that IAS 12.52B would not apply to these interest payments and that consequently, the related income tax consequences should be presented directly in equity.

Committee discussion and decision

The Committee believe that there is a disconnect in IAS 12 between the requirement to have the deferred tax consequences follow the accounting for the related item and the exception in IAS 12.52B for distributions.  Some members of the Committee disagreed with the staff analysis that this was not a distribution and also highlighted that in some jurisdictions dividends are the subject of a solvency test rather than a reference to retained earnings. 

Ultimately, the conflict can only be resolved through an interpretation of or a narrow scope amendment to IAS 12.  The issue will be brought back when the Committee next has a face-to-face meeting, in March 2016. 

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