Initial recognition exception and single-asset entities - Agenda Paper 8C

Background

In September the Committee assessed a request related to the initial recognition exception in IAS 12 when an entity acquires all of the shares of an entity that is not a business (in accordance with IFRS 3) and the acquired entity has only one asset (an investment property) which is measured at fair value.

The submitter explained that if an entity acquirers an entity that has only an investment property the acquirer will not recognise deferred tax on acquisition because of the exception in IFRS 3.2(b). The consideration paid for the subsidiary becomes the deemed cost of the property. If the parent immediately measures the property at fair value it will recognise a gain, not because the fair value has increased but because of the accounting for the deferred tax. In practice, the valuation would be made at the end of the reporting period, but the deferred tax effect will be embedded in any recognised gain or loss.

The staff outreach determined that this type of transaction is common, with a large number of respondents follow the accounting treatment described in the submission while others recognise both the investment property and the deferred tax liability at initial recognition.

The staff assessed that addressing this issue would require a more comprehensive review of IAS 12 than was within the scope of the Committee’s activities. The feedback received from the agenda consultation indicated that a comprehensive review of IAS 12 was not a high priority project.

The Committee decided to issue a draft decision not to add the matter to its agenda.

Staff analysis on comment letters received

The Committee received eight comment letters. Most of the comment letters agreed that this was not an issue the Interpretations Committee could deal with. Two respondents disagreed with the technical analysis and argued that the initial recognition exception does not apply to the transaction. The staff disagree and think that requirements in IFRS 3 and IAS 12 are clear on this point.

Staff recommendations

The Staff recommended that the Committee finalise the agenda decision.

Discussion

The IC approved the Staff’s recommendation. Given the concern raised by various IC members, the Staff will bring back further analysis on the subsequent recognition and measurement of the deferred tax liability to see whether a separate project thereon is warranted. The Staff will also alert the Board to this issue.