The Board discussed the following issues arising from a comparison of IAS 12 and FASB Statement 109, Accounting for Income Taxes, with a view to determining what changes could be made to move closer to convergence:

• Exceptions to the basic principles.
• Measurement criteria for deferred tax assets.
• Recognition criteria for deferred taxes.
• Allocations to shareholders' equity ("backwards tracing").
• Balance sheet classification of deferred tax assets and liabilities.

Exceptions to the Basic Principle of Recognising Deferred Taxes for All Temporary Differences

General exemption. The Board agreed to remove from IAS 12 the general exception to the basic principle of recognising a deferred tax liability or asset for taxable temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not (i) not a business combination, and (ii) at the time of the transaction affects neither accounting profit nor taxable profit. The Board noted that the staff would provide further details at a later date as to how these resultant deferred tax assets or liabilities should be accounted for.

Leveraged lease. The Board noted that FASB Statement 109 contained an exemption to the basic principle for leveraged leases. The Board agreed that IAS 12 should not contain a similar exemption.

Goodwill. The Board agreed that IAS 12 should not be amended to remove the exemption in respect of goodwill and negative goodwill.

Investments in subsidiaries, branches, associates, and interests in joint ventures. After discussion the Board generally leaned toward retaining the exemption in respect of subsidiaries but removing it respect of associates and equity accounted joint ventures. The Board agreed that the staff should draft various examples detaining the various options for further discussion at a later meeting. The Board agreed to clarify the meaning of branches within the exemption and to specify that it is a separate taxable entity.

Measurement Criteria for Deferred Tax Assets

The Board agreed to clarify that 'substantially enacted' in respect of tax rates means 'virtually certain'. The Board further agreed to retain the use of the undistributed profit rate in measuring deferred tax balances.

Recognition Criteria for Deferred Tax Assets

The Board agreed that probable means 'more likely than not' and does not intend to go to the valuation allowance approach of SFAS 109.

Allocations to Shareholders' Equity ('Backwards Tracing')

The Board agreed to retain the provision in IAS 12 that requires the allocation of current and deferred taxes directly to equity where the tax relates to items that were taken directly to equity in the current or a previous period.

Balance Sheet Classification of Deferred Tax Assets and Liabilities

The Board agreed to amend IAS 12 to converge with FASB Statement 109, which classifies deferred taxes and liabilities as either current or non-current based on the balance sheet classification of the related non-tax asset or liability.