Convergence Project

Date recorded:

IAS 12, Income Taxes

The Board considered whether a deferred tax liability should be rrcognised on undistributed earnings of subsidiaries.

The Board agreed (vote 12-2) that an entity should provide deferred taxes for future income taxes payable on the undistributed earnings of subsidiaries. The Board agreed to view a subsidiary as an investment and not as consolidated assets and liabilities that should be treated at a group level. Moreover, it was specified that the deferred tax is neither linked to the control notion nor to the distribution of dividends. Therefore a liability exist and should be raised based on the difference between the carrying value of the subsidiary and the expected recoverable amount of the investment, this include retained earnings.

The Board also discussed three related issues:

1. Accounting for withholding taxes for distributions within the consolidated group. The staff clarified "withholding taxes" for distribution within a consolidated group would encompass "additional taxes that a subsidiary will have to pay on a distribution to the parent company".

2. The Board's decision in April that an entity shall measure deferred tax assets and liabilities at the rate applicable to undistributed profits. The Board agreed that a deferred tax should be recognised, and it should be measured by use of the rate at which the distribution will be taxed.

3. Investments in associates, branches, and interests in joint ventures. The Board agreed to eliminate the exemptions in IAS 12.39.

The staff will address disclosure, tax equity, and foreign subsidiaries issues at the next meeting.

IAS 19, Employee Benefits

The Board agreed to add the following additional disclosure requirements related to defined benefit plans:

  • Five-year history of the surplus/deficit and (asset and liability amounts should be presented separately).
  • Five-year history of experience adjustments.

The Board believes the disclosure of the surplus/deficit (gross presentation) over the last five years will give information about the volatility of the plan and of any emerging trends, for example, persistent over- or under-funding. Experience adjustments are the actuarial gains and losses that arise because of differences between the actuarial assumptions made at the beginning of the period and actual experience during the period. The Board believes a five-year history of experience adjustments gives information about the reliability of the amounts recognised based on those assumptions (ie the service cost and interest cost).

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