Convergence Income Taxes
The IASB staff identified the following general areas where differences exist between IAS 12 and Statement 109:
- Scope - exceptions to the basic principle
- Measurement criteria for deferred tax assets and liabilities
- Recognition criteria for deferred tax assets
- Allocations to shareholders' equity ("backwards tracing")
- Balance sheet classification of deferred tax assets and liabilities
- Disclosure requirements
- Deferred tax on equity instruments
The IASB has reached the following tentative conclusions which still need to be debated by FASB:
Category | Description of difference | Standard | Tentative IASB decision |
|---|---|---|---|
Scope - exception to the basic principle | Initial recognition of an asset or liability | IAS 12 | Amend IAS 12 to eliminate the initial recognition exception |
Scope - exception to the basic principle | Positive and negative goodwill | IAS 12 and FAS 109 | Retain the exception of goodwill |
Scope - exception to the basic principle | Investments in subsidiaries, branches and associates, and interests in joint ventures | IAS 12 and FAS 109 | The IASB tentatively decided that an entity should recognize the income tax consequences of all temporary differences arising in the consolidated financial statements. It concluded that, in principle, no exception should exist for temporary differences on investments in subsidiaries and associates or interests in joint ventures - domestic or foreign. The IASB also decided to amend IAS 12 to eliminate the notion of 'branches'. |
Scope - exception to the basic principle | Special transitional procedures for temporary differences related to deposits in statutory reserve funds by U.S. steamship enterprises for this exception. | FAS 109 | Do not amend IAS 12 to provide for this exception. |
Scope - exception to the basic principle | Leveraged leases | FAS 109 | Do not amend IAS 12 to provide for this exception. |
Scope - exception to the basic principle | Intercompany transfers of inventory or other assets remaining within the group | FAS 109 | Do not amend IAS 12 to provide for this exception. Ask FASB to consider amending Statement 109 to eliminate this exception. |
Scope - exception to the basic principle | Foreign nonmonetary assets that are remeasured from the local currency into the functional currency using historical exchange rates: temporary differences that result from (1) changes in exchange rates or (2) indexing for tax purposes | FAS 109 | Do not amend IAS 12 to provide for this exception. Ask FASB to consider amending Statement 109 to eliminate this exception. |
Measurement criteria for deferred tax assets and liabilities Substantively enacted' rate vs. Enacted rate | IAS 12 and FAS 109 | Use of 'substantively enacted' rate is appropriate. | Do not amend IAS 12 to converge with Statement 109. Ask FASB to consider amending Statement 109 to converge with IAS 12. |
Measurement criteria for deferred tax assets and liabilities | Undistributed rate vs. Distributed rate | IAS 12 | US GAAP - Use of undistributed rate is appropriate. However, if there is an obligation to distribute a portion of those profits, any deferred taxes on that portion would be measured at the distributed rate. Do not amend IAS 12 to converge with Statement 109. Ask FASB to consider amending Statement 109 to converge with IAS 12. |
Recognition criteria for deferred tax assets | 'Affirmative judgment approach' vs. 'Impairment approach' | IAS 12 and FAS 109 | 'Affirmative judgment approach' is consistent with IASB Framework. Do not amend IAS 12 to converge with Statement 109. As the difference results primarily in presentation and disclosure differences, the IASB did not believe that convergence on this issue was essential. |
Recognition criteria for deferred tax assets | 'Probable' vs. 'More likely than not' | IAS 12 and FAS 109 | The threshold for recognition should be 'more likely than not'. Amend IAS 12 to clarify that, consistent with Statement 109, 'probable' means 'more likely than not' for purposes of this standard. |
Allocations to shareholders' equity ('backwards tracing') | Allocation of current year deferred taxes related to an item that was credited or charged directly to equity in a prior year: Directly to equity vs. Current year income | IAS 12 and FAS 109 | The IASB believes that the allocation should be to equity, to the extent determinable. It was sympathetic to practical considerations and directed the IASB staff to work with the FASB staff to develop a joint paper that addresses practical considerations. |
Balance sheet classification of deferred tax assets and liabilities | Non-current vs. Current or non-current based on the classification of the related nontax asset or liability for financial reporting. | IAS 12 and FAS 109 | Amend IAS 12 to converge with Statement 109. |