Joint IASB-FASB Meeting

The IASB and FASB discussed how to account for the tax effects of acquisitions of assets that are not accounted for as a business combination where the amount paid is different from the tax base of the asset acquired.

The staff noted that IAS 12 prohibits an entity from 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 which is (i) not a business combination, and (ii) at the time of the transaction affects neither accounting profit nor taxable profit ('initial recognition exemption').

They also noted that EITF 98-11 concluded that when accounting for the tax effect of single-asset acquisitions in which the amount paid differs from the tax base (or tax basis under US GAAP) of an asset, an entity should allocate the consideration paid between the asset and the related deferred tax asset or liability. The EITF also concluded that the simultaneous equations method should be used to determine the assigned value of the asset and the related deferred tax asset or liability.

It was further noted that the IASB tentatively decided to eliminate the initial recognition exception, but expressed concern at converging with the accounting treatment prescribed by EITF 98-11. As the FASB had indicated they may be willing to move away from the EITF 98-11 treatment the IASB further considered the issue and tentatively concluded that in these situations, an entity should allocate the consideration paid between the asset and the related deferred tax asset or liability using the simultaneous equations method; however, any tax benefit in excess of the cost of the related asset is recognised immediately in profit or loss.

The FASB had considered five alternatives that were also presented to the joint meeting, these being:

Alternatives that Retain Simultaneous Equations to Calculate to Final Book Basis

• Alternative 1 - adopt the IASB 's proposed answer which is to compute asset values using the simultaneous equations and record any calculated deferred credits in income.
• Alternative 2 - retain EITF Issue 98-11 guidance.
• Alternative 3 - compute asset and DTA/ DTL (deferred tax asset/ deferred tax liability) using simultaneous equations and record any calculated deferred credits as a purchase discount allowance to the DTA. Alternatives that Use Fair Value to Compute Final Book Basis
• Alternative 4 - record non-monetary asset at fair value, DTA/DTL using Statement 109 [IAS 12 ], and any calculated deferred credits as a gain on purchase.
• Alternative 5 - record non-monetary asset at fair value, DTA/ DTL using Statement 109 [IAS12 ], and any calculated deferred credits as a purchase discount allowance to the DTA.

None of the joint Board members indicated a preference for the simultaneous equations alternatives. It was noted that under Alternative 5 the discount would need to be tracked and recorded in profit and loss when it is realised.

In a joint vote of the two boards, the majority preferred Alternative 5 (12-9).