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Short-term Convergence — Income Taxes

Date recorded:

The Board was informed that the staffs of both the FASB and IASB are working towards a joint exposure draft of amendments to FAS 109 and IAS 12, such that constituents will be able to see where either Board is making amendments to its standards.

Disclosure

(a) Components of income tax expense

The Board agreed to retain the specific example in paragraph 80(b) of IAS 12.

The Board agreed to add to IAS 12 the examples in paragraphs 45(g) and 45(f) of FAS 109

(b) Contingent assets and liabilities

The forthcoming exposure draft of proposed amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains the following:

88B. When changes in tax rates or tax laws are substantively enacted after the balance sheet date, an entity discloses the effect of those changes on its current and deferred tax assets and liabilities (see IAS 10 Events after the Balance Sheet Date).

The Board agreed to propose deleting this requirement in the Income Taxes ED, noting that IAS 10 would capture this information.

(c) Intercompany asset transfers

The Board agreed to include disclosures to address the following matters:

  • Expand the disclosure requirements of FAS 109, paragraph 43 to include the component of deferred tax assets and liabilities that represents the impact of an intercompany transfer of an asset between taxing jurisdictions with different effective tax rates.
  • Require disclosure of any such impact recognized as part of income tax expense (benefit) in the income statement for interim or annual periods. This could pertain to all transfers or be limited to transfers whose timing or terms are not customary for the consolidated entity.
  • Require disclosure of tax effects of any modifications, including unwinding (reversal), of terms of such transfers.

(d) Nature of deferred tax assets

The Board agreed to eliminate the disclosure requirement in IAS 12 paragraph 82.

(e) Public entities not subject to tax

The Board agreed to add to IAS 12 the disclosure requirement in FAS 109 paragraph 43, but to extend this to all companies, not just public ones:

A public enterprise that is not subject to income taxes because its income is taxed directly to its owners shall disclose that fact and the net difference between the tax bases and the reported amounts of the enterprise's assets and liabilities.

(f) Reconciliation between tax expense and pre-tax accounting profit

By a majority (12 in favour; 2 opposed), the Board agreed that the tax rate reconciliation would require the use of the domestic rate of the parent company.

(g) Amounts and expiry dates of operating loss and tax credit carryforwards and deductible temporary differences

The Board agreed to defer their discussion of this topic.

(h) Consolidated tax returns

The Board agreed to add to IAS 12 the disclosure requirements of FAS 109 paragraph 49:

An entity that is a member of a group that files a consolidated tax return shall disclose in its separately issued financial statements: a. The aggregate amount of current and deferred tax expense for each statement of earnings presented and the amount of any tax-related balances due to or from affiliates as of the date of each statement of financial position presented b. The principal provisions of the method by which the consolidated amount of current and deferred tax expense is allocated to members of the group and the nature and effect of any changes in that method (and in determining related balances to or from affiliates) during the years for which the disclosures in (a) above are presented.

(i) Disclosure of dividends and unremitted earnings

  • The Board agreed to retain the disclosures required by IAS 12 paragraphs 82A, 87A, 87B and 87C.
  • The Board agreed that when a preparer makes a post balance-sheet disclosure of dividends declared, the tax effects, if any, of that dividend also be disclosed
  • The Board decided not to add guidance similar to that in paragraph 44(a) of FAS 109 to IAS 12, which requires an entity to disclose the types of events that would cause temporary differences that have not been recognized to become taxable. This was contrary to the staff recommendation. This matter will be re-debated as a sweep issue.
  • The Board (in common with the FASB) did not agree with a staff recommendation to require all entities to disclose a foreign earnings table. Instead, the Board agreed (8 in favour; 6 opposed/ indifferent) to require a continuity schedule for foreign unremitted earnings and to raise a question in the Invitation to Comment about the usefulness of this disclosure.

Uncertain tax positions

The Board agreed that:

  • An enterprise must establish that it is probable1 in the Statement 5 context (meaning that "the future event or events are likely to occur") that a position taken (or expected to be taken) regarding a tax deduction, credit, or filing position would be sustained if challenged by taxing authorities prior to the tax benefit from that position being recognised as a benefit or reduction of tax expense in the financial statements.
  • An enterprise must presume that a taxing authority will review a tax position when evaluating whether the position is probable of being sustained. Therefore, consideration of the risk of detection is inappropriate.
  • The enterprise shall recognise the tax position in any subsequent period that it becomes probable that the tax position will be sustained.

The Board agreed that initial measurement should be based in the entity's best estimate of the settlement amount. The guidance in FASB Concepts Statement 7 would be useful.

After a discussion on derecognition, the Board asked the staff to return to the next meeting with a paper discussing the interaction of IAS 12 and the proposed amendments to IAS 37.

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