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Short-term Convergence: Income Taxes

Date recorded:

Exemption related to investments in subsidiaries, associates and joint ventures

The Board discussed a staff proposal that the exception from recognising deferred taxes on undistributed earnings of foreign subsidiaries and joint ventures currently proposed in the draft ED be changed to an exception for subsidiaries and joint ventures in jurisdictions in which intragroup distributions have taxable consequences. This proposal was made as a result of an analysis of costs and benefits undertaken by the staff.

The Board disagreed with the staff proposal, which would create rather than remove an IFRS/US GAAP difference. The Board did agree to ask a question in the Invitation to Comment accompanying the ED about whether it had reached the right conclusion on removing the exemption currently in IAS 12 paragraph 39.

Transition

The Board discussed staff proposals for transition. The Board modified the staff proposals such that there would be two sets of transitional requirements, depending on whether the entity was an existing IFRS user or a first-time adopter.

(a) Existing preparers

The Board agreed that existing users be required to apply the amendments to the assets and liabilities in the opening balance sheet for the first period starting after the publication of the standard and to all events and transactions thereafter. In applying the amendments to the assets and liabilities in that first opening balance sheet:

  • i. a re-analysis of the cumulative amounts recognised through profit or loss or directly in equity should not be allowed and
  • ii. assets and liabilities that currently fall under the initial recognition exemption should be treated as if they had been acquired for their carrying amount at the balance sheet date. In other words they would be grossed up to create (i) a new carrying amount and (ii) a deferred tax balance calculated in accordance with IAS 12 with the sum of (i) and (ii) equalling the previous carrying amount.

(b) First-time adopters

The Board modified the staff recommendation such that first-time adopters whose date of transition to IFRSs is later than a specified date shortly after the publication of the final standard should apply the amendments retrospectively except that:

  • i. the requirements for the allocation of tax across components of profit or loss and equity should be applied prospectively to events and transactions after the date of transition to IFRS. The cumulative tax effect of transactions recognised directly in equity is also recognised in equity on the transition date and
  • ii. the carrying amount of assets and liabilities that would currently fall under the initial recognition exception is determined as if they had been acquired for their carrying amount at the balance sheet date. In other words they would be grossed up to create (i) a new carrying amount and (ii) a deferred tax balance calculated in accordance with IAS 12 with the sum of (i) and (ii) equalling the previous carrying amount.

The Board also agreed that first-time adopters whose date of transition to IFRSs is before date specified above should apply the amendments retrospectively except in those situations in which data is required before the date of adoption that would have required assumptions using contemporaneous judgements. In such situations, the current version of IAS 12 would be used. This approach is similar to that adopted in the transitional approach to amendments to IAS 39.

Board members were asked whether any of them would be presenting Alternative Views in the ED. Two Board Members stated that they might do so, but that both would read the draft ED before committing themselves.

Uncertain tax positions

FASB staff led the IASB through the FASB's recent discussions and redeliberations of their ED Accounting for Uncertain Tax Positions-an interpretation of FASB Statement No. 109, issued in July 2005.

Scope

No discussion.

Recognition

The IASB noted that during their redeliberations, the FASB had reduced the recognition threshold to more likely than not. (The term more likely than not in US GAAP is similar to the term probable as used in IFRS.) The IASB welcomed that decision, which resulted in a common recognition point for all tax assets.

Measurement

The IASB had a wide-ranging discussion on a possible approach to measurement of uncertain tax positions. There was no real conclusion, except that the FASB are interested in the IASB's 'expected outcome' model being developed in the revisions to IAS 37.

Subsequent recognition and measurement

The Board noted that during their redeliberations that the FASB had concluded that the best estimate at the reporting date would be based on all information available to management at that reporting date. Absolute certainty of the resolution of the tax position or finality of the outcome was not necessary. However, changes in estimates about recognition and measurement would be based on new information available to the enterprise, not on a new interpretation of old or previously available information.

The IASB voted (8 in favour; 2 opposed; 2 abstained) to incorporate the FASB's conclusion (in particular that any subsequent recognition and measurement changes be based on new information) in the forthcoming IASB ED.

Changes in judgement

The IASB noted that during redeliberations, the FASB concluded that interim period accounting should follow the guidance in Opinion 28 and Interpretation 18, which currently prescribes changes in judgments in interim periods.

Interest and penalties

The Board noted that during redeliberations, the FASB had concluded that interest and penalties should be recognised in the period they are deemed to be incurred, based on the provisions of the tax law. Interest should be accrued on the full difference between the tax return and the financial statements. In addition, the classification of interest and penalties should be treated as an accounting policy election, and that the election should be disclosed as well as the amount of interest and penalties recognised in the financial statements.

Several Board Members voiced objection to some or all of the FASB's conclusions. However, after a vigorous debate they agreed to include the FASB's conclusions in the IASB ED.

Classification

The Board noted that the FASB had affirmed their conclusions in their ED that the difference between the amounts recognised in the financial statements, and the amounts reported in the tax returns should be classified as a current liability to the extent that amounts are anticipated to be paid within the next 12 months or the operating cycle, if longer.

Additionally, amounts would not be classified as a deferred tax liability unless they resulted from a taxable temporary difference, as defined in Statement 109.

The Board appeared to support a similar approach in the forthcoming IASB ED.

Transition

The Board noted that the FASB had concluded that transition should be made using the cumulative effect of a change in accounting principle. The change in net assets as a result of applying the provision would be treated as an adjustment to the beginning balance of retained earnings. Retroactive application would not be permitted.

The Board agreed to adopt the same approach in their ED.

Effective date

The IASB's ED would not include a proposed effective date.

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