Financial Statement Presentation

Date recorded:

Presentation of Income Tax Information

The staff introduced a paper which considered two issues:

  1. Revisiting the Board's view, expressed in September 2006, that income taxes should be presented in a separate section in the financial statements, eliminating the need for intraperiod tax allocation.
  2. The information an entity should disclose in the notes if income taxes are no longer allocated.


Issue 1: Presentation of income taxes

This issue was brought back to the Board for consideration as some IASB members have questioned the Board's preliminary view on the issue. The staff believed that given the amount of constituent input into the issue it would be helpful for all Board members to be reminded of the reasoning behind their views.

In presenting the paper the staff changed their stated recommendation. Their original recommendation was to not revisit the issue of income tax presentation until the Board has received comments on their preliminary view regarding the presentation of income taxes and related note disclosures through the normal due process procedures. The revised staff recommendation was that an analysis should be included within the discussion paper which expresses no preferred view, and includes at least one alternative.

The staff asked the Board to consider this recommendation.

One Board member noted that the issue to be addressed was one of disaggregation of the income tax number - whether the Board will require, prohibit or encourage disaggregation. A number of Board members expressed the view that some form of disaggregation is useful, and that it is not always arbitrary.

Four alternative methods of allocating (or disaggregating) income taxes was presented in the staff paper:

Alternative A. Allocate all income tax effects to each category/section in the basic financial statements. As a result, every category/section would be calculated on an after-tax basis.

Alternative B. Allocate income tax effects to selected categories, such as the operating category, and the other comprehensive income (OCI) and discontinued operations sections. Allocation to those categories/sections would be similar to the allocation that is done under existing standards (allocation to the operating category would be instead of allocation to continuing operations).

Alternative C. Allocate income tax effects to OCI items (or to the OCI section as a whole) and present the remaining income tax amount in the income tax section. (This would be a transitional alternative, only for the purpose of preserving a net income subtotal.)

Alternative D. Present on a net-of-tax basis transactions for which the income tax effect can be objectively calculated (a discrete transaction). The remaining income tax expense/benefit for the period would be presented in the income tax section as a single, unallocated amount. Example of discrete transactions that could be presented on a net-of-tax basis are a gain on the sale of real estate held for investment purposes or a gain on the sale of a business.

In addition, one Board member noted that a fifth alternative was also possible in which income tax effects were allocated, and net income was presented.

The Board discussed whether they supported the allocation of income tax effects or not. Views around the table were split, with some Board members expressing support for the Board to retain its original decision not to allocate income taxes, whilst others were in favour of allocating. Those Board members in favour of allocation suggested that in the vast majority of cases allocation can be achieved and, if allocation is required within the note disclosures to the financial statements, they see no reason why this cannot also be done for the financial statements. Other Board members expressed support for the revised staff view that an analysis should be included within the discussion paper which expresses no preferred view, and includes at least one alternative (a 'neutral' view).

The Board were asked by the staff to vote on how the discussion paper should proceed. They were asked (in three separate votes) to vote as to whether the discussion paper should provide a 'neutral' view, a preferred view of not allocating, or a preferred view of allocating. A simple majority (7 in favour) voted in favour of expressing a 'neutral' view. No majority was gained in voting for a preferred view of not allocating (4 in favour), or a preferred view of allocating (6 in favour). The Board therefore, agreed to include an analysis within the discussion paper which expresses no preferred view, and includes at least one alternative (a 'neutral' view).

The Board then moved on to discuss which of the five alternatives (outlined above) might be Board prefer to include in the discussion paper in relation to the possible methods of allocating income tax effects. Board members expressed mixed views and no conclusions were made. Staff were asked to produce a number of examples illustrating how the alternative allocation methods might be applied, and to include these in the discussion paper. The Board will reconsider the issue once the examples are completed.


Issue 2: Note disclosure if income taxes are not allocated

The Board then moved on to consider what information an entity should disclose in the notes if income taxes are no longer allocated. One Board member expressed the view that if the intention is not to allocate then requiring detailed disclosure is just another way of requiring allocation - albeit the information is just more difficult for users to find. Overall the Board was supportive of the staff view that an entity should disclose information in the notes to financial statements that will assist users in analysing income tax information, although the final format of that disclosure was not decided. Disclosures recommended by the staff (in addition, or as a replacement to IAS 12 and FASB Statement 109) included:

  • (a) An explanation of the relationship between income tax and comprehensive income.
  • (b) A qualitative discussion about each significant reconciling item in the reconciliation.
  • (c) A qualitative discussion that explains the impact of income taxes on the operating, investing, financing, discontinued operations and other comprehensive income categories/sections of the statement of comprehensive income (to the extent not already covered by (b) above).

The staff advised that the next steps in the process was for a pre-ballot draft of the discussion paper be sent to Board members for the April Board meeting.

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