Income taxes – Recovery of underlying assets

Date recorded:

In preparation of the issuance of the exposure draft Deferred Taxes: Recovery of Underlying Assets, the staff shared a pre-ballot draft with certain constituents to obtain feedback. This process identified five primary issues the staff brought back to the Board for reconsideration.

The first issue identified related to the exception applying to deferred tax assets in addition to deferred tax liabilities as initially determined. Constituents mentioned it was inconsistent to measure deferred tax liabilities based on the exception while not also measuring deferred tax assets using a similar approach. The Board tentatively agreed to include deferred tax assets within the exception.

Similar to the first issue, constituents also expressed concern over consequential amendments to the scope of SIC 21 (applying only to deferred tax assets and not to deferred tax liabilities for non-depreciable assets that are revalued or fair valued) because SIC 21 would not be applied consistently. The Board tentatively agreed to withdraw SIC 21 in its entirety and incorporate the constituent concerns as part of issue four discussed further below.

The third issue raised by constituents was application of the exception to all temporary differences relating to an underlying asset rather than just to a temporary difference created by revaluation of the asset. This is because the unit of account in determining the manner of recovery is the underlying asset rather than the individual temporary difference. The Board tentatively agreed that the exception should apply to all temporary differences relating to the underlying asset and not just temporary differences created by revaluation.

The fourth issue identified by constituents relates to how deferred taxes should be measured when applying the exception. The Board's original decision was to apply the exception based on the lower tax consequence of either sale or use of the underlying asset. However, constituents questioned why a lower approach was used instead of an alternative approach such as a higher or average. The Board tentatively agreed to require when utilising the exception that the measurement should reflect the underlying asset being recovered entirely through sale. This is because the approach:

  • can be applied to both the measurement of deferred tax assets and deferred tax liabilities,
  • is a more practical approach than the lower of approach,
  • is consistent with the approach in SIC 21, and
  • reflects at least one of the entities' dual intentions (sale or use).

The fifth issue was whether the exception should be required to be applied. Constituents believed the exception should not be required when an entity's intention to sell or use the underlying asset is unclear. The staff proposed addressing this concern by requiring the exception to be applied under a rebuttable presumption of recovery by sale unless the entity has clear evidence to prove it will consume the asset's future economic benefit. The Board discussed the proposal and whether the suggested wording provided too high of a hurdle to overcome in order to apply the use approach (i.e., providing evidence). The Board agreed that other standards such as IFRS 9 apply management's intent to the determination of accounting considerations. The Board tentatively agreed with the staff recommendation subject to wording revisions to focus on management intent or expectations rather than requiring evidential matter.

Constituents also raised certain other issues including:

  • Should the exception be applied to other assets?
  • Should the exception also be applied when assets are measured at fair value in a business combination and subsequently measured using a cost model?
  • The computation of tax consequences of a sale may be complex
  • Tax planning opportunity, and
  • Retrospective application.

The Board tentatively decided not to make changes to the pre-ballot draft based on the concerns raised on these topics. However, the exposure draft will include a specific question on the retrospective application provisions, specifically in the context of a business combination and whether they are overly burdensome to apply.


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