Cover paper (Agenda Paper 12)

In June 2023, the IASB published Exposure Draft IASB/ED/2023/3 International Tax Reform—Pillar Two Model Rules—Proposed Amendments to the IFRS for SMEs Standard. The comment period ended on 17 July 2023.

The purpose of this meeting was to provide the IASB with a summary of feedback on the ED and the staff’s  analysis and recommendations on how to proceed.

Temporary exception to deferred tax accounting (Agenda Paper 12A)

This paper summarised and analysed feedback on Question 1 of the Invitation to Comment in the ED.

Staff recommendations

The staff recommended that the IASB finalise its proposals in the ED:

• To introduce a temporary exception to the requirements to recognise deferred tax assets and liabilities related to Pillar Two income taxes (Recommendation 1)
  
• To disclose information that would otherwise be required by paragraphs 29.39–29.41 of the IFRS for SMEs Standard about deferred tax assets and liabilities related to Pillar Two income taxes (Recommendation 2)
• To make the temporary exception mandatory (Recommendation 3)
  
• Not to specify how long the temporary exception will be in place (Recommendation 4)
  
• To require an SME within the scope of Pillar Two legislation to disclose that it has applied the temporary exception (considering improvements to clarity of drafting suggested by the staff in the agenda paper) (Recommendation 5)
  

The staff also recommend6 that the IASB make no changes to the scope of the temporary exception to include the measurement of deferred taxes recognised under domestic tax regimes (Recommendation 6).

IASB discussion

The IASB members who spoke agreed with the staff recommendation. However, one IASB member disagreed with the improvements to clarity in drafting suggested by the staff in Recommendation 5. In her view, the words used in the ED were preferrable. If there needs to be more clarity, she would prefer the words are aligned with what has been proposed for addition in the basis for conclusions (BC). One IASB member disagreed with that view and preferred the new wording. Another IASB member did not object to the new words but believes they are not needed. That IASB member also noted that he agreed with the decision not to add ‘Pillar Two legislation’ to the glossary of the Standard.

IASB decision

All IASB members agreed with Recommendations 1-4 and 6. On Recommendation 5, 11 out of the 14 IASB members agreed with the recommendation including the clarification as proposed. When asked whether IASB members would prefer aligning the words with the BC, only 6 agreed.

Disclosure requirements (Agenda Paper 12B)

This paper summarised and analysed feedback on Question 2 of the Invitation to Comment in the ED.

Staff recommendations

The staff recommende that the IASB finalise its proposals in the ED:

• Not to introduce new disclosure requirements in periods when Pillar Two legislation is enacted or substantively enacted but not yet in effect (Recommendation 1)
  
• To clarify that ‘other events’ in the disclosure objective in paragraph 29.38 of the IFRS for SMEs Standard include enactment or substantive enactment of tax rates and tax laws, such as Pillar Two legislation (Recommendation 2)
• To require an entity to disclose separately its current tax expense (income) related to Pillar Two income taxes (Recommendation 3)
  

IASB discussion

There was a lengthy discussion on Recommendation 2. The agenda paper included an example where an entity might not be exposed to top-up income tax, because the tax is payable by the entity’s ultimate parent. However, in the example, an entity would still be required to disclose information that enables users of its financial statements to evaluate the nature and financial effect of unrecognised tax consequences.

Some IASB members suggested that the requirements as drafted are not clear enough to arrive at this conclusion. This was also evidenced by some of the responses received to the ED. These IASB members proposed to include the example from the agenda paper in the amendments, or, at the very least, in the BC to the amendments.

This was met with strong opposition from other IASB members who said that the example could be taken as definitive by SME preparers whereas the assessment depends on the facts and circumstances of the entity and the jurisdiction. This could lead to unintended consequences that are yet unknown to the IASB. In addition, IASB members raised concerns about including an example that has not been exposed for public comment.

Instead of including the entire example, some IASB members suggested to use words from the example to clarify the principle. However, one IASB member warned that the IASB would not be able to agree on the drafting in this meeting which means that staff would have to bring the draft to another meeting. This was contrary to the objective of publishing the amendments as soon as possible. In his view, the greater good of publishing the amendments quickly outweighs the clarification achieved by the words.

He also noted that the respondents who raised this issue were only a small minority. The Chair disagreed and said that some of the comment letters were from networks which represented more than one view. The responses show that the amendments as drafted are not clear and can lead to diversity in practice. The IASB can either accept that diversity or act on it.

IASB decision

10 of the 14 IASB members agreed with Recommendation 1.

9 of the 14 IASB members supported Recommendation 2 as drafted. The Chair suggested to vote on including words from the example in the agenda paper in the amendments which was met with opposition from some IASB members. They said that they would need to see the words before they could decide, which would delay the process. It was noted that if the words were included in the BC instead of in the requirements, no formal vote was needed as the staff would be limited to only include the discussions of the IASB and it was unusual to vote on that. It was therefore decided not to take another vote on Recommendation 2, and instead accept the majority vote for the recommendation as drafted and add in the BC the IASB’s rationale for the vote.

All IASB members agreed with Recommendation 3.

Effective date, transition and due process (Agenda Paper 12C)

This paper summarised and analysed feedback on Question 3 of the Invitation to Comment in the ED.

Staff recommendations

The staff recommended that the IASB finalise its proposals in the ED to require an SME to apply

• The exception (proposed new paragraph 29.3A)—and disclose it has applied the exception (proposed new paragraph 29.42)—immediately upon the issue of these amendments and retrospectively in accordance with Section 10 of the IFRS for SMEs Standard
• The amended paragraph 35.10(h) immediately upon the issue of these amendments
• The disclosure requirement in proposed new paragraph 29.43 for annual reporting periods beginning on or after 1 January 2023

The staff also asked the IASB whether:

• It agrees with the staff recommendation not to re-expose the amendments to the IFRS for SMEs Standard
• Any IASB member intends to dissent from the amendments to the IFRS for SMEs Standard
• The IASB is satisfied that it has complied with the applicable due process requirements and that it has undertaken sufficient consultation and analysis to begin the balloting process for the amendments to the IFRS for SMEs Standard

IASB discussion

One IASB member disagreed with the immediate effective date as it would leave no time for translation and endorsement.

IASB decision

13 of 14 IASB members agreed with the staff recommendations.

One IASB member indicated that he needs to read the BC before he can decide whether to dissent from the amendments to the IFRS for SMEs Standard. No other IASB members indicated dissent.

All IASB members were satisfied that the IASB has complied with the applicable due process requirements and that it has undertaken sufficient consultation and analysis to begin the balloting process for the amendments to the IFRS for SMEs Standard.