IAS 12 — Recognition of current income tax on uncertain tax positions

Date recorded:

The project manager started by introducing the Committee members to Agenda Paper 3: Recognition of current income tax on uncertain tax position – principles of interpretation. She reminded the IC that it had received a request to clarify the recognition of a tax asset in the situation in which tax laws required an entity to make an immediate payment when a tax examination resulted in an additional charge, even if the entity intended to appeal against the additional charge. In the case presented, the submitter expected to recover some or all of the amount paid. With respect to the threshold of asset recognition the submitter asked whether they should apply IAS 12 (‘probable’) or IAS 37 (‘virtually certain’). The IFRS IC had tentatively decided to develop an interpretation on this issue.

The staff recommended broadening the scope so it would comprise all tax assets and liabilities. Also, the staff recommended not including any measurement guidance in the interpretation. It was further proposed to apply the interpretation retrospectively with no specific provisions for first-time adopters.

The project manager explained that a proposed draft interpretation was included in agenda paper 3A. She said that the consensus was that IAS 12 was applicable to all uncertain current tax positions. In accounting for an excess of tax paid over tax expected to be due, an entity would have to follow three steps:

  1. determination of the amount of cash paid;
  2. determination of the amount expected to be due, which was measured as the amount expected to be payable to the tax authorities in accordance with IAS 12; and
  3. recognition of the excess of 1) over 2) as an asset.

The project manager asked whether the Committee agreed with the staff’s recommendations and wondered what comments they might have on the proposed draft interpretation.

One observing IASB member expressed the concerns that some Board members had about issuing an interpretation on a scope question where they thought the scope of IAS 12 and IAS 37 was quite clear. She said that if the matter was brought forward to the Board she, for one, would ask the question why an interpretation was needed. One Committee member saw the unintended consequence of the interpretation not being applicable to prepayments on taxes that were outside the scope of IAS 12. One observing Board member said that he was concerned the interpretation did not look at the uncertainty of the tax liability. A Committee member agreed with the Board members that thought the scope was clear without an interpretation. Another Committee member agreed and said that he would therefore prefer an agenda decision. He said that if the IC should nonetheless vote on proceeding with the interpretation, the issue should be limited to what was asked in the submission. A fellow IC member said she was concerned about more assets being recognised through the interpretation which would be an unfavourable outcome for her. One Committee member was still not convinced that IAS 12 was applicable in this case as the request was looking at contingent assets.

The Chairman said that the issue was a major area of practice abuse in the US and the SEC was very concerned about it, which led the FASB to act. He asked the IOSCO representatives whether they saw this issue also in other jurisdictions. One IOSCO representative confirmed that and said it would be useful to clarify. One Committee member said that a European enforcer had the same concerns but their view was different to the view expressed in the proposed draft interpretation on which Standard to apply.

The Chairman asked to explore also measurement guidance in the interpretation. One Committee member agreed but expressed concerns whether this was feasible. He said that disclosure requirements in IAS 12 for disputes with tax authorities point to guidance in IAS 37, so to him it was not crystal clear which Standard to apply. An IC member replied that he would not analogise the guidance for disclosures to the guidance for recognition, as there was explicit recognition guidance in IAS 12. One Committee member said he believed that IAS 12 applied but understood that there was significant diversity in practice. He said that an agenda decision that would state that the fact pattern was clearly in the scope of IAS 12 should be carefully drafted as preparers who had applied IAS 37 should not be forced into reporting an error. One Committee member said that detection risk should also be part of the guidance. One IOSCO representative said that given the diversity in practice, the Committee should make a decision on which Standard to apply.

The Chairman said that the IC had the following alternatives:

  1. Staff should bring a paper on recognition and measurement including detection risk and probability.
  2. Proceed with the proposed draft interpretation.
  3. Limit the proposed draft interpretation to the specific fact pattern provided.
  4. Issue an agenda decision.

One Committee member said that alternative 1) could be carried out simultaneously with any of the other alternatives.

When called to a vote by the Chairman, six IC members were in alternative 4), three were in alternative 3), four were in alternative 2) and no member voted for alternative 1).

One Committee member said that members voting in favour for alternative 4) might not be opposed to alternative 1) and it might be worth exploring the measurement issue.

The Chairman summarised that an agenda decision would be issued on this specific fact pattern and the staff would bring back a paper on measurement.

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