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IAS 12 — Accounting for income tax consequences of payments on financial instruments classified as equity

Date recorded:

IAS 12 Income Taxes - Accounting for income tax consequences of payments on financial instruments classified as equity – Agenda paper 5

Recap

The Interpretations Committee discussed in November 2015 a request for clarification of an issue related to the presentation of any income tax consequences of payments on, and issuing costs of, financial instruments classified as equity (i.e. whether an entity should present these income tax consequences directly in equity or in profit or loss). The Interpretations Committee noted that the interaction between the requirements in paragraph 52B of IAS 12 and those in paragraphs 57, 58 and 61A of IAS 12 is unclear and asked the staff to explore the issue further.

Paragraph 61A of IAS 12 requires an entity to recognise directly in equity any income tax relating to items that are recognised directly in equity. However, paragraph 52B of IAS 12 requires an entity to recognise the income tax consequences of dividends in profit or loss, except to the extent that those tax consequences arise from transactions that an entity recognises outside profit or loss or from a business combination.

During the discussion, some Interpretations Committee members thought that the presentation of income tax relating to the payments described in the submission would be expected to be the same as the presentation of any income tax consequences of dividends. The outreach activities conducted by the staff indicated that the issue is common and the predominant accounting observed is to present the income tax consequences of the submission in equity.

The objective of this paper was to analyse the income tax consequences of payments on financial instruments classified as equity.

Staff recommendation

The staff recommended amending IAS 12 to clarify the applicability of the requirements in paragraph 52B of IAS 12, as part of the Annual Improvements to IFRSs 2015-2017 Cycle. That amendment would clarify that: (i) paragraph 52B would be applicable to the income tax consequences of dividends in all circumstances; and (ii) ‘dividends’ in paragraph 52B refers to distributions of profits to holders of equity instruments. Accordingly, in assessing whether to apply paragraph 52B to, for example, payments on financial instruments classified as equity, an entity would determine whether those payments are distributions of profit. The recommendation to propose an amendment was based on the fact that the issue was common in many jurisdictions and it was necessary to promote a consistent application of the Standard.

Discussion

There was general support for the staff analysis and recommendation because it was considered that it followed a logical conclusion. The majority of the Interpretation Committee members approved the staff recommendation.

However, there was one common concerned raised by several Interpretation Committee members which indicated the need to clarify how to identify distribution of profits from other transactions. During the discussion it was suggested to add indicators in the draft of the amendments.  Some Interpretation Committee members pointed out that the clarification of how to distinguish a distribution of profits should not depend on the law of a particular jurisdiction; instead it should be based on the economic substance of the transaction; while others indicated that the question should usually go to tax attorneys and would require judgement.

Another concern raised was whether this issue should be handled by an annual improvement because it seemed to be a significant issue. The staff was instructed to make a risk assessment and determine how to best handle the issue. The staff clarified that their proposal did not include adding guidance; consequently, it would be necessary to explore whether by adding guidance an annual improvement would still be appropriate.

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