IAS 12 Income Taxes - Recognition of deferred taxes when acquiring a single-asset entity – Agenda paper 6

Date recorded:


This was a new issue received by the Interpretations Committee. The question related to the initial recognition exception in IAS 12 when an entity acquires all of the shares of an entity that is not a business (in accordance with IFRS 3) and the acquired entity has only one asset (an investment property) which is measured at fair value. The submitter explained the issue as follows: a) Entity A acquires Entity B. Entity B’s only asset is an investment property measured at fair value and accordingly, entity B also recognises a deferred tax liability. b) The purchase price is equal to entity B’s net equity (fair value of the investment property less the deferred tax liability). c) Entity A applies the initial recognition exception in IAS 12 and does not recognise a deferred tax liability and allocates the entire purchase price to the investment property. d) Entity A elects to measure the investment property at fair value and recognises a gain after initial recognition (which is the difference between the purchase price allocated and the carrying value of the investment property in Entity B) and accordingly, it recognises a deferred tax liability.

Staff Analysis

The staff conducted outreach activities which indicated that the transaction is common in several jurisdictions. A large number of respondents follow the accounting treatment described in the submission while others recognise both the investment property and the deferred tax liability at initial recognition. The staff believed that the initial recognition exception applied to this transaction because IAS 12 is applied from the perspective of the reporting entity (i.e. entity A has not previously recognised the investment property in its consolidated financial statements) The staff indicates that the initial recognition exception was introduced to acknowledge the fact that the purchase price usually considers the non-deductibility of the asset for tax purposes. The staff also noted that IAS 12 was developed at a time when fair value was not widely used and the standard did not include a similar recognition exception when an asset is subsequently measured at fair value.  The staff believed that amending IAS 12 should take into account different variations of the transaction and should be considered as part of a comprehensive review of IAS 12. However, the feedback received from the agenda consultation indicated that a comprehensive review of IAS 12 was not a high priority project.

Staff recommendation

The staff recommended not adding this issue into its agenda. 

Appendix A contained the proposed wording of the agenda decision which stated as a reason for not taking the issue that IAS 12 provided an adequate basis to enable an entity to account for deferred taxes in the situation described in the submission.


The Interpretations Committee approved the staff recommendation.

During the discussion some Interpretation Committee members and some Board members noted that the wording of the agenda decision needs to be improved. The most important concern noted was that the agenda should be consistent with the analysis done by the staff as shown in the agenda paper. The agenda paper in response to the submitters question indicated that amending the Standard would be a significant undertaking which was not feasible. 

The staff explained that in analysing whether it was possible to fix this issue (for example by adding another recognition exception) they noted that the issue was too broad because there were several fact-patterns from different jurisdictions and it would not be possible to find a practical solution.

The staff was also asked to clarify in the agenda decision that the analysis related to consolidated financial statements.

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