IAS 12 Income tax omnibus

Date recorded:


The issue is whether the IFRIC should add six deferred tax issues to its agenda (listed below).  The IFRIC noted that all of the issues would potentially be affected by the Board’s short-term convergence project on IAS 12 Income Taxes that will be discussed by the Board in April. The IFRIC agreed to await the Board’s decision on the scope of that project before deciding whether to proceed with these agenda items.


Decision not to add

February 2003



Issues 1-3 concern whether, and how, entities should apply the exemption from recognising deferred tax on initially recognising assets and liabilities.

Issue 4:  Any entity issues an equity instrument, any payments made under which will be deductible against taxable profits.

Should the entity recognise a deferred tax asset on recognising an equity instrument, and should the income tax benefit arising on any payments made under the instrument be recognised in income or equity?

Issue 5:  An entity purchases an option on its own shares and classifies it as an equity instrument.  For tax purposes, the cost of the option will be deductible against future taxable profits at some point in the future.  Should an entity recognise a deferred tax asset on recognising the equity instrument?

Issue 6:  Certain tax jurisdictions compute tax liabilities on a territorial rather than a worldwide basis, so that overseas income is not taxable unless it is repatriated.  If the entity does not intend to repatriate the overseas interest income, and therefore does not expect to be liable to domestic taxation, should it recognise a deferred tax liability?
The IASB has tentatively decided to amend IAS 12 to eliminate the ‘initial recognition exception’.  Accordingly, the IFRIC declined to take this item onto the agenda.

The IFRIC agreed that the underlying issue was how to account for the tax consequences of distributions to external shareholders.  The IFRIC observed that the accounting for tax-deductible dividends is explicit in IAS 12.  Paragraph 52B of IAS 12 states:

…the income tax consequences of dividends are recognised when a liability to pay the dividend is recognised.  The income tax consequences of dividends are more directly linked to past transactions or events than to distributions to owners.  Therefore, the income tax consequences of dividends are recognised in net profit or loss for the period as required by paragraph 58 except to the extent that the income tax consequences of dividends arise from the circumstances described in paragraph 58 (a) and (b).

The Board reaffirmed at the April 2003 meeting that the tax consequences of dividends are recognised when a liability to pay the dividend is recognised.  Accordingly, the IFRIC agreed that no further consideration of this issue is necessary.

At the June 2004 meeting, the Board tentatively agreed to modify the definition of tax base in IAS 12 to explain that tax base is a measurement attribute and is the amount at which an asset, liability or equity instrument is recognised for tax purposes under existing tax law as a result of one or more past events.  Accordingly, an entity would recognise deferred tax for temporary differences arising on equity instruments.

The IFRIC agreed that IAS 12 requires recognition of a deferred tax liability.  The current exception in IAS 12 relates to differences between the carrying amount of investments in subsidiaries, branches and associates or interests in joint ventures that result primarily from undistributed earnings.  The exception does not apply to the temporary differences that exist between the carrying amount and tax base of the individual assets and liabilities within the subsidiary, branch, associate or interest in joint ventures.

Additionally, the Board has tentatively decided to eliminate this exception. Thus, the IFRIC agreed to take no further action.

IFRIC reference: IAS 12

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