Income Taxes — IASB Discusses Limited Project on Income Taxes

Published on: 18 Mar 2010

The IASB met today to discuss the objective and scope of a limited project to amend IAS 12, Income Taxes. The Board generally agreed with the proposed objective of the project and spent the majority of the session discussing the project’s scope and timing.

Note that the Board is currently focusing on the major convergence projects under the MoU, which have a deadline of June 2011 for completion. The Board plans to reconvene on income taxes sometime this summer.

Project’s Objective and Scope

The limited project’s objective is to address current practice issues that (1) do not require fundamental changes to the current approach on accounting for income taxes under IAS 12 or (2) increase divergence with U.S. GAAP.

The staff proposed that the limited project focus on the following seven areas:

Practice Issues

1. Uncertain tax positions.

2. Deferred tax on property revaluation.

Improvements Proposed in the 2009 Exposure Draft

3. Introduction of an initial step to consider whether recovery of an asset or settlement of a liability will affect taxable profit.

4. Recognizing a deferred tax asset in full and an offsetting valuation allowance to the extent necessary.

5. Guidance on assessing the need for a valuation allowance.

6. Guidance on substantive enactment.

7. Allocation of current and deferred taxes within a group that files a consolidated tax return.

In addition to the seven areas proposed by the staff, the Board suggested adding to the project the issue of what tax rate should be applied (distributed rate versus undistributed rate) for entities such as real estate investment trusts (REITs). This issue was addressed in the March 2009 exposure draft (ED) and was generally supported; however, it was not originally recommended by the staff for inclusion in this project because of the operational challenges noted in the comment letters on the ED.

During the discussion on item (2) above, the Board decided to form a small working group to further discuss and revise the proposal related to an exemption for deferred taxes on revalued property. This working group is expected to present its recommendations on this topic, as well as final recommendations for the other issues identified, to the Board this summer.

The agenda papers for this meeting provide further details on the objective and scope of the limited project.

Background of Income Taxes Project

The IASB’s efforts related to accounting for income taxes have been ongoing. Accounting for income taxes was identified as a short-term convergence project of the IASB and the FASB as part of the 2006 Memorandum of Understanding (MoU). However, in 2008 the FASB decided to indefinitely defer its income tax project, while the IASB moved forward with its project. In March 2009, the IASB issued an ED, Income Tax (ED/2009/2), containing proposals for an IFRS that would replace the current guidance under IAS 12 and its related interpretations (see Deloitte’s April 9, 2009 Heads Up for further information on the ED). The IASB received a considerable amount of criticism from constituents on the ED, leading the Boards to defer undertaking a fundamental review of the accounting for income taxes until sometime in the future. As an alternative to the proposals contained in the ED, the IASB decided to limit the scope of this project to specific, less controversial practice issues, as outlined above.

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