On 31 March 2009, the International Accounting Standards Board ("IASB") published an Exposure Draft of a proposed new standard on Income Tax. The Board is inviting public comment on the Exposure Draft by 31 July 2009.
The proposed standard retains the basic approach to accounting for income tax, known colloquially as the 'Balance Sheet' approach. The objective of the proposed standard is to clarify various aspects of IAS 12 Income Taxes ("IAS 12") and reduce the differences between IAS 12 and the US standard (SFAS 109 Accounting for Income Taxes), and related US GAAP.
Although the proposed standard retains the same principle, the IASB proposes to eliminate most of the recognition exceptions in IAS 12 to simplify the accounting and strengthen the principle in the standard. In addition, the IASB proposes a changed structure for the standard that will make it easier to use. IASB Chairman, Sir David Tweedie said the IASB's "aim is to achieve a clearer, more principle-based standard that will make the accounting requirements on income tax easier to understand and apply and will also result in more consistent reporting".
If adopted, the proposed standard will replace the existing requirements in IAS 12. The table in the IASB website suggests that the finalised standard is expected to be released in early 2010 however it is hoped that more time is given to adopt the changes.
The proposed main changes from IAS 12 are:
- Measure current and deferred tax assets and liabilities
using probability-weighted average amounts
IAS 12 is silent on how to account for uncertainty over whether the tax authority will accept the amounts reported to it.
However, the Exposure Draft proposes that the current and deferred tax assets and liabilities should be measured at the probability-weighted average of all possible outcomes, assuming that the tax authority examines the amounts reported to it by the entity and has full knowledge of all relevant information. This measure clearly requires reporting entities to account for uncertain tax positions. The board recognised the departure from FIN 48 and considered the Interpretation issued by the FASB but noted that it was not consistent with the Board's thinking behind the proposed amendments to IAS 37.
The IASB believes that the use of a probability-weighted average of all possible outcomes, without any probability-based recognition threshold, provides more relevant information than an approach that uses a probability-based recognition threshold.
In terms of documentation, the IASB does not intend entities to seek out additional information for the purposes of applying this aspect of the proposed standard. Rather, it proposes only that entities do not ignore any known information that would have a material effect on the amounts recognised. One would question whether the level of documentation required would be less than that prescribed in FIN 48.
- Changes to the definition of tax basis
Under the proposed new standard, 'tax basis' would follow the definition as contained in the tax law. For example, the tax base of a CGT asset will be its cost base for CGT purposes.
Further, the tax basis would no longer depend on how the entity expects to recover the carrying amount of an asset. Currently, the tax base in IAS 12 depends on management's expectations of how the carrying amount of the asset will be recovered.
- Removal of the initial recognition exception in IAS
12
The current exception prohibits an entity from recognising deferred tax assets and liabilities that arise when an asset or liability has a tax base different from its initial carrying amount, except in a business combination or in a transaction affecting accounting or taxable profit.
The Exposure Draft proposes to introduce an initial step in determining deferred tax assets and liabilities so that no deferred tax arises in respect of an asset or liability if there would be no effect on taxable profit when the entity recovers or settles its carrying amount. These changes would have an impact on the holdings of luxury cars and pre-CGT assets.
- Changes to the investments in subsidiaries, branches,
associates and joint ventures exception in IAS 12
IAS 12 includes an exception to recognising deferred tax balances for some investments in subsidiaries, branches, associates and joint ventures based on whether an entity controls the timing of the reversal of the temporary difference and the probability of reversal in the foreseeable future.
The proposed exception would be restricted to investments in foreign subsidiaries, joint ventures or branches that are permanent in nature. Note also that the proposed standard would remove the exception for investments in associates.
- Recognise deferred tax assets in full less a valuation
allowance
This approach will replace the recognition of a deferred tax asset for which realisation is probable and instead, recognise deferred tax assets in full with an offsetting valuation allowance (if applicable) so that the net carrying amount equals the highest amount that is more likely than not to be realisable against taxable profit.
- Change to the requirements relating to tax effects of
distributions to shareholders
IAS 12 requires the entity to use the undistributed rate to measure deferred tax assets or liabilities.
The changes proposes that an entity would measure current and deferred tax assets and liabilities using the rate expected to apply when the tax asset or liability is realised or settled, including the effect of the entity's expectations of future distributions.
- Other changes
New definitions for tax credit and investment tax credit
IAS 12 does not define these terms which has lead to questions about the classification of some tax benefits. The Exposure Draft proposes that a tax credit be defined as 'a tax benefit that takes the form of an amount that reduces income tax payable' and an investment tax credit as 'a tax credit that relates directly to the acquisition of depreciable assets'. The introduction of these definitions would make the new IFRS easier to use by removing doubt over the required treatment for tax benefits.
Classification of deferred tax assets and liabilities
Deferred tax assets and liabilities are currently classified as non-current, regardless of the classification of the underlying asset or liability giving rise to the temporary difference. It has been proposed that deferred tax assets and liabilities should be classified as either current or non-current, consistent with the financial reporting classification of the related non-tax asset or liability.
Clarification on the classification of interest and penalties
IAS 12 is silent on the classification of interest and penalties. The Exposure Draft suggests that the classification of interest and penalties should be a matter of accounting policy choice to be applied consistently and that the policy chosen should be disclosed.
Additional disclosures
The Exposure Draft also contains additional disclosure requirements to make financial statements more informative, including disclosures relating to adjustments for a change in the tax status of an entity and tax benefits allocated directly to contributed capital or to goodwill.
Additional guidance on assessing the realisability of deferred tax assets
IAS 12 does not provide information on this matter whilst the Exposure Draft provides guidance on accounting for significant expenses to implement a tax planning strategy to realise a deferred tax asset.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
