Why are we doing the project?
The IFRS Interpretations Committee received a request to clarify the accounting for deferred tax assets when an entity:
- has deductible temporary differences relating to unrealised losses on debt instruments that are classified as available-for-sale financials assets and measured at fair value;
- is not allowed to deduct unrealised losses for tax purposes;
- has the ability and intention to hold the debt instruments until the unrealised loss reverses; and
- has insufficient taxable temporary differences and no other probable taxable profits against which the entity can utilise those deductible temporary differences.
In order to resolve the significant diversity in practice, the Interpretations Committee recommended to the IASB to clarify the accounting in IAS 12 Income Taxes.
What are we doing?
The IASB proposed the following clarifications in the Exposure Draft Annual Improvements to IFRSs 2010-2012 Cycle (ED/2012/1) published in May 2012, in order to resolve the significant diversity in practice:
- an entity assesses whether to recognise the tax effect of a deductible temporary difference as a deferred tax asset in combination with other deferred tax assets. If tax law restricts the utilisation of tax losses so that an entity can only deduct the tax losses against income of a specific type (eg if it can only deduct capital losses only against capital gains), the entity must still assess a deferred tax asset in combination with other deferred tax assets, but only with deferred tax assets of the appropriate type;
- taxable profit against which an entity assesses a deferred tax asset for recognition is the amount before any reversal of deductible temporary differences; and
- an action that results only in the reversal of existing deductible temporary differences is not a tax planning opportunity. To qualify as a tax planning opportunity, the action needs to create or increase taxable profit.
The Interpretations Committee discussed the comments received on the proposed amendment to IAS 12 in its meeting in November 2012 and concluded that clarifying the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value requires further discussion and analysis on two issues. However, it was not clear at this stage whether resolving these two issues could be achieved within the constraints of the Annual Improvements process, or whether this would need to be undertaken as a narrow-scope amendment to IAS 12. Consequently, the Interpretations Committee decided to consult with the IASB on the most appropriate path forward.
In its meeting in December 2012, the IASB tentatively decided that the most appropriate path forward to clarify the accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value is a separate narrow scope project to amend IAS 12. This is because:
- the issue of whether an entity can assume that it will recover an asset for more than its carrying amount when estimating probable future taxable profits should be addressed in separate narrow-scope project; and
- such a project, which goes beyond clarifications and corrections (ie a project with a broader scope than annual improvements), also allows for discussing whether to amend IAS 12 to achieve an outcome for deferred tax accounting that is consistent with the one that was recently discussed by the US-based Financial Accounting Standards Board (FASB) for the same type of debt instruments.