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IFRS Interpretations Committee recommends approach for clarification

 15 May 2013


The IFRS Interpretations Committee decided to recommend to the IASB that it should amend IAS 12 to clarify that deferred tax assets for unrealised losses on debt instruments are recognised, unless recovering the debt instrument by holding it until an unrealised loss reverses does not reduce future tax payments and instead only avoids higher tax losses.

At its meeting in December 2012, the IASB tentatively decided that the accounting for deferred tax assets for unrealised losses on debt instruments should be clarified by a separate narrow-scope amendment to IAS 12. This is because:

  1. 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 a separate narrow-scope project; and
  2. such a project, which goes beyond clarifications and corrections (that is, 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 would be consistent with the one that was recently discussed by the FASB for the same type of debt instruments.

Furthermore, the IASB noted that clarifying this issue requires addressing the question of whether an unrealised loss on a debt instrument measured at fair value gives rise to a deductible temporary difference when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all of the contractual cash flows.

At this meeting, the Interpretations Committee decided to recommend to the IASB that it should amend IAS 12 to clarify that deferred tax assets for unrealised losses on debt instruments are recognised, unless recovering the debt instrument by holding it until an unrealised loss reverses does not reduce future tax payments and instead only avoids higher tax losses. This involves:

  1. an unrealised loss on a debt instrument measured at fair value gives rise to a deductible temporary difference when the holder expects to recover the carrying amount of the asset by holding it to maturity and collecting all of the contractual cash flows; and
  2. an entity can assume that it will recover an asset for more than its carrying amount when estimating probable future taxable profits.

In addition, the Interpretations Committee understood that its recommendation would not always achieve an outcome for deferred tax accounting that would be consistent with the one that was recently discussed and proposed by the FASB. It expects that this will be the case if recovering the debt instrument by holding it until an unrealised loss reverses does not reduce future tax payments and instead only avoids higher tax losses. The Interpretations Committee concluded that deferred tax assets should not be recognised in such a situation. This is because it is not clear what the economic benefit embodied in the deferred tax asset is, if recovering the debt instrument by holding it until an unrealised loss reverses does not reduce future tax payments and instead only avoids higher tax losses.

The Interpretations Committee noted that:

  1. its recommended amendment to IAS 12; and
  2. an amendment that achieves an outcome for deferred tax accounting that would be consistent with the one that was recently discussed and proposed by the FASB would be significantly different. The Interpretations Committee decided to consult with the IASB on the approach that is to be the basis for the amendment before discussing further details and drafting a proposed amendment.

Following consultation with the IASB, the staff will present an analysis discussing further details, a recommendation and a draft proposed amendment to IAS 12 in a future meeting.

 

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