The IFRS Interpretations Committee analysed feedback from the consultation with IASB members and tentatively decided to confirm its recommended approach and to draft an amendment to IAS 12 that illustrates the application of the existing principles of IAS 12 in accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value.
At its meeting in May 2013, the Interpretations Committee tentatively decided to:
- recommend to the IASB that it should amend IAS 12 to clarify that deferred tax assets for unrealised losses on debt instruments measured at fair value are recognised, unless recovering the debt instruments by holding it until an unrealised loss reverses does not reduce future tax payments and instead only avoids higher tax losses; and
- 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.
At this meeting, the Interpretations Committee analysed feedback from the consultation with IASB members and tentatively decided to confirm its recommended approach and to draft an amendment to IAS 12 that illustrates the application of the existing principles of IAS 12 in accounting for deferred tax assets for unrealised losses on debt instruments measured at fair value. The Interpretations Committee noted that this amendment should explain the following aspects in the application of the principles of IAS 12:
- an unrealised loss on a debt instrument measured at fair value gives rise to a deductible temporary difference if the holder of the debt instrument expects to recover its carrying amount by holding it to maturity and collecting all of the contractual cash flows and if the loss is not tax deductible until realised;
- an entity assesses the utilisation of deductible temporary differences related to unrealised losses on debt instruments measured at fair value in combination with other deferred tax assets. If tax law, however, restricts the utilisation of deductible temporary differences so that an entity can only utilise certain tax deductions against taxable profits of a specific type (for example, if it can deduct capital losses only against capital gains), the entity must still assess such a deductible temporary difference in combination with other deductible temporary differences, but only with deductible temporary differences of the appropriate type;
- when estimating probable future taxable profit for the purposes of recognising deferred tax assets, an entity assumes that it will recover an asset for more than its carrying amount, provided such a recovery is probable;
- probable future taxable profit against which existing deductible temporary differences are assessed for utilisation excludes tax deductions represented by those deductible temporary differences;
- the approach to apply in the assessment of the utilisation of deductible temporary differences when it is probable that the entity will utilise only part of its deductible temporary differences. This was raised in the context of a circumstance where all three sources of taxable profits (ie future reversal of existing taxable temporary differences, future taxable profits, and tax planning opportunities) are available but together are insufficient for the recognition of all deferred tax assets; and
- how an entity should determine the amount of deferred tax to recognise in other comprehensive income compared with the amount to recognise in profit or loss, when the entity cannot recognise all deferred tax assets due to having insufficient future taxable profits. The Interpretations Committee noted that this determination should be on a reasonable pro-rata allocation, unless tax law requires a different allocation.
Subject to reviewing the draft amendment to IAS 12, the Interpretations Committee supported the staff recommendation that such an amendment to IAS 12 should mainly be an illustrative example, with other amendments to IAS 12 made only if the clarification through an illustrative example is insufficient.
The Interpretations Committee tentatively decided to develop the amendment to IAS 12 for application to debt instruments measured at fair value in accordance with IAS 39 as well as those measured at fair value in accordance with IFRS 9.
Finally, the Interpretations Committee asked the staff to assess whether there are any unintended consequences for the accounting for deferred tax arising in relation to non-financial assets measured at fair value when drafting the amendment to IAS 12.
The staff will present a draft amendment to IAS 12 in a future Interpretations Committee meeting.