The IFRS Interpretations Committee (Committee) discussed the following matter and tentatively decided not to add it to its standard-setting agenda. The Committee will reconsider this tentative decision, including the reasons for not adding the matter to its standard-setting agenda, at a future meeting. The Committee invites comments on its tentative agenda decision. All comments will be on the public record and posted on our website unless a responder requests confidentiality and we grant that request. We do not normally grant such requests unless they are supported by good reason, for example, commercial confidence.
Tentative agenda decision
The Committee received a request about deferred tax when the recovery of the carrying amount of an asset gives rise to multiple tax consequences. In the fact pattern described in the request:
- an entity acquires an intangible asset with a finite useful life (a licence) as part of a business combination. The carrying amount of the licence at initial recognition is CU100. The entity intends to recover the carrying amount of the licence through use, and the expected residual value of the licence at expiry is nil.
- the applicable tax law prescribes two tax regimes: an income tax regime and a capital gains tax regime. Tax paid under both regimes meets the definition of income taxes in IAS 12. Recovering the licence’s carrying amount through use has both of the following tax consequences:
- under the income tax regime—the entity pays income tax on the economic benefits it receives from recovering the licence’s carrying amount through use, but receives no tax deductions in respect of amortisation of the licence (taxable economic benefits from use); and
- under the capital gains tax regime—the entity receives a tax deduction of CU100 when the licence expires (capital gain deduction).
- the applicable tax law prohibits the entity from using the capital gain deduction to offset the taxable economic benefits from use in determining taxable profit.
The request asked how the entity determines the tax base of the asset and, consequently, how it accounts for deferred tax.
The fundamental principle in IAS 12
Paragraph 10 of IAS 12 states that ‘where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle upon which this Standard is based’. The same paragraph describes, as that fundamental principle, ‘that an entity shall, with certain limited exceptions, recognise a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences’.
Applying the fundamental principle to the fact pattern
The Committee observed that, in the fact pattern described in the request, the tax base of the asset is not immediately apparent. The Committee also observed that the recovery of the asset’s carrying amount gives rise to two distinct tax consequences—it results in taxable economic benefits from use and a capital gain deduction that cannot be offset in determining taxable profit. Accordingly, applying the fundamental principle in IAS 12, an entity reflects separately the distinct tax consequences of recovering the asset’s carrying amount.
An entity identifies temporary differences in a manner that reflects these distinct tax consequences by comparing:
- the portion of the asset’s carrying amount that will be recovered under one tax regime; to
- the tax deductions that will be received under that same tax regime (which are reflected in the asset’s tax base).
In the fact pattern described in the request, the Committee concluded that the entity identifies both:
- a taxable temporary difference of CU100—the entity will recover the licence’s carrying amount (CU100) under the income tax regime, but will receive no tax deductions under that regime (that is, none of the tax base relates to deductions under the income tax regime); and
- a deductible temporary difference of CU100—the entity will not recover any part of the licence’s carrying amount under the capital gains tax regime, but will receive a deduction of CU100 upon expiry of the licence (that is, all of the tax base relates to deductions under the capital gains tax regime).
The entity then applies the requirements in IAS 12 considering the applicable tax law in recognising and measuring deferred tax for the identified temporary differences.
The Committee concluded that the principles and requirements in IAS 12 provide an adequate basis for an entity to account for deferred tax in the fact pattern described in the request. Consequently, the Committee [decided] not to add the matter to its standard-setting agenda.
The deadline for commenting on the proposals is 14 February 2020. The Committee will consider all comments received in writing by that date; agenda papers analysing comments received will include analysis only of comments received by that date.