Monday, September 13, 2010

IASB Proposes Change to Standard on Accounting for Income Tax Against Backdrop of Broad IASB-FASB Review of Tax Accounting Standards

As the IASB and FASB conduct an ongoing fundamental review of the financial standard for accounting for income tax, the IASB has proposed a specific significant amendment to its international accounting standard for income tax, IAS12, that would provide an exception to the principle that the measurement of deferred tax liabilities and deferred tax assets should reflect the tax consequences that would follow from the manner in which the entity expects to recover or settle the carrying amount of its assets and liabilities.

The IASB recognizes that, in some jurisdictions, applying this principle can be difficult or subjective in some circumstances. For example, a deferred tax liability or a deferred tax asset may arise from investment property that is measured using the fair value model in IAS 40 and is held by the company both to earn rental income and for capital appreciation. Attempts to apply this principle to this situation often result in difficulty and subjectivity. This is an issue in jurisdictions where the tax law treats gains and losses from the recovery of an asset through sale differently from income earned from using the same asset by applying different tax rates. As a result, in some jurisdictions, there may be no tax consequences arising from the future sale of the asset, but significant tax consequences if the carrying amount of the asset is considered to be recovered through use.

Under the IASB’s proposed changes to IAS 12, the measurement of deferred tax liabilities and deferred tax assets should reflect a rebuttable presumption that the carrying amount of the underlying asset will be recovered entirely by sale. The specified circumstances are that the deferred tax liability or deferred tax asset arises from investment property, when an entity applies the fair value model in IAS 40, or property, plant and equipment or intangible assets, when an entity applies the revaluation model in IAS 16. The presumption is rebutted only when an entity has clear evidence that it will consume the asset’s economic benefits throughout its economic life.

The Board decided that, when a firm uses the fair value model in IAS 40 or the revaluation model in IAS 16 or IAS 38, the tax consequences reflecting presumed recovery of the underlying asset entirely by sale are more relevant than a presumption of recovery by an alternative manner. In making that decision, the Board considered a combination of various views expressed by interested parties, which included the view that presuming a sale is consistent with measurement of the underlying asset on a fair value measurement basis that reflects the price that would be received if the asset is sold. But the Board made the presumption of recovery through sale rebuttable based on its belief that it is not appropriate to assume the recovery of the underlying asset by sale when the firm has clear evidence that it will consume the asset’s economic benefits throughout its economic life.

The IASB explained that the proposal is intended to provide a practical approach for measuring deferred tax liabilities and deferred tax assets when it would be difficult and subjective to determine the expected manner of recovery. The Board said that the amendments would apply retrospectively, including retrospective restatement of all deferred tax liabilities or deferred tax assets within the scope of the proposed amendments, including those that were initially recognized in a business combination

In March 2009 the Board proposed a new IFRS on accounting for income tax to replace IAS 12. But later that year the IASB withdraw that proposal and embarked with FASB on a fundamental and comprehensive review of the accounting for income tax, but at the same time the IASB reserved the right to address specific issues.

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