John Chan from Accounting Consulting Services brings us up to speed on the clarified guidance for recognising deferred tax assets on unrealised losses.
The amendments arose from a question submitted to the IC about the deferred tax accounting for deferred tax assets arising on debt investments measured at fair value. The IASB observed diversity in practice and therefore developed narrow-scope amendments to clarify IAS 12.
Are there any changes to the principles in IAS 12?
No. The amendments clarify the guidance in IAS 12 by adding examples and elaborating on some of the requirements in more detail. They do not change the underlying principles for the recognition of deferred tax assets.
What are the clarifications?
When does a temporary difference arise?
The amendments clarify that a temporary difference is calculated by comparing the carrying amount of an asset against its tax base at the end of the reporting period.
When an entity determines whether or not a temporary difference exists, it should not consider
- the expected manner of recovery of the related assets (for example, by sale or by use); or
- whether it is probable that any deferred tax asset arising from a deductible temporary difference will be recoverable.
How is future taxable profit estimated?
The IASB clarified that:
- determining the existence and amount of temporary differences; and
- estimating future taxable profit against which deferred tax assets can be utilised are two separate steps.
Estimating future taxable profit inherently includes the expectation that an entity will recover more than the carrying amount of an asset. Therefore, if an entity considers it is probable that it can realise more than the carrying amount of an asset at the end of a reporting period, it should incorporate this assumption into its estimate of future taxable profit.
Is the recoverability of a deferred tax asset assessed collectively or separately?
It depends on the tax law. Deferred tax assets are assessed in combination with other deferred tax assets where the tax law does not restrict the source of taxable profits against which particular types of deferred tax assets can be recovered. Where restrictions apply, deferred tax assets are only assessed in combination with those of the same type.
How do deferred tax assets affect future taxable profit?
The tax deduction resulting from the reversal of deferred tax assets is excluded from the estimated future taxable profit used to evaluate the recoverability of those assets.
Effective date and transition
The amendments are effective for annual periods beginning on or after 1 January 2017. Earlier application is permitted. An entity may, on initial application of this amendment, elect to recognise any change in the opening equity of the earliest comparative period presented in the opening retained earnings (or in another component of equity, as appropriate), without allocating the change across different equity components.
Who is affected?
The amendments are not limited to any specific type or class of assets and clarify several of the general principles underlying the accounting for deferred tax assets