Simon Whitehead and Satoshi Tsunoda of US Accounting Consulting Services examine the practical implications of IC rejections related to IAS 12.
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The Interpretations Committee (IC) regularly considers anywhere up to 20 issues at its periodic meetings. A very small percentage of the issues discussed result in an interpretation. Many issues are rejected; some go on to become an improvement or a narrow scope amendment. The issues that are not taken on to the agenda end up as ‘IFRIC rejections’, known in the accounting trade as ‘not an IFRIC’ or NIFRICs. The NIFRICs are codified (since 2002) and included in the ‘green book’ of standards published by the IASB although they technically have no standing in the authoritative literature. This series covers what you need to know about issues that have been ‘rejected’ by the IC. We go standard by standard and continue with IAS 12 as per below.
IAS 12 is a standard that makes relatively frequent appearances at IC meetings, giving rise to over 20 IFRIC rejections to date. Space is too limited to cover them all in detail so we will focus on the more interesting issues. A full listing of all NIFRICs can be found in the table at the end of the article.
Classification of interest and penalties (June 2004)
A submitter asked the IC where interest and penalties on under/overpaid income taxes should be presented. The IC concluded that the disclosure requirements of IAS 1 and IAS 12 were sufficient to inform the user where an entity had presented such amounts. As a result, the IC declined to provide any guidance on the matter meaning that an accounting policy election exists with respect to presentation of these amounts.
Assets in a corporate wrapper (November 2005 & July 2014)
The issue of assets in a corporate wrapper, or single asset entities, is one that has existed for many years. The perceived problem is that IAS 12 requires deferred taxes to be provided on both the consequences of recovering the asset within the corporate wrapper and the consequences of recovering the investment in the legal entity housing the asset (that is, the corporate wrapper). Many entities will assert that they will never sell the asset from within the wrapper but rather just sell the entity that houses the asset, and as such the ‘inside basis’ temporary difference is irrelevant. There is no exception in IAS 12 to avoid recording both temporary differences.
The IC originally rejected the submission back in 2005 because at the time the IASB was working with the FASB to produce a converged new income taxes standard. That project fell apart in 2009 amid strongly negative feedback to an exposure draft, so the issue was never resolved. When it returned to the IC in 2014, the IC concluded it was unable to address the issue by way of an interpretation because the standard’s requirements are clear, and the scope of any amendment to the standard would go beyond the remit of an annual improvement. Consequently, the IC recommended that the IASB consider the issue as part of its research project on income taxes.
In summary, it does not appear that the issue will be addressed in the short term and entities will likely have to continue to record two deferred tax positions on assets in corporate wrappers.
Scope of IAS 12 (December 2005, March 2006, May 2009 & July 2014)
Over the years the IC has received a number of questions about the scope of IAS 12. Submitters have questioned whether taxes based on gross income or tonnage are income taxes, and also whether uncertain tax positions are within the scope of the income tax guidance or should be viewed as provisions under IAS 37.
The IC has confirmed that income taxes are only those taxes based on some measure of net profit. Taxes based on gross income, or taxes paid in lieu of profits based taxes (such as tonnage taxes) do not meet the definition of income taxes. The tax does not need to be based on accounting profit before tax to be an income tax, but it must be based on some form of net amount of income less expenses. Following the agenda decisions confirming that levies, often described as a tax, are in the scope of IAS 37 (March 2006 and May 2009), the IC further developed IFRIC 21 clarifying the accounting for levies.
A certain amount of diversity in practice had existed in respect of uncertain tax positions with some believing that IAS 37 was the appropriate place for them. The IC confirmed in 2014 that uncertain tax positions are income taxes and IAS 37 scopes out income taxes. This conclusion is expected to be reconfirmed in the forthcoming IC interpretation on uncertainty in income taxes.
Recognition of deferred tax assets when an entity is loss-making (May 2014)
In considering whether a deferred tax asset is recoverable, IAS 12 requires that entities first look to taxable temporary differences, then assess the availability of taxable profits, and finally consider any tax planning opportunities. One submitter asked the IC whether it was appropriate to use taxable temporary differences to justify recognition of deferred tax assets when the entity was expected to make losses.
The IC confirmed that even if an entity expects to make losses, deferred tax assets should be recognised to the extent of deferred tax liabilities of the same nature. Deferred tax liabilities are sources of future taxable income that are recognised on the balance sheet, so if the entity has deferred tax assets that can create deductions in the same future periods as the liabilities reverse, then the assets should be recognised.
Discounting of current taxes payable (June 2004)
A submitter asked whether current income taxes payable should be discounted when the entity is permitted to pay the taxes over a period greater than twelve months. The IC generally supported discounting, but was concerned that discounting current taxes potentially conflicted with IAS 20, which at that time required that additional interest should not be imputed for government loans at below market interest rates. However, at the time that the issue was discussed, the conflict was expected to be resolved by the IASB’s tentative decision to withdraw IAS 20. Upon withdrawal of IAS 20, the IC did not think the issue would be unclear. On that basis, the IC noted that current taxes payable should be discounted if material.
However, the IASB later decided not to withdraw IAS 20 and in fact amended it for periods beginning on or after 1 January 2009 to require imputing of interest for offmarket government loans. While this might have been expected to resolve the issue in favour of discounting, by January 2009 the income tax convergence project was in full swing, and at a joint meeting of the Boards that month, the IASB and FASB decided to remain silent on the issue of discounting current taxes. While this project was ultimately shelved4, the fact that the IASB had declined to take a position on the issue of discounting current taxes has led to continued diversity in practice. In our opinion, a policy choice exists and entities may choose to discount current taxes, but are not required to do so.
Summary of IAS 12 rejections
Click here to view table.