European Commission advisers want improvements to IAS 12 proposal

September 18, 2012

More work is required before an amendment to IAS 12, the international accounting standard that deals with accounting for income taxes, is finalised, says EFRAG, the body that advises the European Commission on the technical quality of international financial reporting standards (IFRS).

The International Accounting Standards Board (IASB) outlined the proposal to change IAS 12 relating to the recognition of deferred tax assets for unrealised losses on available-for-sale debt securities in the Annual Improvements to IFRSs 2010 – 2012 Cycle exposure draft, which was published on May 3.

EFRAG said it supported the IASB’s attempts to address the issue butit was concerned that the amendment potentially covers a much wider set of questions than just the recognition of deferred tax assets for unrealised losses on available-for-sale debt securities.

“We believe the IASB should perform additional outreach work and extended analysis to ensure that these amendments do not introduce new problems in areas where none exist to date,” EFRAG’s response added. “This is particularly the case because the interaction between IAS 12 Income Taxes and complex tax legislation in many jurisdictions has the potential to result in some anomalous outcomes.

“EFRAG believes that preparers differ in their understanding and interpretation of the basic mechanics of IAS 12. The wording of this amendment is also complex and will not in our view assist this understanding. Therefore, we believe that the IASB should improve the wording of the proposed amendments to IAS 12 to ensure their consistent application in the future.”

The IASB’s proposed amendment aims to clarify when an entity has to assess whether to recognise the tax effect of a deductible

temporary difference as a deferred tax asset in combination with other deferred tax assets. The proposal states that if tax law only allows losses to be deducted against particular types of income “the entity must still assess a deferred tax asset in combination with other deferred tax assets, but only with such assets of the appropriate type”.

The proposal also clarifies that:

· taxable profit against which an entity assesses a deferred tax asset for recognition is the amount before any reversal of deductible temporary differences; and

· an action that results only in the reversal of existing deductible temporary differences is not a tax planning opportunity. To qualify as a tax planning opportunity, the action needs to create or increase taxable profit.

The period for comments on the exposure draft closed on September 5 and the amendments are set to take effect for annual periods beginning on or after January 1 2014.