Narrow-scope amendments

Why are we doing the project?

The IFRS Interpretations Committee received a request to clarify the accounting for deferred tax assets when an entity:

• has deductible temporary differences relating to unrealised losses on debt instruments that are classified as available-for-sale financials assets and measured at fair value;
• is not allowed to deduct unrealised losses for tax purposes;
• has the ability and intention to hold the debt instruments until the unrealised loss reverses; and
• has insufficient taxable temporary differences and no other probable taxable profits against which the entity can utilise those deductible temporary differences.

In order to resolve the significant diversity in practice, the Interpretations Committee recommended to the IASB to clarify the accounting in IAS 12 Income Taxes.

What are we doing?

The issue had initially been considered as part of the 2010-2012 Cycle of Annual Improvements to IFRSs, but based on the comment letters received on the Exposure Draft, the IASB tentatively decided at its meeting in December 2012 that addressing the issue would require a narrow-scope amendment instead.

Furthermore, the IASB asked the Interpretations Committee to develop a recommendation for this amendment.

How are we doing it?

At its meeting in May 2014, the IASB discussed and tentatively agreed with the recommendation of the Interpretations Committee that the proposed amendments to IAS 12 should include an illustrative example that addresses the following aspects in the application of the existing principles in IAS 12:

1. An unrealised loss on a debt instrument measured at fair value gives rise to a deductible temporary difference even if (i) the debt instrument holder expects to recover the carrying amount of the debt instrument by holding it to maturity and collecting all of the contractual cash flows, and (ii) the loss is not tax deductible until realised.
2. An entity assesses the utilisation of deductible temporary differences related to unrealised losses on debt instruments measured at fair value in combination with other deductible temporary differences. If tax law, however, restricts the utilisation of deductible temporary differences so that they are deductible only against the taxable profits of a specific type, the entity still assesses utilisation of such deductible temporary differences in combination with other deductible temporary differences, but only of the appropriate type. An example of such a restriction could be, for example, that capital losses are deductible only against capital gains.
3. An entity’s estimate of future taxable profit, made for the purposes of recognising deferred tax assets, assumes that it will recover an asset for more than its carrying amount, if the recovery of an asset for more than its carrying amount is probable.
4. An entity excludes the tax deductions represented by existing deductible temporary differences from the probable future taxable profit against which those differences are assessed for utilisation. The IASB also tentatively agreed with the recommendation of the Interpretations Committee that it should propose an amendment to paragraphs 24?31 of IAS 12 to clarify this point.
5. The example should illustrate the assessment of the utilisation of deductible temporary differences when all three sources of taxable profits (ie future reversal of existing taxable temporary differences, future taxable profit and tax planning opportunities) are available but are insufficient in total to support the recognition of deferred tax assets for all of the deductible temporary differences.
6. As a consequence of (e), the example should explain how an entity should determine the amount of deferred tax to recognise in OCI, compared to the amount that it should recognise in profit or loss, when the entity cannot recognise all deferred tax assets because it has insufficient future taxable profits. The Interpretations Committee noted that this determination should be on a reasonable pro-rata allocation, unless tax law requires a different allocation.

However, the IASB disagreed with the recommendation of the Interpretations Committee that items (a)-(c) should only be addressed in an illustrative example. The IASB tentatively decided that these items should also be addressed by amending the mandatory guidance in IAS 12.

Finally, the IASB tentatively agreed with the recommendation of the Interpretations Committee that the illustrative example should explain the application of IAS 12 to debt instruments measured at fair value in accordance with IAS 39 Financial Instruments: Recognition and Measurement as well as those measured at fair value in accordance with IFRS 9 Financial Instruments.

At its meeting June 2014, the IASB considered how to amend the mandatory guidance of IAS 12 to clarify items (a)-(d).

In addition, the IASB tentatively decided:

• that the proposed amendments to IAS 12 should illustrate the application of IAS 12 to debt instruments that are:
  • classified as available-for-sale financial assets (IAS 39 Financial Instruments: Recognition and Measurement); and
  • classified as financial assets that are measured at fair value through other comprehensive income (IFRS 9 Financial Instruments, as it is to be amended by the limited amendments to the classification and measurement requirements for financial assets).
• for entities already applying IFRS, that retrospective application of the proposed amendments is limited so that transfers between retained earnings and other components of equity in the opening statement of the financial position should not be required in order to restate cumulative amounts previously recognised in profit or loss, other comprehensive income or directly in equity. Full retrospective application should be permitted.
• that it would not propose an exception to, or exemption from, the retrospective application of IFRS for the proposed amendments to IAS 12 for first-time adopters of IFRS.

In August 2014, the IASB published for comment the Exposure Draft Recognition of Deferred Tax Assets for Unrealised Losses (Proposed amendments to IAS 12). The comment period ended on 18 December 2014.

In March 2015, the Interpretations Committee was presented with a summary and an analysis of the 68 comment letters received on the Exposure Draft.

The Interpretations Committee decided to propose that the IASB should proceed with the proposed amendments, subject to some amendments to the proposed wording for further clarification.

The Interpretations Committee also recommended that:

• the example illustrating paragraph 26(d) should be further shortened and additional explanation about identification of the tax base included in the Basis for Conclusions; and
• limited retrospective application should be further clarified and consideration given to the need to recycle amounts from OCI in subsequent periods.

The Interpretations Committee expressed concern about the ability of an entity to recover an asset for more than its carrying amount when it is measured at fair value and recovery is not based on contractual cash flows. The Interpretations Committee asked the staff to include discussion of the concern in the Basis for Conclusions.

At its meeting on 23 June 2015, the IASB was presented with a summary and an analysis of the 68 comment letters received on the Exposure Draft as well as the recommendations from the Interpretations Committee.

The IASB decided that it should proceed with finalising the proposed amendments, subject to some revisions to the proposed wording as follows:

1. revise the example illustrating paragraph 26(d) to clarify that the debt instrument is measured at fair value and remove information that is superfluous to the objective of the example, and add an explanation about the identification of the tax base in paragraph BC6;
2. clarify the transition requirements;
3. revise the proposed guidance relating to recovery of an asset for more than its carrying amount in a way that enhances understanding and reduces the risk of an arbitrary estimate of probable future taxable profit;
4. clarify that ‘taxable profit excluding tax deductions’ used for assessing the utilisation of deductible temporary differences is different from 'taxable profit on which income taxes are payable'; and
5. shorten Illustrative Example 7 and amend it to be consistent with the guidance in paragraph 63 on allocation of deferred tax between profit or loss and other comprehensive income.

At the July 2015 meeting, all IASB members agreed that:

1. the amendments to IAS 12 should be finalised without re-exposure;
2. the effective date of the amendments should be 1 January 2017 and earlier application should be permitted; and
3. the due process requirements to date have been complied with.

The IASB published the final amendments to IAS 12 in January 2016.