(April 13, 2015)

On February 27, 2015, the IASB's user advisory group, the Capital Markets Advisory Committee (CMAC), held its first meeting of 2015. On April 9, 2015 the summary of the discussions, along with meeting (sound) recordings and Agenda Papers were published on the website of the IFRS Foundation and the IASB. One of the items on the agenda regarded Accounting for Income Taxes. With respect to this item two Agenda Papers had been prepared “Accounting for income taxes - Is there a need for change?” (Agenda Paper 3) and “Income Tax - Case Study” (Agenda Paper 3A).

With respect to this item the Summary of the discussions mentions the following: 

“Income taxes

Today’s accounting for income tax has been criticised for not providing information that is useful to users of financial statements and for the complexity in its application. In order to identify the areas of weakness and obtain input from investors about the extent to which the Standard should be improved, a pre-meeting survey to CMAC members was conducted in January and the result was summarised and used as the basis for discussion during the meeting.

During the meeting, the staff asked the CMAC members:

• what tax information is used for analysis today and how this information is incorporated into valuation models;

• whether today’s accounting for income tax provides the information needed, and in which areas do the CMAC members recognise a need for improvement; and

• to what extent should the Standard be improved, whether limited amendments to improve disclosures or a new Standard to tackle difficult issues such as the discounting of deferred tax?

The main messages from the CMAC members are as follows:

• the use of tax information and its usefulness:

  • investors use tax information, including deferred tax information, to help them to project future tax cash flow.

  • the tax information investors use are, for example, information on tax rates, tax loss carryforwards and other items that may affect future tax payments. Some investors see a deferred tax asset representing tax loss carryforwards, and a deferred tax liability, which is a mixture of liability (ie non-recurring items), equity (ie recurring items) and something else (for example, deferred tax on revaluation).

  • some users think that the disclosure of information about tax is useful information but currently there is a lack of transparency, with some seeing it as a ‘black box’.

  • some users think deferred tax is a mechanism to smooth out earnings and hide volatility, whereas those investors would prefer to see the volatility.

• investors are looking for more information about effective tax rates and differences in taxation that relate to jurisdictional factors. They would like more information such as:

  • geographical or segment information on the breakdown of the composition of effective tax rate and tax expense, as well as key tax information such as application of special tax schemes (for example, patent box), planning to use tax losses etc.

  • some users want the management’s projections while other users prefer to get raw data, based on which they will project future tax themselves,

• mixed views on the discounting of deferred tax balances:

  • those who support discounting believed that deferred tax balances are affected by the time value of money like any other assets or liabilities.

  • those who oppose discounting suggested that it is difficult to determine which discount rate should be used and discounting will make deferred tax balances even more difficult to understand. 

Next steps

The staff plan to reach out to the wider investor community to seek more input from users and incorporate their views, together with views expressed by CMAC members, into the research paper.”

Click here to be forwarded to the Summary of the discussions as published on the website of the IFRS Foundation and the IASB, which will open in a new window.

Click here to be forwarded to the meeting (sound) recordings of the discussions regarding Agenda Papers 3 and 3A, as available on the website of the IFRS Foundation and the IASB.

Click here to be forwarded to Agenda Paper 3 (a presentation titled: “Accounting for income taxes - Is there a need for change?”) as published on the website of the IFRS Foundation and the IASB, which will open in a new window.

Click here to be forwarded to Agenda Paper 3A (a Staff Paper titled: “Income Tax – Case Study”) as published on the website of the IFRS Foundation and the IASB, which will open in a new window.

The item Accounting for Income Taxes was one of the items on the agenda of this meeting. If you are interested in the other items that were on the Agenda, the meeting (sound) recordings and Agenda Papers of these items then click here to be forwarded to the webpage on the IFRS Foundation and the IASB that is dedicated to the February 2015 CMAC meeting.

Copyright – internationaltaxplaza.info

Follow International Tax Plaza on Twitter (@IntTaxPlaza)

and

Stay informed: Subscribe to International Tax Plaza’s Newsletter!