During its March 2017 meeting the IFRS Interpretations Committee (Hereafter: IFRIC) discussed 2 topics related to IAS 12. IFRIC considered whether or not to add a project on interest and penalties related to income taxes to its standard-setting agenda. Furthermore IFRIC discussed the issue of recognition of deferred taxes when acquiring a single-asset entity that is not a business.
Below we will provide you with what is stated regarding both topics in the update that was published with respect to the March 2017 meeting of IFRIC.
IAS 12 Income Taxes – Interest and penalties related to income taxes
“IAS 12 Income Taxes – Interest and penalties related to income taxes (Agenda Paper 6)
IFRS Standards do not specifically address the accounting for interest and penalties related to income taxes (interest and penalties). Respondents to the draft IFRIC Interpretation Uncertainty over Income Tax Treatments said that entities apply either IAS 12 or IAS 37 Provisions, Contingent Liabilities and Contingent Assets to interest and penalties.
In the light of this feedback, the Committee considered whether to add a project on interest and penalties to its standard-setting agenda.
On the basis of its analysis, the Committee concluded that a project on interest and penalties is not a higher priority than other projects already on the Board’s or Committee’s agenda. Consequently, the Committee [decided] not to add a project on interest and penalties to its standard-setting agenda.
Nonetheless, the Committee observed the following:
a. if an entity determines that amounts payable or receivable for interest and penalties are income taxes, then the entity applies IAS 12 to those amounts. If an entity does not apply IAS 12 to interest and penalties, then it applies IAS 37 to those amounts;
b. paragraph 79 of IAS 12 requires an entity to disclose the major components of tax expense (income); for each class of provision, paragraphs 84-85 of IAS 37 require a reconciliation of the carrying amount at the start and end of the reporting period as well as various other pieces of information. Accordingly, regardless of whether an entity applies IAS 12 or IAS 37 when accounting for interest and penalties related to income taxes, the entity would disclose information about those interest and penalties if it is material; and
c. paragraph 122 of IAS 1 Presentation of Financial Statements requires disclosure of the judgements that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.”
IAS 12 Income Taxes – Recognition of deferred taxes when acquiring a single-asset entity that is not a business
“IAS 12 Income Taxes – Recognition of deferred taxes when acquiring a single-asset entity that is not a business (Agenda Paper 8C)
The Committee received a submission questioning how, in its consolidated financial statements, an entity accounts for a transaction in which it acquires all the shares of another entity that has an investment property as its only asset. In the fact pattern submitted, the acquiree had recognised in its statement of financial position a deferred tax liability arising from measuring the investment property at fair value. The amount paid for the shares is less than the fair value of the investment property because of the associated deferred tax liability. The transaction described in the submission does not meet the definition of a business combination in IFRS 3 Business Combinations because the acquired entity is not a business. The acquiring entity applies the fair value model in IAS 40 Investment Property.
The submitter asked whether the requirements in paragraph 15(b) of IAS 12 permit the acquiring entity to recognise a deferred tax liability on initial recognition of the transaction. If this is not the case, the submitter asked the Committee to consider whether the requirements in paragraph 15(b) of IAS 12 should be amended so that, in these circumstances, the acquiring entity would not recognise a gain on measuring the investment property at fair value immediately after initial recognition of the transaction.
The Committee noted that:
a. because the transaction is not a business combination, paragraph 2(b) of IFRS 3 requires the acquiring entity, in its consolidated financial statements, to allocate the purchase price to the assets acquired and liabilities assumed; and
b. paragraph 15(b) of IAS 12 says that an entity does not recognise a deferred tax liability for taxable temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting profit or loss nor taxable profit (tax loss).
Accordingly, on acquisition, the acquiring entity recognises only the investment property and not a deferred tax liability in its consolidated financial statements. The acquiring entity therefore allocates the entire purchase price to the investment property.
The Committee concluded that the requirements in IFRS Standards provide an adequate basis for an entity to determine how to account for the transaction. The Committee also concluded that any reconsideration of the initial recognition exception in paragraph 15(b) of IAS 12 is something that would require a Board-level project. Consequently, the Committee decided not to add this matter to its standard-setting agenda.
The Committee noted that the Board had recently considered whether to add a project on IAS 12 to the Board’s agenda but had decided not to do so. Consequently, the Committee did not recommend that the Board consider adding a project to its agenda on this topic.”
Click here to be forwarded to the update that was published with respect to the March 2017 meeting of IFRIC.
Click here to be forwarded to the IFRS website where one can find links to the meeting/agenda papers and recordings of the March 2017 meeting of IFRIC.
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