IASB issues amendments to IAS 12 Income Taxes

IASB issues amendments to IAS 12 Income Taxes

The amendments clarify how to account for deferred tax assets related to debt instruments measured at fair value.

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The International Accounting Standards Board (IASB) published amendments to IAS 12 on 19 January 2016. The amendments, Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12), clarify how to account for deferred tax assets (DTAs) related to debt instruments measured at fair value. Only four paragraphs (including one on commencement) have been added or amended in the Standard itself but there are several pages added to the Basis for Conclusions. The revisions apply for periods beginning on or after 1 January 2017, with early adoption permitted. The IASB press release refers to the changes as being clarifications, and arguably the revised Standard represents best practice under current IFRS.

Although the development of these changes has been framed in terms of non-tax-deductible unrealised losses on debt securities, the new text is not specific to that circumstance and the clarifications can, in principle, apply to any type of deductible temporary differences (DTDs).  The revisions are as follows:

  • Para 27A - if tax law only allows DTDs to be deducted from profits of a particular type, that should be taken into account when considering the availability of future profits. Thus, for example capital losses need to be tested for recoverability separately from ordinary trading losses. Also, all temporary differences of the same type must be considered in aggregate;
  • Para 29(a)(i) - Future taxable profit used to support the recovery of DTAs should exclude the effect of the deduction representing the reversal of the DTD.  This is to avoid double counting;
  • Para 29A - Probable future profits may include the recovery of assets at more than their balance sheet carrying value (even if that value is fair market value). Thus, in particular, contractual cash flows from a debt security can be used to measure future profits.  This is equivalent to saying that unrealised losses can be assumed to reverse (i.e. that the value of the security will be pulled to par as maturity approaches).   This paragraph gives fixed rate debt instruments as an example but is not limited to such assets. 

The Basis for Conclusions make clear that this is a general principle not limited to any class of asset (paragraph BC52). It is not clear whether or not it would be appropriate, in practice, to apply this principle to a portfolio of equity investments which are fair valued (i.e. to anticipate future capital gains). 

Further interpretation

The changes may have relatively limited impact in the UK as UK tax law generally gives a deduction for unrealised losses on debt instruments. 

These changes do not mean that DTAs can be automatically recognised if it is probable that losses on bonds will reverse. The bond cannot be considered in isolation from other matters that give rise to taxable profits and losses of the same type.    

Thus, if there are other circumstances which are likely to give rise to future tax losses (e.g. future interest payments) and these future items are sufficient to eliminate any sources of future profits, then there would seem to be no basis to recognise a DTA in respect of the unreleased loss on the bonds. In other words, a DTA can generally only be recognised if the DTD gives an incremental benefit relative to the DTD not existing. The position may be more complex if some future years are expected to have profits and some losses, and, in such circumstances, this will need to be considered carefully.  

These changes confirm that an entity with an unrealised loss on debt securities should generally have the same deferred tax position irrespective of whether or not the tax regime allows an immediate deduction (assuming no sources of current year profit). In one case there will be a DTA for a carried forward tax loss, in the other a DTA on unrealised loss. This is appropriate as the two companies are in near identical economic circumstances. 

For further information please contact:

Gordon Gray

+44 (0)131 527 6796

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