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:
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).
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.
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