IASB June 2005

The Board considered papers on two issues:

• Disclosures
• Uncertain tax positions

Disclosures

The Board considered the differences between the disclosure requirements of IAS 12 and SFAS 109 and noted the FASB decisions relating to those differences, as set out below. The Board made the following decisions.

Adjustments recognised in the period for current tax of prior periods are given as an example of a significant component of income expense that should be disclosed. SFAS 109 does not include this example. The FASB decided to add the example to SFAS 109. The IASB decided to keep the example in IAS 12.

Examples of significant components of income expense given in SFAS 109 but not IAS 12 are:

• adjustment for change in tax status of an entity
• tax benefits allocated directly to contributed capital or to goodwill

The FASB decided to keep the examples in SFAS 109. The IASB decided to add the examples to IAS 12.

Contingencies relating to tax balances. The FASB decided not to require further disclosures beyond those required under SFAS 5. The IASB decided to discuss the disclosures in IAS 12 after considering the issue of uncertain tax positions.

The effect of changes in tax rates or laws substantively enacted after the balance sheet date is required to be disclosed under IAS 12, but not SFAS 109. The FASB decided not to add this disclosure requirement to SFAS 109. The IASB noted that the disclosure was required by IAS 10 Events after the Balance Sheet Date and concluded it should be deleted from IAS 12.

Intercompany transfers of inventory. The FASB decided to add to SFAS 109 requirements for disclosure of:

the component of deferred tax assets and liabilities that represents the effect of an intercompany transfer of an asset between taxing jurisdictions with different effective tax rates.

any such effect recognised as part of income tax expense (benefit) in the income statement for interim or annual periods. This could apply to all transfers or be limited to transfers whose timing or terms are not customary for the consolidated entity.

tax effects of any modifications, including unwinding (reversal), of terms of such transfers.

The IASB decided to add the same disclosures.

IAS 12, but not SFAS 109, requires disclosure of the amount of a deferred tax asset and the nature of the evidence supporting its recognition when:

• the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and
• the entity has suffered a loss in either the current or the preceding period in the tax jurisdiction to which the deferred tax asset relates.
• The FASB decided not to add this disclosure to SFAS 109. The IASB decided to delete the requirement from IAS 12.
• SFAS 109, but not IAS 12, requires public entities not subject to income taxes because their income is taxed directly to their owners to disclose that fact and the net difference between tax bases and carrying amounts. The FASB decided to keep this disclosure requirement in SFAS 109. The IASB decided to add the requirement to IAS 12, and to make it applicable to all entities.
• IAS 12 and SFAS 109 both require a reconciliation between tax expense and pre-tax accounting profit. However, IAS 12 permits an entity to aggregate separate reconciliations prepared using the domestic rate in each individual jurisdiction, whereas SFAS 109 requires the use of the domestic federal statutory tax rates. The FASB decided to retain the requirement in SFAS 109 to use the domestic federal statutory rate. The IASB decided to amend IAS 12 to require the use of the statutory rate applicable to the parent company.
• Both IAS 12 and SFAS 109 require disclosure of the expiry dates of operating losses and tax credit carryforwards. However, IAS 12 also requires an entity to disclose the expiry date of deductible temporary differences whereas SFAS 109 does not. The FASB decided not to add the requirement relating to deductible temporary differences. The IASB noted a possible example of a deductible temporary difference that expires. The IASB instructed the staff to develop an analysis of the tax base in the example to discover whether such an analysis would resolve the matter. Pending consideration of that analysis, the IASB decided to keep the requirement relating to deductible temporary differences.
• SFAS 109, but not IAS 12, requires an entity that is a member of a group that files a consolidated tax return to disclose in its separately issued financial statements:
• the aggregate amount of current and deferred tax expense for each statement of earnings presented and the amount of any tax-related balances due to or from affiliates as of the date of each statement of financial position presented and
• the principal provisions of the method by which the consolidated amount of current and deferred tax expense is allocated to members of the group and the nature and effect of any changes in that method (and in determining related balances to or from affiliates) during the years for which the disclosures in (a) above are presented.
• The FASB decided to keep the disclosures. The IASB had previously decided to converge with the FASB requirements relating to the allocation of tax to members of a group that files a consolidated tax return. Therefore, the IASB decided to add the disclosure requirements to IAS 12.
• IAS 12 contains disclosure requirements regarding the potential income tax consequences of the payment of dividends. In summary, an entity is required to disclose, if practicable, the nature and the amount of income tax consequences that would result from the payment of dividends to shareholders when income is taxed at different rates depending on whether that income is distributed to shareholders. The FASB agreed to add these disclosures to SFAS 109. The IASB decided to keep the disclosures in IAS 12.
• IAS 12, but not SFAS 109, requires disclosure of the amount of income tax consequences of dividends to shareholders of the entity that were proposed or declared before the financial statements were authorised for issue, but are not recognised as a liability in the financial statements. There is no requirement under US GAAP to disclose dividends that were proposed or declared after the balance sheet date. The FASB decided to require disclosure of the income tax consequences if such dividends are disclosed. The IASB decided to keep the disclosure requirement in IAS 12.
• IAS 12 and SFAS 109 have similar requirements relating to foreign unremitted earnings; both require disclosure of the aggregate amount of temporary differences associated with the foreign unremitted earnings that qualify for the recognition exception. However:
• SFAS 109, but not IAS 12, requires disclosure of the types of events that would cause temporary differences that have not been recognised to become taxable.
• IAS 12 encourages (if practicable) disclosure of the unrecognized deferred tax liability, whereas SFAS 109 requires disclosure of that liability (if practicable).
• If disclosure of the unrecognised deferred tax liability is not practicable, SFAS 109, but not IAS 12, requires a statement that determination is not practicable.
• The FASB decided to keep these disclosures. The IASB noted that, the definition of impracticable in IFRSs creates a higher hurdle than the US GAAP definition of practicable. It is therefore more likely that these disclosures would be required under the IFRS definition. The IASB did not wish to impose a greater disclosure burden on IFRS preparers than on US GAAP preparers and decided not to add these disclosures.

The IASB also considered possible disclosures relating to unremitted foreign earnings beyond those in either IAS 12 or SFAS 109. The FASB had decided not to require additional disclosures. The IASB also decided not to require additional disclosures but to ask a question in the Exposure Draft requesting specific suggestions for useful incremental disclosures.

Uncertain tax positions

The IASB considered a draft FASB FSP on uncertain tax positions. The IASB expressed concern that the proposals in the draft FSP were inconsistent with the IASB thinking behind the forthcoming proposed amendments to IAS 37, particularly in relation to the use of a probability-based recognition threshold and the use of a single point of ‘best estimate’ for measurement. The IASB noted that the proposed amendments to IAS 37 could not be applied directly to uncertain tax positions because the methodology in IAS 12 (and SFAS 109) uses a measurement basis different from the risk-adjusted, expected value, current interest rate measurement basis in IAS 37. Nonetheless, the IASB instructed the staff to analyse the issue of uncertain tax positions in an IAS 12/IFRS context, without reference to US GAAP on contingencies.