IASB September 2005

The Board considered two issues:

• uncertain tax positions and
• special deductions.

Both issues addressed uncertainty relating to income taxes: uncertain tax positions addresses uncertainty in the amounts underlying current and deferred tax, and special deductions addresses uncertainty in the rates to apply in measuring deferred tax.

The Board made the following decisions:

• in respect of current tax, the entity has a stand-ready liability to pay but the amount is uncertain. Consistent with the approach in the proposed amendments to IAS 37 on recognition, no probability threshold should be applied to the recognition of the stand-ready liability. Rather than adopting an IAS 37 settlement value measurement objective within the constraints of the objectives of IAS 12, the Board decided on an expected outcome measure (ie the probability weighted average of the possible outcomes).
• in respect of deferred tax, uncertainty could exist in both the amount of the underlying deferred tax balances and the tax rates expected to apply. As with current tax, no probability threshold should be applied to the recognition of additional (or reduced) deferred tax. An expected outcome measure determined by the probability-weighted average of the possible amounts and possible rates should be used. The expected rates should be based on rates substantively enacted at the balance sheet date. Only adjustments related to the level of income (eg graduated tax rates) and to the type of income (eg the use of different rates depending on the entity’s activities should be anticipated). Other possible deductions or rate differences should not be anticipated.
• the proposed amendments to IAS 37 included consequential amendments to the disclosure of uncertainties relating to income taxes. Those disclosures should be retained.
• the SFAS 109 valuation allowance approach to the recoverability of deferred tax assets should be adopted, replacing the ‘affirmative judgement’ approach in IAS 12.

The Board noted that the decisions described in first three bullet points above created divergence from the FASB draft Interpretation on uncertain tax positions and the US GAAP treatment of special deductions. The Board asked the staff to develop a paper for the joint IASB/FASB meeting in October so that the boards could discuss the issues together.