IASB January 2007

Paragraph 15 of IAS 12 Income Taxes establishes a general principle that a deferred tax liability should be recognised for all taxable temporary differences. However, paragraph 15(a) provides a special exception from that general principle for the initial recognition of goodwill. As a result of that exception, a deferred tax liability is not recognised on initial recognition of goodwill.

Based on a tentative Board decision in September 2006, the pre-ballot draft of an Exposure Draft of an IFRS for SMEs that was sent to the Board in December 2006 proposed the same general principle as in paragraph 15 of IAS 12 but without the special exception.

In their comments on that pre-ballot draft, some Board members noted that the question of whether, and in what amount, deferred tax should be recognised on initial recognition of goodwill is under study in the IASB’s convergence projects on income taxes and business combinations. They suggested that it was therefore premature to reach a decision on the issue for SMEs alone.

The Board decided that the Exposure Draft should propose the same special exception as is in IAS 12, namely that an SME should not recognise a deferred tax liability for taxable temporary differences associated with the initial recognition of goodwill.

The Board also decided to require disclosure of the aggregate amount of temporary differences associated with the initial recognition of goodwill for which deferred tax liabilities have not been recognised.