IAS 12 Deferred Tax (2010) Amendments - Recovery of Underlying Assets

Project History

In 2002, the IASB decided to undertake a joint project with the FASB with the objective of reducing the differences between IAS 12 Income Taxes and the US GAAP requirements. An Exposure Draft to replace IAS 12 was published by the IASB on 31 March 2009.

Based on the comments received to the ED, the IASB decided that they would consider undertaking a fundamental review of accounting for income taxes at some time in the future. 

In the meantime, the IASB decided to undertake a limited scope project to amend IAS 12. In September 2010, the IASB issued an exposure draft on Deferred Tax: Recovery of Underlying Assets, which proposed to amend one aspect of IAS 12. The purpose of the amendment was to provide an exception to the principle in IAS 12 that measurement of deferred tax assets (liabilities) is based on the manner the carrying amount of an asset is recovered. The IASB observed that, in some cases, it is difficult and subjective to assess whether recovery will be through use or through sale. 

To provide a practical approach in such cases, the proposed amendments would introduce a rebuttable presumption that an asset is recovered entirely through sale, unless the entity has clear evidence that recovery will occur in another manner.

The presumption would apply when investment properties, property, plant and equipment or intangible assets are remeasured at fair value or revalued at fair value. 

EFRAG's Comment Letter

In November 2010, EFRAG issued its comment letter on the ED in which it supported the IASB in its effort to address the issue. However, EFRAG did not agree with the use of an exception to the measurement principles in IAS 12.

In its comment letter, EFRAG suggested that the issue should be addressed by extending application guidance on the measurement principle. EFRAG also expressed two major concerns: 

• the rebuttable presumption was not operational; and
• the scope of the exception was overly broad. Therefore, property, plant and equipment or intangible assets, measured using the revaluation model in IAS 16 and IAS 38, respectively, should have been excluded.  

In December 2010, the IASB issued the Amendments in the form of exemptions, which differ from the ED with regard to: (a) the rebuttable presumption has been reworded so that clear evidence is no longer required. The Amendments instead require that 'if a deferred tax liability or asset arises from investment property that is measured using the fair value model in IAS 40, there is a rebuttable presumption that the carrying amount of the investment property will be recovered through sale.' Compared to the original proposals the effort required to rebut the presumption is likely to be reduced; and (b) the scope of the exemption has been restricted to investment property (as EFRAG suggested). 

EFRAG's Final Endorsement Advise

In Janaury 2012, EFRAG published its Endorsement Advice Letter and Effects Study Report relating to the endorsement of the Amendments for use in the European Union and European Economic Area. EFRAG supported the Amendments and concluded that they meet the technical requirements of endorsement in the EU. EFRAG has also concluded that the benefits of the Amendments outweigh the costs.