Changes to IAS 12 clarify recognition of DTAs on unrealised losses
On 19 January 2016, the International Accounting Standards Board (IASB) issued amendments to IAS 12 Income Taxes to clarify the requirements for recognising deferred tax assets (DTAs) for unrealised losses, particularly with respect to fixed rate debt instruments.
If all other recognition criteria for deductible temporary differences are met, entities will be required to recognise DTAs for temporary differences from unrealised losses on debt instruments measured at fair value.
The changes clarify four issues as follows:
- If all other recognition criteria are met, DTAs must be recognised for the deductible temporary difference between the fair value and tax base on fixed rate debt instruments that are not deemed to be impaired (see example below)
- Deductible temporary differences must be compared to taxable profits of the same type (e.g. capital or revenue profits) to determine whether there is sufficient taxable profit against which the deductible temporary differences can be utilised
- To avoid ‘double dipping’, when comparing deductible temporary differences against the amount of future taxable profits, the calculation of future taxable profits must exclude tax deductions resulting from the reversal of those deductible temporary differences
- The estimate of future taxable profits can include recovery of certain assets at amounts more than their carrying amount if there is enough evidence that it is probable that the entity will recover the asset for more than its carrying amount. Examples would include:
- Property measured using cost model for which an external valuation has been conducted
- Fixed rate debt instruments held to maturity.
Example (based on facts included in illustrative example to paragraph 26(d))
Entity A purchases a debt instrument on 1 January 2017 with the following terms:
- Face value $1,000
- Repayable in five years’ time
- Interest rate is two per cent payable annually in arrears
- Effective interest rate is two per cent
- Instrument is measured at fair value in the financial statements
- Tax base = cost = $1,000 because it will result in a tax deduction of $1,000 when determining taxable profit, irrespective of whether the instrument is sold or used.
On 31 December 2018, the fair value has decreased to $918 because market interest rates have increased to five per cent.
It is probable that Entity A will collect all cash flows if it holds the instrument to maturity. This means that there is no impairment loss on the debt instrument, which will be recovered on maturity for $1,000.
The illustrative example clarifies that on 31 December 2018, when the fair value of the debt instrument falls below cost, there is a deductible temporary difference of $82, being the difference between the carrying amount of the instrument ($918) and the tax base ($1,000).
When do the changes apply?
The changes, which can be early adopted once approved by the Australian Accounting Standards Board (AASB), are mandatory for annual periods beginning on or after 1 January 2017.
The amendments apply retrospectively so generally restatement of prior year comparatives will be required. However, in the first year of application, adjustments to opening equity (usually at the opening balance sheet date of 1 January or 1 July 2016, depending on the year-end) can be recognised in opening retained earnings without allocating the change between retained earnings and other components of equity. If this relief is applied, the entity must disclose this fact.