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On 20 August 2014, the IASB published the Exposure Draft ED/2014/3 Recognition of Deferred Tax Assets for Unrealised Losses (Proposed Amendments to IAS 12) (the ED). The ED proposes to:
a. confirm that decreases in the carrying amount of a fixed-rate debt instrument for which the principal is paid on maturity give rise to a deductible temporary difference if this debt instrument is measured at fair value and if its tax base remains at cost. This applies irrespective of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use, i.e. by holding it to maturity, or whether it is probable that the issuer will pay all the contractual cash flows;
b. clarify the extent to which an entity’s estimate of future taxable profit (paragraph 29 of IAS 12) includes amounts from recovering assets for more than their carrying amounts;
c. clarify that an entity’s estimate of future taxable profit (paragraph 29 of IAS 12) excludes tax deductions resulting from the reversal of deductible temporary differences; and
d. clarify that an entity assesses whether to recognise the tax effect of a deductible temporary difference as a deferred tax asset in combination with other deferred tax assets. If tax law restricts the utilisation of tax losses so that an entity can only deduct tax losses against income of a specified type or specified types (e.g. if it can deduct capital losses only against capital gains), the entity must still assess a deferred tax asset in combination with other deferred tax assets, but only with deferred tax assets of the appropriate type.
In summary, EFRAG has some concerns or wording suggestions on the following issues:
- EFRAG recommends that the example that illustrates paragraph 26(d) also explains that it is irrelevant, for the purpose of assessing whether a deductible temporary difference arises, whether the debt instrument is measured at FVPL or at FVOCI;
- EFRAG is asking to constituents whether they agree with the IASB’s intention to add paragraph 29A to the body of the Standard to clarify that, when an entity estimates taxable profit in future periods for assessing the utilisation of deductible temporary differences, it can assume that an asset can be recovered for more than its carrying amount;
- EFRAG believes that paragraph 29(a)(i) is difficult to read and recommends that an illustrative example is introduced into the body of the Standard for clarification. In addition, EFRAG believes that it should be further explained in the Basis for Conclusions that the utilisation of deductible temporary differences is not assessed against future taxable profit for a period upon which income taxes are payable; and
- In relation to the proposal to add paragraph 27A to IAS 12 to clarify how entities have to group deductible temporary differences when assessing their utilisation, EFRAG believes that the Basis for Conclusions should explain the clarification for those who believe that a separate assessment should be made for the particular case of debt instruments illustrated in paragraph 26(d).
Responses to the draft comment letter are requested by 28 November 2014.