14 October 2003

Ms Ruth Picker
Acting Chairman
Urgent Issues Group
PO Box 204
COLLINS ST WEST VIC 8007

Dear Ruth

Tax Consolidation

The Group of 100 is concerned with the proposed amendments to UIG Abstract 52 as highlighted in UIG Action Alert 03-6 (18 September 2003). We request that the Urgent Issues Group (UIG) considers the following observations in items 1 to 4 and provides further clarity and guidance on the issues considered in items 5 and 6.

1. Accounting for tax consolidation should not give rise to changes in the application of accounting standards.
   
   We understand that the UIG proposes that groups should adopt the principles in AASB 1020 ‘Income Taxes’ (1999) when entering tax consolidation even where the group is applying AASB 1020 (1989). The UIG has proposed deferred tax balances should be restated in the consolidated as well as the head entity’s financial statements to reflect the difference between the consolidated carrying values and tax values. The impact of any adjustments will be recognised in income tax expense in the year of entering tax consolidation. Adjustments to deferred tax balances will result from:
    
   • fair value adjustments arising from prior acquisitions;
   • revaluations of non-current assets;
   • assets – such as certain licences and intangibles – that are wholly or partly non-tax deductible. 

   Tax consolidation has been primarily introduced to simplify the administrative requirements in preparing and lodging group tax returns. The consolidation of the tax return preparation function should not, in itself, give rise to changes in accounting principles and the timing of the application of accounting standards.
    

2. The UIG is effectively requiring early adoption of revised 1999 AASB 1020, which is inconsistent with the AASB’s 18 November 2002 announcement.
   
   It appears that the Australian Accounting Standards Board’s (AASB’s) 18 November 2002 announcement to defer application of revised 1999 AASB 1020 will be partially overruled by UIG decision. 
   
   The Chairman of the AASB Mr Keith Alfredson said:
   
   “The Board decided to defer the operative date of AASB 1020 and AAS 3 in light of the Financial Reporting Council’s decision regarding the adoption of the International Accounting Standards Board’s standards in Australia by 1 January 2005. Deferral of the operative date avoids imposing more than one accounting policy change concerning income tax before 1 January 2005…”
   
   The UIG’s role is to interpret and provide clarity to the application of standards that have been determined by the AASB. It would appear that the proposed amendments to UIG Abstract 52, which was not vetoed by the AASB, are inconsistent with the AASB’s intention as noted above.
    
3. The recommendations will adversely affect the comparability and consistency of financial reporting.
   
   Two different accounting treatments arise under the proposed amendments to UIG Abstract 52 for entities applying the AASB 1020 (1989):

   i. companies that have not chosen to enter tax consolidation and continue to apply AASB 1020 (1989); and

   ii. companies that have entered tax consolidation and apply AASB 1020 (1999) at the date of entry into tax consolidations and AASB 1020 (1989) for transactions that arise subsequent to the entrance date. 

   An entity adopting AASB 1020 (1989) is likely to have financial report impacts on entry into tax consolidation even if there has been no change to the tax base of assets or other grouping concessions arising as a result of entry into tax consolidation.
    

4. The simultaneous application of certain requirements of both the old and the revised AASB 1020 adversely affects the understanding of financial reports.
   
   The introduction of the UIG’s proposed amendments would make it difficult for users of financial reports to determine the tax effect of specific transactions. Two different accounting treatments are applied to identical transactions depending upon whether the transaction occurred prior to entry into tax consolidations or not. For example, on entry into tax consolidations the consolidated group will book deferred tax balances relating to revaluations of non-current assets. 
   
   However, future asset revaluations will be accounted for as permanent differences. These different accounting treatments are likely to confuse users.
    
5. Specific guidance for changes in cost bases arising from entry into tax consolidation.
   
   UIG Abstract 52 should provide additional guidance in relation to the changes in cost bases of assets as a result of the group entering tax consolidation. The Group of 100 considers that this is a specific issue that should be specifically dealt with in the UIG Abstract and not give rise to changes in previously accounted transactions (such as revaluations of non-current assets) for entities that continue to apply AASB 1020 (1989). We recommend that the application of the principles of AASB 1020 (1999) be limited to changes in cost bases of assets arising solely from entry into tax consolidation and not applied to other circumstances that give rise to accounting and tax cost base amendments.
   
   For entities that do not qualify for any resetting of tax values of assets or other grouping concessions upon entry into tax consolidation there should be no accounting impact for the consolidated group. The proposed amendments to UIG Abstract 52 would not provide this outcome.
    
6. Transitional arrangements.
   
   The UIG proposals do not contain any transitional provisions, which would be available where AASB 1020 (1999) is first applied. As a result, the proposal by the UIG will give rise to adjustments to current year income tax expense, rather than against retained earnings.
   
   We understand that the UIG has not yet considered whether any transitional arrangements should apply for groups that have already entered tax consolidation and reported the impact on different bases from those set out above. Groups that entered tax consolidation on 1 July 2002 that apply AASB 1020 (1989), have already prepared 30 June 2003 group accounts. If the proposed amendments to UIG Abstract 52 have retrospective effect, this may give rise to significant financial statement changes despite there being no change in AASB 1020(1989) which has been consistently applied from year to year. The Group of 100 recommends that the amendments to UIG Abstract 52 do not apply retrospectively and should be limited to changes in cost bases of assets arising solely from entry into tax consolidation.

Yours sincerely

John V. Stanhope
National President

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