Definitions of tax basis and temporary difference
The ED proposes changes to the definition of tax basis so that the tax basis does not depend on management’s intentions relating to the recovery or settlement of an asset or liability. It also proposes changes to the definition of a temporary difference to exclude differences that are not expected to affect taxable profit. (See paras BC17-BC23 of the Basis for Conclusions).
Do you agree with the proposals? Why or why not?

The G100 considered the proposed approach to temporary differences including the exclusion of differences that are not expected to affect taxable profit and the principle that the temporary differences recognized should reflect the balance sheet tax consequences and have the following concerns:

• The assumption of recovery through sale when determining the tax basis is not appropriate as it can be inconsistent with the management intent which is applied in IAS 12.
• The application of management intention in the ED is not clear or internally consistent. Management intent is not taken into account in determining the tax basis but is relied upon in recognizing the amount of deferred tax.
• The meaning of recovery through use should be clarified as it is fundamental to the application of the proposals. For example, it is not clear whether the tax deductibility of an item is necessary for recovery through use to be achieved.

Definitions of tax credit and investment tax credit
The ED would introduce definitions of tax credit and investment tax credit. (See para BC24 of the Basis for Conclusions).

Do you agree with the proposed definitions? Why or why not?

The G100 considers that the inclusion of those definitions is unnecessary, particularly as the ED does not provide guidance on accounting for tax credits and investment tax credits.
 

Initial recognition exception
The ED proposes eliminating the initial recognition exception in IAS 12. Instead, it introduces proposals for the initial measurement of assets and liabilities that have tax bases different from their initial carrying amounts. Such assets and liabilities are disaggregated into (a) an asset or liability excluding entity-specific tax effects and (b) an entity-specific tax advantage or disadvantage. The former is recognized in accordance with applicable standards and a deferred tax asset or liability is recognized for any temporary difference between the resulting carrying amount and the tax basis. Outside a business combination or a transaction that affects accounting or taxable profit, any difference between the consideration paid or received and the total amount of the acquired assets and liabilities (including deferred tax) would be classified as an allowance or premium and recognized in comprehensive income in proportion to changes in the related deferred tax asset or liability. In a business combination, any such difference would affect goodwill. (See paras BC25-BC35 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The G100 considered the efforts to address this exception both on practical grounds and for achieving a more principles-based standard. However, we are concerned that the approach adopted will add to the costs and complexity of applying the standard without any clear improvement in the quality and understandability of the information included in the financial statements.

The G100 is concerned about how to identify ‘entity-specific’ tax consequences and the recognition of the entity-specific tax effect and how an entity is to assess the tax position of others to determine whether entity-specific impacts arise. If the proposals are retained guidance will be required to assist implementation.
 

Investments in subsidiaries, branches, associates and joint ventures
IAS 12 includes an exception to the temporary difference approach for some investments in subsidiaries, branches, associates and joint ventures based on whether an entity controls the timing of the reversal of the temporary difference and the probability of it reversing in the foreseeable future.

The ED would replace these requirements with the requirements in SFAS 109 and APB Opinion 23 “Accounting for Income Taxes – Special Areas” pertaining to the difference between the tax basis and the financial reporting carrying amount for an investment in a foreign subsidiary or joint venture that is essentially permanent in duration. Deferred tax assets and liabilities for temporary differences related to such investments are not recognized. Temporary differences associated with branches would be treated in the sane way as temporary differences associated with investments in subsidiaries. The exception in IAS 12 relating to investments in associates would be removed. The Board proposes this exception from the temporary difference approach because the Board understands that it would often not be possible to measure reliably the deferred tax asset or liability arising from such temporary differences. (See paras BC39-BC44 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not? Do you agree that it is often not possible to measure reliably the deferred tax asset or liability arising from temporary differences relating to an investment in a foreign subsidiary or joint venture that is essentially permanent in duration? Should the Board select a different way to define the type of investments for which this is the case? If so, how should it define them?

The G100 believes that if a principle is to be applied it should be applied consistently and that any exceptions to the principles are applied consistently. Accordingly, we believe the exceptions for investments in subsidiaries, branches, associates and joint ventures, should be removed in their entirety or applied to all classes of these investments.

The G100 considers that there are no grounds for treating domestic and foreign investments differently and considers that on cost-benefit grounds exemption of both foreign and domestic subsidiaries is justified. This is particularly so where domestic subsidiaries are included in a tax consolidation regime.
 

Valuation allowances
The ED proposes a change to the approach to the recognition of deferred tax assets. IAS 12 requires a one-step recognition approach of recognizing a deferred tax asset to the extent that its realization is probable. The ED proposes instead that deferred tax assets should be recognized in full and an offsetting valuation allowance recognized so that the net carrying amount equals the highest amount that is more likely than not to be realizable against taxable profit. (See paras BC52-BC65 of the Basis for Conclusions).

Assessing the need for a valuation allowance

Uncertain tax positions
IAS 12 is silent on how to account for uncertainty over whether the tax authority will accept the amounts reported to it. The ED proposes that current and deferred tax assets and liabilities should be measured at the probability-weighted average of all possible outcomes, assuming that the tax authority examines the amounts reported to it by the entity and has full knowledge of all relevant information. (See paras BC57-BC63 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The G100 strongly disagrees with this proposal.

The G100 does not consider that detailed guidance and requirements are needed in relation to this matter and do not support the proposals. We believe that the approach proposed will increase arbitrariness, impose significant cost burdens on companies in addition to those involved in measuring deferred tax items and determining valuation allowances which would take into account uncertainties relating to the recoverability of tax assets and a consideration of the most likely outcome.

Our reasons for disagreeing with the proposal also include:

• The methodology to account for uncertain tax positions is more complex than the US GAAP requirements. The experience of members complying with the current US GAAP requirements (which are less onerous than those proposed) suggests that the additional costs (including time and increasing capability of internal tax function which bears most of the burden of proving compliance with these rules and external advisors whose opinion is practicably sought as evidence of compliance and increased audit costs) should not be underestimated.
   
• The ED does not define uncertain tax positions. However, uncertainty in tax outcomes is pervasive and, in the absence of a specific factor indicating otherwise, applying probability weightings for the range of possible outcomes for all tax uncertainties is a complex, arbitrary and potentially futile exercise.

The introduction of a threshold would be preferable (for example, the probability threshold in the current US GAAP requirements) as it acts as a gateway to meaningful measurement. Such an approach is consistent with the underlying principles: convergence and meaningful measurement.

• Tax administration can involve both legal uncertainty and administrative uncertainty. Attempting to measure uncertainty on one of these bases or a mixture of both would itself be a cause for uncertainty and result in differing approaches.
   
• The Board notes that it does not intend that entities seek additional information; however, this is unlikely to be the case given the complexity of tax laws and the method of measurement proposed.
   
• The proposal implies that if a tax authority does not accept an amount submitted the liability is likely to be more than that recognized by the entity. A comparison with the tax authorities’ view on the issue concerned does not necessarily provide relevant information to users. There are a myriad of factors contributing to final success/failure including the willingness (and financial ability) of a taxpayer and regulator to pursue a matter (even assuming full knowledge on behalf of the revenue authority), technical ability of advisers, negotiating ability, compliance history, availability and quality of evidence and technical accuracy.
   
• Determining whether a tax position is more likely than not (ie applying a probability threshold) should be within the capability of a competent tax practitioner. It would also be expected that competent tax practitioners would agree on whether a particular tax position crosses the threshold. The same cannot be said of a probability average weighting of the range of possible outcomes of a tax position. In this scenario it is highly likely that different (competent) tax practitioners have different opinions as to the outcome. Additionally, the greater the assessment of uncertainty the more likely it is that the results of probability average weighting will differ substantially from amounts reported in the financial statements.

Enacted or substantively enacted rate
IAS 12 requires an entity to measure deferred tax assets and liabilities using the tax rates enacted or substantively enacted by the reporting date. The ED proposes to clarify that substantive enactment is achieved when future events required by the enactment process historically have not affected the outcome and are unlikely to do so. (See paras BC64-BC66 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The G100 agrees with the approach proposed in the ED which takes account of the way tax rates are ‘enacted’ in different systems. In addition, we suggest that the examples and illustrative material be generic and not based on that in any particular jurisdiction.
 

Sale rate or use rate
When different rates apply to different ways in which an entity may recover the carrying amount of an asset, IAS 12 requires deferred tax assets and liabilities to be measured using the rate that is consistent with the expected manner of recovery. The ED proposes that the rate should be consistent with the deductions that determine the tax basis, ie the deductions that are available on sale of the asset. If those deductions are available only on sale of the asset, then the entity should use the sale rate. If the same deductions are also available on using the asset, the entity should use the rate consistent with the expected manner of recovery of the asset. (See paras BC67-BC73 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The G100 believes that the rate used should reflect how the entity’s expectations of the manner of recovery or settlement. This approach is also consistent with looking to management intent to determine the tax basis of an asset or liability.
 

Do you agree with the proposals? Why or why not?

The G100 agrees with the proposed approach which looks to management intent/expectations relating to the distribution.
 

IAS 12 is silent on the treatment of tax deductions that do not form part of a tax basis and the exposure draft proposes no change. (See paras BC82-BC88 of the Basis for Conclusions).

Do you agree that the ED should be silent on the treatment of tax deductions that do not form part of a tax basis? If not, what requirements do you propose, and why?

The G100 agrees that the ED should not address the treatment of tax deductions that are not part of a tax basis.
 

Tax based on two or more systems
In some jurisdictions, an entity may be required to pay tax based on one of two or more tax systems, for example, when an entity is required to pay the greater of the normal corporate income tax and a minimum amount. The ED proposes that an entity should consider any interaction between tax systems when measuring deferred tax assets and liabilities. (See paragraph BC89 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The G100 agrees that interaction between the tax systems should be considered. However, the guidance in relation to how this is to be achieved should be expanded and clarified.
 

Allocation of tax to components of comprehensive income and equity
IAS 12 and SFAS 109 require the tax effects of items recognized outside continuing operations during the current year to be allocated outside continuing operations. IAS 12 and SFAS 109 differ, however, with respect to the allocation of tax related to an item that was recognized outside continuing operations in a prior year. Such items may arise from changes in the effect of uncertainty over the amounts reported to the tax authorities, changes in assessments of recovery of deferred tax assets or changes in tax rates, laws, or the taxable status of the entity. IAS 12 requires the allocation of such tax outside continuing operations, whereas SFAS 109 requires allocation to continuing operations, with specified expectations. The IAS 12 approach is sometimes described as requiring backwards tracing and the SFAS 109 approach as prohibiting backwards tracing.

The ED proposes adopting the requirements in SFAS 109 on the allocation of tax to components of comprehensive income and equity. (See paras BC90-BC96 of the Basis for Conclusions).

Allocation of current and deferred taxes within a group that files a consolidated tax return
IAS 12 is silent on the allocation of income tax to entities within a group that files a consolidated tax return. The ED proposes that a systematic and rational methodology should be used to allocate the portion of the current and deferred income tax expense for the consolidated entity to the separate or individual financial statements of the group members. (See para BC100 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The G100 supports the proposals and the statement of a high level principle applying to allocations in a tax consolidation regime which vary significantly from jurisdiction to jurisdiction. The existing guidance in Australia on responding to practical issues could be considered as a source of further guidance for inclusion in the proposed standard.
 

Classification of deferred tax assets and liabilities
The ED proposes the classification of deferred tax assets and liabilities as current or non-current, based on the financial statement classification of the related non-tax asset or liability. (See para BC101 and BC102 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The G100 does not support the proposals in the ED. If tax assets and liabilities are recognized as assets and liabilities in their own right the manner of their classification should be based on that which is most useful to users which is more likely to be an approach based on the timing of settlement or recovery of the tax cash flows.
 

Classification of interest and penalties
IAS 12 is silent on the classification of interest and penalties. The ED proposes that the classification of interest and penalties should be a matter of accounting policy choice to be applied consistently and that the policy chosen should be disclosed. (See para BC103 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The G100 agrees that the standard should not be directive on the treatment of these costs and that where material an entity should disclose their treatment as an accounting policy choice.
 

Disclosures
The ED proposes additional disclosures to make financial statements more informative. (See paras BC104-BC109 of the Basis for Conclusions).

Do you agree with the proposals? Why or why not?

The Board also considered possible additional disclosures relating to unremitted foreign earnings. It decided not to propose any additional disclosure requirements. (See para BC110 of the Basis for Conclusions).

Do you have any specific suggestions for useful incremental disclosures on this matter? If so, please provide them.

The G100 is concerned about the increasing volume and complexity of disclosures in financial statements and their usefulness and believes that there is a significant need for the development of a robust set of disclosure principles to be applied when disclosure items are being determined.

In this regard we take some comfort in the approach taken in the ED to consider the disclosures needed to provide useful information without adding unnecessarily to the existing disclosure load of IAS 12.

The G100 supports the proposed disclosures to align with US GAAP but has significant concerns about requiring a further reconciliation for each type of temporary difference.
 

Effective date and transition
Paras 50-52 of the ED set out the proposed transition for entities that use IFRSs, and para C2 sets out the proposed transition for first-time adopters. (See paras BC111-BC120 of the Basis for Conclusions).

Do you agree with these proposals? Why or why not?

The G100 agrees with the proposals.