4002 Ifrs Ias12 Web

IFRS ADVISORY SERVICES
Converting to IFRS Get Ready for a Revised Accounting Standard for Income Taxes
August 2008
KPMG LLP
Understand how the upcoming revisions to the IFRS accounting standard for income taxes could affect your tax provisions and deferred tax balances, as well as your conversion project.
All Canadian publicly accountable enterprises are required to adopt International Financial Reporting Standards (IFRS) for fiscal periods beginning on or after January 1, 2011. As part of developing your conversion plan, we recommend that you perform an initial assessment of the impact of IFRS for your business. In the area of accounting for income taxes, we caution you that differences that exist today between existing IFRS and Canadian GAAP may be eliminated around the time of Canadas changeover to IFRS. Certain aspects of IAS 12 Income Taxes are expected to change and converge with Canadian GAAP , but several important differences will likely still remain. These expected changes to IFRS present additional challenges to Canadian companies making this initial assessment and planning their conversion efforts in the area of income taxes. The much-anticipated change to IAS 12 continues to experience delays. The IASBs current project plan indicates that the final revised income tax accounting standard will not likely be issued until 2010, suggesting a likely 2012 effective date.
Even with proposed amendments, several key differences will likely remain.
Contents
IFRS accounting standard for income taxes 2 Fundamentals of IAS 12 3 Expected differences between amended 4 IAS 12 and Canadian GAAP Existing differences expected 8 to be eliminated Stay tuned 10 Addressing income taxes in 11 your IFRS project We can help 12
If early adoption of this revised IFRS standard is permitted, a Canadian company should consider the merits of adopting this revised standard as part of its IFRS transition. This approach would allow Canadian companies to avoid adopting the existing standard, which has more differences from Canadian GAAP , and then facing another change in accounting policy shortly after transition. However, early adopting does present a potential downsideCanadian companies would be implementing the revised accounting standard before existing IFRS users, and before issues regarding application and interpretation are considered elsewhere in the world.
2008 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.
2 Converting to IFRSGet Ready for a Revised Accounting Standard for Income Taxes
In this publication, we focus on some of the differences between Canadian GAAP and IFRS that exist today, based on the current IFRS standards, as well as those that are expected to remain under the revised IFRS standard. Use this information to help you to size up the impact IFRS will have on your tax provisions and deferred tax balances evaluate the merits of early adopting the revised IFRS standard.
IFRS accounting standard for income taxes

The IASB is developing its exposure draft on an amended IFRS accounting standard for income taxes, IAS 12 Income Taxes. This amended standard is part of the IASBs joint convergence project with the Financial Accounting Standards Board (FASB) to develop a single, comprehensive standard for accounting for income taxes. The IASB and the FASB have discussed and made converged decisions on most issues. While the IASB plans to issue an exposure draft of its amended standards in late 2008, the FASB has recently noted that its tax project has been suspended indefinitely, and that it has no plans to issue an amendment to its income tax standard. In some areas, the revised international standard is expected to reflect the current requirements of IAS 12. In other areas, it will reflect the existing US GAAP standard. In certain matters, convergence with US GAAP was not reached.
Watch for further clarificationsproposed revisions are expected in December 2008.
The IASBs exposure draft has encountered delays; current indications are that it may be issued in late 2008. Based on the IASBs current workplan, a final standard is unlikely to be issued before 2010. If issued in 2010, it would be reasonable to expect a mandatory effective date of 2012. Generally, IFRS standards can be early adopted; however, that provision may not be confirmed until the final standard is issued.
August 2008 3
Fundamentals of IAS 12
In many respects, the fundamental principles of IAS 12 are very similar to Canadian GAAP . It is based on the balance sheet approach, whereby an entity recognizes deferred tax assets and liabilities for temporary differences (differences between the carrying amount of an asset or liability in the balance sheet and its tax base) and for operating loss and tax credit carryforwards. IAS 12 covers income taxes, including all domestic and foreign taxes based on taxable profits, as well as other taxes, such as withholding taxes, that are payable by a subsidiary, associate, or joint venture on distributions to the reporting entity. Taxes that are not based on taxable profits, such as payroll and value-added taxes, are excluded from the scope of IAS 12. Also currently excluded are government grants and investment tax credits; however, IAS 12 applies to all temporary differences that may arise from such grants or investment tax credits. While the amended IAS 12 is expected to define investment tax credits, it is unclear at this time whether it will address their underlying accounting. Similar to Canadian GAAP , the total income tax expense (or recovery) recognized in profit or loss is the sum of current tax expense (or recovery) plus the change in deferred tax liabilities and assets during the period, less income tax recognized directly in equity or arising from a business combination.
Expected differences between amended IAS 12 and Canadian GAAP

In this section, we highlight certain items that we expect will be treated differently under amended IAS 12 than they are under existing Canadian GAAP . These differences are based on the IASBs April 2008 project plan, and they will affect an entitys income tax provision calculation. Other differences may also exist. Investments in subsidiaries, associates, and interests in joint ventures Under amended IAS 12, we expect that deferred tax will not be recognized for the excess of the carrying amount for financial reporting over the tax base of an investment in a foreign subsidiary or a foreign corporate joint venture (i.e., the outside basis difference), provided that it will not reverse in the foreseeable future. There will be no exception for associates , domestic or foreign, and no exception for domestic subsidiaries and joint ventures, thus adopting the current US approach. In contrast, current Canadian GAAP applies this exception to all subsidiaries and corporate joint ventures, not just foreign subsidiaries and foreign corporate joint ventures. Thus, companies may need to record additional deferred taxes on adopting IFRS. Inter-company transfers of assets An inter-company transfer of assets (such as the sale of inventory or depreciable assets) is a taxable event that establishes a new tax base for those assets in the buyers tax jurisdiction. The new tax base of those assets is deductible on the buyers tax return, as those assets are consumed or sold to an unrelated party. In addition, the seller will likely have a current taxable event, leading to current income taxes payable or recoverable on the transfer. Under IFRS and Canadian GAAP , on consolidation, the sellers gain or loss on the transfer is eliminated, and the assets transferred are carried in the consolidated financial statements at the sellers carrying amount prior to the transfer. Eliminating this inter-company profit creates a temporary difference in the consolidated financial statements between the carrying amount of the transferred asset and its new tax basis.
August 2008 5
Under amended IAS 12, we expect that a deferred tax asset or liability will be recognized for this temporary difference in the consolidated financial statements caused by the change in tax bases between the buyer and seller as a result of an intra-group transfer of assets. The deferred tax will therefore be computed using the buyers tax basis and the buyers tax rate. This approach differs from current Canadian GAAP , under which a deferred tax liability or asset is not recognized for the temporary difference in the consolidated financial statements caused by the change in tax bases between the buyer and seller as a result of an intra-group transfer of assets, and any current taxes paid or recovered by the seller, based on the sellers tax rate, are deferred. Business combinations In a business combination, temporary differences arise when the carrying amount of identifiable assets and liabilities acquired is revalued at fair value, but the tax bases are not affected by the business combination or are affected by a different amount. For example, when the carrying amount of an identifiable asset is increased to fair value, but the tax base of the asset remains at cost to the previous owner, a taxable temporary difference arises. Consistent with current Canadian GAAP , we expect amended IAS 12 will require a company to recognize a deferred tax liability for these temporary differences. A previously unrecognized deferred tax asset relating to the acquirees or acquirers tax losses may be recovered by utilizing the future profit of the consolidated group. Thus, the benefit of that unrecognized deferred tax asset may meet the recognition criteria under IFRS and Canadian GAAP as a result of the business combination. Under IFRS, when previously unrecognized deferred tax assets (e.g., tax loss carryforwards) of the acquirer are recognized, the acquirer recognizes the deferred tax asset as a gain in profit or loss. This treatment differs from current Canadian GAAP , which requires that previously unrecognized deferred tax assets of the acquirer that become recoverable due to a business combination are recognized as a part of the business combination, rather than in profit or loss. The future recognition of the deferred tax asset is reported in profit or loss under Canadian GAAP only if the acquirers deferred tax asset was not recognized as of the acquisition date as part of the business combination.
From the acquirees perspective under existing IAS 12 and IFRS 3 Business Combinations, if deferred tax assets of the acquiree that were not recognized at the date of acquisition are subsequently realized, the adjustment is recognized as a tax recovery in profit or loss. In addition, IFRS requires goodwill to be written down to the amount that would have been recorded had the tax losses been recognized at the date of acquisition. This write-down would be reflected as an operating expense. Under amended IAS 12 and IFRS 3, reduce the carrying amount of any goodwill relating to the business combination only for those deferred tax assets of the acquiree that were not recognized at the date of acquisition and that are subsequently realized within the measurement period as a result of new information about facts and circumstances that existed at the acquisition date. The measurement period is that period after the acquisition date during which the acquirer is permitted to make adjustments to the provisional amounts recognized at the acquisition date. If the carrying amount of goodwill is reduced to zero, any remaining deferred tax asset is recognized in profit and loss. In contrast, current Canadian GAAP requires the acquirees deferred tax assets for temporary differences that existed at acquisition to be subsequently recognized, first against goodwill, then against other noncurrent intangible assets, before any balance is recognized as a tax recovery in profit or loss, whether or not the deferred tax asset was realized within the measurement period or related to facts and circumstances that existed at the acquisition date.
Compound instruments Under IFRS, an entity that issues compound financial instruments, such as convertible debentures, classifies the instruments liability component as a liability and the equity component as equity. However, as a result of strict criteria under IFRS for classification of a component as equity, many compound financial instruments may not achieve split accounting . Rather, they will be treated as liabilities and separate embedded derivatives. In some jurisdictions where the terms of the instrument allow for split accounting under IFRS, a taxable temporary difference generally arises as the tax base of the liability component on initial recognition is equal to the initial carrying amount of the sum of the liability and equity components.
August 2008 7
Under amended IAS 12, we expect that the resulting deferred tax liability will be recognized and the deferred tax expense charged directly to the carrying amount of the equity component. Subsequent changes in the deferred tax liability are recognized in profit or loss. In contrast, current Canadian GAAP provides that, if a compound instrument can be settled without the incidence of tax, deferred taxes would not be recorded related to the temporary difference (i.e., the tax base of the liability component is considered equal to its carrying amount and no temporary difference arises). As a result, Canadian companies with outstanding convertible debentures may be required to recognize additional deferred tax liabilities on changeover to IFRS.
Foreign non-monetary assets and liabilities Under amended IAS 12, we expect that a deferred tax asset or liability will be recognized for exchange gains and losses related to foreign non-monetary assets and liabilities that are re-measured into the functional currency using historical exchange rates or indexation for tax purposes. In contrast, current Canadian GAAP provides that, for an integrated foreign operation, a deferred tax asset or liability is not recognized for changes in temporary differences caused by such exchange gains and losses related to foreign non-monetary assets and liabilities.
Uncertain tax positions Accounting for uncertain tax positions is a major area where the IASB and FASB could not reach convergence. The approach expected to be taken in amended IAS 12 differs significantly from the US GAAP approach for recognizing and measuring uncertain tax positions. Under amended IAS 12, we expect that an entity will first recognize its tax liability based on its filed tax position. Also, the entity may have to pay more tax if the tax authorities do not accept that position. Any uncertainty over filed tax positions is regarded as giving rise to a stand-ready liability (non-contingent obligation) to pay the additional tax. No probability threshold will be applied to the recognition of the stand-ready liability. An entity adjusts the as-filed liability to reflect any uncertainty over the outcomes (i.e., measuring the liability based on its expected outcome). For example, even if it is probable that a deduction will be allowed, a liability would be recognized for the probability-weighted average of possible outcomes. Currently, Canadian GAAP does not contain specific guidance on the recognition and measurement of uncertain tax positions, and practice may vary. Canadian companies adopting IFRS may need to re-measure liabilities recorded for uncertain tax positions that remain unsettled at their IFRS transition date.
Existing differences expected to be eliminated

Currently, the differences are numerous between existing IFRS and Canadian GAAP for the accounting for income taxes. However, as part of its joint convergence project with the FASB, the IASB agreed to certain amendments to existing IAS 12 to more closely align its requirements to US GAAP (and Canadian GAAP). A Canadian company choosing not to early adopt the revised IFRS standard for income taxes will need to address these additional differences in preparing its opening IFRS balance sheet, notwithstanding the fact that they will be eliminated when the amended standard becomes effective in 2012.
August 2008 9
We summarize below the current areas in which the expected treatment under amended IAS 12 is similar to the way they are currently accounted for under existing Canadian GAAP . In making your decision on early adoption of the amended IFRS standard, you should consider how significantly these differences will affect your opening IFRS balance sheet and conversion efforts. Recognizing deferred tax assets Under amended IAS 12, we expect that all deferred tax assets will be recognized and a valuation allowance recorded to the extent it is probable that the deferred tax assets will not be realized. Probable under amended IAS 12 is expected to be defined as more likely than not , consistent with Canadian GAAP . Measuring deferred tax assets and liabilities Similar to Canadian GAAP , deferred taxes under IFRS are measured based on enacted or substantively enacted tax rates as of the balance sheet date. Under amended IAS 12, substantive enactment will likely occur when any future steps in the enactment process will not change the outcome. However, it is possible that this requirement of amended IAS 12 may be more stringent than the guidance in Emerging Issues Committee (EIC) Abstract 111. Goodwill A deferred tax liability is not recognized if it arises on the initial recognition of goodwill that is not tax-deductible. However, if the goodwill is tax-deductible, any temporary difference is recognized after the acquisition. Initial recognition exception An entity may acquire an asset or liability or groups of assets and liabilities in a transaction that is not a business combination where the carrying amount recognized for the asset or liability is different from its tax basis. Current IAS 12 contains an initial recognition exception that prohibits recognition of deferred income taxes if that transaction affects neither accounting nor taxable income.
We expect that IAS 12s current initial recognition exception will be eliminated and that, under amended IAS 12, (i) the asset or liability should be recorded at fair value (i.e., assuming full tax basis), (ii) a deferred tax liability (asset) will be recognized for the resulting temporary difference, and (iii) any difference between the sum of these two amounts and the consideration paid or received is recognized as a purchase price discount allowance on the deferred tax liability or asset. This expected approach under IAS 1 is different from the current gross-up methodology required under Canadian GAAP . Allocation of tax to components of profit or loss or equity Under amended IAS 12, we expect that the tax effects of items charged or credited directly to equity during the current year will be similarly charged or credited directly to equity, similar to existing Canadian GAAP . However, in amended IAS 12, the IASB has decided to adopt the US GAAP approach, whereby most subsequent changes in deferred income taxes relating to items previously recognized in equity (e.g., due to changes in tax rates) will generally be recognized in profit or loss. Although IAS 12s existing comprehensive requirement for backwards tracing will be eliminated, the US GAAP approach has partial backwards tracing in that, in certain circumstances, a reduction in a valuation allowance against deferred tax assets is recorded in equity. Balance sheet classification of deferred tax assets and liabilities Under amended IAS 12, we expect that deferred tax assets and liabilities will be classified as either current or non-current based on the classification of the related non-tax asset or liability for financial reporting, and IAS 12s existing requirement to classify all deferred taxes as non-current will be eliminated.
Stay tuned
We anticipate that the IASB will issue its exposure draft on amendments to IAS 12 toward the end of 2008. Once the final exposure draft is issued, we will provide further guidance to confirm and clarify the expected differences noted in this publication.
August 2008 11
Addressing income taxes in your IFRS project

Your IFRS conversion team should include resources knowledgeable in accounting for income taxes. Depending on the size and complexity of your organizational structure and tax provision calculations, you may be well advised to identify a separate project team for the IAS 12 conversion. As the full implementation of all IFRS standards will affect a companys pre-tax reported profits and equity, tax professionals will need to be engaged in the IFRS changeover beyond just the IAS 12 standards. Tax professionals will need to understand the impact of all IFRS adjustments to equity and earningsboth on adopting IFRS and on an ongoing basis and evaluate the merits of early adopting the amended IFRS standard. Many of these IFRS adjustments will create new or additional temporary differences that need to be recognized in tax provisions and on tax returns. Regardless of the structure of the project, in order to have a successful implementation, companies must make sure that enough time and qualified resources are made available to address the income tax consequences of all your IFRS accounting changes. Clearly, implementation of IFRS will require considerable effort from the companys finance staff as well as the tax department. You may need to implement new processes and procedures, and IT systems may need to be modified to capture and track the new data necessary for financial reporting as well as preparing tax returns. Detailed training on IAS 12 and its amendments will need to be developed and delivered to various professionals within your organization. An early understanding of the impact on a companys effective tax rate will be important for both communicating impacts of IFRS to stakeholders and recasting financial budgets and forecasts. For all of these reasons, the qualifications of your IAS 12 project team are very important.
Engage your tax department early in your IFRS conversion project.
kpmg.ca
We can help
KPMG has helped many organizations in assessing the impact of and implementing IFRS. We have developed tools to be used for a quick assessment of the potential impact of IAS 12, both the existing and amended standards. We can assist in your evaluation of the merits of early adopting the amended IFRS standard. Our established conversion methodology incorporates the different disciplines critical to a successful conversion. KPMGs IFRS conversion services teams are multidisciplinary teams comprising professionals, including tax advisers, knowledgeable in IFRS and Canadian GAAP and skilled in financial reporting processes and financial integration. The experience and extensive resources of our conversion services teams can provide benefits to enterprises of all sizes and to either partial or full-scale conversion projects. To learn more about our IFRS resources and our conversion services, visit www.kpmg.ca/ifrs. Contact us If you want to learn more or need assistance, please contact the members of your KPMG engagement team or the managing partner at a KPMG office near you.
Information is based on the IASBs Project Updates for their short-term convergence on income taxes, as of April 2008. All conclusions reported in the Project Updates are tentative and may be changed as the project develops. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.
2008 KPMG LLP , a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.
KPMG LLP , a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm affiliated with KPMG International, a global network of professional firms providing Audit, Tax, and Advisory services. Member firms operate in 145 countries and have more than 123,000 professionals working around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.

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IFRS ADVISORY SERVICES

IFRS accounting standard for income taxes

Watch for further clarificationsproposed revisions are expected in December 2008.

Expected differences between amended IAS 12 and Canadian GAAP

Existing differences expected to be eliminated

Addressing income taxes in your IFRS project

Engage your tax department early in your IFRS conversion project.

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