EFRAG & ASB Discussion Paper: Improving the Financial Reporting of Income Tax 9 November 2011

Why we have issued this Discussion Paper The financial reporting of income tax has been criticised by some users and preparers. Some argue that the standard is flawed and question the underlying principle by pointing to the many exceptions. Others maintain that the underlying principle is not flawed and argue that any approach to income tax would have difficulty dealing with complex and different tax requirements around the world. For those reasons EFRAG and the ASB decided to issue this discussion paper. The intention is to stimulate debate about the financial reporting of income tax. The objective is to determine whether the focus of future efforts should to improve IAS 12 or to replace it with a new approach with different principles as input on a potential future IASB project. The discussion paper sets out different perspectives in attempt to structure the debate on the topic and attempts to not favour one view over another. The comment period closes on 29 June Please send comments to Background to the Project

What we have said The DP does not repeat the work already done by the IASB. Technical practice issues have been deferred until it has been decided whether IAS 12 should be improved or replaced. Once that is decided many of the technical issues that have arisen would be addressed in a later stage. The first part of the DP considers significant improvements that might be made to IAS 12 to better meet user needs. We have found that users want a better understanding of an entity’s tax charge and information to better predict potential future cash flow impacts of income tax. With an aim of meeting those needs, we considered three areas where IAS might be significantly improved. First, the DP discusses improved disclosures including a more transparent tax rate reconciliation. Second, the DP considers improved measurement of income tax by considering whether deferred tax amounts should reflect the time value of money and be discounted. The third area of improvement discussed is focused on greater clarity about an entity’s uncertain tax position through both disclosure and measurement. Key Messages in the Discussion Paper

What we have said The second part of the DP explores five alternative approaches to the accounting for income tax. These approaches include the (1) temporary difference approach, (2) flow through approach, (3) partial allocation approach, (4) valuation adjustment approach, and (5) the accruals or temporary difference approach. We make the case in the DP for each of the alternative approaches by pointing out the strengths and weaknesses of the alternative’s underlying principle. The debate sought by the second part of the DP is around the validity of these strengths and weaknesses. Key Messages in the Discussion Paper

Next Steps The next steps will depend on the comments received. After the comment period closes, EFRAG and the ASB will publish a feedback statement summarising the key issues raised by constituents. Next Steps