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IFRS Proposals for change

IFRS Proposals for change: The requirements in the proposed standard change the definition of control under consolidation accounting so that the same criteria are applied to all entities to determine control. The definition will be supported by extensive application guidance that addresses the different ways in which a reporting entity  might control another entity.

IFRS Proposals for change

The changed definition and application guidance is not expected to result in widespread change in the consolidation decisions made by IFRS reporting entities, although all  entities will need to consider the new guidance. The core principle that consolidation presents a parent and its subsidiaries as if they are a single entity remains unchanged, as do the mechanics of  consolidation.

The staff draft excludes disclosures and any guidance specifically for investment companies and omits the previous guidance on preparation of separate financial statements. Disclosures will be included in a comprehensive disclosure standard to be published this year, which will cover disclosure principles for subsidiaries, joint ventures and associates.

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The IASB plans to issue an exposure draft in 2010 of guidance for investment companies. An investment company would be required to report investees that it controls at fair value rather than consolidate those investees. The status of the guidance on separate financial statements is unclear, but the relevant portion of current IAS 27, ‘Consolidated and  separate financial statements’, may be  retained.

The new standard, when issued, will replace IAS 27 and SIC-12, ‘Consolidation – special purpose entities’. The staff draft includes the decisions made by the IASB following comment letters and the redeliberations of ED 10, ‘Consolidated financial statements’, which was published in December 2008. It is not a required due process document, but it has been published to facilitate upcoming roundtable   discussions.

Consolidation is a joint project between the IASB and the FASB under the Memorandum   of Understanding. The two Boards will jointly host roundtable discussions on the IASB   staff draft in the US in October 2010.

The IASB has issued an exposure draft proposing an exception to the existing principle for the measurement of deferred tax assets or liabilities arising on certain non-financial assets measured at fair value. The proposals would reduce the deferred tax assets and liabilities recognised by entities that hold these non-financial assets in territories where the capital gains tax rate is different from the income tax rate. Tony de Bell, Moi Lre Kok and Michele Embling in PwC’s Global Accounting Consulting Services look at the detail.

IFRS Proposals for change

The current principle in IAS 12 requires the measurement of deferred tax assets or liabilities to reflect the tax consequences that would follow from the way that management expects to recover or settle the carrying amount of the entity’s assets or liabilities. For example, management may expect to recover an asset by using it, by selling it or by a combination of use and sale. Management’s expectations can affect the measurement  of deferred taxes when different tax rates or tax bases apply to the profits generated from using the asset for part of its life,  then selling it.

Entities holding investment properties that are measured at fair value may find it difficult or subjective to estimate how much of the carrying amount will be recovered through rental income (that is, through use) and how much will be recovered through sale, particularly when there is no specific plan for  disposal.

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The IASB has proposed an exception to the principle in IAS 12. The proposal introduces a rebuttable presumption that certain assets measured at fair value are recovered entirely by sale. The rebuttable presumption applies to the deferred tax liabilities or assets that arise from investment properties, property, plant and equipment or intangible assets  that:

  • are measured using the fair value model or revaluation model; or
  • are initially measured at fair value in a business combination, if the acquirer subsequently uses the fair value model or revaluation model to measure those

The presumption of recovery entirely by sale is rebutted when there is clear evidence that the entity will consume the asset’s economic benefits during its economic  life.

SIC-21, ‘Income taxes – Recovery of revalued non-decipherable assets’, will be withdrawn by the  amendment.

IFRS Proposals for change: Transition

The amendment would be applied retrospectively, with early adoption permitted. The IASB is also seeking comments on whether specific transition guidance is needed for previous business combinations. No effective date is set, but the IASB intends to finalise the amendment for early adoption by entities with December 2010 year ends.

IFRS Proposals for change: Am I affected?

All entities holding investment properties, property, plant and equipment or intangible assets measured at fair value in territories where the capital gains tax rate is different from the income tax rate (for example, Singapore, New Zealand, Hong Kong and South Africa) will be significantly affected. The proposals would reduce the deferred tax assets and liabilities recognised by these entities.

IFRS Proposals for change: What do I need to do?

The comment period ends on 9 November 2010; a final amendment is expected in December 2010 or early 2011. Management should begin to assess the implications of the proposal on their existing deferred tax liabilities or assets arising on investment properties, property, plant and equipment and intangible assets measured at fair value. Management should also consider commenting on the exposure draft to ensure their views on the proposed changes are  considered

IFRS Proposals for change

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