International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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2019, the value of the goodwill of that business is once more €3 million. However, in accordance with
IAS 36, which prohibits the reinstatement of previously impaired goodwill (see Chapter 20 at 8.2.4), no
accounting adjustment is made to the carrying value of goodwill.
If the goodwill were disposed of for its current fair value of €3 million, tax of €200,000
would arise. However, the entity recognises no deferred tax liability at the end of 2019,
since IAS 12 requires the entity to recognise the tax (if any) that would arise on disposal
of the goodwill for its carrying amount of zero. If the asset were sold for zero, a tax loss
of €2.5 million would arise but, in accordance with the general provisions of IAS 12
discussed at 7.4 above, a deferred tax asset could be recognised in respect of this
deductible temporary difference only if there were an expectation of suitable taxable
profits sufficient to enable recovery of the asset.
This may mean that any deferred tax asset or liability recognised under IAS 12 will
reflect the expected manner of recovery or settlement, but not the expected amount of
recovery or settlement, where this differs from the current carrying amount.
8.4.3
Assets and liabilities with more than one tax base
IAS 12 notes that, in some jurisdictions, the manner in which an entity recovers (settles)
the carrying amount of an asset (liability) may affect either or both of:
(a) the tax rate applicable when the entity recovers (settles) the carrying amount of
the asset (or liability); and
(b) the tax base of the asset (or liability).
In such cases, an entity should measure deferred tax assets and liabilities using the tax rate
and the tax base that are consistent with the expected manner of recovery or settlement.
[IAS 12.51A]. Assets which are treated differently for tax purposes depending on whether their
value is recovered through use or sale are commonly referred to as ‘dual-based assets’. The
basic requirements of IAS 12 for dual-based assets can be illustrated with a simple example.
Example 29.27: Calculation of deferred tax depending on method of realisation of
asset
A building, which is fully tax-deductible, originally cost €1 million. At the end of the reporting period it is
carried at €1,750,000, but tax allowances of €400,000 have been claimed in respect of it. If the building were
sold the tax base of the building would be €1.5 million due to inflation-linked increases in its tax base.
Any gain on sale (calculated as sale proceeds less tax base of €1.5 million) would be taxed at 40%. If the
asset is consumed in the business, its depreciation will be charged to profits that are taxed at 30%.
If the intention is to retain the asset in the business, it will be recovered out of future income of €1.75 million,
on which tax of €345,000 will be paid, calculated as:
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€000
Gross income
1,750
Future tax allowances for asset
(£1m less €400,000 claimed to date)
(600)
1,150
Tax at 30%
345
If, however, the intention is to sell the asset, the required deferred tax liability is only €100,000 calculated as:
€000
Sales proceeds
1,750
Tax base
(1,500)
250
Tax at 40%
100
8.4.4
Determining the expected manner of recovery of assets
Example 29.27 above, like the various similar examples in IAS 12, assumes that an asset
will either be used in the business or sold. In practice, however, many assets are
acquired, used for part of their life and then sold before the end of that life. This is
particularly the case with long-lived assets such as property. We set out below the
approach which we believe should be adopted in assessing the manner of recovery of:
• depreciable PP&E, investment properties and intangible assets (see 8.4.5 below);
• non-depreciable PP&E, investment properties and intangible assets (see 8.4.6
and 8.4.7 below); and
• other assets and liabilities (see 8.4.8 below).
8.4.5
Depreciable PP&E and intangible assets
Depreciable PP&E and investment properties are accounted for in accordance with
IAS 16. Amortisable intangibles are accounted for in accordance with IAS 38. IAS 16 and
IAS 38, which are discussed in detail in Chapters 17 and 18, require the carrying amount
of a depreciable asset to be separated into a ‘residual value’ and a ‘depreciable amount’.
‘Residual value’ is defined as:
‘... the estimated amount that an entity would currently obtain from disposal of the
asset, after deducting the estimated costs of disposal, if the asset were already of
the age and condition expected at the end of its useful life’
and ‘depreciable amount’ as:
‘... the cost of an asset, or other amount substituted for cost, less its residual value’.
[IAS 16.6, IAS 38.8].
It is inherent in the definitions of ‘residual value’ and ‘depreciable amount’ that, in
determining residual value, an entity is effectively asserting that it expects to recover
the depreciable amount of an asset through use and its residual value through sale. If
the entity does not expect to sell an asset, but to use and scrap it, then the residual value
(i.e. the amount that would be obtained from sale) must be nil.
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Accordingly, we believe that, in determining the expected manner of recovery of a
depreciable asset for the purposes of IAS 12, an entity should assume that, in the case
of an asset accounted for under IAS 16 or IAS 38, it will recover the residual value of
the asset through sale and the depreciable amount through use. This view is reinforced
by the Basis for Conclusions on IAS 12 which notes that ‘recognition of depreciation
implies that the carrying amount of a depreciable asset is expected to be recovered
through use to the extent of its depreciable amount, and through sale at its residual
value’. [IAS 12.BC6].
Such an analysis is also consistent with the requirement of IAS 8 to account for similar
transactions consistently (see Chapter 3 at 4.1.4). This suggests that consistent assumptions
should be used in determining both the residual value of an asset for the purposes of IAS 16
and IAS 38 and the expected manner of its recovery for the purposes of IAS 12.
The effect of this treatment is as follows.
Example 29.28: Dual-based asset
As part of a business combination an entity purchases an opencast mine to which there is assigned a fair value
of €10 million. The tax system of the jurisdiction where the mine is located provides that, if the site is sold
(with or without the minerals in situ), €9 million will be allowed as a deduction in calculating the taxable
profit on sale. The profit on sale of the land is taxed as a capital item. If the mine is exploited through
excavation and sale of the minerals, no tax deduction is available.
The entity intends fully to exploit the mine and then to sell the site for retail development. Given the costs
that any developer will need to incur in preparing the excavated site for development, the ultimate s
ales
proceeds are likely to be nominal. Thus, for the purposes of IAS 16, the quarry is treated as having a
depreciable amount of €10 million and a residual value of nil.
On the analysis above, there is a taxable temporary difference of €10 million associated with the depreciable
amount of the asset (carrying amount of €10 million less tax base in use of nil), and a deductible temporary
difference of €9 million associated with the residual value (carrying amount of nil less tax base on disposal
of €9 million).
The entity will therefore provide for a deferred tax liability on the taxable temporary difference. Whether or
not a deferred tax asset is recognised in respect of the deductible temporary difference will be determined in
accordance with the criteria discussed in 7.4 above. In some tax regimes, capital profits and losses are treated
more or less separately from revenue profits and losses to a greater or lesser degree, so that it may be difficult
to recognise such an asset due to a lack of suitable taxable profits.
We acknowledge that this is not the only interpretation of IAS 12 adopted in practice.
However, any alternative approach should be consistent with:
• the requirement of IAS 12 to have regard to the expected manner of recovery of
the asset in determining its tax base; and
• the overall objective of IAS 12 to ‘account for the current and future tax
consequences of ... the future recovery (settlement) of the carrying amount of
assets (liabilities) that are recognised in an entity’s statement of financial position’
(see 2.1 and 8.4.2 above).
The principle of ‘expected manner of recovery’ and its importance in the determination
of the appropriate measurement of deferred tax was reinforced by the Interpretations
Committee in its agenda decision on indefinite-life intangible assets, as discussed
at 8.4.6.B below.
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8.4.6
Non-depreciable PP&E and intangible assets
During 2009 and 2010 the IASB received representations from various entities and
bodies that it was often difficult and subjective to determine the manner of recovery of
certain categories of asset for the purposes of IAS 12. This was particularly the case for
investment properties accounted for at fair value under IAS 40 which are often traded
opportunistically, without a specific business plan, but yield rental income until
disposed of. In many jurisdictions rental income is taxed at the standard rate, while gains
on asset sales are tax-free or taxed at a significantly lower rate. The principal difficulty
was that the then extant guidance (SIC-21 – Income Taxes – Recovery of Revalued
Non-Depreciable Assets) effectively required entities to determine what the residual
amount of the asset would be if it were depreciated under IAS 16 rather than accounted
for at fair value,21 which many regarded as resulting in nonsensical tax effect accounting.
To deal with these concerns, in December 2010 the IASB amended IAS 12 so as to give
more specific guidance on determining the expected manner of recovery for non-
depreciable assets measured using the revaluation model in IAS 16 (see 8.4.6.A below)
and for investment properties measured using the fair value model in IAS 40 (see 8.4.7
below). As noted at 8.4.6.B below, an indefinite-life intangible asset (that is not
amortised because its useful economic life cannot be reliably determined) is not the
same as a non-depreciable asset to which this amendment would apply.
8.4.6.A
PP&E accounted for using the revaluation model
IAS 16 allows property, plant and equipment (PP&E) to be accounted for using a
revaluation model under which PP&E is regularly revalued to fair value (see Chapter 18
at 6). IAS 12 clarifies that where a non-depreciable asset is revalued, any deferred tax
on the revaluation should be calculated by reference to the tax consequences that
would arise if the asset were sold at book value irrespective of the basis on which the
carrying amount of the asset is measured. [IAS 12.51B]. The rationale for this treatment is
that, in accounting terms, the asset is never recovered through use, as it is not
depreciable. [IAS 12.BC6].
IAS 12 clarifies that these requirements are subject to the general restrictions on the
recognition of deferred tax assets (see 7.4 above). [IAS 12.51E].
An issue not explicitly addressed in IAS 12 is whether the term ‘non-depreciable’ asset
refers to an asset that is not currently being depreciated or to one that does not have a
limited useful life. This is explored further in the discussion of non-amortised intangible
assets immediately below.
8.4.6.B
Non-amortised or indefinite-life intangible assets
Under IAS 38 an intangible asset with an indefinite life is not subject to amortisation.
The analysis at 8.4.5 and 8.4.6.A above would appear to lead to the conclusion that,
where an intangible asset is not amortised, any deferred tax related to that asset should
be measured on an ‘on sale’ basis. IAS 12 requires tax to be provided for based on the
manner in which the entity expects to recover the ‘carrying amount’ of its assets. In this
case it could be argued that if the asset is not amortised under IAS 38, the financial
statements are asserting that the carrying amount is not recovered through use.
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However, an alternative analysis would be that the fact that an intangible asset is not
being amortised does not of itself indicate that the expected manner of recovery is by
sale. Rather, an intangible asset is regarded as having an indefinite life when it is
determined that there is no foreseeable limit to the period over which the asset is
expected to generate net cash inflows for the entity. [IAS 38.88]. This could still indicate
an expectation of recovery through use.
This question was considered by the Interpretations Committee, which issued an
agenda decision in November 2016, as follows:22
• the requirements in paragraph 51B of IAS 12 do not apply to indefinite-life
intangible assets. An indefinite-life intangible asset is not a non-depreciable asset
as envisaged by paragraph 51B of IAS 12. This is because a non-depreciable asset
has an unlimited (or infinite) life. IAS 38 is clear that the term ‘indefinite’ does not
mean ‘infinite’; [IAS 38.91]
• the reason for not amortising an indefinite-life intangible asset is not because there
is no consumption of the future economic benefits embodied in the asset. When
the IASB amended IAS 38 in 2004, it observed that an indefinite-life intangible
asset is not amortised because there is no foreseeable limit on the period during
which the entity expects to consume the future economic benefits embodied in
the asset and, hence, amortisation over an arbitrarily determined maximum period
would not be representationally faithful; [IAS 38.BC74]
• the fact that an entity does not amortise an indefinite-life intangible asset does not
necessarily mean that its carrying amount will be recovered only through sale and
not through use. An entity recovers the carrying amount of an asset in the form of
economic benefits that flow to the entity in future periods, which could be through
>
use or sale of the asset; and
• accordingly, an entity should determine its expected manner of recovery of the
carrying value of the indefinite-life intangible asset in accordance with the
principle and requirements in paragraphs 51 and 51A of IAS 12 (as discussed
at 8.4.3 above) and reflect the tax consequences that follow from that expected
manner of recovery.
Whilst the agenda decision requires entities to review cases where they have previously
applied paragraph 51B to indefinite-life intangible assets, it does not imply a presumption
that the carrying amount of an indefinite-life intangible asset is always recovered through
use (or for that matter through sale). The agenda decision emphasises that entities should
apply the principle and requirements in paragraphs 51 and 51A that the tax consequences
follow the expected manner of recovery of the asset. As noted above, this is a judgement
made by reference to the entity’s specific circumstances including its business model.
Therefore, it remains possible that an entity could determine recovery through sale by
applying the requirements of paragraphs 51 and 51A of IAS 12. However, such a
conclusion would require an entity to be able to demonstrate that the facts and
circumstances, including the entity’s business model, support a realistic expectation that
the specific intangible asset would be disposed of before any material recovery of its
carrying amount had occurred through use.
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8.4.7 Investment
properties
IAS 40 allows investment properties to be accounted for at fair value (see Chapter 19
at 6). IAS 12 requires any deferred tax asset or liability associated with such a property
to be measured using a rebuttable presumption that the carrying amount of the
investment property will be recovered through sale. [IAS 12.51C]. The same rebuttable
presumption is used when measuring any deferred tax asset or liability associated with
an investment property acquired in a business combination if the entity intends to adopt
the fair value model in accounting for the property subsequently. [IAS 12.51D].
The presumption is rebutted if the investment property is depreciable and the entity’s