periods beginning on or after 1 January 2019, with earlier application permitted, provided
that this is disclosed. When an entity first applies these amendments, it applies them to
the income tax consequences of dividends recognised on or after the beginning of the
earliest comparative period. [IAS 12.98I].
The Board concluded that entities would have sufficient information to apply the
amendments in this way, which will enhance comparability of reporting periods.
[IAS 12.BC70].
10.3.5.A
Tax benefits of transaction costs of equity instruments
In its Basis of Conclusions, the Board noted that the amendments should not be
interpreted to mean that an entity recognises in profit or loss the income tax
consequences of all payments on financial instruments classified as equity. Rather, an
entity would exercise judgement in determining whether payments on such instruments
are distributions of profits (i.e. dividends). If they are, then the requirements in
paragraph 57A apply. If they are not, then the requirements of paragraph 61A of IAS 12
apply to the income tax consequences of those payments, meaning the related tax is
recognised in equity. [IAS 12.BC67].
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The Board considered and rejected the suggestion that it should provide guidance on
how to determine if payments on financial instruments classified as equity are
distributions of profits on the basis that:
(a) any attempt by the Board to define or describe distributions of profits could affect
other IFRS Standards and IFRIC Interpretations, and risks unintended consequences; and
(b) the amendments do not change what is and is not a distribution of profits. They
simply clarify that the requirements in paragraph 57A apply to all income tax
consequences of dividends.
Nevertheless, the Board concluded that finalising the amendments without adding
specific guidance would eliminate the potential for inconsistent accounting that
resulted from the ambiguity of the scope of the requirements that had existed
previously. [IAS 12.BC69]. In our opinion, guidance will be needed ultimately on how to
determine which payments on financial instruments classified as equity would not be
regarded as distributions of profits.
Whilst some payments in relation to equity instruments, such as the issue costs of equity
shares, can clearly be regarded as a transaction cost than a distribution of profits, entities
will have to exercise judgement in determining the appropriate treatment of other
items. In making such a judgement, the legal and regulatory requirements in the entity’s
jurisdiction would also be relevant, for example if those local requirements stipulate
whether a particular payment is, in law, a distribution.
10.4 Gains and losses reclassified (‘recycled’) to profit or loss
Several IFRSs (notably IAS 21 and IFRS 9) require certain gains and losses that have been
accounted for outside profit or loss to be reclassified (‘recycled’) to profit or loss at a later
date when the assets or liabilities to which they relate are realised or settled. Whilst IAS 12
requires any tax consequences of the original recognition of the gains or losses outside
profit or loss also to be accounted for outside profit or loss, it is silent on the treatment to
be adopted when the gains or losses are reclassified. In our view, any tax consequences
of reclassified gains or losses originally recognised outside profit or loss should also be
reclassified through profit or loss in the same period as the gains or losses to which they
relate. Indeed, such reclassification is often an automatic consequence of the reversal of
previously recognised deferred tax income or expense and its ‘re-recognition’ as current
tax income or expense, as illustrated in Example 29.39.
Example 29.39: Tax on reclassified (‘recycled’) items
An entity has an annual reporting period ending 30 September. On 1 January 2019 an entity purchases for
€2,000 a debt security that it classifies under IFRS 9 as fair value through OCI (‘FVOCI’) with recycling. At
30 September 2019 it restates the security to its fair value of €2,400, which was also its fair value on
1 May 2020. On 1 July 2020 it disposes of the investment for €2,100.
The entity’s tax rate for the year ending 30 September 2019 is 40% and for 2020 35%. The change of
rate was made in legislation enacted (without previous substantive enactment) on 1 May 2020. The
entity is subject to tax on disposal of the investment (based on disposal proceeds less cost) in the period
of disposal.
The accounting entries for this transaction would be as follows:
Income
taxes
2457
€
€
1 January 2019
Debt security
2,000
Cash
2,000
30 September 2019
Debt security [€2,400 – €2,000]
400
Deferred tax (statement of financial position) [€400 @ 40%]
160
Other comprehensive income (‘OCI’)
240
Recognition of increase in value of asset, and related deferred tax
1 May 2020
Deferred tax (statement of financial position)
[€400 @ (35% – 40%)]
20
OCI
20
Remeasurement of deferred tax (no change in the fair value of the
debt security since 30 September 2019)
1 July 2020
Debt security
300
OCI (revaluation of €300 less deferred tax of €105)
195
Deferred tax (statement of financial position)
105
Recognition of decrease in value of asset, and related deferred tax
Cash 2,100
OCI (reclassification of €100 (before tax) to income statement)
100
Debt security
2,100
Profit on disposal of debt security
[cash €2,100 less original cost €2,000]
100
Deferred tax (statement of financial position)
35
Deferred tax income (OCI)
35
Current tax (profit or loss)
35
Current tax (statement of financial position)
[35% of €100 pre-tax profit]
35
To record the sale of the debt security and related taxation
10.4.1
Debt instrument measured at fair value through OCI under IFRS 9
IFRS 9 requires an entity to recognise a loss allowance for expected credit losses (ECLs)
on financial assets that are debt instruments measured at fair value through other
comprehensive income (FVOCI). [IFRS 9.5.5.1].
Under the general approach, at each reporting date, an entity recognises a loss
allowance based on either 12-month expected credit losses or lifetime expected credit
losses, depending on whether there has been a significant increase in credit risk on the
financial instrument since initial recognition. [IFRS 9.5.5.3, 5.5.5].
The Standard states that these expected credit losses do not reduce the carrying amount
of the financial assets in the statement of financial position, which remains at fair value.
Instead, an amount equal to the allowance that would arise if the asset was measured at<
br />
amortised cost is recognised in other comprehensive income as the ‘accumulated
impairment amount’. [IFRS 9.4.1.2A, 5.5.2, Appendix A].
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The accounting treatment (ignoring the accounting for any tax) and journal entries for
debt instruments measured at FVOCI are illustrated in Chapter 47 at 9.1 by the following
example, based on Illustrative Example 3 in the Implementation Guidance for the
standard. [IFRS 9 IG Example 13, IE78-IE81].
Example 29.40: Debt instrument measured at fair value through other
comprehensive income
An entity purchases a debt instrument with a fair value of £1,000 on 15 December 2019 and measures the
debt instrument at fair value through other comprehensive income (FVOCI). The instrument has an interest
rate of 5 per cent over the contractual term of 10 years, and has a 5 per cent effective interest rate. At initial
recognition the entity determines that the asset is not purchased or originated credit-impaired.
Debit
Credit
Financial asset – FVOCI £1,000
Cash
£1,000
(To recognise the debt instrument measured at its fair value)
On 31 December 2019 (the reporting date), the fair value of the debt instrument has decreased to £950 as a result
of changes in market interest rates. The entity determines that there has not been a significant increase in credit
risk since initial recognition and that ECLs should be measured at an amount equal to 12-month expected credit
losses, which amounts to £30. For simplicity, journal entries for the receipt of interest revenue are not provided.
Debit
Credit
Impairment loss (profit or loss)
£30
Other comprehensive income(a) £20
Financial asset – FVOCI £50
(To recognise 12-month expected credit losses and other fair value changes on the debt instrument)
(a) The cumulative loss in other comprehensive income at the reporting date was £20. That amount consists of the total fair value change of £50 (i.e. £1,000 – £950) offset by the change in the accumulated impairment amount representing 12-month
ECLs that was recognised (£30).
On 1 January 2020, the entity decides to sell the debt instrument for £950, which is its fair value at that date.
Debit
Credit
Cash £950
Financial asset – FVOCI £950
Loss (profit or loss)
£20
Other comprehensive income
£20
(To derecognise the fair value through other comprehensive income asset and recycle amounts
accumulated in other comprehensive income to profit or loss, i.e. £20).
As noted at 9.1 in Chapter 47, this means that in contrast to financial assets measured at
amortised cost, there is no separate allowance for credit losses but, instead, impairment
gains or losses are accounted for as an adjustment of the revaluation reserve
accumulated in other comprehensive income, with a corresponding charge to profit or
loss (which is then reflected in retained earnings).
Assume that, for tax purposes, current tax does not arise until the asset is recovered. In
Example 29.40 above, the asset revaluation creates a temporary difference as the carrying
value is now different to its original cost (being its tax base). The asset revaluation is first
accounted in OCI, therefore, the related tax is recorded in OCI. [IAS 12.61A].
As regards the recognition of the ECLs, and as noted above, there is no further change
to the carrying value of the asset. Impairment gains or losses are accounted for as an
Income
taxes
2459
adjustment of the revaluation reserve accumulated in other comprehensive income,
with a corresponding charge to profit or loss. Under the general principal in IAS 12, the
entity would transfer the related deferred tax out of OCI and into profit or loss in
respect of the ECLs reallocated out of OCI. A similar transfer would be made in respect
of any earlier revaluation entries that are recycled to profit or loss on derecognition of
the debt instrument. [IAS 12.61A]. Accordingly, if the applicable rate of tax is 20%, the tax-
effected journals in Example 29.40 above would be as follows:
Example 29.41: Debt instrument measured at fair value through other
comprehensive income – tax effect
When the entity recognises the reduction in fair value of the instrument from £1,000 to £950 and the 12-
month ECLs:
Debit
Credit
Deferred tax asset (statement of financial position))(a)
£10
Profit or loss – deferred tax
£6
Other comprehensive income – deferred tax
£4
(a) The deferred tax asset arising from the deductible temporary difference on revaluation is £10 (£50 @ 20%), with related deferred tax credits in profit or loss and OCI at a rate of 20% applied to the amounts recognised in each of those statements of
£30 and £20 respectively.
On 1 January 2020, the entity decides to sell the debt instrument for £950, which is its fair value at that date.
The tax rate on a disposal is also 20% in this example. The related tax journals are as follows.
Debit
Credit
Deferred tax asset (statement of financial position)
£10
Profit or loss – deferred tax
£6
Other comprehensive income – deferred tax
£4
Current tax liability (statement of financial position)
£10
Profit or loss – current tax
£10
(Being the reversal of the deductible temporary differences on disposal of the debt instrument and the
recognition of current tax deduction on the taxable loss on sale).
10.4.2
Recognition of expected credit losses with no change in fair value
Consider an example where there has been no change to the asset’s fair value since its
acquisition, but an expected credit loss has been determined. Current tax is charged on
realisation of the asset only.
As discussed above, the ECLs are accounted for as an adjustment (credit) to the
revaluation reserve accumulated in other comprehensive income, with a corresponding
charge to profit or loss. However, in this case, there is no change to the carrying amount
of the asset. Prima facie, therefore, there is no temporary difference associated with the
asset. However, the treatment discussed at 7.2.4.D above would support a conclusion that
this temporary difference of nil should in fact be analysed into:
• a deductible temporary difference arising on the ECLs that affect accounting profit; and
• a taxable temporary difference of an equal amount arising on the amount reflected
in OCI, which is effectively an upward revaluation to restore the asset back to its
fair value.
This analysis indicates it would be appropriate to recognise a deferred tax asset for
amounts recognised for ECLs in profit or loss [IAS 12.58] and to recognise the tax effect
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of the ‘item that is recognised outside profit or loss’ (i.e. the credit to OCI) in other
comprehensive income. [IAS 12.61A].
This approach is illustrated in Example 29.42 below:
Example 29.42: Tax effect of expected credit losses with no change in fair value
>
An entity purchases a debt instrument with a fair value of £1,000 and measures the debt instrument at
fair value through other comprehensive income (FVOCI). The instrument has an interest rate of 5 per
cent over the contractual term of 10 years, and has a 5 per cent effective interest rate. At initial
recognition the entity determines that the asset is not purchased or originated credit-impaired. Current
tax is charged or credited on realisation of the asset, at an enacted rate of 20%.
Debit
Credit
Financial asset – FVOCI £1,000
Cash
£1,000
(To recognise the debt instrument measured at its initial fair value)
The entity determines that expected credit losses (ECLs) should be measured at an amount equal to 12-month
expected credit losses, which amounts to £30. However, the fair value of the debt instrument is still £1,000.
Debit
Credit
Impairment loss (profit or loss)
£30
Other comprehensive income
£30
Financial asset – FVOCI Nil
(To recognise 12-month expected credit losses on the debt instrument and (in OCI) its increase in fair value)
The entity determines that paragraphs 58 and 61A of IAS 12 require the tax effect of amounts
recognised in profit and loss to be recognised in profit or loss and for the tax effect of amounts
recognised in other comprehensive income to be recorded in the same place.
Debit
Credit
Profit or loss – deferred tax
£6
Other comprehensive income – deferred tax
£6
Deferred tax asset (statement of financial position)
Nil
The entity in Example 29.42 above could have determined that the recognition of the
expected credit loss does not generate a temporary difference because neither the
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