Explanatory Statement
Amending Standard AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets
December 2010
EXPLANATORY STATEMENT
Reasons for Issuing AASB 2010-8
AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets, which incorporates the IASB’s Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12), was made by the AASB in December 2010 to enable Australian reporting entities to continue to be compliant with International Financial Reporting Standards.
Main Features of AASB 2010-8
The amendments provide a practical approach for measuring deferred tax liabilities and deferred tax assets when investment property is measured using the fair value model in AASB 140 Investment Property. Under AASB 112 Income Taxes, the measurement of deferred tax liabilities and deferred tax assets depends on whether an entity expects to recover an asset by using it or by selling it. However, it is often difficult and subjective to determine the expected manner of recovery when the investment property is measured using the fair value model in AASB 140.
To provide a practical approach in such cases, the amendments introduce a presumption that an investment property is recovered entirely through sale. This presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.
Interpretation 121 Income Taxes – Recovery of Revalued Non-Depreciable Assets addresses similar issues involving non-depreciable assets measured using the revaluation model in AASB 116 Property, Plant and Equipment. The amendments incorporate Interpretation 121 into AASB 112 after excluding investment property measured at fair value from the scope of the guidance previously contained in Interpretation 121.
Application Date
The Amending Standard AASB 2010-8 is applicable to annual reporting periods beginning on or after 1 January 2012 with early adoption permitted for annual reporting periods beginning on or after 1 January 2005 but before 1 January 2012.
Consultation Prior to Issuing this Standard
The AASB issued Exposure Draft ED 204 Deferred Tax: Recovery of Underlying Assets in September 2010. ED 204 reproduced the proposals included in the IASB’s Exposure Draft ED/2010/11 Deferred Tax: Recovery of Underlying Assets (September 2010) without amendment.
The AASB received two submissions from Australian constituents on ED 204. While accepting that this is an issue in some jurisdictions and circumstances, the submissions received did not favour the proposals, and the AASB expressed similar concerns about the proposals in its submission to the IASB. The IASB subsequently narrowed the scope of its proposed exception to the principles in IAS 12, in part reflecting constituents’ comments.
A Regulation Impact Statement has not been prepared in connection with the issuance of AASB 2010-8 as the amendments made do not have a substantial direct or indirect impact on business or competition, are of a minor or machinery nature or clarify existing requirements.
Overview
The Amending Standard AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets was enacted in December 2010 by the Australian Accounting Standards Board (AASB) to ensure Australian reporting entities remain compliant with International Financial Reporting Standards (IFRS). This legislation addresses the difficulty in determining the expected manner of recovery of investment property measured using the fair value model in AASB 140 Investment Property, and provides a practical approach for measuring deferred tax liabilities and assets in such circumstances. The policy objective is to incorporate the International Accounting Standards Board’s (IASB) amendments to the International Accounting Standard (IAS) 12, Deferred Tax: Recovery of Underlying Assets, into Australian accounting standards. The AASB introduced a presumption that investment properties are recovered entirely through sale, unless the property is held within a business model that consumes its economic benefits over time rather than through sale. The standard applies to annual reporting periods beginning on or after 1 January 2012, with early adoption permitted from 1 January 2005.
Scope and Application
The Amending Standard AASB 2010-8, which incorporates the IASB’s Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12), applies to Australian reporting entities to ensure continued compliance with International Financial Reporting Standards. The standard aims to provide a practical approach for measuring deferred tax liabilities and assets, specifically when investment property is measured using the fair value model under AASB 140. It addresses the complexities in determining the expected manner of recovery of such assets by introducing a presumption that investment properties are recovered through sale unless the entity's business model is structured to consume the economic benefits over time rather than through sale. The standard is applicable to annual reporting periods commencing on or after 1 January 2012, with early adoption allowed for periods starting from 1 January 2005. The amendments integrate Interpretation 12, which addresses similar issues with non-depreciable assets measured under the revaluation model in AASB 116, but exclude investment property measured at fair value from the scope of the guidance previously contained in Interpretation 12. The AASB’s consultation process included feedback on the Exposure Draft ED 204, which mirrored the IASB's proposals, but the submissions did not favour the proposals, leading the AASB to express concerns and the IASB to subsequently narrow the scope of its proposals.
Key Provisions
The main operative sections of AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets (sections 2 to 4) provide a practical approach to measuring deferred tax liabilities and assets when investment property is measured using the fair value model in AASB 140 Investment Property. Section 2 outlines the general principles of deferred tax measurement, while section 3 specifies the presumption that investment property is recovered entirely through sale, and section 4 details the conditions under which this presumption can be rebutted.
The Act imposes several obligations on entities governed by it. Firstly, entities must measure deferred tax liabilities and assets according to the principles set forth in AASB 112 Income Taxes. Secondly, entities must apply the presumption that investment property is recovered entirely through sale unless they can demonstrate that the investment property is held within a business model that consumes substantially all of the economic benefits embodied in the investment property over time. Finally, entities must ensure that their accounting policies are consistent with the amendments made by AASB 2010-8 for annual reporting periods beginning on or after 1 January 2012.
The AASB 2010-8 Amendments to Australian Accounting Standards – Deferred Tax: Recovery of Underlying Assets do not explicitly outline specific offences, penalties, or civil/criminal consequences for non-compliance. However, failure to comply with accounting standards can result in financial misstatements, which may lead to legal and regulatory consequences for entities and their directors. Such consequences may include financial penalties, reputational damage, and potential legal action from shareholders or regulatory bodies. The precise consequences depend on the severity and impact of the non-compliance on the entity's financial reporting.