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Proactive - Financial Reporting for Corporate Income Taxes


The accounting for corporate income taxes has been subject to much criticism from the user and preparer community, who have questioned the decision-usefulness of the numbers produced by the existing IAS 12 Income Taxes, and claim that the standard is too difficult to apply and understand.

In light of these criticisms, the UK Accounting Standards Board (ASB) and the German Accounting Standard Board (GASB) agreed to lead an EFRAG pro-active project on the accounting for corporate income taxes. One of the premises on which the project is based is that the problems with IAS 12 are so deep seated that piecemeal reform, addressing only specific issues, is unlikely to provide a satisfactory solution. A fundamental review is therefore needed.

The aim of the project is to critically examine key aspects of accounting for corporate income tax separately from the requirements in existing IAS 12, with a view to develop a Discussion Paper that starts from first principles and sets out proposals that might form the basis of a new standard on accounting for corporate income taxes.

The project is resourced by personnel from the ASB, DRSC and EFRAG and is supported by an international Tax Advisory Panel represented by preparers, users, standard-setters and academics. The Tax Advisory Panel meets regularly and actively supports the project team in the development and preparation of proposals.

The two Boards, including EFRAG, have received regular updates on progress made and asked for views on the development of the draft chapters of the paper. The ASB and the DSRC had an initial discussion during their February 2010 Board meetings and received an update in their September 2010 Board meetings. EFRAG had its first discussion on the draft material at its meeting in February 2010 and received an update at its meeting in September 2010.

The initial discussions with the Advisory Panel focused on identifying the complexities in the application of IAS 12 and understanding why users generally regard information about tax effects in the financial statements difficult to make sense of. As the project progressed, the Panel explored a range of alternative approaches including the flow through approach, partial allocation and a valuation adjustment approach, to gather thoughts on the strengths and weaknesses of the different 'developed' models and consider whether any of these approaches could provide a convincing solution.

A proposed approach was discussed with EFRAG in December 2010 and with the ASB and the GASB at their meetings in early 2011. At the meeting in December 2010, EFRAG also discussed whether the consultation process should be done in phases or via a single comprehensive discussion paper. All three parties agreed that a phased approach would be preferable. The objective of a two-phase approach would be to obtain a better understanding of the application issues around IAS 12 and whether those issues could be resolved through amendments to IAS 12.

In May 2011, EFRAG and the two Boards discussed a draft paper on phase I. It was decided that phase I should focus on whether the current standard should be improved or whether alternative approaches should be considered. After considering the feedback received on phase I of the project, phase II would either focus on the improvements to IAS 12 or focus on the development of an alternative approach to tax accounting.

A final draft paper was presented to all parties involved in September 2011. The Discussion Paper was approved by EFRAG and the ASB and issued in December 2011 with a comment deadline by 29 June 2012.

EFRAG together with a number of National Standards Setters also organised a total of five outreach events on a subject in Europe. The feedback received at those events has been reported separately and reports are available on EFRAG's website.

A Feedback Statement on the DP was published by EFRAG and the FRC on 8 February 2013, and provides an analysis of comment letters received on this consultation together with their responses to the main issues raised by respondents.   The project is now closed.

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