November 9, 2010
International Accounting Standards Board
30 Cannon Street
London EC4M 6XH, United Kingdom
Deferred Tax: Recovery of Underlying Assets Proposed Amendments to IAS 12
Dear IASB members:
The Canadian Life and Health Insurance Association (the "CLHIA") appreciates the
opportunity to comment on the Exposure Draft Deferred Tax: Recovery of Underlying
Assets Proposed Amendments to IAS 12 (the “Exposure Draft”). CLHIA is the
national trade association for life and health insurers in Canada and its members
account for 99% of the life and health insurance in force in Canada and administer
about two-thirds of Canada's pension plans. Canadian life insurers hold over $15
billion of investment real estate in order to support the very long term nature of their
insurance liabilities, which may extend for 50 years or more. As a result, this issue is
very significant for our industry.
We believe that the proposed change will significantly improve the relevance and
reliability of the information presented in financial statements. It will ensure
improved consistency and comparability by reducing the subjectivity involved in
measuring deferred taxes. Presuming the recovery of the carrying amount of the
underlying asset through sale for the measurement of the deferred tax liability is
consistent with measurement of the underlying asset on a fair value measurement
basis, which reflects the price that would be received if the asset was sold. In
addition, the proposals will significantly reduce administrative burdens while at the
same time substantially improving the decision usefulness of the financial
statements.
Our detailed responses to the questions are included in the attached Appendix.
Sincerely,
Peggy McFarland, C.A.
Director, Corporate Taxation
1 Queen Street East
Suite 1700
Toronto, Ontario
M5C 2X9
1, rue Queen Est
Bureau 1700
Toronto (Ontario)
M5C 2X9
Tel: (416) 777-2221
Fax: (416) 777-1895
www.clhia.ca
Tél.: (416) 777-2221
Fax: (416) 777-1895
www.accap.ca
Toronto
●
Montreal
●
Ottawa
APPENDIX - Responses to Exposure Draft Questions
Question 1 – Exception to the measurement principle
Question:
The Board proposes an exception to the principle in IAS 12 that the
measurement of deferred tax liabilities and deferred tax assets should reflect the
tax consequences that would follow from the manner in which the entity expects
to recover or settle the carrying amount of its assets and liabilities. The proposed
exception would apply when specified underlying assets are remeasured or
revalued at fair value.
Do you agree that this exception should apply when the specified underlying
assets are remeasured or revalued at fair value?
Why or why not?
Response:
We agree that this exception should apply given that in applying the
expectation approach under IAS 12, in many cases, it is difficult and
subjective to determine the expected manner of recovery when the specified
underlying assets are remeasured or revalued at fair value. The situation of
most concern to the Canadian life insurance industry is the treatment of
investment properties, as such properties may be held to earn rental income
as well as capital appreciation at some time in the future. The Canadian life
insurance industry strongly believes that the only practical and realistic
approach to the measurement of deferred taxes with respect to investment
properties is to assume that the value of these assets will be recovered
through sale. The industry has consistently applied this approach to its
investment properties under current estimates of the impact of adopting IFRS
on opening retained earnings. However, clarification that this method is
appropriate under IFRS and further guidance in this area are urgently
needed.
In situations where there are no immediate plans for disposal of the
investment property, it is very difficult and subjective to estimate how much of
the carrying amount of the investment property will be recovered by cash
flows from rental income and how much of it will be recovered by cash flows
from selling the asset. In particular, it is difficult to estimate the residual value
at the end of the period. IAS 12 also requires the bifurcation of the fair value
into land and building components. This imposes another level of subjectivity
in the estimation process required by existing IAS 12. While this exercise
would be challenging enough to administer for a limited number of properties,
it would be even more difficult as the quantum of properties subject to the
estimation process increases; some Canadian life insurance companies have
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hundreds of investment properties. Given that the industry holds over $15
billion of real estate investments to support the long-term nature of its policy
liabilities, which may extend for 50 years or more, this is an extremely
significant issue for our industry.
The exposure draft provides a practical approach that avoids subjective
estimates of an entity’s expected manner of recovery of its assets and
liabilities while reducing the related administrative burden.
We strongly support the exception proposed in the exposure draft when
the specified underlying assets are remeasured or revalued at fair value.
Question 2 – Scope of the exception
Question:
The Board identified that the expected manner of recovery of some
underlying assets that are remeasured or revalued at fair value may be
difficult and subjective to determine when deferred tax liabilities or deferred
tax assets arise from:
(a) investment property that is measured using the fair value model in
IAS 40;
(b) property, plant and equipment or intangible assets measured using
the revaluation model in IAS 16 or IAS 38;
(c) investment property, property, plant and equipment or intangible
assets initially measured at fair value in a business combination if the
entity uses the fair value or revaluation model when subsequently
measuring the underlying asset; and
(d) other underlying assets or liabilities that are measured at fair value or
on a revaluation basis.
The Board proposes that the scope of the exception should include the
underlying assets described in (a), (b) and (c), but not those assets or
liabilities described in (d). Do you agree with the underlying assets included
within the scope of the proposed exception?
Why or why not? If not, what changes to the scope do you propose and why?
Response to Question 2:
We agree that the scope as outlined in the exposure draft is appropriate. As
discussed above, the Canadian life insurance industry’s primary concern is
ensuring that investment property that is measured using the fair value model
in IAS 40 is included in the scope of the exception. While we are in support of
the scope of the exception including the underlying assets described in (a),
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(b) and (c), we would also agree with limiting the exception to only investment
properties using the fair value model in IAS 40 described in (a) above.
We support the scope adopted in the exposure draft.
Question 3 – Measurement basis used in the exception
Question:
The Board proposes that, when the exception applies, deferred tax liabilities
and deferred tax assets should be measured by applying a rebuttable
presumption that the carrying amount of the underlying asset will be
recovered entirely through sale. This presumption would be rebutted only
when an entity has clear evidence that it will consume the asset’s economic
benefits throughout its economic life.
Do you agree with the rebuttable presumption that the carrying amount of the
underlying asset will be recovered entirely by sale when the exception
applies?
Why or why not? If not, what measurement basis do you propose and why?
Response:
We agree with the rebuttable presumption that the carrying amount of the
underlying asset will be recovered entirely by sale when the exception applies
for the following reasons:
 presuming the recovery of the carrying amount of the underlying
asset through sale for the measurement of the deferred tax liability
is consistent with measurement of the underlying asset on a fair
value measurement basis that reflects the price that would be
received if the asset was sold
 the exception provides the least subjective manner of measuring
deferred taxes, providing users of the financial statements with
consistent and comparable financial information.
We agree that in certain circumstances, when there is clear evidence that an
entity will consume the asset’s economic benefit throughout its economic life,
it is not appropriate to assume a recovery of the asset through sale. By
making the presumption rebuttable, in such cases, entities may still assume
recovery through use when it is more appropriate.
We would further point out that the expectation approach under IAS 12 also
may not reflect reality and could actually undermine the relevance and
reliability of financial statements. In the Canadian tax regime, capital gains
are effectively taxed at only 50% of the tax rate applied to business income.
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Thus, establishing a deferred tax liability assuming use instead of sale could
result in a materially higher deferred tax liability that would be realized and
brought into income if and when the asset is sold. Such an income inclusion
may be material.
We support the adoption of the measurement basis as outlined in the
exposure draft.
Question 4 – Transition
Question:
The Board proposes that the amendments should apply retrospectively. This
requirement includes retrospective restatement of all deferred tax liabilities or
deferred tax assets within the scope of the proposed amendments, including
those that were initially recognised in a business combination.
Do you agree with the retrospective application of the proposed amendments
to IAS 12 to all deferred tax liabilities or deferred tax assets, including those
that were recognised in a business combination?
Why or why not? If not, what transition method do you propose and why?
Response:
We agree with retrospective application of the proposed amendments to
IAS 12 to all deferred tax liabilities or deferred tax assets on the basis
that it would result in consistent and comparable financial information
and would not be unduly burdensome for entities to apply this
retrospectively.
We also support retrospective application of the exposure draft to business
combinations. We also believe that a timely issuance of the amendment may,
in certain circumstances, significantly reduce the accounting efforts with
respect to business combinations occurring before the amendment becomes
effective, as the application of the proposed amendment will reduce the need
for adjustments to either the purchase price allocation or the opening retained
earnings during the post-acquisition period.
Question 5 – Other comments
Response:
The issuing date and the effective date of this amendment are of critical
importance for countries such as Canada, Brazil, India and South Korea
which are adopting IFRS effective 2011. In particular, the ability to early
adopt is critical.
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Companies will be required to disclose the opening transition adjustment as
at January 1, 2010 in their 2010 financial statements. Without clarity by the
end of December 2010 regarding the IASB's decision on the exposure draft,
companies may be in a situation where they may be required to prepare the
transition adjustment under existing IAS 12 to be positioned to meet their
year-end disclosure deadline, regardless of the final decision. This exercise
will be extremely onerous as it involves a number of disciplines, including
actuarial, accounting and tax, and it will consume a great deal of time and
effort during year-end when resources are stretched to the limit. The
Canadian life insurance industry’s strong preference is to avoid this
unnecessary exercise. We would like to impress upon the Board the need for
clarity, i.e. an official statement or announcement, preferably in early to mid
December confirming whether the proposed amendment to the standard will
be issued and, if so, whether there will be an early adoption provision for
2010 or 2011.
Without timely notice by the end of 2010 of the IASB's approval of the
exposure draft recommendations, Canadian companies may be required to
prepare the transitional adjustment under the existing IAS 12 guidance which
would result in:
 significant undue work effort for little or no ultimate benefit
 reduced reliability and comparability of the financial statements due
to increased subjectivity.
Paragraph 17 indicates that early application will be permitted. If the effective
date is after 2011, early application will be critical for the Canadian life
insurance industry; otherwise companies would be required to prepare their
transitional adjustment under existing IAS 12 and may face the negative
consequences noted above.
Paragraph BC31 indicates that the Board normally sets an effective date of
between six and eighteen months after issuing amendments. If the effective
date is after 2011, Canadian life insurers will require regulatory approval to
early adopt this amendment. (Canada's Office of the Superintendent of
Financial Institutions has indicated that Canadian financial institutions will
require their approval to early adopt any changes to IFRS standards.) While
early indications are that the regulator will approve such a request, there is
the possibility that it could be denied, in which case companies may be forced
to have a “double conversion” – first to transition under existing IAS 12 for
2010 and 2011 and then to transition in 2012 or beyond to the amended
standard.
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In paragraph BC29, the Board expressed its view that the proposed change
should not be unduly burdensome for entities to apply. In paragraph BC 33,
the Board also expresses its intention to finalize any amendments resulting
from this exposure draft as soon as possible. In the same paragraph, the
Board acknowledges that the amendments address a problem that exists in
practice and needs to be solved as soon as possible and that the
amendments are straightforward. We are in full agreement with the Board on
this matter. Given the consequences that the Canadian life insurance
industry will face if this amendment does not proceed quickly, we request that
the effective date be set at the earliest date possible.
We recommend the Board move forward with this amendment as
quickly as possible. Ideally, an issuing date before January 1, 2011,
with permission for early adoption, would alleviate any undue
compliance burdens and regulatory issues. In the event the IASB
decides to issue the proposed amendment to the standard but the
amendment will not be issued before January 1, 2011, we request that
the IASB formally communicate by that date that the amendment will be
issued no later than March 1, 2011, with permission for early adoption.
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