IAS APPLICATION

IAS Application

Introduction

Accounting for deferred tax is a complex issue in the investment property industry and involves judgment dependent on the facts and circumstances. This paper deals with some of the more frequently encountered issues and suggests practical solutions. Where many transactions are done with the property in a legal shell (wrapper), the central issue is whether the transaction is an asset deal1 or a business combination. Under the present IAS 12, this results in different accounting for deferred tax and consequently has a significant effect on goodwill and impairment. An asset deal may result in a “day one” profit when the investment property (acquired for a price that reflects a portion of the tax deferral) is subsequently brought to its fair value. In a business combination, goodwill may arise because of the fact that IAS 12 requires the deferred tax liability to be measured at an undiscounted value, which may give rise to subsequent impairment issues. This paper is based on the assumption that the investment asset is calculated at the reasonable price under the choice available in IAS 40. Deferred tax issues may also arise when the cost model is used, but this generally does not create such complex issues as those found under the fair value model. The analysis is from the perspective of a group's consolidated financial statements, rather than an entity's standalone financial statements.

To,

The Chairman,

International Accounting Standard Board

Subject: Proposition for change in IAS 12

Dear Sir,

I would like to suggest some changes in the IAS 12, which mainly deals with the real estate investment property and accounting for deferred tax. This clause has some faults, in my letter I will discuss the problem in this clause and will suggest some probable solutions for it.

IAS 12 requires accounting for delayed tax based on minor dissimilarities between the book worth of an asset or liability, and its taxation foundation. Fair value measurement of investment property is likely to create differences between the accounting base and the tax base. In a few countries, the taxation rules regarding investment properties may be very dissimilar from the usual tax regulations for other actions. There could be a different rate of taxation or no tax at all such a situation may occur depending on the way business is structured legally. However, in actual tradition this procedure often involves the conversion of a lawful covering that is holding the assets. This can be the case for other reasons such as neglecting the listing of changes in ownership in the records of public, e.g. the property registration or neglecting the requirement to renegotiate rent contracts. The shell, which owns the property, will, therefore create suppleness for the owner to shape a sale through means of a property or a share deal, whichever the most beneficial at a given point in time.

A revised IFRS, 3 “Business Combinations” was issued by the IASB in January 2008, with endorsement for use in the European Union ...