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Emerging Issues Committee
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Abstract Approved Conversion of an Unincorporated Entity to an Incorporated Entity It is expected that a number of income trusts and other specified investment flow-throughs (SIFTs) will convert to a corporate structure as a result of changes to the Income Tax Act enacted in 2007. Draft Abstract D68. The Committee discussed the Draft Abstract, made some editorial changes and agreed to issue a final Abstract. The basis of application reads as follows: “The Committee reached a consensus that the accounting treatment in this Abstract should be applied prospectively to all conversions completed after the date of issuance of this Abstract.” It is expected that EIC-170 will be posted on the CICA website in early April 2008. D68 will remain on the website until EIC-170 is posted. Draft Abstract Approved Determination of “Substantively Enacted” for Changes to Income Tax Regulations EIC-111, “Determination of Substantively Enacted Tax Rates under CICA 3465,” provides guidance on the application of the term “substantively enacted” when changes are proposed to the income tax laws. However EIC-111 does not address changes to regulations, and there is diversity in practice as to when proposed changes to regulations are applied in measuring income tax assets and liabilities in accordance with Income Taxes, paragraph 3465.56. The Committee approved a Draft Abstract that states that a regulation should be considered substantively enacted when pre-publication in the Canada Gazette, Part I occurs. It is expected that D76 will be posted on the CICA website for public comment in early April 2008. Abstracts Amended Consequential Amendments The Committee discussed and approved consequential amendments to the following Abstracts resulting from revision to Section 1000, Financial Statement Concepts, and the release of Section 3064, Intangible Assets. EIC-12, “Capitalization of Interest Costs on Investments in Potential Takeover Targets” EIC-14, “Adjustments to the Purchase Equation Subsequent to the Acquisition Date” EIC-52, “Lessee's Accounting on Re-negotiation of an Operating Lease” EIC-101, “Debtor's Accounting for Changes in Line-of-Credit or Revolving-Debt Arrangements” EIC-126, “Accounting by Mining Enterprises for Exploration Costs” EIC-143, “Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts” The amendments did not affect any of the consensuses in these Abstracts. Potential Projects Interpretation of “expected” in paragraph 3465.103 Income Taxes, paragraph 3465.103, discusses the recognition of an asset or a liability by a rate-regulated entity with respect to future income taxes expected to be included in approved rates charged to customers in future periods. The term “expected” is not defined in the Handbook and could be interpreted to require different levels of certainty. The Committee agreed to refer this item to the AcSB for clarification or addition to the EIC agenda. A company may have a tax loss carryforward for which it has established a valuation allowance because it is not more likely than not to be realized. The company may also have financial instruments classified as available for sale. If the company records an unrealized gain in other comprehensive income, there would be a taxable temporary difference that gives rise to a future income tax liability. The existence of the future income tax liability will allow for the reversal of some or all of the valuation allowance for the tax loss carryforwards. At its February 2008 meeting, the EIC decided to recommend that the AcSB approve addition of this item to the EIC agenda. The AcSB approved the EIC recommendation at its February 27, 2008 meeting. The Committee discussed whether the reversal of the valuation allowance should be recorded in net income or in other comprehensive income and tentatively concluded that it should be included in net income. The Committee agreed to consult the AcSB before developing a draft Abstract. |