Emerging Issues Committee
Decision Summary
February 12, 2008

Abstract Amended

EIC-104, Impact of Refundable Taxes on Future Income Tax Calculations

EIC-104 addresses the accounting for future income taxes relating to temporary differences for those corporations that are subject to refundable taxes (refundable Part I Tax and Part IV Tax). EIC-104 was issued before Section 3855, Financial Instruments — Recognition and Measurement. For financial assets classified as available for sale, Section 3855 requires changes in fair value to be recorded in other comprehensive income.

Draft Abstract D72, “Impact of Refundable Taxes on Future Income Tax Calculations Related to Available-for-Sale Securities,” was exposed on the CICA website for public comment by January 11, 2008. The Draft Abstract proposed changes to EIC-104 to address the accounting when the future income taxes result from a temporary difference on a financial instrument classified as available for sale. The amended Abstract provides that the refundable portion of taxes related to financial instruments classified as available for sale should be charged to retained earnings (in accordance with the paragraph 3465.75) or recorded as a future income tax asset (in accordance with the paragraph 3465.76) when it is more likely than not that the refundable portion of the taxes will be recovered. When it is not more likely than not that the refundable portion of the taxes will be recovered, the refundable portion of the taxes should be charged to other comprehensive income.

The Committee agreed to issue a final amended Abstract after making some editorial changes. The basis of application reads as follows:

“The Committee reached a consensus that the accounting treatment in this Abstract may be applied prospectively and should be applied after the date of issuance. However, the accounting when the change in fair value of a financial instrument is recorded through other comprehensive income should be applied retrospectively to the date of adoption of Section 3855.”

The amended EIC-104 is posted on the CICA website.

Draft Abstract Discussed

Future Income Tax Consequences of Exchangeable Interests in an Income Trust or Specified Investment Flow-Through

A common income trust structure has an income trust control a business through a limited partnership. The partnership also has other partners who have the right to exchange their partnership interest for units of the income trust. EIC-151,”Exchangeable Securities Issued by Subsidiaries of Income Trusts,” provides guidance on accounting for exchangeable securities.

Draft Abstract D73, providing guidance on the future income tax consequences of exchangeable interests in an income trust or specified investment flow-through, was posted on the CICA website for public comment by January 11, 2008.

Several constituents raised concerns with the guidance in the Draft Abstract and the Committee agreed to consider other accounting approaches at a future meeting.

Potential Projects

EIC-139 Replacement Guidance

Former EIC-139 provided detailed guidance on how to account for the retained interest in a securitization of receivables.

This retained interest is a financial instrument that is now subject to Section 3855. EIC-139 was withdrawn in 2007 and a working group was formed to develop replacement guidance based on Section 3855.

The Committee considered a Discussion Paper on this issue prepared by the working group and agreed to continue the discussion at a future meeting.

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.

At its December 2007 meeting, the EIC decided to recommend that the AcSB approve the addition of this item to the EIC agenda. At its February 5, 2008 meeting, the AcSB approved the EIC recommendation.

The Committee tentatively decided that a regulation should be considered substantively enacted when pre-publication in the Canada Gazette, Part I occurs. The Committee agreed to continue its discussions and consider a Draft Abstract at a future meeting.

Inter-period Allocation of Future Income Taxes

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. The Committee discussed whether the reversal of the valuation allowance should be recorded in net income or in other comprehensive income and decided to recommend to the AcSB that it approve the addition of this issue to the EIC agenda.

Accounting for Maintenance and Inspection Costs

At its February 5, 2008 meeting, the AcSB did not approve the recommendation to add this issue to the EIC agenda.