4 International Tax Reform—Pillar Two Model Rules (Amendments to IAS 12) DECA

22 June 2023 Agenda Paper 4

Executive Summary

Decisions for the Board

Does the Board agree that, subject to any amendments or additions required by the Board, the DECA can be published for public consultation?

Recommendation

Subject to any amendments or additions required by the Board, the Secretariat recommends that the Board approves the DECA for public consultation.

Appendices

Appendix A [Draft] Endorsement Criteria Assessment of International Tax Reform–Pillar Two Model Rules (Amendments to IAS 12) Appendix B DECA–Invitation to Comment Appendix C Your Details

Purpose

1 The purpose of this paper is to:

a) Obtain Board feedback on the Draft Endorsement Criteria Assessment (DECA), included as Appendix A of this paper, for the narrow-scope amendments International Tax Reform–Pillar Two Model Rules (the Amendments). b) Request the Board’s approval to publish the DECA on the UKEB website for stakeholder consultation.

Background

2 In May 2023, the IASB issued the narrow scope amendments International Tax Reform–Pillar Two Model Rules (the Amendments).

Mandatory temporary exception

3 If adopted, the Amendments would introduce a mandatory temporary exception from deferred tax accounting in relation to Pillar Two top-up taxes and a requirement to disclose that this exception had been applied.

Targeted disclosure requirements

4 The Amendments would also introduce targeted disclosure requirements.

5 An entity would be required to disclose its current tax expense (income) related to Pillar Two income taxes separately, once the tax is in effect.

6 In periods when the legislation has been enacted or substantively enacted but is not yet in effect, an entity would be required to disclose known or reasonably estimable qualitative and quantitative information that helps users of financial statements understand the entity’s exposure to Pillar Two income taxes. Where an entity does not have known or reliably estimable information on its exposure to Pillar Two top-up taxes at the end of the reporting period, it would have to make a statement to this effect and disclose the progress it has made in assessing its exposure.

Transition and effective date

7 If adopted, the exception from deferred tax accounting would be effective immediately and retrospectively, together with the requirement to disclose that it has been applied. The targeted disclosure requirements would be effective for annual periods beginning on or after 1 January 2023 but would not be required for interim periods ending on or before 31 December 2023.

Stakeholder outreach

8 We gathered feedback on the IASB’s initial proposals by holding two roundtables, one for accounting firms and institutes and one attended by preparers and also open to investors, and a discussion with the Investor Advisory Group (IAG). This informed our final comment letter, submitted on 9 March 2023. The March meetings of the Preparer Advisory Group (PAG) and Accounting Firms and Institutes Advisory Group (AFIAG) confirmed the urgency of the Amendments.

9 The final Amendments issued in May 2023 reflect the principal comments in the UKEB comment letter. Since their issue we have conducted further stakeholder outreach, primarily to inform the long term public good assessment in the DECA.

10 The Secretariat held a discussion at the June meeting of the PAG on the balance of costs and benefits of applying the Amendments. The Secretariat also held separate discussions with two preparers who are not members of the PAG.

11 In addition, the Amendments were discussed with the IAG at its June 2023 meeting. IAG members welcomed the mandatory temporary exception and considered that the targeted disclosure requirements provided additional useful information.

12 The results of this additional outreach are reflected in the DECA. Stakeholders will have the opportunity to share their views on the costs and benefits arising from the Amendments in their responses to the DECA.

Next steps and timeline

13 In accordance with the PIP (approved by the Board in February 2023), and assuming the Board decides to adopt the Amendments, the UKEB project plan timeline will ensure adoption is completed before the end of July 2023.

Endorsement and adoption phase

14 Accounting firms and preparer stakeholders have observed that this matter is urgent, given current expectations that the relevant legislation will be enacted in the coming weeks. In accordance with the Due Process Handbook paragraph 6.29, the DECA will be open for public consultation for the minimum period of 14 days. Both the AFIAG and the PAG confirmed to us at their March meetings that in their view a short consultation period was necessary in this case.

15 Subject to amendments or additions to the DECA required by the Board, the proposed timeline for publication, public consultation and subsequent finalisation of the ECA is set out in the table and diagram below.

Question for the Board

1 Does the Board agree that, subject to any amendments or additions required by the Board, the DECA can be published for public consultation?

Endorsement and Adoption timeline (as proposed in February 2023 PIP)

The UKEB does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it. © 2023 All Rights Reserved

Introduction

Purpose

1 The purpose of this Draft Endorsement Criteria Assessment (DECA) is to determine whether International Tax Reform–Pillar Two Model Rules (Amendments to IAS 12) (the Amendments), issued by the International Accounting Standards Board (IASB) in May 2023, meet the UK’s statutory requirements for adoption as set out in Regulation 7 of Statutory Instrument (SI) 2019/685².

2 The IASB’s proposals were set out in Exposure Draft ED/2023/1 International Tax Reform–Pillar Two Model Rules (Amendments to IAS 12) (the ED)³. The UKEB submitted its Final Comment Letter (FCL) on the ED to the IASB on 9 March 2023⁴.

Background to the Amendments

3 The Pillar Two model rules introduce a minimum tax rate for entities and groups with turnover of €750m or above. In jurisdictions where an entity or group’s effective tax rate is below 15%, the Pillar Two model rules require the entity or group to top up the tax it pays to that rate.

4 Stakeholders expressed concern about the complexities of accounting for deferred tax in respect of the Pillar Two model rules. They also highlighted to the IASB that there is an urgent need for clarity due to the expected enactment of the Pillar Two model rules in 2023 across multiple jurisdictions, including the UK. In response to this feedback, the IASB developed the Amendments.

5 If adopted, the Amendments will introduce a mandatory temporary exception from deferred tax accounting in relation to Pillar Two income taxes, a requirement to disclose that this exception has been applied and targeted disclosure requirements. The exception from deferred tax accounting will be effective immediately and retrospectively, together with the requirement to disclose that it has been applied. The targeted disclosure requirements will be effective for annual periods beginning on or after 1 January 2023. Section 2 of this DECA provides a brief description of the Amendments.

Exclusions from the adoption assessment

6 The Amendments to the Basis for Conclusions of IAS 12 Income Taxes have not been included as part of the UKEB’s assessment as UK-adopted international accounting standards comprise only the mandatory sections of standards. Similar amendments will be made to the IFRS for Small and Medium-Sized Entities (SMEs) standard, which is not used in the UK.

7 This DECA does not therefore consider any amendments to the IAS 12 Basis for Conclusions or to the IFRS for SMEs.

Structure of the assessment

8 We have presented our analysis in the following sections:

a) Section 1: describes UK statutory requirements for adoption of new or amended international accounting standards; and b) Section 2: discusses how the Amendments meet the criteria in Section 1.

Do the Amendments lead to a significant change in accounting practice?

9 A standard adopted by the UKEB under Regulation 6 of SI 2019/685 that it considers is likely to lead to a “significant change in accounting practice”, is subject to the requirements in paragraph 3 of Regulation 11 of SI 2019/685 that the UKEB:

a) “carry out a review of the impact of the adoption of the standard; and b) publish a report setting out the conclusions of the review no later than 5 years after the date on which the standard takes effect (being the first day of the first financial year in respect of which it must be used)”.

10 Section 2 of the DECA discusses whether the Amendments lead to a significant change in accounting practice and concludes that they do not⁵.

I. Section 1: UK statutory requirements for adoption

UK statutory requirements

1.1 Paragraph 1 of Regulation 7 of SI 2019/685 requires that an international accounting standard only be adopted if:

a) “the standard⁶ is not contrary to either of the following principles– i. an undertaking’s accounts must give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss; ii. consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking; b) the use of the standard is likely to be conducive to the long term public good in the United Kingdom; and c) the standard meets the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management.”

1.2 This DECA assesses the criteria above in the following order:

a) Whether the Amendments meet the criteria of relevance, reliability, understandability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management (SI 2019/685 Regulation 7(1)(c)). b) Whether the Amendments are not contrary to the principle that an entity’s accounts must give a true and fair view (SI 2019/685 Regulation 7(1)(a)). c) Whether use of the Amendments is likely to be conducive to the long term public good in the UK (Regulation 7(1)(b)). SI 2019/685 Regulation 7(2) includes specific areas to consider for this assessment. They are: i. whether the Amendments are likely to improve the quality of financial reporting; ii. the costs and benefits that are likely to result from the use of the Amendments; and iii. whether the Amendments are likely to have an adverse effect on the economy of the UK, including on economic growth.

Relevance, reliability, understandability and comparability7

1.3 Information is relevant if it is capable of making a difference in the decision-making of users⁸ or in their assessment of the stewardship of management. The information may aid predictions of the future, confirm or change evaluations of the past, or both.

1.4 Financial information is reliable if, within the bounds of materiality, it:

a) can be depended on by users to represent faithfully what it either purports to represent or could reasonably be expected to represent; b) is complete; and c) is free from material error and bias.

1.5 Financial information should be readily understandable by users with a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence.

1.6 Information is comparable if it enables users to identify and understand similarities in, and differences among, items. Information about an entity should be comparable with similar information about other entities and with similar information about the same entity for another period.

1.7 In conducting our overall assessment against the technical accounting criteria we are required to adopt an absolute, rather than a relative, approach. Our assessment is therefore an absolute one against the criteria (do the Amendments provide information that is understandable, relevant, reliable and comparable?) rather than a relative one (do the Amendments provide information that is more understandable, relevant, reliable and comparable than current, or any other, accounting?). When an assessment of any individual aspect or requirement of the Amendments uses comparative language (e.g. ‘enhances comparability’), this does not mean that our objective is to reflect a real comparison in relative terms. Instead, our objective is to explain that any individual aspect or requirement of the Amendments has the potential to “enhance” one or more of the qualitative characteristics. Consideration of whether the Amendments are likely to improve the quality of financial reporting is separate from this assessment and is included within the UK long term public good assessment in Section 2.

True and fair view assessment

1.8 As noted above, the first adoption criterion set out in SI 2019/685 Regulation 7(1) requires that an international accounting standard can be adopted only if:

“[...] the standard is not contrary to either of the following principles–

a) an undertaking’s accounts must give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss; b) consolidated accounts must give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included in the accounts taken as a whole, so far as concerns members of the undertaking; [...]”

1.9 For the sake of brevity, we refer to our assessment against this endorsement criterion as ‘the true and fair view assessment’ and to the principles set out in Regulation 7(1)(a) as the ‘true and fair principle’. However, these abbreviated expressions do not imply that our assessment has considered anything other than the full terms of the endorsement criterion set out above.

1.10 The duty of the UKEB under Regulation 7(1)(a) is to determine generically, before a standard is applied to a set of accounts, whether that standard is not contrary to the true and fair principle. In other words, it is an ex-ante assessment. We have therefore considered whether the Amendments contain any requirement that would prevent accounts prepared using the Amendments from giving a true and fair view.

1.11 Our approach is to determine whether the Amendments are not contrary to the true and fair principle in respect of any of the specific items identified in Regulation 7(1)(a) (namely, the assets, liabilities, financial position and profit or loss) in the context of the preparation of the accounts as a whole. A holistic approach has been taken to this assessment, considering the impact of the Amendments taken as a whole, including its interaction with other UK-adopted international accounting standards⁹.

1.12 For the purposes of our assessment, we consider the requirement in IAS 1 Presentation of Financial Statements for financial statements to “present fairly the financial position, financial performance and cash flows of an entity” to be equivalent to the Companies Act 2006 requirement for accounts to give a true and fair view.

1.13 Our assessment is separate from the duty of directors under section 393(1) of the Companies Act 2006, which requires directors to be satisfied that a specific set of accounts gives a true and fair view of an undertaking’s or group’s assets, liabilities, financial position and profit or loss.

[Draft] Adoption decision

1.14 Section 2 of this DECA discusses how the Amendments meet the statutory endorsement criteria set out in this Section.

1.15 On the basis of this assessment, [and subject to any stakeholder feedback,] the UKEB [tentatively] concludes that the Amendments meet the statutory endorsement criteria. The UKEB is therefore of the view that it will adopt the Amendments for use in the UK.

2. Section 2: Description and assessment of the Amendments

Do the Amendments lead to a significant change in accounting practice?

2.1 The UKEB is required to assess whether or not the Amendments are likely to lead to a ‘significant change in accounting practice’ and therefore meet the criteria for a post-implementation review.

2.2 The Amendments do not fundamentally change the basic requirements of IAS 12 or introduce new principles, nor do they impact the majority of entities.

2.3 As a result, the UKEB [tentatively] concludes that the Amendments are not likely to lead to a significant change in accounting practice and do not meet the criteria for a post-implementation review under Regulation 11 in SI 2019/685.

Appendix A: Glossary

Contact Us UK Endorsement Board 1 Victoria Street | London | SW1H 0ET | United Kingdom www.endorsement-board.uk

Appendix B: Invitation to Comment

Call for comments on Draft Endorsement Criteria Assessment of International Tax Reform–Pillar Two Model Rules (Amendments to IAS 12)

Deadline for completion of this Invitation to Comment:

Close of business, Monday 10 July 2023

Please submit to: [email protected]

Introduction

The objective of this Invitation to Comment is to obtain input from stakeholders on the endorsement and adoption of International Tax Reform–Pillar Two Model Rules (Amendments to IAS 12) (the Amendments), published by the International Accounting Standards Board (IASB) in May 2023. The Amendments provide a mandatory temporary exception from deferred tax accounting in relation to Pillar Two top-up taxes alongside targeted disclosure requirements. The exception from deferred tax accounting will be effective immediately and retrospectively, together with the requirement to disclose that it has been applied. The targeted disclosure requirements will be effective for annual periods beginning on or after 1 January 2023. The information collected from this Invitation to Comment is intended to help with the endorsement assessment.

UK endorsement and adoption process

The requirements for UK adoption are set out in Statutory Instrument 2019/685¹⁰.

The powers to formally adopt international accounting standards for use in the UK were delegated to the UK Endorsement Board in May 2021¹¹.

Who should respond to this Invitation to Comment?

Stakeholders with an interest in the quality of accounts prepared in accordance with IFRS Accounting Standards.

How to respond to this Invitation to Comment

Please download this document, answer any questions on which you would like to provide views, and return it to [email protected] by close of business on Monday 10 July, 2023.

Brief responses to individual questions are welcome, as well as comprehensive responses to all questions.

Privacy and other policies

The data collected through submitting this document will be stored and processed by the UKEB. By submitting this document, you consent to the UKEB processing your data for the purposes of influencing the development of and adopting IFRS for use in the UK. For further information, please see our Privacy Statements and Notices and other Policies (e.g. Consultation Responses Policy and Data Protection Policy)¹².

The UKEB’s policy is to publish on its website all responses to formal consultations issued by the UKEB unless the respondent explicitly requests otherwise. A standard confidentiality statement in an e-mail message will not be regarded as a request for non-disclosure. If you do not wish your signature to be published, please provide the UKEB with an unsigned version of your submission. The UKEB prefers to publish responses that do not include a personal signature. Other than the name of the organisation/individual responding, information contained in the “Your Details” document will not be published. The UKEB does not edit personal information (such as telephone numbers, postal or e-mail addresses) from any other response document submitted; therefore, only information that you wish to be published should be submitted in such responses.

Assessment against endorsement criteria

Our draft assessment concludes that:

• the Amendments meet the criteria of relevance, reliability, understandability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management, as required by SI 2019/685 (see Regulation 7(1)(c));
• application of the Amendments is not contrary to the principle that an entity’s accounts must give a true and fair view as required by SI 2019/685 (see Regulation 7(1)(a)); and
• that the Amendments are likely to be conducive to the long term public good in the UK as required by SI 2019/685 (see Regulation 7(1)(b)), having considered:
• whether they will generally improve the quality of financial reporting;
• the costs and benefits that are likely to result from their use; and
• whether they are likely to have an adverse effect on the economy of the UK, including on economic growth.

Our assessment of the Amendments is set out in Section 2 of the DECA in the pages indicated below:

Questions

Technical accounting criteria assessment

1 Do you agree with the draft assessment of the Amendments against the technical accounting criteria? (please select one option)

2 Please include any comments you may have in response to question 1:

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True and fair view

3 Do you agree with the draft assessment that the Amendments are not contrary to the true and fair view requirement? (please select one option)

4 Please include any comments you may have in response to question 3:

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UK long term public good

5 Do you agree with the initial assessment of costs and benefits for preparers and for users of the Amendments? (please select one option)

6 Please include any comments you may have in response to question 5, including if any costs or benefits have been omitted:

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7 Do you agree with the draft assessment that the Amendments are likely to be conducive to the long term public good in the UK? (please select one option)

8 Please include any comments you may have in response to question seven:

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Thank you for completing this Invitation to Comment Please submit this document by close of business on Monday 10 July 2023 to: [email protected]

Your details

Name: Click or tap here to enter text. Email address: Click or tap here to enter text.

Are you responding:

If responding on behalf of an organisation, Name of organisation: Click or tap here to enter text.

Please select what best describes the organisation:

If your response was ‘Other’, please describe: Click or tap here to enter text.

Is your organisation a listed entity?

Please select which industry your organisation predominately operates in:

Would you be happy for UKEB to contact you by email if we wished to discuss some of your responses?

Privacy and other policies

The data collected through submitting this document will be stored and processed by the UKEB. By submitting this document, you consent to the UKEB processing your data for the purposes of influencing the development of and endorsing IFRS for use in the UK. For further information, please see our Privacy Statements and Notices and other Policies (e.g. Consultation Responses Policy and Data Protection Policy)¹³.

The UKEB’s policy is to publish on its website all responses to formal consultations issued by the UKEB unless the respondent explicitly requests otherwise. A standard confidentiality statement in an e-mail message will not be regarded as a request for non-disclosure. If you do not wish your signature to be published, please provide the UKEB with an unsigned version of your submission. The UKEB prefers to publish responses that do not include a personal signature. Other than the name of the organisation/individual responding, information contained in the “Your Details” document will not be published. The UKEB does not edit personal information (such as telephone numbers, postal or e-mail addresses) from any other document submitted; therefore, only information that you wish to be published should be submitted in such responses.