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1. NARUC Staff Subcommittee on Accounting and Finance IAS 12 – Potential Tax Considerations May 4, 2009 PwC Sal Montalbano, Tax Director

2. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

3. Agenda

4. Status of IFRS in the US

5. SEC roadmap • On November 14th the SEC published its “Roadmap for the potential use of financial statements prepared in accordance with IFRS by US issuers” • The key provisions of the proposed Roadmap are fundamentally consistent with those included in the August 27th SEC announcement. • The Roadmap includes several milestones leading to the SEC making a final decision in 2011 whether to require mandatory IFRS reporting for US issuers. • Improvements in accounting standards • Accountability and funding of the IASB • Improvement in the ability to use XBRL for IFRS reporting • Increased IFRS education and training in the US • Experience of eligible IFRS early adopters • The Roadmap contemplates a phased transition to IFRS. • Large accelerated filers in 2014 • Accelerated filers in 2015 • Remaining filers in 2016

6. SEC roadmap (continued) • Issuers may only begin reporting using IFRS in an annual report on Form 10-K. • Must contain three years of audited financial statements • The Roadmap includes a provision to allow a limited number of US issuers to early adopt IFRS for years ending on or after 12/15/2009. • Eligibility would be limited to the 20 largest public companies (by market cap) in industries where IFRS is used most often • As part of the SEC’s 2011 evaluation, it may expand the eligibility criteria to allow additional issuers to use IFRS prior to a mandatory transition date.

7. SEC roadmap (continued) • Impact of the new administration • Comments made during new SEC Chairperson Mary Schapiro’s nomination process • Although supportive of a set of global standards, the SEC needs to proceed with great caution • Concerned about potential cost to companies to transition to IFRS • She would not be bound by the proposed Roadmap • Paul Volcker, Chairman of Obama’s Economic Advisory Panel, expressed his view that the US should be working toward international accounting standards under the auspices of the IASB

8. Income tax convergence project

9. Income tax convergence project (continued) • Impact of FASB’s decision to suspend deliberations to amend FAS 109 • FAS 109 guidance remains in current state • US companies should monitor IASB deliberations and comment on IAS 12 exposure draft • MoU issued on September 11, 2008 • FASB plans to solicit input from US constituents by issuing an Invitation to Comment containing the IASB’s proposed replacement of IAS 12 • At conclusion, FASB will decide whether to undertake a project that would eliminate differences in the accounting for income taxes

10. IASB exposure draft—Issued March 31, 2009 • Amendments to IAS 12 to adopt US GAAP for the following based on deliberations to date • Valuation allowance approach for DTA • Intraperiod allocation rules • APB 23 exception • Balance sheet classification of deferred tax assets and liabilities • Expected differences remaining at the time of conversion • Stock-based compensation • Uncertain tax positions • Intercompany transfers of assets • Measurement of foreign nonmonetary assets and liabilities • New standard may become effective in 2010 or 2011-Comment period through July 31, 2009

11. Comparison of US GAAP and IFRS – Tax Accounting Similarities & Differences

12. Comparison of US GAAP and IFRS • US GAAP and IFRS frameworks share many fundamental principles, however, at times they are conceptualized and applied differently • Differences will likely result in a number of adjustments in a company’s tax accounts—carousel tax differences • Current US GAAP – IFRS tax accounting differences include: • Deferred taxes • Deferred tax base • Recognition of deferred tax assets • Business combinations • Treatment of undistributed profits • Presentation • Stock-based compensation • Uncertain tax positions • Intercompany transfers of assets

13. Determine the book bases • Determine the tax base • Calculate temporary differences • Consider recoverability of DTAs • Determine tax rates • Identify exceptions • Recognise deferred tax • Disclosure Nine step approach to calculating deferred taxes • Presentation and offsetting

14. Determining the tax base of an asset • Tax base of an asset is “the measurement, under applicable substantively enacted tax law, of an asset”. • i.e. Tax base = future deductible amount • Some items may have a tax basis but no carrying amount (ie research expenses expensed for book and capitalized for tax)

15. Determining the tax base of a liability • Tax base of a liability is “the measurement, under applicable substantively enacted tax law, of an….liability” • Carrying amount less any amounts deductible against taxable income • Definition of tax basis provided under IFRS is not present in FAS 109 Designed to bring IAS 12 in conformity with FAS 109

16. Determination of tax base To determine the tax base, Ask yourself One asset/liability may have more than one tax base, but recovery results in measurement of one deferred tax balance • ‘What are the tax consequences that would follow from the manner in which the entity expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities?’

17. Recognition of deferred tax assets • A deferred tax asset should be recognised for all deductible temporary differences to the extent that: It is probable that taxable profit will be available against which the deductible temporary difference can be utilized 30% allowance 100% 70% US GAAP IFRS

18. Recognition of deferred tax assets – Amended IAS 12 • Valuation allowances • Exposure draft is adopts the valuation allowance model utilized in FAS 109 • IASB notes that change would have no effect on net amount recognized (ie disclosure event only) • Incorporates language from FAS 109 regarding determination of realizability of deferred tax assets

19. Deferred taxes – Recording impact of change in tax law • US GAAP • Recognize the impacts of a tax law change on deferred taxes and current tax liability when the law is Enacted • IFRS • Recognize the impacts of the change when the law is Substantively Enacted • In US, this may only be achieved upon enactment

20. Business combinations • Recognition of acquired tax benefits subsequent to acquisition • Acquired deferred tax benefits recognized during the measurement period • First reduce amount of goodwill to zero • Any remaining deferred tax benefit recognized in the income statement • Acquired deferred tax benefits recognized after the measurement period • Recognize in the income statement

21. Business combinations (continued) • Acquirer’s valuation allowance • If, as a result of the combination, the acquirer is able to recognize carryforwards that previously required a valuation allowance, benefit of releasing acquirer’s valuation allowance recognized in the income statement – does not impact the opening balance sheet or goodwill balance • Tax uncertainties in a business combination • Recognized in the income statement if outside the measurement period • Convergence • Post FAS 141R, treatment the same under IFRS and US GAAP

22. Undistributed profits

23. Presentation

24. Equity-settled share-based payments • Temporary difference and related DTA is based on the tax benefit that could be obtained in a current settlement of the award, generally the current fair value of the stock less the exercise price (if any) for a deductible award (intrinsic value) • Variable accounting based on the intrinsic value recorded through the tax provision - no income tax benefit is recorded until award is in the money • Amount of income tax benefit recorded through the provision is capped at the individual award’s carrying amount – generally the original grant date fair value determined under IFRS 2 • Benefit in excess of individual award’s carrying amount is recorded in equity • Ability to offset shortfalls with previously recorded windfall tax credits is restricted to windfalls and shortfalls arising from the same equity award only (i.e., no general windfall pool) • “Shortfalls” will flow through the tax provision as a result of inability to record a tax benefit equal to the original grant date fair value • Individual award tracking will be necessary

25. Share-based payments – Convergence • Two key differences between IFRS 2 and FAS 123(R) • IFRS uses “intrinsic value” for recording deferred tax asset. In the case of a stock option, intrinsic value is the excess of the FMV of the stock over the strike price. • ETR will be substantially more volatile under IFRS • IFRS has no windfall tax pool • If tax deduction is ultimately less than the pre-tax charge, there is a charge to P&L • If the reverse is true, the additional tax benefit goes to equity • Accounting for share-based compensation does not change in the exposure draft

26. Uncertain tax positions – US GAAP

27. Uncertain tax positions – IFRS

28. Uncertain tax positions –Convergence • The accounting for uncertain tax positions is expected to continue to be an area of difference between US GAAP and IFRS • The exposure draft includes provisions to account for uncertain tax positions • No recognition threshold – Measure using the probability-weighted average amount of All possible outcomes • Similar to US GAAP, detection risk will not be a factor in assessing potential outcomes • Disclosure requirements differ from current FIN 48 disclosure requirements (no tabular rollforward)

29. Intercompany transfers of assets - FAS 109 9(e) exception

30. Other tax considerations in an IFRS conversion

31. Accounting method considerations • Conversion to IFRS will change the starting point for determining pre-tax book income • Companies are expected to have over 100 changes to pre-tax income • Tax departments will need to understand and analyze each change to pre-tax income in all jurisdictions (both US and non-US) • Will change in pre-tax income flow through to taxable income? • Will the change affect CFC computation of E&P? • Is new IFRS method an acceptable method for tax purposes? • Will the change require a tax accounting method change? • Will system changes be required to gather information to compute new book/tax differences?

32. Accounting method considerations (continued) • While companies are expected to have over 100 changes to pre-tax income, this is not expected to result in 100 tax accounting method changes • Rather, conversion to IFRS will result primarily in changes in the computation of, or elimination of, book/tax differences • However, certain method changes are likely to be required or desired in certain situations • Current tax method requires book conformity (LIFO) • Costs are recharacterized as inventoriable for books (reclassification of costs between Sec. 471 and 263A) • Review uncovers erroneous tax method currently being utilized • Review identifies more favorable tax method

33. Regulatory Issues

34. IASB and Regulatory Accounting • Currently no ability to recognize regulatory assets and liabilities under IFRS • No FAS 71 equivalent • Entities in flow through jurisdictions have large FAS 109 tax regulatory assets • IASB members grant qualified approval to proposal on a project for rate regulated entities • February 2009 • Cost of service regulation included • Canada to adopt IFRS before US--2011

35. Questions

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