The Institute of Chartered Accountants of Nigeria
Taxation Implications
of
IFRS
Position for graphic or image
By Taiwo Oyedele FCA, FCCA, FCTI, CISA
Partner, PwC
2011 MCPE
Taxation implications of IFRS
Objectives
At the end of this session, participants should be able to:
•
Explain the principles of IFRS
•
Identify the tax implications of IFRS
•
Manage the impact of IFRS on their organisations
2
Agenda
Overview of IFRS
Tax implications and planning opportunities
Fiscal filters
Strategies for effectiveness
Conclusion
Case studies
Questions
Time: 2 hrs 30 mins
Managing the tax impacts on the organisation
Taxation implications of IFRS
Overview of IFRS
• IFRSs have been developed primarily to meet the information needs of
shareholders, lenders and other investors. These needs do not always align
with those of the tax authorities (e.g. extensive use of fair value and the
application of substance over form).
• Taxable profit of any specific period may differ between two standards,
however, the cumulative earnings of an entity over time will tend to be the
same as the individual transactions are cashed.
• From taxation point of view, however, there are additional variables that
may influence tax position such as impairment and treatment of tax losses
etc.
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Taxation implications of IFRS
Overview of IFRS
• IFRS stands for International Financial Reporting Standards issued by the
International Accounting Standards Board (IASB).
• Body was previously known as International Accounting Standards
Committee issuing International Accounting Standards (IAS).
• Essentially, IFRS comprises of four types of documents:
- International Accounting Standards (IASs);
- International Financial Reporting Standards (IFRSs);
- Interpretations of the International Financial Reporting Interpretations
Committee (IFRICs) formerly the Standing Interpretations Committee
(SICs); and
- IASB Framework for the Preparation and Presentation of Financial
Statements
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Taxation implications of IFRS
Overview of IFRS
By comparison, Nigerian GAAP is made up of the following:
• The Companies and Allied Matters Act (CAMA) LFN 2004
• Statements of Accounting Standards (SAS) issued by the Nigerian
Accounting Standards Board (NASB)
• Other local legislation and industry specific Guidelines such as BOFIA,
Prudential Guidelines, Insurance Act and SEC Rules
• International best practice (optional)
6
Taxation implications of IFRS
Overview of IFRS – gaining ground worldwide
Require or permit IFRS
Converging/converting to adopt IFRS
Pursing convergence but no plan to adopt yet
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Taxation implications of IFRS
Overview of IFRS - Key drivers
Improved
transparency and
comparability
for investors and
rating agencies
Industry
perception of
market leadership
More efficient
access to capital
for global
corporations
Increasing
demand for public
accountability and
transparency by
all stakeholders
Need to attract
international investors
and to enable easy
monitoring of overseas
investments.
IFRS:
More room for
management’s
judgment and truer
reflection of economic
reality with principlesbased GAAP
Reduced cost of
financial reporting
for global
companies
Tax Implications of IFRS Conversion
Facilitate
comparison
between public
entities (IPSAS)
The Uniform
Global
Accounting
Language
Ability to analyse
impact on
tax-related issues
Streamlined M&A
activity
Ability to understand
interaction with
strategic initiatives
to generate value
from synergies
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Taxation implications of IFRS
Overview of IFRS
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Listed & significant public entities (SPEs)
•
Entities with listed securities (domestic and foreign stock exchanges)
•
Government business entities e.g. NNPC
•
Unquoted entities required by law to file returns with regulatory authorities
(excluding returns with CAC & tax authorities) e.g. private banks and
insurance companies
Transition Date:
2010
Reporting Date:
2012
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Other public interest entities (Other PIEs)
•
Unquoted or private entities which are of significant public interest because
of their nature of business, size, number of employees or their corporate
status which require wide range of stakeholders.
•
Examples are large not for profit entities such as charities and pension
funds and may include publicly owned entities and other entities where
there is a potentially significant effect on financial stability.
Transition Date:
2011
Reporting Date:
2013
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Small and Medium-size Enterprises (SMEs)
• Entities that have no public accountability whose debt or equity instruments
are not listed; and
• Not in the process of issuing such instruments for trading in a public market;
and
• Do not hold assets in a fiduciary capacity for a broad group of outsiders; and
• Annual turnover not more than N500 million or such amount as may be fixed
by the CAC; and
• Total asset not more than N200 million or such amount as may be fixed by
the CAC; and
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Small and Medium-size Enterprises (SMEs)
• No Board member is a foreigner; and
• No member is a government or a government corporation or agency or its
nominee, and
• The directors among them hold not less than 51 percent of its equity
share capital.
Transition Date:
2012
Reporting Date:
2014
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Transition date – To Dos
• Awareness
• Planning (people, systems & process)
• Training
• Assessment & impact analysis
• Transition adjustments (Recognise, De-
recognise, Reclassify & Re-measure)
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Reporting date – To Dos
• Interim reporting based on IFRS (Listed entities and SPEs)
• Statutory audit
• File IFRS returns (CAC, FIRS, SEC, CBN, NAICOM etc)
• Investors communication
• Compliance monitoring
• Training
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Intervening period – To Dos
• Consultations and stakeholders engagement (NASB, FIRS, Other
Regulators, Investors etc)
• Accounting policies / manual review and changes
• Chart of accounts and mapping
• Prepare IFRS opening balance sheet (statement of financial position)
• Prepare comparative figures
• Conduct “Dry Runs”
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Intervening period – To Dos
• Legislative changes
• Communicate transition to
stakeholders
• Present a reconciliation of
shareholders’ equity and net income
between N-GAAP and IFRS
• Training
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Post Conversion – To Dos
• Monitor changes in IFRS and market practice
• Sustain benefits from the transition process
• Supervision, monitoring and enforcement of IFRS implementation
• Capacity building and support – establish experts units at the NASB,
CBN, NDIC and NAICOM to tackle new or revised standards
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Taxation implications of IFRS
Overview of IFRS – conversion roadmap
Example _ Timeline for SPEs with Dec 31st Year End Date
• Transition adjustments
1 Jan 2011
• Opening balance sheet
1 Jan 2011
• Comparative figures
31 Dec 2011
• First IFRS financial statements
31 Dec 2012
• Published audited IFRS financials
30 June 2013
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Taxation implications of IFRS
Managing the tax impacts on the organisation
Practical Issues
• First time adoption (IFRS 1) – minimum requirements, exceptions,
mandatory and optional exemptions
• Group entities (parent vs subsidiaries in different categories)
• Changes in legislation (CAMA, ISA, BOFIA, CITA etc)
• Transition guidelines
• Knowledge gap (professionals, regulators & preparers)
• Early adoption issues
• Tight conversion deadline and implications of non-compliance
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Taxation implications of IFRS
Managing the tax impacts on the organisation
Key changes with tax impact
Item
IFRS Requirements
Tax Consideration
Impairment
Required for assets (tangible &
intangible) including financial
instruments.
Transactions are accounted for in line
with their economic substance rather
than strictly legal form.
This is required in certain cases (as in
the case of some financial
instruments) or allowed (in the case
of non-current assets).
Incurred loss model (compared to
expected loss model under N-GAAP).
Should impairment be treated as
provisions (general & specific) or
losses (realised & unrealised)?
This would have both current and
deferred tax implications as in the
case of coumpound instruments.
The tax impact of fair value should
be substantially limited to deferred
taxation.
Substance
over form
Fair value
Provisions
Materiality
and
aggregation
Only specific provisions for
doubtful receivables are tax
deductible.
Expenses that do not meet the criteria Should tax rule on capital expense
for capitalisation will be expensed or be modified?
otherwise reclassified as intangible or
other assets.
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Taxation implications of IFRS
Managing the tax impacts on the organisation
Key changes with tax impact
• Companies may have to
include qualitative impact
analysis of IFRS
implementation in their 2010
financial statements
• Present in the 2011 accounts
a reconciliation between
current GAAP and IFRS:
1.1.11
31.12.11
Shareholders’ equity in
accordance with NGAAP
Impairment of assets
Fair value adjustments
Intangible assets
Non current assets
Revenue recognition
Consolidation
o Shareholders’ equity as of
1.Jan.2011 & 31.Dec.2011
o Net income at 31.Dec.2011
Deferred taxes
(...)
Shareholders’ equity in
accordance with IFRS
Impact of IFRS adoption
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Taxation implications of IFRS
Managing the tax impacts on the organisation
What do we have to do differently?
• Government to amend relevant reporting legislation, regulations and
tax rules
• Keep separate tax books / maintain parallel books of accounts?
• Record keeping, chart of accounts and mapping
• Preparation and presentation of financial statements
• Measurement bases for assets and liabilities
• Revenue recognition
• Disclosure requirements, nomenclature and format
• Impact on audit of tax and tax compliance
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Taxation implications of IFRS
Managing the tax impacts on the organisation
Tax Implications
Possible impact on tax reporting, tax cost and tax
cash flow
• Transition adjustments and tax reconciliation
• Related party transactions and disclosures
• Early adoption issues
• Business combination
• Fair value as deemed cost – capital allowance
• Mark-to-market treatment
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Taxation implications of IFRS
Managing the tax impacts on the organisation
Tax Implications
• Advances and fair value treatment (capital loss vs unwinding
income)
• Uncertain tax position and disclosures
• Deferred tax (balance sheet vs income statement approach, non
current classification and effective to statutory rate reconciliation)
• Equity accounting for JV and associates (stand-alone vs
consolidated)
• Revenue recognition
• Customer loyalty programme and promotional offers
• Warranty claim / provisions
• Inventory vs fixed assets reclassification & VAT treatment
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Taxation implications of IFRS
Managing the tax impacts on the organisation
Tax Implications
•
Leases (finance vs operating) – different tax treatment
•
Substance over form (equity vs liability classification e.g. preference
shares)
•
Uncertain tax positions & disclosure requirements
•
Depreciation of intangible assets
•
Componentisation of assets
•
Functional and reporting currency vs tax returns currency
•
Segment reporting vs tax filing and other income taxation
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Taxation implications of IFRS
Managing the tax impacts on the organisation
Tax Returns Reconciliation
It will be necessary to prepare a
reconciliation of tax returns under
N-GAAP to IFRS. This should cover
major tax attributes including:
• Provisions (taxed & untaxed)
• QCE and capital allowances
• Unutilised capital allowances
• Unutilised tax losses
• Withholding tax credit notes
• VAT and WHT (revenue & opex)
• Staff cost & PAYE/ITF returns
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Taxation implications of IFRS
Tax Planning Opportunities
•
Review of tax reporting systems and processes
•
Embedding chart of accounts into Extensible Business Reporting
Language (XBRL) for tax analysis
•
Cash advances and staff loan – possible classification of write off as
employees benefit (subject to PAYE implications)
•
Re-appraising the tax cycle and tax management framework (tax
planning, provisions, resourcing, compliance, reporting and tax
dispute resolution etc)
•
Provisions and impairments to be treated as specific as much as
possible
•
Ensure proper record keeping and explanation to support tax
treatment in the event of a tax enquiry
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Taxation implications of IFRS
Fiscal Filter
Tax limitations of IFRS transition can be surpassed by the introduction
of “fiscal filters" to cushion the tax burden. Thus, the taxable income will
consider the IFRS accounting profit, adjusted to reflect the
requirements of tax legislation. This model:
- Introduces a high level of flexibility in fiscal reporting;
- Avoids the need for a double accounting system;
- Eliminates almost all effects on tax revenues from IFRS adoption
“Fiscal filters" should have two primary functions: the preservation of
tax base (e.g. capital gains roll over, losses and revaluation reserves)
and the minimisation of effects from the transition adjustments.
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Taxation implications of IFRS
Fiscal Filter - Examples
Issue
Transition
adjustments
Financial
Instruments
Impairment
Fixed tangible
assets
Introduction of new fiscal filters
Difficulty
IFRS
level
Yes
Complex
IFRS 1
Transition adjustments will be registered in equity, namely in retained earnings
and reserves. Specific taxation rules should be defined for these adjustments. For
example, a transition period of three years for recognition of tax charge or income.
Yes
Complex
IAS 39, IFRS9
Current fiscal legislation states that only realised capital gains and losses are
subject to taxation. In an IFRS environment, current fiscal rules should be
maintained.
Evaluate
Complex
IAS 39, 36
Tax authority should evaluate whether to accept impairment losses determined
under IFRS or define specific rules and support the introduction of a fiscal filter.
Yes
Easy
IAS 16
IFRS allow entities to measure their fixed tangible assets at amortised cost or at
fair value. Each entity can choose between one of the referred measurement
methods. For tax purposes, the amortised cost method should be considered, with
the definition of assets economic life.
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Taxation implications of IFRS
Strategies for effectiveness
• Be proactive. Carry out a detailed plan, develop a budget, set KPIs and
develop a conversion strategy which should be agreed and properly
documented
• Consider using a project team with a clear timetable of action points
attached to individuals with appropriate authority to ensure accountability
• Set clear milestones and request regular progress reports
• Appoint a senior personnel (possibly the CFO / Finance Director) to carry
out the oversight function and project monitoring
• Involve external professionals to leverage best practice
• For multinationals, consider exchange programme or secondment for key
staff to countries already reporting under IFRS
• Report regularly to stakeholders (board, shareholders, regulators etc)
• Use the conversion opportunity to reassess tax, accounting and reporting
processes and consider how to optimise value and other benefits
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Taxation implications of IFRS
Conclusion
• IFRS is driving the revolutionary world of accounting with over 100
countries worldwide either requiring or permitting its use.
• There is no doubt that conversion to IFRS is a huge task and a big
challenge.
• Its revolutionary impact requires a great deal of decisiveness and
commitment.
• It is a new world order in corporate reporting that will alter not only the
financial accounting and reporting landscape in Nigeria but also tax
accounting, tax cash flow and tax distributable reserves.
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Taxation implications of IFRS
Conclusion
• Given the interrelationship between accounting measurements and
taxation, as part of the conversion process, companies need to
consider the possible impact of the changes on their tax accounting
methods, and possible impacts on taxable profits, tax assets and
liabilities and tax distributable reserves.
• For instance, extensive use of fair value under IFRS may give rise to
differences in recognised income and carrying values of assets and
liabilities and a resulting difference in current and deferred tax liability
or asset.
• Consider impact on communication with external stakeholders
including the tax authorities.
• Considering these factors, a successful conversion requires not only
the commitment of the finance team, but also demands full involvement
of the tax team.
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Taxation implications of IFRS
Conclusion
“In a time of drastic change it is the learners who
inherit the future. The learned usually find
themselves equipped to live in a world that no
longer exists.
Eric Hoffer, U.S. philosopher.
Thank you
The views and opinions expressed in this presentation are those of the author and do not in any way represent the views of the author’s employer or the
Institute of Chartered Accountants of Nigeria. You should not act upon the information contained in this publication without obtaining specific professional
advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The
author does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance
on the information contained in this publication or for any decision based on it.
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Taxation implications of IFRS
Case Study
Financial Reporting Nigeria Limited (FRNL ) is a wholly owned subsidiary of Financial Reporting Incorporated (FRI) based in
England and Wales.
FRNL is involved in assisting entities with corporate reporting and financial advisory. The company has been operating in Nigeria
for many years. As a company incorporated in Nigeria, RPNL prepares its accounts under Nigerian GAAP, essentially SAS, for
statutory reporting purposes including filing of returns with regulatory authorities (the Corporate Affairs Commission and the
Federal Inland Revenue Service).
However, the Consolidated Financial Statements of the parent entity FRI and its subsidiaries are prepared in accordance with
International Financial Reporting Standards (IFRS).
Given that the FRI group does not report under Nigerian GAAP, FRNL has to prepare its financial information in line with IFRS as
a “voluntary preparer” for group reporting purposes.
However, the Federal Government of Nigeria in a bid to improve transparency of financial reporting has announced a mandatory
conversion to IFRS with different conversion dates for different categories of entities between 2012 and 2014.
Questions
1. Discuss the categories of reporting entities for conversion purposes as contained in the IFRS conversion roadmap
issued by the Federal Government of Nigeria.
2. In your opinion, which category does FRNL fall into and why?
3. Based on your response to (2) above, state the transition and reporting dates for FRNL and two activities each to be
performed under each of the dates identified.
4. What are the differences (if any) between the voluntary IFRS accounts prepared by FRNL for group reporting and the
mandatory IFRS adoption for local reporting?
5. What are the challenges FRNL is likely to face in the IFRS transition process and what are your recommendations to
minimise the impact?
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