ICPAK
IAS 12 - Income taxes
by Simon Fisher
31 March 2011
Institute of Certified Public Accountants of Kenya
Page 1
Income taxes
This slide presentation has been prepared for general
guidance only, and does not constitute professional advice.
You should not act upon the information contained in these
slides without obtaining specific professional advice.
Accordingly, to the extent permitted by law, RSM Ashvir
(and its employees and agents) accept no liability, and
disclaim all responsibility, for the consequences of anyone
acting, or refraining from acting, in reliance on the
information contained in these slides or for any decision
based on it, or for any consequential, special or similar
damages even if advised of the possibility of such
damages.
Institute of Certified Public Accountants of Kenya
Page 2
Income taxes
Course objectives
By the end of today you should:
• know the components making up tax expense
• have a good understanding of the basic concepts of IAS 12
• understand the main exemptions within IAS 12
• be able to compute deferred tax on commonly encountered assets and
liabilities
• know what disclosures are required under IAS 12
• be able to prepare a ‘tax reconciliation’
• be aware of differences between full IFRS and the IFRS for SMEs.
This course does not cover the computation of taxable profit.
Institute of Certified Public Accountants of Kenya
Page 3
Income taxes
Tax expense …
… is the aggregate amount included in the determination of profit
or loss for the period in respect of current tax and deferred tax
(12.5).
Institute of Certified Public Accountants of Kenya
Page 4
Agenda/Contents
Section 1: Accounting for current tax
Section 2: Accounting for deferred tax
Institute of Certified Public Accountants of Kenya
Page 5
Agenda/Contents
Section 1: Accounting for current tax
Section 2: Accounting for deferred tax
Institute of Certified Public Accountants of Kenya
Page 6
Accounting for current tax
Current tax
Current tax is the amount of income tax payable/recoverable in
respect of the taxable profit/loss for the period (12.5).
Current tax for current and prior periods should, to the extent
unpaid, be recognised as a liability (12.12).
Institute of Certified Public Accountants of Kenya
Page 7
Agenda/Contents
Section 1: Accounting for current tax
Section 2: Accounting for deferred tax
Institute of Certified Public Accountants of Kenya
Page 8
Accounting for deferred tax
Deferred tax
We will be looking at:
• Basic concepts
• Measurement
- the rule
- the exceptions to the rule
• Recognition
• Presentation and disclosure.
Institute of Certified Public Accountants of Kenya
Page 9
Accounting for deferred tax
Basic concepts
What is deferred tax?
Why do we need it?
How is it calculated?
Institute of Certified Public Accountants of Kenya
Page 10
Accounting for deferred tax
What is deferred tax accounting …..
Accounting for the tax consequences of the future
recovery/settlement of the carrying amount of assets/liabilities in
a company’s balance sheet.
IAS 12 (effective from 1998) uses the balance sheet liability
method (as opposed to the deferral method) and focuses on
‘temporary differences’ existing at the balance sheet date (not
‘timing differences’)
Institute of Certified Public Accountants of Kenya
Page 11
Accounting for deferred tax
Basic concepts
What is deferred tax?
Why do we need it?
How is it calculated?
Institute of Certified Public Accountants of Kenya
Page 12
Accounting for deferred tax
Measurement – the rule
Institute of Certified Public Accountants of Kenya
Page 13
Accounting for deferred tax
The IAS 12 approach to calculating deferred tax
For every asset and liability in the balance sheet, and for
tax losses carried forward:
Carrying amount of asset/liability
Less: tax base of asset/liability
X
(X)
Temporary difference
X
@applicable tax rate
X%
Deferred tax asset/liability
Institute of Certified Public Accountants of Kenya
X
Page 14
Accounting for deferred tax
What is a temporary difference?
Temporary difference = [the carrying value of an asset or
liability] - [its tax base]:
Carrying amount of asset/liability
Less: tax base of asset/liability
Temporary difference
Institute of Certified Public Accountants of Kenya
X
(X)
X
Page 15
Accounting for deferred tax
The tax base is …..
…… “the amount attributed to that asset or liability for tax
purposes” (12.5)
The tax base of an asset is the amount that will be deductible for
tax purposes … when the entity recovers the carrying amount of
the asset (12.7).
ie Tax base = future deductible amount
Note: if the future recovery of the asset is not taxable, the tax
base is equal to the carrying amount.
Institute of Certified Public Accountants of Kenya
Page 16
Accounting for deferred tax
Examples 1, 2 and 3
Institute of Certified Public Accountants of Kenya
Page 17
Accounting for deferred tax
The tax base is …..
…… the amount attributed to that asset or liability for tax
purposes
The tax base of a liability is its carrying amount, less any amount
that will be deductible for tax purposes in respect of that liability in
future periods (12.8).
Note: in the case of revenue received in advance, the tax base of
the resulting liability is its carrying amount, less any amount of the
revenue that will not be taxable in future periods.
Institute of Certified Public Accountants of Kenya
Page 18
Accounting for deferred tax
Examples
Examples 4, 5 & 6
Institute of Certified Public Accountants of Kenya
Page 19
Accounting for deferred tax
Revaluations …..
Revaluations of property, plant and equipment increase the
carrying amount of an asset without affecting the tax base.
They therefore create additional temporary differences on which
deferred tax must be recognised (12.20).
Institute of Certified Public Accountants of Kenya
Page 20
Accounting for deferred tax
Consolidation
Compare the group carrying value with the tax base.
Temporary differences may be affected by:
• Elimination of inter-company items
• Fair value adjustments – eg on acquisition of a subsidiary
• Unification of accounting policies.
Institute of Certified Public Accountants of Kenya
Page 21
Accounting for deferred tax
Question 1
Institute of Certified Public Accountants of Kenya
Page 22
Accounting for deferred tax
Temporary differences can be …..
• taxable differences - giving rise to deferred tax liabilities; or
• deductible differences - giving rise to deferred tax assets
(12.5)
Institute of Certified Public Accountants of Kenya
Page 23
Accounting for deferred tax
Measurement –
the exceptions to the rule
Institute of Certified Public Accountants of Kenya
Page 24
Accounting for deferred tax
Specific Exemption - Initial recognition
The tax effect of all temporary differences arising on initial
recognition of an asset or liability which:
•
is not a business combination
•
at the time of the transaction, affects neither accounting profit
nor taxable profit/loss,
should not be recognised (12.15).
Institute of Certified Public Accountants of Kenya
Page 25
Accounting for deferred tax
Initial recognition of assets and liabilities
Related to a
business combination?
Yes
Recognise DTA/DTL
No
At the time of the transaction,
affects accounting profit
or taxable profit (tax loss)?
No
Institute of Certified Public Accountants of Kenya
Yes
Don’t recognise DTA/DTL
Page 26
Accounting for deferred tax
Initial recognition …..
Question 2
Saloon Car
Institute of Certified Public Accountants of Kenya
Page 27
Accounting for deferred tax
Saloon car – part 2
Institute of Certified Public Accountants of Kenya
Page 28
Accounting for deferred tax
Revaluations …..
Revaluations of property, plant and equipment increase the
carrying amount of an asset without affecting the tax base.
The resulting change in the temporary difference has not arisen
on initial recognition. Therefore the deferred tax must be
recognised (12.20).
Institute of Certified Public Accountants of Kenya
Page 29
Accounting for deferred tax
Specific Exemption - Goodwill
No deferred tax liability shall be recognised in respect of goodwill
arising in a business combination for which impairment is not
deductible for tax purposes (12.15(b)).
Institute of Certified Public Accountants of Kenya
Page 30
Accounting for deferred tax
Measurement – Applicable rate
Institute of Certified Public Accountants of Kenya
Page 31
Accounting for deferred tax
The applicable rate …..
Carrying amount of asset/liability
Tax base of asset/liability
X
(X)
Temporary difference
X
@applicable tax rate
X%
Deferred tax asset/liability
Institute of Certified Public Accountants of Kenya
X
Page 32
Accounting for deferred tax
Expected manner
The measurement of deferred tax assets and liabilities should
reflect the tax consequences that follow from the manner in which
the enterprise expects to recover or settle the respective asset or
liability (12.51).
Institute of Certified Public Accountants of Kenya
Page 33
Accounting for deferred tax
Rate to be applied …..
Deferred tax assets and liabilities should be computed at the rate
expected to apply in the period when the asset is realised or the
liability settled, based on rates enacted or substantively enacted
at the balance sheet date (12.46).
Institute of Certified Public Accountants of Kenya
Page 34
Accounting for deferred tax
Example of origination and reversal of temporary
differences - PPE
Value
Carrying value
Cost
Carrying value
=
A
Tax base
=
B
Taxable temporary
difference
___
=
A
C
===
C1
B
Tax base
Provide via profit and loss account
at income tax rates
C2
C3
Time
Institute of Certified Public Accountants of Kenya
Page 35
Accounting for deferred tax
Examples
Examples 7 & 8
Institute of Certified Public Accountants of Kenya
Page 36
Accounting for deferred tax
Measurement - discounting
Deferred tax assets and liabilities should not be discounted
(12.53).
Institute of Certified Public Accountants of Kenya
Page 37
Accounting for deferred tax
Question 3
Institute of Certified Public Accountants of Kenya
Page 38
Accounting for deferred tax
Recognition
Institute of Certified Public Accountants of Kenya
Page 39
Accounting for deferred tax
Recognition …..
All deferred tax liabilities should be recognised, except on
goodwill and temporary differences subject to the initial
recognition exception (12.15).
Deferred tax assets should be recognised to the extent that it is
probable that taxable profit will be available against which the
deductible temporary difference (including carry forward tax
losses) can be utilised (12.24).
Annual reassessment is required (12.37).
Institute of Certified Public Accountants of Kenya
Page 40
Accounting for deferred tax
Recognition …..
Tax losses
The existence of tax losses is strong evidence that future taxable
profit may not be available – there therefore has to be convincing
evidence that it will be available (12.35).
Institute of Certified Public Accountants of Kenya
Page 41
Accounting for deferred tax
Question 4 and 5
Institute of Certified Public Accountants of Kenya
Page 42
Accounting for deferred tax
Presentation and disclosure
Institute of Certified Public Accountants of Kenya
Page 43
Accounting for deferred tax
Presentation ….
Deferred tax should be recognised in the profit and loss account
except where the transaction giving rise to the asset or liability is
recognised directly in equity, or from a business combination
(12.58): eg
•
prior year adjustments
•
revaluation surpluses
•
“excess” depreciation.
Institute of Certified Public Accountants of Kenya
Page 44
Accounting for deferred tax
Offsetting ….
Deferred tax assets and liabilities may be offset only if:
• The entity has a legally enforceable right to set off current tax
assets against current tax liabilities
• The deferred tax assets and liabilities relate to income taxes
levied by the same tax authority on the same taxable entity
(12.74).
Institute of Certified Public Accountants of Kenya
Page 45
Accounting for deferred tax
Disclosure in the notes to the profit and loss account…..
Definition: Tax expense is the aggregate amount included in the
determination of profit or loss for the period in respect of current
tax and deferred tax (12.5).
The components of the tax expense should be disclosed eg
•
current tax
•
deferred tax movement
•
prior period under/over provision
•
deferred tax asset not previously recognised (12.79).
Institute of Certified Public Accountants of Kenya
Page 46
Accounting for deferred tax
Also …..
•
Tax relating to discontinued operations (12.81(h)).
Institute of Certified Public Accountants of Kenya
Page 47
Accounting for deferred tax
And …..
….. a reconciliation of:
•
the tax expense, to
•
the accounting profit multiplied by the applicable tax rate
The “proof of tax” (12.81(c)).
Institute of Certified Public Accountants of Kenya
Page 48
Accounting for deferred tax
Proof of tax
Accounting profit
Add back: items not tax deductible in period
Tax computation
X
(X)
Sub total
X
Deduct: non-taxable income and allowances
X
Taxable profit
X
Institute of Certified Public Accountants of Kenya
Page 49
Accounting for deferred tax
Proof of tax
Accounting profit
Tax Tax
computation effect
X
Adjustment for permanent differences
X
Sub total
X
Origination and reversal of temporary differences
X
Taxable profit
X
Institute of Certified Public Accountants of Kenya
A?
Page 50
Accounting for deferred tax
Proof of tax
Accounting profit
Tax
computation
X
Tax
effect
Adjustment for permanent differences
X
Sub total
X
C?
Origination and reversal of temporary differences
X
B?
Taxable profit
X Current
tax
Institute of Certified Public Accountants of Kenya
Page 51
Accounting for deferred tax
Proof of tax
Tax
computation
Tax
effect
Accounting profit
X
D
Adjustment for permanent differences
X
E
Sub total
X
Origination and reversal of temporary
differences
Taxable profit
Institute of Certified Public Accountants of Kenya
Tax
expense
X Deferred
tax mvt
X Current
tax
Page 52
Accounting for deferred tax
Proof of tax
Tax
computation
Tax
effect
X
D
Adjustment for permanent differences
X
E
Sub total
X
Proof of
Accounting profit tax
Proof of tax
Origination and reversal of temporary differences
Taxable profit
Institute of Certified Public Accountants of Kenya
Tax
expense
X Deferred
tax mvt
X Current
tax
Page 53
Accounting for deferred tax
Question 6
Institute of Certified Public Accountants of Kenya
Page 54
Accounting for deferred tax
Example …..
Accounting profit
Tax at applicable rate of 30%
Tax effect of:
Expenses not allowed for tax purposes
Income not subject to tax
Effect of change of tax rate on deferred tax
liability
Prior period over-provision
Tax expense
Institute of Certified Public Accountants of Kenya
1,200,000
360,000
60,000
(80,000)
(20,000)
(10,000)
310,000
Page 55
Accounting for deferred tax
And in the notes to the balance sheet …..
• The movement of gross deferred tax assets and liabilities
analysed by category of temporary difference (12.81(g))
• The evidence supporting recognition of deferred tax assets if
the entity is making losses (12.82)
• The amount of temporary differences and unused tax losses
for which no deferred tax asset is recognised (12.81(e)).
Institute of Certified Public Accountants of Kenya
Page 56
Accounting for deferred tax
Case study
Institute of Certified Public Accountants of Kenya
Page 57
Accounting for deferred tax
Exposure draft – Income Tax
Issued on 31 March 2009 …
• … has been abandoned, but unfortunately was ‘borrowed’
for the IFRS for SMEs
Institute of Certified Public Accountants of Kenya
Page 58
Accounting for deferred tax
IFRS for SMEs – Income tax
• No initial recognition exemption, other than for goodwill, but
• Section 29.3(c): “the tax basis of assets and liabilities is
determined by the consequences of sale of the assets …”
• Section 29.24: “an entity shall measure current and deferred
tax … using the probability-weighted average amount of all
the possible outcomes, assuming that the tax authorities will
review the amounts reported and have full knowledge of all
relevant information”
• all deferred tax assets should be recognised and then a
valuation allowance is used, if necessary.
Institute of Certified Public Accountants of Kenya
Page 59
Accounting for deferred tax
IFRS for SMEs – Income tax
Conflict:
Section 29.3(c): “the tax basis
of assets and liabilities is
determined by the
consequences of sale of the
assets …”
Institute of Certified Public Accountants of Kenya
Section 29.20: “the
measurement of deferred tax …
shall reflect the consequences
that would follow from the
manner in which the entity
expects … to recover … the
carrying amount of the related
assets …”
Page 60
Accounting for deferred tax
IFRS for SMEs – Income tax
Gobbledegook:
Section 29.32(b): an entity shall
disclose “an explanation of the
significant differences in
amounts presented in the
statement of comprehensive
income and amounts reported
to tax authorities”
Institute of Certified Public Accountants of Kenya
Which amounts – Revenue?
Expenses?
Surely what was meant was:
“an explanation of the
significant differences between
the effective tax rate and the
applicable statutory tax rate”?
Page 61
Accounting for deferred tax
Amendment to IAS 12 – Recovery of underlying assets
• Issued 20 December 2010
• Effective for accounting periods beginning on or after 1
January 2012
• Introduces the presumption that the carrying value of an
investment property carried at fair value is recovered entirely
through sale
• The presumption is rebutted if the investment property is held
within a business model whose objective is to consume
substantially all of the economic benefits embodied in the
investment property over time, rather than through sale.
Institute of Certified Public Accountants of Kenya
Page 62
Accounting for deferred tax
Conclusion
IAS 12 is a rule based standard:
•
Rule 1: Deferred tax = (carrying amount - tax base) x
applicable tax rate.
Institute of Certified Public Accountants of Kenya
Page 63
Thank
you!
Thank you!