for Accounting Professionals
IAS 12 Income Taxes
2011
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
IAS 12 Income Taxes
IFRS WORKBOOKS
(1 million downloaded)
Welcome to IFRS Workbooks! These are the latest versions of the legendary workbooks in Russian and English produced by 3 TACIS projects, sponsored by the
European Union (2003-2009) and led by PricewaterhouseCoopers. They have also appeared on the website of the Ministry of Finance of the Russian Federation.
The workbooks cover various concepts of IFRS based accounting. They are intended to be practical self-instruction aids that professional accountants can use to upgrade
their knowledge, understanding and skills.
Each workbook is a self-standing short course designed for approximately of three hours of study. Although the workbooks are part of a series, each one is independent of
the others. Each workbook is a combination of Information, Examples, Self-Test Questions and Answers. A basic knowledge of accounting is assumed, but if any
additional knowledge is required this is mentioned at the beginning of the section.
Having written the first three editions, we want to update them and provide them to you to download. Please tell your friends and colleagues. Relating to the first
three editions and updated texts, the copyright of the material contained in each workbook belongs to the European Union and according to its policy may be used free of
charge for any non-commercial purpose. The copyright and responsibility of later books and the updates are ours. Our copyright policy is the same as that of the
European Union.
We wish to especially thank Elizabeth Appraxine (European Union) who administered these TACIS projects, Richard J. Gregson (Partner, PricewaterhouseCoopers)
who led the projects and all friends at Bankir.Ru for hosting the books.
TACIS project partners included Rosexpertiza (Russia), ACCA (UK), Agriconsulting (Italy), FBK (Russia), and European Savings Bank Group (Brussels). The help of
Philip W. Smith (editor of the third edition) and Allan Gamborg, project managers and Ekaterina Nekrasova, Director of PricewaterhouseCoopers, who managed the
production of the Russian version (2008-9) is gratefully acknowledged. Glyn R. Phillips, manager of the first two projects conceived the idea, designed the workbooks and
edited the first two versions. We are proud to realise his vision.
Robin Joyce
Professor of the Chair of
International Banking and Finance
Financial University
under the Government of the Russian Federation
Visiting Professor of the Siberian Academy of Finance and Banking
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Moscow, Russia
2011 Updated
2
CONTENTS
1. Introduction
1
Introduction
3
2
IAS 12 for Banks
4
3
Permanent Differences
5
4
Definitions
6
5
Deferred Tax – basic idea
7
6
Tax Accounting – the process
14
7
Fair Value Adjustments
25
8
Deferred Tax Assets
32
9
Determine appropriate tax rates
36
10
Determine movement in deferred tax balances 44
11
Presentation
12
Accounting for Deferred Tax - Detailed Rules .. 48
13
Disclosure
14
Appendix – Some IFRS / Russian Accounting
Comparisons
58
46
53
15
Multiple Choice Questions
16
Answers to multiple choice questions ............. 71
17
NUMERICAL QUESTIONS .................................. 71
18
ANSWERS TO NUMERICAL QUESTIONS ......... 75
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
67
Aim
The aim of this workbook is to assist the individual in
understanding the IFRS accounting treatment and disclosures of
Income Taxes, as detailed in IAS 12.
Definitions of the terms used are set in section 3 on page 4.
Deferred tax is making an accrual for tax, which is then reversed
when the tax is paid. The purpose is to account for tax in the
same accounting period as the economic event that incurs the
tax, regardless of when the tax is paid (or recovered). It links the
accounting system with the systems of taxation reported in the
financial statements.
In simple terms, sales generally generate a tax charge.
Revaluations generate a deferred tax charge (an accrual for tax).
Objective
The accounting profit may differ from the taxable profit as each
is compiled according to its own set of rules and regulations.
IFRS is a common set of guidelines for compiling the financial
statements but the tax law and tax code of Russia stipulates
how the tax liability will be calculated, and when it will be paid.
Tax is often only collected in arrears or in advance. When this
happens, there will be timing differences between when the
profit is reported and when the tax on it is paid. This generates a
tax liability (or tax asset).
IFRS 12 sets out to overcome this problem in terms of
presentation so that financial statements prepared under
Income Taxes
different tax regimes include the effect of taxes at the
appropriate time.
IAS 12 prescribes the accounting treatment for income taxes,
and the tax consequences of:
(1) Transactions of the current period that are recorded the
financial statements; and
(2) The future liquidation of assets and liabilities that are
recorded only the balance sheet.
If liquidation of those assets and liabilities will make future tax
payments larger or smaller, IAS 12 generally requires an
undertaking to record a deferred tax liability (or deferred tax
asset).
IAS 12 requires an undertaking to account for the tax
consequences of transactions, in the same manner that it
accounts for the transactions:


For transactions recorded in the income statement, any
related tax consequences are also recorded in the
income statement.
For transactions recorded directly in equity, any related
tax consequences are also recorded directly in equity (for
example, property revaluations under IAS 16).
The recognition of deferred tax assets, and liabilities, in a
business combination affects the amount of goodwill arising in
that combination.
IAS 12 also covers:
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
1. Recognition of deferred tax assets arising from unused
tax losses, or unused tax credits,
2. Presentation of income taxes, and
3. Disclosure of information relating to income taxes.
Scope
IAS 12 should be applied in accounting for income taxes
including:
1. All domestic, and foreign, taxes based on taxable profits.
2. Taxes, such as withholding taxes payable by a subsidiary,
associate, trade investment or joint venture on distributions to
the reporting undertaking.
IAS 12 does not deal with the methods of accounting for
government grants, or investment tax credits (see IAS 20).
However, IAS 12 does deal with the accounting for temporary
differences that may arise from such grants, or investment tax
credits each of which alter the timing of when the tax is payable.
2 IAS 12 for Banks
Accounting for income tax is firmly based on the national tax
system.
As bank accounting for income tax is based on the national tax
system, banks have little more than to follow the presentation
requirements of IAS 12, using the figures already compiled.
Differences may occur in the treatment of carried forward tax
losses and tax credits.
4
Income Taxes
The major additional work is the deferred tax computations,
effectively accruing for future tax on revaluations. In Russia, there
is a requirement to account for tax (PBU 18), but banks have, so
far, been exempt from this requirement.
In simple terms, sales generally generate a tax charge.
Revaluations generate a deferred tax charge (an accrual for tax).
The revaluations gains will be effectively shown as 80% of the
total gain, having accrued deferred tax at 20%.
Banks already revalue their currency positions daily in Russia,
but generally have not revalued their financial instruments to
reflect the latest market prices.
Deferred tax will need to be accrued for all revaluations of
financial instruments, where this is required by IFRS 9 Financial
Instruments, unless the profits will not be liable for tax.
3 Permanent Differences
Permanent differences between the financial profit and taxable
profit arise when income is not taxable or expenses are not
allowed for tax.
A government grant may be a gift that is not taxed. Government
bonds often provide tax-free interest income, or may be taxed at
a lower rate than the standard income tax rate for companies.
Fines paid by an undertaking may not be tax-deductible.
The tax computation for the period will calculate the impact of
these transactions.
No further accounting is needed and no deferred asset or liability
will be recorded.
Deferred tax will need to be accrued for the fair values of assets
computed in accounting for acquisitions and revaluations of
property.
Where transformation from Russian accounting to IFRS moves
profit from one period to another and the tax payment does not
move, deferred tax will need to be accrued. This will especially
apply to finance leases (IAS 17 Leases) which are not recognised
for tax purposes as any different from operating leases.
When reviewing financial statements of clients and
correspondent banks, banks will need to ensure that deferred tax
has been fully accrued.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
5
Income Taxes
Definitions
EXAMPLE-Permanent Differences
Your firm receives a tax- free $4million grant to employ more
staff.
It is later also fined $1m for environmental misuse, after illegally
discharging chemicals into a river. The fine cannot be deducted
for tax.
Accounting profit (‘net profit before tax’)
Accounting profit is net profit for a period, before deducting tax.
TAXABLE PROFIT (OR TAX LOSS)
Taxable profit (tax loss) is the profit (loss) for a period, calculated
according to the rules of the tax authorities, upon which income
taxes are payable (recoverable).
The financial statements will reflect these items, but your tax
computation will exclude them, or record that no tax is payable
nor receivable. Your tax computation will reconcile these
adjustments to the accounting profit.
TAX EXPENSE (OR TAX INCOME)
Tax expense (tax income) is the total amount included in the net
profit (or loss) for the period, in respect of current tax, and
deferred tax.
No deferred tax needs to be calculated for permanent
differences. This is because deferred tax is an accrual of tax, and
there will be no further tax to be accrued.
Tax expense (tax income) comprises both current tax expense
(income) and deferred tax expense (income).
Assuming that both items are taken into profit in full in the same
period, the tax computation could reflect:
Current tax
Current tax is the total of income taxes payable (recoverable) in
respect of the taxable profit (loss) for a period.
In the following examples, I/B refer to Income Statement and
Balance Sheet (SFP).
$m
Accounting Profit
486
Less grant
-4
Plus fine
+1
=Taxable profit
483
Tax charge = 483 * 20% = 96,600
Tax expense
Accrual for income tax
Tax expense for the period
I/B
I
B
DR
96,600
CR
Deferred tax liabilities
Deferred tax liabilities are the amounts of taxes payable, in future
periods, in respect of taxable temporary differences.
DEFERRED TAX ASSETS
Deferred tax assets are the taxes recoverable, in future periods,
in respect of:
(1)
deductible temporary differences (accruals of tax
receivable);
96,600
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(2)
unused tax losses; and
6
Income Taxes
(3)
unused tax credits.
How should management calculate the tax base of a dividend
receivable balance?
Temporary differences
Temporary differences are differences between the carrying
amount of an asset (or liability) in the balance sheet, and its tax
base.
Background
Entity G’s management has recognised, in G’s single-entity
financial statements, a dividend receivable of 100,000 from a
wholly-owned subsidiary. The dividend is not taxable.
Temporary differences may be either:
Solution
Management should calculate the tax base of the dividend
receivable as follows:
(1)
taxable temporary differences that will increase taxable
profit of future periods, when the carrying amount of the
asset (or liability), is liquidated; or
(2)
deductible temporary differences that will reduce taxable
profit (tax loss) of future periods, when the carrying
amount of the asset (or liability) is liquidated.
Tax base
The tax base of an asset (or liability) is the value of that asset (or
liability), for tax purposes. This may be the written down value of
a fixed asset for tax basis. Others are described below.
Carrying amount
Future taxable
amounts
-
Future deductible
amounts
-
Tax base
The tax base is the amount that will be deductible for tax
purposes over the life of the asset.
EXAMPLE - Determine the tax base of assets and liabilities
Issue
An asset’s tax base is the amount that will be deductible for tax
purposes against any taxable economic benefits that will flow to
an entity when it recovers the asset’s carrying amount. If those
economic benefits will not be taxable, the asset’s tax base is
equal to its carrying amount.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
100,000
(the dividend is not taxable)
100,000
5 Deferred Tax – basic idea
Deferred tax is an accrual for tax, receipt or payment, created
when the economic activity and the tax impact are either in
different periods, or do not completely match in amounts or time
period.
Accounting for tax is simpler when the transaction is booked for
both accounting and tax purposes in the same year. In such a
case income tax is recorded and no deferred tax needs to be
accrued.
7
Income Taxes
If a transaction takes place in year 1 and tax is paid in year 2,
year 1 will show a transaction without a tax charge, and year 2
will show a tax charge without a transaction:
In this example, a financial asset (at fair value through profit and
loss) is purchased for 1.000 in Year 1 and revalued at 1.100 at
the period end, recording a profit of 100. The financial asset is
then sold in Year 2 for 1.100, its revalued amount.
Income
Tax expense @ 20%
Net profit
Year 1
100
0
100
Year 2
0
-20
-20
The tax expense is a direct result of the income in period 1.
Readers of financial statements should be made aware that a tax
charge will be levied in the following year.
Deferred tax is used to identify future tax payments generated by
transactions in the current year – it is an accrual for tax, and like
all accruals, will be reversed when the tax is actually paid.
Year 1
Year 2
Income
100
0
Tax expense @ 20%
0
-20
Deferred tax @ 20%
-20
20
Net profit
80
0
The deferred tax reverses over time (and will thus disappear).
This provides a more comprehensive picture to readers. Without
the deferred tax accrual, profits in Year 1 would be overstated,
with the risk that dividends might be higher than the undertaking
could afford.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
In this case, it creates an accrual of the tax charge in year 1 to
link with the timing of the transaction.
It is reversed in year 2 to reflect that tax has been accrued in year
1, even though it was charged in year 2.
On the balance sheet, this deferred tax would be shown as a
liability (accrual) at the end of period 1. It will disappear at the
end of period 2.
EXAMPLE - tax is paid on receipt of the money in
period 1, but only treated as income in period 2.
Year 1
Year 2
Income
0
100
Tax expense @
-20
0
20%
Net profit
-20
100
In year 1 there is a tax charge without a
transaction. In year 2 there is a transaction without
a tax charge.
Again, we use deferred tax to link the transaction
to the tax charge.
Year 1
Year 2
Income
0
100
Tax expense @
-20
0
20%
Deferred tax @
+20
-24
20%
Net profit
0
80
8
Income Taxes
In this case, deferred tax accrues a tax credit in
year 1 to carry forward the tax paid to period 2 to
link with the timing of the transaction. The accrual
is reversed in year 2.
The total tax charge for year 1 will be 40 (120 minus 80),
so the Income Statement for each year will be the same.
The deferred tax reduces the tax charge in year 1, but
increases it in years 2 & 3.
On the balance sheet, this deferred tax would be
shown as an asset (or prepayment of tax) at the
end of period 1. It will disappear by being reversed
at the end of period 2.
EXAMPLE -expenses attract tax credits (‘tax
income’).
EXAMPLE - the cash is received and taxed in year 1, but
the income is split between years 1, 2 and 3. This might
occur when an advance payment is received for a longterm contract.
Year 1
Year 2
Year 3
Income
200
200
200
Tax expense @
-120
0
0
20%
Net profit
80
200
200
The income is the same for each year, but the net profit
changes due to the tax payment. The income in years 2
& 3 is taxed in the first year.
Deferred tax is used to apportion the tax charge to match
the income:
Year 1
Year 2
Year 3
Income
200
200
200
Tax expense @
-120
0
0
20%
Deferred tax @
+80
-40
-40
20%
Net profit
160
160
160
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
If a transaction takes place in year 1 and tax is
credited in year 2, year 1 will show a transaction
without a tax credit, and year 2 will show a tax
credit without a transaction:
Year 1
Year 2
Expense
-100
0
Tax income @
0
+20
20%
Net profit
-100
+20
The tax income, or benefit of paying less tax due to
the expense, is a direct result of the expense in
period 1. Readers of financial statements should
be made aware that tax will be credited in the
following year.
Deferred tax is used to accrue future tax credits
generated by transactions in the current year.
Year 1
Year 2
Expense
-100
0
Tax income @
0
+20
20%
Deferred tax @
+20
-20
20%
Net profit
-80
0
9
Income Taxes
On the balance sheet, this deferred tax would be
shown as an asset at the end of period 1. It will
disappear at the end of period 2 by being reversed.
EXAMPLE- tax is credited on payment of the
money in period 1, but only treated as an expense
in period 2.
Year 1
Year 2
Expense
0
-100
Tax income @
+20
0
20%
Net profit
+20
-100
In year 1 there is a tax credit without a transaction.
In year 2 there is a transaction without a tax credit.
The tax will be shown as a prepayment.
Again, we use deferred tax to link the transaction
to the tax credit.
Year 1
Year 2
Expense
0
-100
Tax income @
+20
0
20%
Deferred tax @
-20
+20
20%
Net profit
0
-80
In this case, it accrues a tax credit in year 1 to
carry forward the tax paid to period 2 to link with
the timing of the transaction. It is reversed in year
2.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
EXAMPLE- an advance payment on a construction
contract.
The cash is paid and credited for tax in year 1, but the
expense is split between years 1, 2 and 3.
Year 1
Year 2
Year 3
Expense
-200
-200
-200
Tax income @
+120
0
0
20%
Net profit
-80
-200
-200
The expense is the same for each year, but the net profit
changes due to the tax credit. The expense in years 2 &
3 is credited for tax in the first year.
Deferred tax is used to apportion the tax credit by accrual
to match the expense:
Year 1
Year 2
Year 3
Expense
-200
-200
-200
Tax income @
120
0
0
20%
Deferred tax @
-80
+40
+40
20%
Net profit
-160
-160
-160
The total tax credit for year 1 will be 40 (120 minus 80),
so the Income Statement for each year will be the same,
matching the economic reality. The deferred tax reduces
the tax credit in year 1, but increases it in years 2 & 3.
10
1
2
3
Calculation (2)/10
DEPRECIATION
EXPENSE
Year
Cum
6 000
600
600
600
1200
600
1800
600
2400
600
3000
600
3600
600
4200
600
4800
600
5400
600
6000
YEAR COST
1
2
3
4
5
6
7
8
9
10
11
12
4
5
(2)-(4)
NET
5 400
4 800
4 200
3 600
3 000
2 400
1 800
1 200
600
0
0
0
6
(2)/12
7
8
(2)-(7)
9
(4)-(7)
10
(9) x 24%
11
(3 - 6) x 24%
12
13
(6) x 24% (11)+(12)
DEFERRED
TAX
TAXDEFERRED
ALLOWANCE
TIMING
BALANCE TAX-INCOME CURRENT TOTAL
(CREDIT)
TAX BASE DIFFERENCE SHEET
STATEMENT
TAX
TAX
Year
Cum
500
500
5 500
100
24
24
120
144
500
1000
5 000
200
48
24
120
144
500
1500
4 500
300
72
24
120
144
500
2000
4 000
400
96
24
120
144
500
2500
3 500
500
120
24
120
144
500
3000
3 000
600
144
24
120
144
500
3500
2 500
700
168
24
120
144
500
4000
2 000
800
192
24
120
144
500
4500
1 500
900
216
24
120
144
500
5000
1 000
1 000
240
24
120
144
500
5500
500
500
120
-120
120
0
500
6000
0
0
0
-120
120
0
EXAMPLE - the purchase of a building in year 1. See table above.
Depreciation is charged in years 1-10, after which the building is fully depreciated. The tax allowance is spread over years 1-12.
In years 1-10, depreciation is more than the tax allowance. In years 11 and 12, tax credits are received even though no depreciation is
charged. This creates timing differences.
By charging deferred tax in years 1-10, and crediting deferred tax in years 11 and 12, the total tax for years 1-10 is equalised each year and
matches the depreciation. In years 11 and 12, there is no total tax which matches the lack of depreciation in these years.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
DR/CR
Balance Sheet
Cost
Amortisation
0
1
2
3
4
-1000
-1000
-1000
0
3000
Amortisation
Tax Base
-3000
Tax Base
-3000
750
750
750
750
-2250
-1500
-750
0
Income
Statement
750
750
-2250
-1500
-750
0
100%
1000
-180
820
1000
-180
820
1000
-180
820
0
-180
-180
76%
760
760
760
0
-3000
Amortisation
Tax @ 24%
Deferred tax
Net profit/loss
The first step is to calculate the net loss as 76% of the expense for each period.
Amortisation
Tax @ 24%
1000
-180
820
1000
-180
820
1000
-180
820
0
-180
-180
Deferred tax
Net profit/loss
DR/CR
Balance Sheet
Cost
Amortisation
DR/CR
0
2
3
4
Amortisation
Tax @ 24%
-1000
-1000
-1000
0
Deferred tax
Net profit/loss
3000
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
2
3
4
-1000
-1000
-1000
0
750
750
750
750
-3000
-2250
-1500
-750
0
1000
-180
820
-60
760
1000
-180
820
-60
760
1000
-180
820
-60
760
0
-180
-180
180
0
Income
Statement
1
-3000
1
-3000
Tax Base
This creates 2 problems of presentation: the loss after tax is NOT at 76% (10024), and in year 4 there is a tax credit without any economic activity.
0
3000
Off-BalanceSheet
Tax
Amortisation
In the above example, a computer is bought for 3.000 with an economic life of 3
years, but the tax benefit will be spread over 4 years. The tax base is shown as
the tax benefit less is accumulated amortisation. (The income statement is an
extract, excluding other items.)
Off-BalanceSheet
Tax
750
Income
Statement
Off-BalanceSheet
Tax
Amortisation
Balance Sheet
Cost
Amortisation
750
100%
CR
76%
Income Taxes
The second step is to compute the deferred tax as the difference between the net
loss and the loss after tax. Identify whether the entry for Year 1 is a debit or a
credit.
DR/CR
Balance Sheet
Cost
Amortisation
0
1
2
3
4
In this example, the balance sheet entry is a debit. A debit in the
balance sheet is an ASSET, so the result is a deferred tax asset.
-1000
-1000
-1000
0
At the end of year 4, the balance on the balance sheet is eliminated
– a control check that the deferred tax accrual has been reversed.
In the next example, a security is bought for 1.000 with an
economic life of 5 years, but the tax benefit will be spread over 4
years. The tax base is shown as the tax benefit less is accumulated
amortisation. (The income statement is an extract, excluding other
items.)
3000
Off-BalanceSheet
Tax
Amortisation
-3000
Tax Base
-3000
750
750
750
750
-2250
-1500
-750
0
Income
Statement
Amortisation
Tax @ 24%
Deferred tax
100%
CR
76%
Balance Sheet
Deferred tax
Asset / liability???
Cumulative
DR
The cumulative figure shows the number that will be seen in the
balance sheet.
1000
-180
820
-60
760
60
60
1000
-180
820
-60
760
60
120
1000
-180
820
-60
760
60
0
-180
-180
180
0
This creates 2 problems of presentation: the loss after tax is NOT at
76% (100-24), and in year 5 there is economic activity a tax credit
without a tax credit.
DR/CR
Balance Sheet
Cost
Amortisation
0
1
2
3
4
5
-200
-200
-200
-200
-200
250
250
250
250
0
1000
-180
180
The entry to the balance sheet for each year is computed by double entry
bookkeeping:
Year 1
Year 2
Year 3
Year 4
Income Statement
-60
-60
-60
180
Credit
Credit
Credit
Debit
Balance Sheet
60
60
60
-180
Debit
Debit
Debit
Credit
0
Off-Balance-Sheet
Tax
Amortisation
-1000
Tax Base
-1000
-750
-500
-250
0
0
100%
200
-60
140
200
-60
140
200
-60
140
200
-60
140
200
0
200
Income Statement
Amortisation
Tax @ 24%
Deferred tax
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
13
Income Taxes
Net profit/loss
Balance Sheet
Deferred tax
Asset / liability???
76%
Income
Statement
Cumulative
Balance Sheet
Year 1
Year 2
Year 3
Year 4
Year 5
12
Debit
-12
Credit
12
Debit
-12
Credit
12
Debit
-12
Credit
12
Debit
-12
Credit
-48
Credit
48
Debit
Following the procedure of the previous example:
DR/CR
Balance Sheet
Cost
Amortisation
0
1
2
3
4
5
-200
-200
-200
-200
-200
250
250
250
250
0
-750
-500
-250
0
0
1000
Off-Balance-Sheet
Tax
Amortisation
-1000
Tax Base
-1000
Amortisation
Tax @ 24%
100%
DR
76%
Balance Sheet
Deferred tax
Asset / liability???
Cumulative
In this example, the balance sheet entry is a credit. A credit in the
balance sheet is a liability, so the result is a deferred tax liability.
At the end of year 5, the balance on the balance sheet is eliminated
– a control check that the deferred tax accrual has been reversed.
From these examples, we can conclude that if management
accelerates depreciation faster than the tax authorities, a
deferred tax ASSET will arise.
Income Statement
Deferred tax
Net profit/loss
The cumulative figure shows the number that will be seen in the
balance sheet.
CR
200
-60
140
12
152
200
-60
140
12
152
200
-60
140
12
152
200
-60
140
12
152
200
0
200
-48
152
-12
-12
-12
-12
48
-12
-24
-36
-48
0
The entry to the balance sheet for each year is computed by double
entry bookkeeping:
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
In contrast, if management depreciates an asset over a longer
period than the tax authorities, a deferred tax LIABILITY will
arise.
The use of deferred tax does not change the dates of payment of
any tax. It is an extension of the matching (accruals) concept used
in IFRS.
6 Tax Accounting – the process
Tax accounting comprises the following steps:
14
Income Taxes
i) calculate and record current income tax payable (or receivable);
ii) determine the tax base of assets and liabilities;
iii) calculate the differences between (the accounting) carrying
amount of assets and liabilities and their tax base to determine
temporary differences;
iv) identify temporary differences that are not recorded due to
specific exceptions in IFRS;
v) calculate the net temporary differences;
vi) review net deductible temporary differences and unused tax
losses to decide if recording deferred tax assets is correct;
vii) calculate deferred tax assets and liabilities by applying the
appropriate tax rates to the temporary differences;
viii) determine the movement between opening and closing
deferred tax balances;
ix) decide whether offset of deferred tax assets and liabilities
between different group undertakings is appropriate in the
consolidated financial statements; and
x) record deferred tax assets and liabilities, with the net change
recorded in income or equity as appropriate.
The current tax expense (or income) is the amount payable (or
receivable) as calculated in the tax return, plus any adjustment to
deferred tax.
except any tax relates to a transaction that is recorded in equity
rather than the income statement.
For example, any tax related to the revaluation of property, plant
and equipment should be recognised in equity.
EXAMPLE- Tax expense split between the income statement
and equity.
Your tax computation shows an expense of $87m for the year, of
which $3m relates to a property revaluation under IAS 16.
I/B
DR
CR
Tax expense – income statement
I
84m
Tax expense-revaluation reserve
B
3m
Tax accrual
B
87m
Tax expense split between the income
statement and equity
If the tax already paid exceeds the tax due for the period, the
excess will be recorded as an asset, assuming it is recoverable.
EXAMPLE- Tax expense: Prepayment
You have paid $100m as a tax prepayment.
Your tax computation shows an expense of $87m for the year, of
which $3m relates to a property revaluation.
I/B DR
CR
Tax prepayment
B 100m
Cash
B
100m
Recording tax prepayment
Tax expense – income statement
I
84m
Tax expense-revaluation reserve
B
3m
Tax prepayment
B
87m
Tax expense split between the income
statement and equity, matched against the
tax prepayment
The current tax expense is recorded in the income statement,
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
15
Income Taxes
A tax loss, that can be carried back to recover tax of a previous
period, should be recorded as an asset in the period in which the
tax loss occurs.
EXAMPLE- Tax loss: asset
Your tax computation shows a loss of $6m for the year, which can
be carried back to recover tax of a previous tax period.
I/B
DR
CR
Tax recoverable
B
6m
Tax income
I
6m
Recording recoverable tax loss
The tax base of an asset or liability is the amount attributed to it for
tax purposes.
The depreciation for an item of property plant or equipment on an
accounting basis may differ from the calculation on a tax basis.
EXAMPLE- Different depreciation rates for accounting and tax
Your building is to be depreciated over 20 years for accounting
purposes, but the tax authorities insist on a minimum life of 30
years for this type of building.
Whilst the accounting records will reflect the 20-year depreciation
period, the tax base will use the 30-year depreciation model.
i) Revenue received in advance
Special rules apply to liabilities that represent revenue received in
advance.
The tax base is equivalent to:
-the liability's carrying amount, if the revenue is taxable in a
subsequent period;
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
EXAMPLE- Revenue received in advance
Revenue is taxed in a later period. In year 1, it has a tax base of
100.
I/B DR CR
Cash
B 100
Deferred revenue
B
100
Receipt of cash-period 1
Deferred revenue
B 100
Revenue
I
100
Tax expense @ 20%
I
20
Current tax liability
B
20
Revenue recognition and tax expense-period 2
-nil if the revenue is taxed in the period received.
EXAMPLE- Revenue received in advance
Revenue is taxed in the same period. In year 1, it has a tax base of
0.
There is a timing difference as the revenue is recognised for tax
before it is recognised for accounting.
I/B
DR
CR
Cash
B
100
Deferred revenue
B
100
Deferred tax asset @ 20%
B
20
Current tax liability
B
20
Receipt of cash and tax payment -period 1
Deferred revenue
B
100
Revenue
I
100
Tax expense @ 20%
I
20
Deferred tax asset
B
20
Revenue and tax expense recognition period 2
16
Income Taxes
EXAMPLE - Revenues received in advance
Issue
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. In the case of revenue received in advance, the
tax base of the resulting liability is its carrying amount, less any
amount of revenue that will not be taxable in future periods.
How should management calculate the tax base of revenue
received in advance?
Background
Entity A receives royalties from users of its licensed technology of
25,000 relating to the following financial year. Royalties are taxed
on a cash receipts basis.
The royalty income is deferred in the balance sheet until the
period it relates to.
Solution
Management should calculate the tax base of the royalties
received in advance as follows:
Carrying amount
Revenue not taxable
in future period
EXAMPLE - Tax base of long service leave provision
Issue
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. In the case of revenue received in advance, the
tax base of the resulting liability is its carrying amount, less any
amount of revenue that will not be taxable in future periods.
How should management calculate the tax base of a long service
leave provision?
Background
Entity C’s management has recognised a liability under IAS 19
for accrued long service leave of 150,000 at the balance sheet
date. No deduction will be available for tax until the long service
leave is paid.
Solution
Management should calculate the tax base of the long service
leave provision as follows:
Carrying amount 150,000
25,000
(25,000)
Entity A has a deductible temporary difference of 25,000 (25,000
- nil). Management should recognise a deferred tax asset in
respect of the deductible temporary difference.
(Tax was assessed when
revenue was received)
Future deductible amounts
(150,000)
(a deduction will be received for tax purposes when paid)
Future taxable amounts
Tax base
-
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Tax base
-
17
Income Taxes
Entity C has a deductible temporary difference of 150,000
(150,000 - nil). Management should recognise a deferred tax
asset in respect of the deductible temporary difference.
EXAMPLE - Deferred tax on provision for general insurance
risk
ii) Amounts not reflected in the balance sheet
Issue
Deductible or taxable amounts may arise from items that are not
recorded in the balance sheet.
Some items have a tax base but are not recognised as assets
and liabilities in the balance sheet. The difference between the
tax base and the carrying amount of nil is a temporary difference
that results in a deferred tax balance.
Research and development costs may be expensed in the current
period, but deductible for tax purposes over subsequent periods.
The tax base reflects the amount of the deduction that can be
claimed in future periods.
EXAMPLE-Research and development costs
You spend $20m on research in the current period, and it is treated
as an expense. Tax authorities only allow the expense to be
deducted over a 4-year period. Only $5m is allowed in this period.
The remaining $15m is the tax base at the end of year 1, and will
be allowed over the next 3 years.
Research cost
Cash
Tax credit @ 20%
Current tax liability (reduction)
Deferred tax asset
Research cost and tax income -period 1
Current tax liability (reduction)
Deferred tax asset
Tax income -period 2 (and the same for
periods 3 & 4)
I/B
I
B
I
B
B
B
B
DR
20m
CR
Should management recognise a deferred tax liability regarding
provision for general insurance risk that was not included in the
financial statements but which was claimed in the tax accounts?
Background
An insurance entity’s management has recognised in the income
statement net premium income of 5,000 during the year.
Management is permitted for tax purposes to set up a provision
for general insurance risks of 10% of the entity’s net premium
income. Management claims this benefit in full and recognises a
provision of 500 during the year in the tax accounts. It does not
recognise the provision in the entity’s financial statements.
20m
4m
1m
3m
1m
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
1m
The accumulated provision in the tax accounts has been
increasing every year. The balance at the balance sheet date is
3,500, net of any utilisation of the provision. The possibility of a
decrease in this provision is remote, probably occurring only if the
entity was liquidated.
Solution
Yes, management should recognise a deferred tax liability in
respect of this provision with the corresponding entry to the tax
charge in the income statement.
18
Income Taxes
Management should calculate the tax base of the provision as
follows:
Carrying amount
-
Future deductible
amounts
-
Future taxable
amounts
3,500
Tax base
3,500
(the provision is not
recognised in the financial
statements)
(the provision is deductible
for tax purposes in the
current period)
(the expense of future
utilisation of the provision
will not be deductible for tax
purposes)
The entity has a taxable temporary difference of 3,500 (nil 3,500). Management should recognise a deferred tax liability in
respect of the taxable temporary difference.
IFRS adopt the balance sheet model. Management should
therefore recognise the deferred tax liability even though a future
liquidation of the entity might appear to be remote.
iii) Investments within groups
The acquisition of an investment in a subsidiary, associate, branch
or joint venture will give rise to a tax base for the investment in the
parent undertaking's financial statements. The tax base is often the
cost paid.
Differences between the tax base and the carrying amount will arise
in the periods after acquisition due to changes in the carrying
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
amount. The carrying amount will change, for example, if the
investment is accounted for using the equity method, or if an
impairment charge is recorded.
EXAMPLE- Investment in subsidiary and impairment
You buy a subsidiary for $70m. Trading is poor, and you book an
impairment charge of $10m.
The tax base is $70m, representing the cost. It is not adjusted for
the impairment charge, creating a difference between the tax base
and the carrying amount of $10m.
I/B DR
CR
Investment in subsidiary
B 70m
Cash
B
70m
Recording purchase of subsidiary
Impairment of subsidiary
I
10m
Investment in subsidiary
B
10m
Tax income (deferred tax) @ 20%
I
2m
Deferred tax asset
B
2m
Recording impairment charge and (deferred)
tax charge.
The deferred tax asset will be released when
the investment is finally liquidated and the
loss is allowed for tax.
iv) Expected manner of liquidating assets and liabilities
The measurement of deferred tax liabilities and assets should
reflect the way in which management expects to liquidate the
underlying asset or liability.
For example, in some countries a different tax rate may apply
depending on whether management decides to sell or use the
asset.
19
Income Taxes
However, the deferred tax liabilities or assets associated with nondepreciable assets (such as land) can only reflect the tax
consequences that would follow from the sale of that asset.
This is because the asset is not depreciated. Therefore, for tax
purposes, the carrying amount (or tax base) of the non-depreciable
asset reflects the value recoverable from the sale of the asset.
Calculate temporary differences
The concept of temporary differences is central to deferred tax
accounting. This means that the difference will eventually reverse.
Temporary may not mean short-term: it may take many years until
the accruals are completely reversed.
Temporary differences arise when the carrying amount of an asset
or liability differs from its tax base.
A deductible temporary difference generates a deferred tax
asset
(which will reduce future payments) and a
taxable temporary difference gives rise to a deferred tax
liability
(which will increase future payments).
Taxable temporary differences occur when tax is charged in a
period after the accounting period suffers the expense in the
financial accounts.
Taxable temporary differences arise when:
-an asset's carrying amount is greater than its tax base; or when
-a liability's carrying amount is less than its tax base.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Many taxable temporary differences arise because the transaction
is recognised in different periods for tax and accounting purposes.
EXAMPLE- Deductible Temporary Difference
interest revenue is included in pre-tax accounting profit on a timeapportionment basis but may be taxable on a cash basis.
I/B DR
CR
Cash
B
300
Interest revenue
I
100
Deferred interest revenue
B
200
Tax expense @ 20%
Deferred tax asset
Current tax liability
Receipt of cash and tax payment -period 1
Partial recognition of revenue and tax
Deferred interest revenue
Interest revenue
Tax expense @ 20%
Deferred tax asset
Interest revenue and tax expense recognition
-period 2 (Same for period 3)
I
B
B
20
40
B
I
I
B
100
60
100
20
20
EXAMPLE- Taxable Temporary Difference
i) interest revenue is included in pre-tax accounting profit when
accrued but may be taxable on a cash basis.
I/B
DR
CR
Interest receivable
B
700
Interest revenue
I
700
Deferred tax liability
B
140
Tax expense @ 20% (deferred tax)
I
140
Recognition of revenue and application of
20
Income Taxes
deferred tax- period 1
Cash
Interest receivable
Tax expense @ 20%
Cash – tax payment
Deferred tax liability
Tax expense
Receipt of cash and tax payment- period 2
B
I
I
B
B
I
700
700
140
140
140
140
EXAMPLE- Taxable Temporary Difference
ii) revenue from the sale of goods is included in pre-tax accounting
profit when goods are delivered, but may be included in taxable
profit when cash is collected.
Goods sold for 100 delivered in year 1, cash collected and taxed in
year 2.
I/B
DR
CR
Accounts receivable
B
100
Revenue
I
100
Deferred tax liability
B
20
Tax expense (deferred tax) @ 20%
I
20
Receipt of cash and tax recognition period 1
Cash
B
100
Accounts receivable
B
100
Deferred tax liability
B
20
Current tax liability
B
20
Receipt of cash and tax liability
recognition -period 2
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
EXAMPLE- Taxable Temporary Difference
iii) accumulated accounting depreciation may differ from cumulative
tax depreciation because depreciation is accelerated for tax
purposes; Accounting depreciation is 100 and for tax purposes it is
150.
I/B
DR
CR
Depreciation
I
100
Accumulated depreciation
B
100
Current tax (reduction) 150 @ 20%
B
30
Tax income
I
20
Deferred tax liability
B
10
Depreciation and higher tax credit period 1
Depreciation
I
100
Accumulated depreciation
B
100
Current tax (reduction) 50 @ 20%
B
10
Tax income
I
20
Deferred tax liability
B
10
Depreciation and lower tax credit period 2
EXAMPLE- Taxable Temporary Difference
iv) development costs have been capitalised for accounting
purposes and will be amortised to the income statement, but may
have been deducted as an expense in determining taxable profit in
the period in which they were incurred. Amortised over 4 years
starting from the year after they were incurred.
I/B
DR
CR
Development costs (capitalised)
B
100
Cash
B
100
Current tax (reduction) @ 20%
B
20
Deferred tax liability
B
20
Development costs capitalised but
allowed for tax credit -period 1
21
Income Taxes
Depreciation – development costs
Accumulated depreciation
Deferred tax liability
Tax income @ 20%
Depreciation and adjustment for tax period 2
I
B
B
I
Deductible temporary differences arise when:
25
25
5
5
EXAMPLE- Taxable Temporary Difference
v) prepaid expenses for accounting purposes may have been
deducted on a cash basis in determining the taxable profit.
I/B
DR
CR
Cash
B
100
Prepaid expenses
B
100
Current tax (reduction) @ 20%
B
20
Deferred tax liability
B
20
Payment of cash and tax credit -period 1
Expense
I
100
Prepaid expenses
B
100
Deferred tax liability
B
20
Tax income (deferred tax) @ 20%
I
20
Cost and tax income recognition -period
2
The tax laws of the undertaking's operations will determine the
temporary differences.
Deductible temporary differences occur when tax is charged in a
period after the accounting period suffered the expense in the
-an asset's carrying amount is less than its tax base; or when
-a liability's carrying amount is greater than its tax base.
Like taxable temporary differences, many deductible temporary
differences arise from differences in the timing of recording the
underlying transaction for accounting and tax purposes.
Deductible temporary differences examples:
EXAMPLE- Deductible Temporary Difference
i) accumulated depreciation differs from cumulative tax depreciation
as depreciation may be accelerated for accounting purposes.
Accumulated depreciation is 150 but cumulative tax depreciation is
100.
I/B
DR
CR
Depreciation
I
100
Accumulated depreciation
B
100
Current tax (reduction) 50 @ 20%
B
10
Tax income
I
24
Deferred tax asset
B
10
Depreciation and lower tax credit period 1
Depreciation
I
100
Accumulated depreciation
B
100
Current tax (reduction) 150 @ 20%
B
30
Tax income
I
20
Deferred tax asset
B
10
Depreciation and higher tax credit period 2
financial accounts.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
22
Income Taxes
EXAMPLE- Deductible Temporary Difference
ii) employee expenses, or pension payments, are recorded when
incurred for accounting purposes and but only for tax purposes
when paid in cash.
I/B
DR
CR
Pension expense
I
100
Accrual
B
100
Deferred tax asset
B
20
Tax income (deferred tax) @ 20%
I
20
Accrual of pension costs
Cash
B
100
Accrual
B
100
Current tax (reduction) @ 20%
B
20
Deferred tax asset
B
20
Cost and tax income recognition -period
2
EXAMPLE- Deductible Temporary Difference
iii) an impairment loss recorded for accounting purposes will not
affect the current tax liability until disposal of the property.
I/B
DR
CR
Impairment of property
I
10m
Accumulated depreciation of property
B
10m
Tax income (deferred tax) @ 20%
I
2m
Deferred tax asset
B
2m
Recording impairment charge and
(deferred) tax charge
EXAMPLE- Deductible Temporary Difference
iv) research costs are expensed in the period for accounting
purposes, but may only be deducted in a later period for tax
purposes.
I/B
DR
Research cost
I
10m
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Cash
Tax income (deferred tax) @ 20%
Deferred tax asset
Research cost and deferred tax asset period 1
Current tax liability (reduction)
Deferred tax asset
Tax income -later period
B
I
B
B
B
10m
2m
2m
2m
2m
EXAMPLE- Deductible Temporary Difference
v) the recognition of income is deferred for accounting purposes,
but may be included in taxable profit in the current period.
I/B
DR
CR
Cash
B
500
Deferred revenue
B
500
Deferred tax asset @ 20%
B
100
Current tax liability
B
100
Receipt of cash and tax payment -period 1
Deferred revenue
B
500
Revenue
I
500
Tax expense (deferred tax) @ 20%
I
100
Deferred tax asset
B
100
Revenue and tax expense recognition period 2
EXAMPLES- Deferred tax on share options
1. E plc has granted share options to key employees both before
and after 7 November 2002. On adoption of IFRS 2, Share-based
Payment, E plc is not opting to apply the standard fully
retrospectively so no expense will be recognised in the income
statement in respect of those share awards granted before 7
November 2002.
CR
Under UK tax legislation, a tax deduction, equal to the intrinsic
23
Income Taxes
value of the options at exercise date, will be available to E plc when
the employees exercise their options and receive the shares.
Does this give rise to a deferred tax asset during the period
between the options being granted and exercised? If the amount of
that deferred tax asset changes in the future, will the change be
recognised in profit or loss or directly in equity?
IAS 12 requires deferred tax to be recognised on all temporary
differences. That is, the difference between the tax base and the
accounting carrying amount of assets and liabilities.
In respect of the options granted after 7 November 2002, a
temporary difference arises between the tax base of the share
option that has been recognised in the income statement (based on
the future tax deductions) and its carrying value in the balance
sheet (nil because the IFRS 2 share-based payment expense is
offset by a corresponding credit entry in retained earnings). This
gives rise to a deferred tax asset.
Similarly, a deferred tax asset will arise in respect of the options
granted before 7 November 2002.
The tax base of these options, like those granted more recently, is
based
on the future tax deductions. The carrying value of the options in
the balance sheet is, again, nil because there is no share-based
payment expense.
On first-time adoption of IFRS, the credit entry in respect of this
deferred tax asset will be recognised in equity.
The tax deduction will, on exercise of the option, be equal to the
intrinsic value of the options at the exercise date, which cannot be
known for certain until the date of exercise. Therefore, the tax base
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(that is, the amount of the tax deduction to be obtained in the
future) should be estimated on the basis of the information available
at the end of the period (the entity’s share price at the balance
sheet date).
At each balance sheet date, the deferred tax asset will be reestimated on the basis of information available at that time and the
movements in the asset recognised in profit or loss for share
options granted after 7 November 2002 (except to the extent that
the deferred tax exceeds the total IFRS 2 charge, in which case
movements are recognised in equity) and in equity for share
options granted before that date.
2. Deferred tax on share-based payments
Entity A is resident in a country where equity-settled share-based
payments are deductible for tax purposes. The tax authorities allow
the entire tax deduction on the grant date of the award.
Entity A grants an equity-settled share-based payment award to its
employees on the last day of its 2007 financial year. The award
vests in three years’ time. On grant date, the full tax deduction is
provided by the tax authorities. Since no service has been provided
when the year-end financial statements are
drawn up, entity A records no expense in terms of IFRS 2.
Should entity A recognise deferred tax in respect of the award in its
year-end financial statements?
There are no recognised assets or liabilities in the accounts of
entity A in respect of this award. The initial recognition exemption
however does not apply since the taxable profit has been affected
by this transaction (para 22(b) of IAS 12).
This situation is analogous to example 5 of Appendix B in IAS 12. In
24
Income Taxes
that example, the tax authorities provide the company with a tax
deduction after the IFRS 2 expense is recorded.
There is no recognised asset or liability in that example either, yet a
deferred tax asset is recognised since, in the future, the company
will pay less tax than it should based on its accounting profit.
Entity A should therefore recognise a deferred tax liability in its
2007 financial statements. This treatment is confirmed in para 314
of the basis of conclusion to
IFRS 2.
Taxable and deductible temporary differences arise where the
accounting measurement of assets and liabilities differs from the
tax basis.
7 Fair Value Adjustments
Differences arising from fair value adjustments, whether on
acquisition or otherwise, are treated the same as any other taxable
and deductible differences.
In simple terms, sales generally generate a tax charge.
Revaluations (fair value adjustments) generate a deferred tax
charge (an accrual for tax).
Differences arising from fair value adjustments examples:
EXAMPLE - Fair Value Adjustments
i) financial instruments are carried at fair value, but no matching
revaluation may be made for tax purposes.
I/B
DR
CR
Financial instrument
B
100
Gain – fair value adjustment
I
100
Tax expense (deferred tax) @ 20%
I
20
Deferred tax liability
B
20
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Revaluation of financial instrument
EXAMPLE - Deferred tax on available-for-sale equity
investments
An entity holds an available-for-sale investment, ie, shares in a
listed company. The tax base of the shares is £500, which was the
amount initially paid for the shares.
The fair value of the shares at the year end is £1,000. At the
balance sheet date, the entity expects to sell the shares in five
years and receive dividends of £500 during this five-year period.
Dividends are not expected to impair the carrying amount of the
investment when paid.
Dividends are non-taxable. Based on the current tax legislation, if
the shares were sold after five years, capital gains tax at a rate of
10% would be payable on the excess of sales price over cost.
How much deferred tax (if any) should the entity recognise at the
balance sheet date?
The principle in IAS 12 is that an entity should recognise deferred
tax based on the expected manner of recovery of an asset, or
liability, at the balance sheet date.
The dividends are expected to be derived from the investee’s future
earnings rather than from its existing resources at the balance
sheet date. Given that there is no impairment expectation arising
from the dividends, the entity does not expect the carrying amount
at the balance sheet date to be recovered through future dividends
but rather through sale.
25
Income Taxes
This is important since the expected manner of recovery will
determine the deferred tax treatment.
IAS 12 uses the word shall when it states that deferred tax assets
shall be recognised for all deductible temporary differences to the
extent that taxable profit will be available against which the
deductible temporary difference can be utilised.
The carrying amount of £1,000 has a corresponding tax base of
£500 on sale. There is a taxable temporary difference of £500 at
the balance sheet date. The applicable tax rate is the capital gains
rate of 10%. The entity should recognise a deferred tax liability of
£50 relating to the shares.
Entity F is required, therefore, to recognise a deferred tax asset in
respect of the capital losses if those losses can properly be utilised
against the future crystallisation of the capital gains.
EXAMPLE - Fair Value Adjustments
ii) revaluation of property, plant and equipment (IAS 16) to fair
value, but no adjustment for is allowed for tax purposes.
I/B
DR
CR
Revaluation of property, plant and equipment
B
700
Revaluation reserve-equity
B
700
Tax expense (deferred tax) @ 20% charged
B
140
to equity
Deferred tax liability
B
140
Revaluation of property
EXAMPLE - Recognition of capital losses
Entity F (a UK company subject to UK tax) has a portfolio of
properties and has capital tax losses arising from that portfolio. In
the current year, entity F has revalued its land and buildings
resulting in a (capital gains tax) deferred tax liability being
recognised in respect of land and buildings.
Entity F does not expect to realise the capital gain arising from the
revaluation for a number of years. Is entity F required to recognise
a deferred tax asset now in respect of the capital losses under IAS
12?
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
The fact that there is no current intention to realise the capital gain
through the sale of the properties does not affect the recognition of
the deferred tax liability. The difference between the tax base,
which remains the same despite the revaluation, and the revalued
carrying amount of the asset, is a temporary difference that gives
rise to a deferred tax liability.
Entity F should offset the presentation of the deferred tax liability
arising from the revaluation and the deferred tax asset in respect of
the capital losses if they meet the criteria in IAS 12. In other words,
there is a legal right to offset the deferred tax assets and liabilities
and they relate to the same taxation authority.
As long as these criteria are met, there is no requirement to
schedule the reversal of the temporary differences to ensure that
the timing matches.
On acquisition, assets of the company purchased should be fair
valued. This will reflect their market value rather than their book
value. These values will be used in the consolidated accounts.
Normally any change in value will not immediately create a tax
charge or tax credit. Deferred tax should reflect the value change.
Revaluations (fair value adjustments) generate a deferred tax
charge (an accrual for tax).The net difference will increase or
decrease goodwill.
26
Income Taxes
EXAMPLE - Fair Value Adjustments
iii) fair value of assets and liabilities on acquisition, does not affect
the current tax in the consolidated accounts until each asset is
realised.
I/B
DR
CR
Fair value of property, plant and equipment
B
600
Inventory – fair value provision
B
75
Accounts receivable – fair value provision
B
25
Goodwill
Deferred tax liability (600-75-25) @20%
Fair valuing assets after acquisition
B
B
400
100
Temporary differences will arise from consolidation when the
carrying amount of an item in the consolidated financial statements
differs from its tax base. The tax base is often based on the
carrying values and tax charges of the individual group members.
Temporary differences will arise from consolidation examples:
(In consolidated accounts, profits that have been generated from
moving inventory from one unit to another are eliminated, unless
the inventory has left the group. This removes unrealised profits.)
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
EXAMPLE – Consolidation
i) unrealised profits resulting from intra-group transactions are
eliminated on consolidation but not from the tax base.
I/B
DR
CR
Revenue-Intra-group sales
I
5000
Cost of sales-Intra-group purchases
I
5000
Cost of sales-reduction of intra-group profit
I
400
Inventory
B
400
Deferred tax asset
B
80
Tax income (deferred tax) @ 20%
B
80
Provision against loss of investment
Investment
Deferred tax asset
Tax income (deferred tax) @ 20%
Intra-group transactions eliminated on
consolidation
I
B
B
I
300
300
60
60
EXAMPLE – Consolidation
ii) the retained earnings of controlled undertakings are included in
consolidated retained earnings, but taxes are paid on profits when
distributed to the parent.
I/B
DR
CR
Net assets of subsidiary
B
4000
Profits/retained earnings
I/B
4000
Deferred tax liability
B
800
Tax expense (deferred tax) @ 20%
I
800
Retained earnings of controlled
undertakings included in consolidated
27
Income Taxes
retained earnings
EXAMPLE – Consolidation
iii) investments in foreign undertakings that are affected by changes
in foreign exchange rates. The carrying amounts of assets and
liabilities are restated for accounting purposes for changes in
exchange rates, but no similar adjustment is made for tax purposes.
(See IAS 21.)
I/B
DR
CR
Net assets of subsidiary
B
6000
Foreign currency gain - equity
B
6000
Deferred tax liability
B
1200
Tax expense (deferred tax) @ 20% -equity
B
1200
Foreign currency gain of controlled
undertakings included in consolidated
retained earnings
However, the tax base of the parent’s loan receivable and the tax
base of the subsidiary’s loan payable are not eliminated because
they relate to different tax jurisdictions and are of different values.
Management is considering the accounting for the temporary
differences and deferred tax in the parent’s separate financial
statements, in the subsidiary’s separate financial statements and in
the consolidated financial statements.
No, deferred tax should be recognised in the parent’s separate
financial statements in respect of the temporary difference between
the book value of the loan and the tax base of the loan. This is
because IAS 12 does not permit the recognition of deferred tax by a
parent in respect of investments in subsidiaries provided certain
conditions are met.
Entity C, a French entity with a euro functional currency, has a
Russian subsidiary, entity D, with a rouble functional currency.
Entity C has made a US dollar loan to entity D, which qualifies as
part of C’s net investment (quasi-capital) in D in accordance with
IAS 21.
The conditions are:
a) for taxable temporary differences that the parent can control
the timing of the reversal of the temporary difference; and it
is probable that the temporary difference will not reverse in
the foreseeable future.
b) for deductible temporary differences, it is not probable that
the temporary difference will reverse in the foreseeable
future; and that there will be taxable profit against which the
deductible temporary difference can be utilised.
A temporary difference exists between the book value and the tax
base of the loan for the parent, C, and the subsidiary, D. There also
exists a temporary difference in respect of the loan on
consolidation.
Similarly, no deferred tax is recognised in the consolidated financial
statements. The exceptions provided by IAS 12 apply in the
consolidated financial statements provided the conditions set out
above are met.
The book value of the loan is nil on consolidation because the
amount receivable by the parent eliminates against the amount
payable by the subsidiary.
However, deferred tax should be recognised in the separate
financial statements of the subsidiary in respect of the temporary
difference that arises on the loan from the parent. The exceptions in
IAS 12 only apply for investments of investors and not for
corresponding loans payable by the investees.
EXAMPLE – Deferred tax on subsidiary loan
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
28
Income Taxes
EXAMPLE –Deferred tax- sales to associates
Entity A has a 31 December year end. A acquired a 40% interest in
an associate, entity B, on 31 December 20X5 for 500,000. On the
same date, A sold goods costing 60,000 to B for 70,000. B still
holds all these goods in inventory at the year-end.
Entity B did not earn any profits on 31 December 20X5 so there is
no share of B.s profits for A to
recognise when applying equity accounting.
The adjustment to eliminate A’s share of the unrealised profit on
sale of inventory to B creates a temporary difference in respect of
the carrying amount of A’s investment in B in A’s consolidated
financial statements.
The temporary difference relates to A’s asset (its investment in B).
It is therefore A’s tax rate that is used to calculate the deferred
tax.The temporary difference is calculated in accordance with IAS
12 as:
Accounting base of investment in B (500,000 - 4,000) 496,000
However, A recognises an adjustment in its consolidated financial
statements to eliminate its share of the unrealised profit of 10,000
arising on the sale of inventory to B.
Tax base of investment in B
Deductible temporary difference
This consolidation
adjustment is:
Dr: Share of results of associates (40% x 10,000) 4,000
Cr: Investment in associate 4,000
B will probably sell the inventory in the next 12 months. If so, the
deductible temporary difference associated with the unrealised
profit will reverse in the next 12 months.
Entities A and B reside in different tax jurisdictions and pay income
tax at 40% and 30% respectively.
What deferred tax adjustments should A’s management recognise
in respect of the inventory sold by A to B?
Entity A should recognise a deferred tax asset of 1,600, provided it
is probable that it will have taxable profits against which to utilise
this deferred tax.
Deferred tax asset
500,000
4,000
(4,000 x 40%) 1,600
EXAMPLE –Accounting for a tax revaluation
Entity B operates in country X. B has undertaken a group
restructuring during the current year and as a consequence the tax
authorities have allowed a revaluation of the fixed assets to market
value at the date of the reorganisation for tax purposes.
However, the reorganisation is not a business combination for IFRS
purposes and so there has been no change in the IFRS carrying
value of the fixed assets.
Consequently the tax base on all the fixed assets concerned has
increased and is now higher than the IFRS book values.
How should entity B account for this change in tax values of the
fixed assets in its consolidated financial statements?
The differences between the IFRS book values for the fixed assets
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
29
Income Taxes
and the tax values represent temporary differences.
The temporary differences will potentially result in the recognition of
deferred tax assets. B should therefore assess whether it is
probable that the deferred tax
assets will be recovered and recognise them to the extent that it is
probable.
The recognition of the deferred tax assets will result in the
recognition of deferred tax income in the income statement.
This credit cannot be reported in equity as IAS 12, Income Taxes,
only allows deferred tax to be recognised in equity if the
corresponding IFRS entry was also to equity. This is not the case
here as the revaluation was not recognised at all for IFRS
purposes.
EXAMPLE – Recognition of deferred tax – first-time adoption
Entity B, a manufacturing entity, is adopting IFRS for the year
ending 31 December 2005 with a transition date of 1 January 2004.
Entity B operates in a country where the government provides tax
incentives to invest in property, plant and equipment (PPE) in
certain sectors of the economy by providing additional tax
deductions for the cost of the PPE.
For example, an item of plant and machinery which cost 100
qualifies for tax deductions (capital allowances) of 130.The
additional tax deduction of 30 (130 - 100) represents a temporary
difference that arises on initial recognition of the asset.
The guidance IAS 12 requires that no deferred tax is recognised in
respect of the temporary difference that arises on initial recognition
of the PPE except when the asset concerned is acquired in a
business combination (the initial recognition exemption.).
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
When preparing the transition balance sheet at 1 January 2004,
should entity B apply the initial recognition exemption when
calculating the deferred tax:
(a) to PPE purchased directly by the group;
(b) to PPE acquired in a business combination?
(a) Yes, entity B should apply the initial recognition exemption when
calculating deferred tax in the transition balance sheet.
The basic principle in IFRS 1, First-time Adoption of IFRS, is the
retrospective application of all IFRSs except where an exemption or
exception permits or requires otherwise. Consequently entity B
should not recognise deferred tax on transition in respect of that
portion of the temporary difference that arose on initial recognition
of a directly purchased item of PPE.
(b) The initial recognition exemption does not apply to assets and
liabilities acquired in a business combination. Consequently
deferred tax is calculated on transition on the full temporary
difference between accounting base and tax base for PPE originally
acquired in a business combination.
This includes business combinations where the IFRS 1 business
combinations exemption is applied due to the requirement of IFRS
1 that the measurement of deferred tax should follow from the
measurement of other assets and liabilities.
Not all temporary differences are recognised as deferred tax
balances.
The exceptions are:
i) goodwill and negative goodwill;
30
Income Taxes
ii) initial recognition of certain assets and liabilities; and
- if the revaluation does not affect the tax base then a temporary
difference does arise and deferred tax must be provided.
iii) certain investments.
Negative Goodwill
Goodwill
Goodwill is the residual amount after deducting assets and liabilities
at fair value from the purchase price in an acquisition.
IAS 12 does not permit the recognition of a deferred tax asset
arising from deductible temporary differences associated with
negative goodwill, which is treated immediately as income (see
IFRS 3).
IFRS do not permit the recognition of a deferred tax liability for
goodwill when its amortisation/impairment is not deductible. (If it is
fully deductible, there is no timing difference, so no deferred tax
arises.) Since March 2004, goodwill can no longer be amortised
under IFRS (see IFRS 3 workbook).
It is therefore a permanent difference (see above) and deferred tax
does NOT apply.
A deferred tax liability in respect of goodwill is not permitted,
because it would increase the value of goodwill.
Generally, goodwill is a group accounting concept. In most
countries, it is the individual companies that are taxed, not the
group. It is quite rare for goodwill (and its amortisation or
impairment) to be items that attract tax relief.
Where authorities do tax a business combination, deferred tax may
arise.
If an item (income or expense) is not taxable, it should be excluded
from the calculations as a permanent difference (see above).
Taxable temporary differences also arise in the following situations:
Certain IFRSs permit assets to be carried at a fair value or to be
revalued:
- if the revaluation of the asset is also reflected in the tax base then
no temporary difference arises.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Initial recognition of certain assets and liabilities
The second exception relates to a temporary difference that arises
from the initial recognition of an asset or liability (other than from a
business combination) and affects neither accounting income nor
taxable profit.
This exception will apply in limited circumstances, such as:
i) assets for which no deductions are available for tax purposes and
will be recovered through use. For example, some tax authorities
do not tax the gain or loss on disposal of an equity investment; the
tax base of such an investment is therefore zero; and
ii) assets which have a tax base that is different from the cost base
at acquisition. For example, an asset which attracts an investment
tax credit.
This may also apply when a non-taxable government grant related
to an asset is deducted in arriving at the carrying amount of the
asset but, for tax purposes, is not deducted from its tax base; the
31
Income Taxes
carrying amount of the asset is less than its tax base, and this gives
rise to a deductible temporary difference.
Government grants may also be set up as deferred income (see
IAS 20), in which case the difference between the deferred income,
and its tax base of nil, is a deductible temporary difference.
Whichever method of presentation an undertaking adopts, the
undertaking does not record the resulting deferred tax asset.
Investors should usually record deferred tax liabilities for associates
and joint ventures, unless there is an agreement between the
parties that profits will not be distributed in the foreseeable future.
EXAMPLE-Associate
You have a 40% share of a company. It has been agreed that
dividends will be paid annually, if cash is available. Deferred tax
should be calculated for any timing differences.
This exception does not apply to a compound financial instrument
that is recognised as both debt and equity.
This reflects the tax that would be paid in the parent undertaking if
dividends are received from group companies, especially foreign
investments.
The deferred tax impact of the temporary difference on the debt
component is recognised as part of the carrying amount of the
equity component.
The assumption is that the profits made by these investments will
be paid to the parent, and that deferred tax needs to be provided.
Certain investments
To avoid providing deferred tax, the parent must show that such
dividends will not be paid.
Undertakings should recognise deferred tax assets or liabilities for
investments in subsidiaries, associates and joint ventures except in
the following situations:
i) deferred tax liabilities should not be recorded where the parent (or
investor) is able to control the timing of the reversal of the
temporary difference, and it is probable that the temporary
difference will not reverse in the foreseeable future; and
ii) deferred tax assets should not be recorded if the temporary
differences are expected to continue to exist in the foreseeable
future.
EXAMPLE-Control of timing of dividends
These conditions may be met where a parent has control over a
subsidiary's dividend policy and has decided that undistributed
profits will not be distributed in the foreseeable future.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
8 Deferred Tax Assets
Deferred tax assets arising from deductible temporary differences
must be reviewed to determine to what extent they should be
recognised. The realisation of deferred tax assets depends on
taxable profits being available in the future.
EXAMPLE-Unusable deferred tax assets
You have a deferred tax asset of $1m. The firm is continually
generating losses, and the directors decide to liquidate the firm over
the next two years. Further losses are anticipated in the next two
years.
The deferred tax asset should be written off, unless there is a
realistic method to transfer it to another firm that can use it.
I/B
DR
CR
32
Income Taxes
Deferred tax asset
Tax expense
Write off of deferred tax asset
B
I
1m
attempt to move taxable profit between periods to use credits and
1m
losses.
Taxable profits (on which tax will be paid) arise from three sources:
Tax-planning opportunities should be considered in determining
i) Existing taxable temporary differences: taxable temporary
differences exist relating to the same tax authority and the same
taxable undertaking.
whether recognition of a deferred tax asset is appropriate. They
To qualify as a deferred tax asset, these differences should reverse
in the same period as the expected reversal of the deductible
temporary difference; or in the periods into which a tax loss arising
from a deferred tax asset can be carried back or forward.
EXAMPLE-Usable deferred tax assets
You have a tax loss of $10m. The firm will have a tax liability next
year from a taxable temporary difference of $15m. A deferred tax
asset should be recorded, as it will reduce next year’s payment.
I/B
DR
CR
Deferred tax asset
B
10m
Tax income
I
10m
Creation of deferred tax asset from a
tax loss
ii) Future taxable profits: the undertaking may recognise a
deferred tax asset where it anticipates sufficient future taxable
profits.
liability until it is settled.
iii) Tax-planning activities: undertakings commonly engage in taxplanning activities to use tax assets.
Tax-planning activities manage taxable profit so that existing tax
losses and credits do not expire. Tax-planning activities usually
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
should not however be used as a basis for reducing a deferred tax
Unused tax losses and credits
An undertaking may record a deferred tax asset arising from
unused tax losses (or credits) when it is probable that future taxable
profit will be available against which the unused losses (and credits)
may be utilised.
Tax losses, however, may indicate that future taxable profit will not
be available. This would be the case if the undertaking is
continually trading at a loss.
Outstanding sales contracts and a strong earnings history,
exclusive of a loss (for example from the sale of an unprofitable
operation), may provide evidence of future taxable profit.
EXAMPLE - Interim financial statements - change in estimate
Issue
Income tax expense is recognised in each interim period based
on the best estimate of the weighted average annual income tax
rate expected for the full financial year. Amounts accrued for
income tax expense in one interim period may have to be
adjusted in a subsequent interim period of that financial year if
33
Income Taxes
the estimate of the annual income tax rate changes [IAS34].
How should management account for the change in interim tax
estimates in the subsequent financial statements?
Background
Entity A has unused tax losses carried forward at 31 December
20X2 of 3,000,000. A’s management did not recognise a deferred
tax asset in the 20X2 annual financial statements because of
uncertainties regarding the utilisation of those losses. Forecasts
showed no expected taxable profits for the next three years.
Management took the same view in the first quarter of 20X3 after
incurring further losses. Management therefore did not recognise
a deferred tax asset in respect of the losses. The losses carried
forward at 31 March 20X3 were 3,060,000.
Management signed a new 3-year contract with a major customer
during the second quarter of 20X3.The contract provided a
significant increase in plant utilisation. Management revised their
profit forecasts based on this new contract and predict that the
tax losses will be fully utilised in 24 months.
Management therefore have a valid basis for recognising a
deferred tax asset for the whole of the tax losses carried forward
in the second quarter interim financial statements.
Solution
Management should recognise a deferred tax asset for the whole
of the tax losses carried forward, with the corresponding deferred
tax credit recognised in the second quarter income statement.
The event that has caused the recognition of the deferred tax
asset is the signing of the contract in the second quarter.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Recognition of the deferred tax in the second quarter is
appropriate even though the income to be generated from the
contract will not be earned until future quarters.
The undertaking should record a deferred tax asset only to the
extent that it has sufficient taxable temporary differences to match
it, or where there is strong evidence that sufficient taxable profit will
be available.
EXAMPLE - Deferred tax assets for losses
Entity C has significant tax losses, having made trading losses for
the last two years and is considering how much of this can be
recognised as a deferred tax asset. The budgets and forecasts for
the next five years show a return to profitability in year four.
What factors should be taken into account when determining
whether a deferred tax asset can be recognised?
IAS 12 does not specify a time period in which recognised tax
losses should be recovered. Therefore, there should be no arbitrary
cut-off in the time
horizon over which an assessment of recoverability is made,
whether or not budget information is available after a certain period.
Only if it is not probable that future taxable profit will be available at
all is a deferred tax asset not recognised. Otherwise, a deferred tax
asset is recognised to the extent it is considered probable there will
be future taxable profits.
Where an entity has a history of recent losses, it recognises a
deferred tax asset
only where there are sufficient taxable temporary differences or
where there is convincing other evidence that there will be future
taxable profits; such a history
34
Income Taxes
may be strong evidence that future taxable profit will not be
available.
It may be that the probability of taxable profits decreases the further
into the future we look, but any such assessment should be based
on the facts. In some cases, it may be clear that no taxable profits
are probable after a specific time, for example, where significant
contracts or patent rights terminate at a specific date.
In other cases, the assessment should take into account the
maximum taxable profits that are considered just more probable
than not in each year prior to expiry of the tax
losses. This may result in lower estimates for years in the distant
future, but it does not mean that those years should not be
considered.
Care should also be taken to ensure that the projections on which
such assessments are made are consistent with other
communications made by management and with the assumptions
made about the future in relation to other aspects of financial
accounting (eg, impairment testing), except where relevant
standards require a different treatment (eg, impairment testing must
not take account of future investment).
In addition, in such circumstances, consideration should be given to
the disclosures about key sources of uncertainty required by IAS 1,
Presentation of Financial Statements.
EXAMPLE - Portfolio provision - deferred tax
Issue
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
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
difference can be utilised, unless certain limited exceptions apply.
Should a bank’s management calculate a deferred tax asset on
the allowance for loan impairment determined on a portfolio
basis?
Background
Bank A calculates its allowance for loan impairment on a portfolio
basis. The approach is applied to sub-portfolios of loans that
either have not been identified as individually impaired or are not
individually significant. Impairment and uncollectibility are
measured and recognised in the financial statements of the bank
in accordance with IFRS 9.
A’s management expect the loan portfolio to increase in future
years and the amount of the provision is also expected to
increase. Tax relief is obtained only when a specific loan is
written off. Management believe that is not likely that the
temporary differences will reverse in the medium term, if at all.
Solution
Yes, management should recognise a deferred tax asset.
The allowance for loan impairment affects the carrying value of
the loan portfolio and accounting profit. There is no adjustment to
the tax base of any loans. Consequently, a deductible temporary
difference exists between the tax base of the loan portfolio and its
carrying value. Deferred tax should be recognised on this
temporary difference.
The undertaking must also consider the time limits for which tax
authorities permit such losses and credits to be carried forward, in
assessing recoverability.
EXAMPLE - Deferred tax asset on deductible temporary
differences based on a business plan
35
Income Taxes
Issue
When there are insufficient taxable temporary differences relating
to the same taxation authority and the same taxable entity, a
deferred tax asset is recognised to the extent that taxable profit
will be available.
Can management recognise a deferred tax asset if the entity
does not have a track record of profit generation?
Background
Management of entity C, a car-making entity, undertakes a
reorganisation. The reorganisation involves the transfer of C’s IT
services department to a separate entity, entity A.
Entity A will have a net deductible temporary difference, because
of the transfer of accrued pension costs related to the employees
of the IT department.
Management expects A to incur losses for the first year of A’s
operations but expects it to become profitable thereafter. The
forecast future profit is based on sales to third parties using
existing business processes.
Solution
Management should not recognise a deferred tax asset.
A’s performance will depend on sales to third parties, with which
management is not experienced. Management should therefore
not recognise the deferred tax asset because it is not probable
that taxable profits will be available.
Deferred tax assets and liabilities should be measured at the tax
rates expected to apply to the period when the asset or liability is
liquidated.
EXAMPLE-Tax rates
You have a taxable temporary difference of $200m. The rate of
income tax is 20%. Although there are rumours that the rate for
future years will be lower, no official announcement has yet been
made.
The current rate must be used.
The deferred tax liability will be $200m * 20% = $48m.
I/B
B
I
DR
CR
40m
Deferred tax liability
Tax expense – deferred tax
40m
Creation of a deferred tax liability
The best estimate of the tax rate that will apply in the future is the
tax rates that have been enacted (or ‘substantively enacted’) at the
balance sheet date.
Tax rates have been ‘substantively enacted’ when draft legislation
is nearing the end of the approval process.
When different rates of tax apply to different types and amounts of
taxable income, an average rate is used.
9 Determine appropriate tax rates
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
36
Income Taxes
EXAMPLE - Use of average rate
Issue
Deferred tax assets and liabilities are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods
in which the temporary differences are expected to reverse, when different tax rates apply to different levels of taxable income [IAS12R.49].
Can management use one tax rate for a specific temporary difference and a different, average, tax rate for the remaining temporary differences,
when graduated tax rates apply?
Background
Entity A operates in a country where different rates apply to different levels of taxable income.
At 31 December 20X3 the net deductible temporary differences total 30,000. Management expects the temporary differences to reverse over
the next seven years. The average projected profit for the next seven years is 60,000.
A deductible temporary difference related to impairment of trade receivables of 25,000 is expected to fully reverse in 20X5, when the related
expense will be deductible for tax purposes.
Solution
Yes, management should consider separately the impact of this temporary difference reversing in a single year.
The reversal of this large temporary difference will cause a distortion in the average statutory tax rate. Management should therefore consider
its effect separately when calculating the average statutory rate to be used for deferred tax assets and liabilities.
The following table illustrates how management may calculate the deferred tax assets and liabilities, assuming certain graduated tax rates:
Average
Year 2005
Range
-
1,000
Tax rate
Profit
18%
1,000
Income tax
Profit
180
Income tax
1,000
180
1,001
10,000
25%
10,000
2,500
10,000
2,500
10,001
25,000
30%
25,000
7,500
24,000
7,200
25,001
50,000
40%
24,000
9,600
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
37
Income Taxes
60,000
Average rate
33%
19,780
35,000 (a)
9,880
28%
(a) Average profit - temporary difference (60,000 - 25,000 = 35,000)
Management should apply a tax rate of 28% for the deferred tax asset related to impairment of trade receivables, and 33% for the remaining
temporary differences.
The measurement of a deferred tax asset or liability should reflect
the way the undertaking expects to liquidate the asset's carrying
value or the liability.
EXAMPLE - Applicable tax rate for reconciliation between tax
expense and accounting profit when there are several
domestic income-based taxes
For example, if the undertaking expects to sell an investment and
the transaction is subject only to capital gains tax, the undertaking
should measure the related deferred tax liability at the tax rate
applicable to capital gains, if different from the income tax rate.
Issue
Management must explain the relationship between tax expense
(income) and accounting profit. This may be a numerical
reconciliation between actual and expected tax expense (income)
or between the average effective tax rate and the applicable tax
rate.
Profits may be taxed at different rates depending on whether they
are distributed to shareholders. An undertaking should measure
deferred tax assets and liabilities using the tax rates applicable to
undistributed profits.
The applicable tax rate that provides the most meaningful
information to the users of the financial statements should be used.
When a dividend is subsequently declared and recorded in the
financial statements, the undertaking should recognise the
dividend's tax consequences to the undertaking (if any).
Deferred tax assets and liabilities must not be measured on a
discounted basis.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
What tax rates should management include in the applicable tax
rate when an entity operates under a tax regime levying more than
one income-based tax?
Background
Entity G operates in country H in two locations A and B. All entities
in country H incur three principal taxes; a Federal tax, a Local tax
and a President’s Special tax. G generates profits and incurs tax in
regions A and B as follows:
38
Income Taxes
Region
Accounting profit
Taxable
profit
for
Federal
and
President’s
Special
tax purposes
Taxable
profit
for
Local tax purposes
Federal tax rate
President’s
Special
Tax rate
Local tax rate
A
75,600
70,350
B
19,100
18,860
48,600
13,000
25%
5.5%
25%
5.5%
4%
7%
Total
94,700
The source of profits is consistent from year to year, that is G
consistently generates approximately 80% of its profits in region A
each year.
The taxable profit for local income tax purposes is based on the
taxable profit for Federal purposes, less the amount of Federal and
President’s Special tax charged plus or minus some additional
minor items.
Management propose that only the Federal tax rate of 25% be
included in the applicable tax rate.
Solution
Management should provide a reconciliation of the expected tax
charge rather than the effective tax rate.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
39
Income Taxes
EXAMPLE - Change in tax status effective during the period
Issue
The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related
temporary differences. This can result, for example, from a change in tax rates or tax laws.
Can management recognise directly in equity the tax consequences of a change in an entity’s tax status effective during the accounting
period?
Background
On 31 August 20X2, entity A changed its status from one type of limited company to another. Entity A therefore became subject to a
higher income tax rate (30%) than it was previously (25%).
The change in applicable tax rate applies to taxable income generated from 1 September 20X2. The tax rates applicable to a profit on
sale of land are also different and amount to 40% compared with 30% previously.
The information below relates to temporary differences that exist at 1 January 20X2 and at 31 December 20X2 (the end of accounting
period) and which will all reverse after 1 January 20X3.
Carrying amount
Trade
receivables
Land (carried
at revalued
amount)
Plant and
machinery
Warranty
provisions
Total
Tax base
Temporary
difference
Carrying amount
Tax base Temporary
difference
31/12/X2
(300)
2,800
01/01/X2
2,200
01/01/X2
2,500
(300)
31/12/X2
2,500
800
500
300
800
500
300
3,000
800
2,200
2,900
600
2,300
(1,000)
0
(1,000)
(1,000)
0
5,000
3,800
1,200
5,200
3,900
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(1,000)
1,300
40
Income Taxes
Solution
No, the tax consequences of the change in applicable tax rate should be included in net profit or loss for the period, unless they relate
to items originally recognised directly in equity.
The deferred tax at the opening and closing balance sheet dates is calculated as follows:
Trade receivables
Plant and machinery
Warranty provisions
Total
Land (carried at revalued amount)
Temporary
difference
01/01/X2
(300)
2,200
(1,000)
900
Deferred tax
225 (900x25%)
Temporary
difference
31/12/X2
(300)
2,300
(1,000)
1,000
300
90 (300x30%)
300
Deferred tax
300 (1,000x30%)
120 (300x40%)
The change in deferred tax relating to the receivables, the plant and machinery and the warranty provisions is included in the income
statement. The change in deferred tax relating to the land is included in equity because the revaluation of the land is included in equity.
Management must disclose the change in the entity’s tax status and the quantification of this change in the notes to the financial
statements.
profits for the portion of net profit corresponding to dividends
EXAMPLE - Dividends declared after balance sheet date
declared after the balance sheet date?
Issue
Income taxes might be payable at a higher or lower rate if part or all
of the net profit or retained earnings is paid out as a dividend to an
entity’s shareholders. Management should, in these circumstances,
measure current and deferred tax assets and liabilities at the tax
rate applicable to undistributed profits.
Should management apply the tax rate applicable to distributed
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Background
Management declared in February 20X4 a dividend of 400 payable
on 31 March 20X4. Management did not recognise a liability for the
dividend at 31 December 20X3 in accordance with the
requirements of IAS 37.
The profit before tax was 2,000. The tax rate is 30% for
undistributed profits and 40% for distributed profits.
41
Income Taxes
Solution
No, management should apply the tax rate applicable to
undistributed profit.
The recognition of the obligation to pay dividends is the trigger that
requires management to use the tax rate for distributed profit.
Management should therefore recognise a current income tax
expense of 600 (2,000 x 30%).
During 20X4 management will recognise a liability for dividends
payable of 400. It should also recognise additional tax liability 40
(400 x 10%) as a current tax liability and an increase of the current
income tax expense for 20X4.
Zero capital gains tax
Issue
The measurement of deferred tax liabilities and deferred tax assets
should reflect the tax consequences that would follow from the way
in which management expects to recover or settle the
underlying asset or liability [IAS12R.51].
How would this affect the calculation of deferred tax of an entity that
does not suffer any tax consequences from the gain on sale of an
asset?
Background
An entity acquired a building on 1 January 20X1 for 3,000,000.
Depreciation for the building is over 30 years and is not deductible
for tax purposes. Any gain on the sale of building is not taxable.
The entity carries the building at revalued amount. As at 31
December 20X1, the building is revalued at 3,200,000. Tax rate of
30% would apply to other income.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Solution
On 1 January 20X1 (date of acquisition)
The temporary differences as at 1 January 20X1 can be measured
as follows:
Carrying amount
Less: future taxable
income
3,000,000
(3,000,000)
Add: future deductible
amounts
-
Tax base
-
Carrying amount
3,000,000
Taxable temporary
differences
3,000,000
(acquisition cost)
(future assessable
income should be at
least the carrying
amount)
Depreciation is not
deductible
There is a taxable temporary difference, but it arises from the initial
recognition of the asset and, accordingly, no deferred tax liability is
recognised.
As at 31 December 20X1 (Carrying amount recovered through use
of asset)
42
Income Taxes
As at the end of the financial year, the entity intends to recover the
building’s carrying amount through the use of the building. The
temporary differences as at 31 December 20X1 can be measured
as follows:
Carrying amount
Less: future taxable
income
3,200,000
(3,200,000)
Add: future deductible
amounts
-
Tax base
-
(revalued amount)
(future assessable
income should be at
least the carrying
amount)
Depreciation is not
deductible
Initial recognition *
2,900,000
-
-
30%
90,000
(3,000,000100,000)
Revalued amount**
300,000
3,200,000
90,000
*: Taxable temporary differences arise from the initial recognition
and accordingly no deferred tax liability is provided
**: Taxable temporary differences arise from subsequent
recognition of the increase in the building’s value. The
subsequent increase will be recovered through the use of the
building, which will generate profit from operation that is taxable
at 30%. The tax rate applicable therefore would be 30%, and a
deferred tax liability would be recognised. The corresponding
entry is to equity because the underlying revaluation is
recognised in equity.
Carrying amount
3,200,000
As at 31 December 20X1 (Carrying amount recovered through the
sale of asset)
Taxable temporary
differences
3,200,000
As at the end of the financial year, the entity intends to recover the
building’s carrying amount by selling it. The entity has entered into
a binding agreement to sell the building before the end of the
financial year. The temporary differences as at 31 December 20X1
can be measured as follows:
Carrying amount
Taxable temporary
differences
Tax
rate
Deferred
tax
liability
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Less: future taxable
income
3,200,000
(3,200,000)
(revalued amount)
(future assessable
income should be at
least the carrying
amount)
43
Income Taxes
Add: future deductible
amounts
3,000,000
Initial cost is
deductible on sale
-either as deferred tax expense/credit in the income statement;
-or in equity, for those transactions for which the tax effects are
recognised in equity.
EXAMPLE-Tax rates changes
Tax base
Carrying amount
Taxable temporary
differences
3,000,000
You have a temporary taxable difference of $200m. The rate of
income tax is 24%.
3,200,000
In the next period, an official announcement is made that the
income tax rate will fall to 20%.
200,000
Taxable temporary
differences
Proceeds in excess of
cost*
Tax
rate
200,000
0%
Deferred
tax liability
0
*: Taxable temporary difference arising from the sale of the building,
which is taxable at a rate of 0%.
The deferred tax liability will be reduced to $200m * 20% = $40m.
(This example assumes that all of the deferred tax relates to the
income statement.)
I/B
DR
CR
Deferred tax liability
B
48m
Tax expense – deferred tax
I
48m
Creation of a deferred tax liability
Deferred tax liability
B
8m
Tax income (or reduction of tax expense) –
I
8m
deferred tax
Change of rate of deferred liability
Subsequent recognition
At each balance sheet date, an undertaking should review
unrecorded deferred tax assets to determine whether new
conditions will permit the recovery of the asset.
10 Determine movement in deferred tax balances
The movements in deferred tax assets and liabilities should be
recorded:
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
44
Income Taxes
(This scenario assumes that the tax losses are not cancelled by the
change in ownership of the acquiree.)
EXAMPLE-Unrecognised deferred tax asset
Your firm has been making losses, and has generated tax
losses of $50m. These were not shown on the balance
sheet as no trading improvement was anticipated.
A Japanese company signs contracts to use your
components in its new factory, which will return your firm to
profit.
You decide that you will be able to use the carried-forward
losses before they expire. You recognise these losses as a
deferred tax asset.
I/B
B
I
DR
10m
The carrying amount of deferred tax assets and liabilities will
change in subsequent periods with the recognition and reduction of
temporary differences.
The carrying amount of a deferred tax asset should be reviewed at
each balance sheet date for:
i) changes in tax rates;
ii) changes in the expected manner of recovery of an asset;
The deferred tax asset will be $50m * 20% = $10m.
Deferred tax asset
Tax income – deferred tax
Creation of a deferred tax
asset
Subsequent measurement
CR
iii) changes in future profits.
EXAMPLE- Changes in future profits
10m
For example, an acquirer in a business combination may not have
recorded a deferred tax asset in respect of tax losses.
Subsequently, the acquired undertaking may however generate
sufficient taxable profit to absorb these losses and permit
recognition in the consolidated financial statements.
Similarly, an acquiree may have an unrecorded deferred tax asset
relating to tax losses. Subsequent to acquisition, these losses are
recoverable through utilisation of future taxable profit generated by
the acquired group.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Your firm has been making losses, and has generated tax
losses of $50m. These were not shown on the balance sheet
as no trading improvement was anticipated.
A Japanese company signs contracts to use your components
in its new factory, which will return your firm to profit.
You decide that you will be able to use the carried-forward
losses before they expire. You recognise these losses as a
deferred tax asset. The deferred tax asset will be $50m * 20%
= $10m.
The following year, increased costs indicate that taxable
profits will only use $10m of the $50m losses. You reduce the
deferred tax asset by $40*20% = $8m.
45
Income Taxes
Deferred tax asset
Tax income – deferred tax
Creation of a deferred tax asset
Tax expense – deferred tax
Deferred tax asset
Reduction of deferred tax asset due
to changes in future profits
I/B
B
I
I
B
DR
10m
CR
Current and deferred tax assets and liabilities should be presented
separately on the face of the balance sheet.
10m
Deferred tax assets and liabilities should be classified as noncurrent.
8m
8m
Offset (netting an asset and a liability)
Current tax assets and liabilities should only be offset when:
11 Presentation
Change in tax status of an undertaking or its shareholder
-an undertaking has a legal right of offset; and
-intends to settle on a net basis, or
-to liquidate the asset and liability simultaneously.
A change in the tax status of an undertaking or its shareholder
(parent) may have an immediate impact on the undertaking's
current tax liabilities and assets, and alter its deferred tax assets or
liabilities.
The legal right only arises when the same tax authority levies the
taxes, and that authority accepts settlement on a net basis.
EXAMPLES –Change of tax status
1. Your head office is relocated to another country. It adopts
the new country’s tax system.
2. Your firm changes its legal status from a company to a
limited partnership, which requires it to adopt tax rules for
limited partnerships.
3. Your firm is bought by another firm. The tax authorities
cancel all brought-forward tax losses due to the change in
ownership.
The tax consequences of a change in tax status should be included
in tax expense, unless the underlying transaction was recorded in
equity.
Tax assets and liabilities
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
EXAMPLE-Offset
Your firm has carry-forward tax losses of $15m that are recorded as
a current asset. These were caused by trading losses last year.
This year you have a tax charge for the year, due to trading profits.
This is a current liability. When the tax authorities agree that the
loss may be used to reduce the liability, it can be offset.
I/B
DR
CR
Tax loss-current asset
B
15m
Tax income
I
15m
Recording previous year tax loss
Tax expense
I
40m
Tax liability
B
40m
Recording tax charge for this year
Tax liability
B
15m
Tax loss-current asset
B
15m
Offsetting carry- forward loss against
current liability
46
Income Taxes
EXAMPLE- IAS 12 disclosures
At the year-end company C, reporting under IFRS, has property,
plant and equipment (PPE) with carrying amounts, tax bases and
temporary differences outlined in Table 1.These result from assets
being deductible for tax purposes in a manner that differs from the
depreciation recognised for accounting purposes.
At an effective tax rate of 30%, the PPE in a deferred tax liability
position (the property and the office equipment) give rise to a
deferred tax liability of £9 and the assets in a deferred tax asset
position give rise to a deferred tax asset of £4.50.
The entity has a right to use the deferred tax asset to offset the
deferred tax liabilities so, on the face of the balance sheet, the
company discloses the net deferred tax liability position of £4.50.
IAS 12 requires disclosure in the notes to the financial statements
in respect of each type of temporary difference. The amount of the
deferred tax assets and liabilities recognised in the balance sheet
for each period presented. Does this mean that the disclosure in the
notes to the financial statements should show the gross position
(that is, a deferred tax asset of £4.50 and a deferred tax liability of
£9?)
No. We do not believe that IAS 12 requires a gross presentation
because the deferred tax noted in the above table relates to the
same type of temporary difference: that is, differences between
depreciation for tax and accounting purposes.
The company has the right to offset the deferred tax asset and
liability (so is presenting the net position in the balance sheet) so
the amount of that net position relating to the difference between
the carrying amount and tax base of PPE (that is, £4.50) should be
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
disclosed as a component of the total deferred tax liability
recognised.
Table 1
Class of PPE
Carrying Tax base (£)
Temporary DT difference
amount
asset/(liability)
(£)
Property
Cars
Office equipment
(£)
100
50
20
80
65
10
20
-15
10
@30% (£)
-6
4,5
-3
Tax assets in consolidated financial statements of one group
member may only be offset against a tax liability of another member
if there is a right to offset and the group intends to settle on a net
basis, or to liquidate the asset and liability simultaneously.
Similar conditions apply to offsetting deferred tax assets and
liabilities. Deferred tax assets and liabilities in consolidated financial
statements relating to different tax jurisdictions should not be offset.
The group's tax planning opportunities are not usually grounds for
offset unless the opportunity relates to income taxes levied by the
same tax authority on different group members, and the
undertakings intend to liquidate the tax assets and liabilities on a
net basis or simultaneously.
Tax expense
Tax expense (income) related to profit from ordinary activities
should be presented on the face of the income statement. The main
components of the tax expense (income) should also be disclosed
(see Disclosure below).
47
Income Taxes
12 Accounting for Deferred Tax - Detailed Rules
Assets Carried at Fair Value
Standards permit certain assets to be carried at fair value, or to be
revalued (for example, IAS 16, IAS 38, IFRS 9, and IAS 40).
In some countries, the revaluation of an asset to fair value affects
taxable profit for the current period. As a result, the tax base of the
asset is adjusted, and no temporary difference arises.
EXAMPLE-Revaluation of asset that is taxed
Your group wishes to revalue its balance sheet prior to a public
listing. Its subsidiary will suffer current tax on the revaluation.
I/B
DR
CR
Property
B
200m
Revaluation reserve
B
200m
Recording property revaluation
Tax expense –revaluation reserve
B
48m
Current tax liability
B
48m
Recording current tax charge on the
equity component
In other countries, the revaluation of an asset does not affect
taxable profit in the period, and the tax base of the asset is not
adjusted. Such revaluations require deferred tax to be accrued.
The future liquidation of the carrying amount will result in a taxable
flow of benefits to the undertaking, and the amount that will be
assessed for tax purposes will differ from the amount of those
benefits.
The difference between the carrying amount of a revalued asset,
and its tax base, is a temporary difference and gives rise to a
deferred tax liability, or asset.
EXAMPLE-Revaluation of an IAS 16 asset that is not
subject to current tax.
Your group wishes to revalue its balance sheet prior to a
public listing. Its subsidiary will suffer no current tax on the
revaluation.
I/B
DR
CR
Property
B
300m
Revaluation reserve
B
300m
Recording property revaluation
Revaluation reserve - Tax expense
B
60m
Deferred tax liability
B
60m
Recording deferred tax charge on
the equity component
This is true even if:
(1) the undertaking does not intend to dispose of the asset. The
revalued carrying amount of the asset will be recovered
through use (for example, depreciation). This will generate
taxable income which exceeds the depreciation that will be
allowable for tax purposes in future periods; or
(2) tax on capital gains is deferred, if the proceeds of the
disposal of the asset are reinvested in similar assets. In
such cases, the tax will become payable on sale (or use) of
the similar assets.
EXAMPLE - Deferred tax arising from revaluation of land
Issue
A deferred tax liability should be measured at the tax rates that
are expected to apply to the period in which the liability is settled
[IAS12R.47].
Which tax rate should management use for calculating the
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
48
Income Taxes
deferred tax liability in respect of revalued land?
Background
Entity A conducts its business in country Z. Management has
revalued the land on which the entity’s industrial plant is located,
and has recognised the increase from the revaluation in equity
[IAS16R.39].
The tax rate applicable to a profit on sale of PPE in Country Z is
30%, and the tax rate applicable to taxable profits earned from
using the asset is 40%.
The tax base of a liability component of a compound instrument
on initial recognition may be equal to the initial carrying amount of
the sum of the liability and equity components. The resulting
taxable temporary difference arises from the initial recognition of
the equity component separately from the liability component.
How should management calculate the deferred tax liability on the
taxable temporary difference arising from the initial recognition of
a compound instrument?
Background
Solution
Management should use the tax rate applicable to a profit on sale
of the land, that is, 30%, to determine the deferred tax associated
with the property.
The difference between the revalued amount of the land and its
tax base is a temporary difference and gives rise to a deferred
tax liability [IAS12R.20]. The corresponding deferred tax charge
should be recognised in equity because the revaluation increase
is recognised in equity.
The land is a non-depreciable asset. The corresponding deferred
tax liability that arises from the revaluation is measured based on
the tax consequences that would follow from recovery of the
land’s carrying amount through sale [SIC-21.5]. This is because
the revalued amount of the land is not recovered through an
accounting charge such as depreciation.
An entity issues a convertible bond on 1 January 20X3 which will
mature on 31 December 20X7. The holders of the bond have the
right to convert the instrument into a fixed number of the entity’s
ordinary shares at any time. The interest rate of the bond is 5%
and is paid annually. The market interest rate is 7%.
Management calculates the initial amount of the liability and equity
components by discounting the future cash flows associated with
the liability element at 7%. Management determines the
components as follows:
Liability component
Equity component
Total amount of the bond
1,836
164
2,000
EXAMPLE - Convertible debt
Issue
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Management will recognise an interest expense for accounting
purposes based on 1,836 at the market interest rate of 7%. The
49
Income Taxes
interest charge for accounting purposes will therefore be higher
than the cash paid as interest on the bond.
A tax deduction will be received for the interest paid in cash. The
difference between the interest expense for accounting purposes
and the cash amount of interest is not deductible for tax purposes.
The entity is subject to an income tax rate of 40%.
Solution
Management should calculate the deferred tax liability as the
difference between the carrying amount of the liability element and
the tax base of the bond.
Carrying amount of the liability component
1,836
Tax base of the liability component
2,000
Temporary difference
Deferred tax liability (164 x 40%)
164
1/1/X3
31/12/X3 31/12/X4 31/12/X5 31/12/X6 31/12/X7
Carrying
amount of
the liability
component
1,836
1,865
1,895
1928
1,963
2,000
Tax base
2,000
2,000
2,000
2,000
2,000
2,000
164
135
105
72
37
-
of the
liability
component
Taxable
temporary
difference
66
The corresponding entry to the deferred tax liability is to the equity
instrument. The equity element will therefore be stated at 98 (16466). However, the effect of the subsequent changes in the
carrying value of the liability component will be reflected as a
deferred tax expense in the income statement.
The following table summarises the effects of the deferred tax
over the period to maturity:
Deferred tax
liability
66
54
42
29
15
-
Deferred tax
expense
-
12
12
13
14
15
The deferred tax expense corresponds to the difference between the
accounting interest expense and the cash interest expense of the bond. The
following table illustrates:
31/12/X3
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
31/12/X4
31/12/X5
31/12/X6
31/12/X7
50
Income Taxes
Nominal
interest
(5%)
100
100
100
100
Interest
market
rate
(7%)
129
131
133
135
100
137
(3) exchange differences, arising on the translation of the
financial statements of a foreign undertaking in
consolidation; and
(4) amounts arising on initial recognition of the equity
component of a compound financial instrument (see IFRS
9).
It may be difficult to determine the amount of current and deferred
tax that relates to items credited, or charged, to equity. This may be
the case when:
Difference
29
31
33
35
Income tax
on the
difference
(40%)
12
12
13
14
37
15
(1) there are graduated rates of income tax, and it is impossible
to determine the rate at which a specific component of
taxable profit (tax loss) has been taxed;
Items Credited or Charged Directly to Equity
(2) a change in the tax rate or rules, affects a deferred tax
asset, or liability, relating to an item that was previously
charged to equity; or
Current tax and deferred tax should be charged, or credited, directly
to equity, if the tax relates to items that are credited, or charged, in
the same or a different period, directly to equity (see revaluation
examples above).
(3) an undertaking determines that a deferred tax asset should
be recorded, or should no longer be recorded in full, and the
deferred tax asset relates to an item that was previously
charged to equity.
Standards require or permit certain items to be credited, or
charged, directly to equity. Examples of such items are:
(1) a change in carrying amount arising from the revaluation of
property, plant and equipment under IAS 16 ;
(2) an adjustment to the opening balance of retained earnings,
resulting from either a change in accounting policy applied
retrospectively, or the correction of an error. IAS 8 has
seriously limited this application;
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
In such cases, the current and deferred tax is based on a
reasonable pro-rata allocation of the current, and deferred tax in the
tax jurisdiction concerned, or other method that achieves a better
allocation in the circumstances.
Under IAS 16, an undertaking may transfer each period, from
revaluation surplus to retained earnings, an amount equal to:
the difference between the depreciation (or amortisation) on a
revalued asset, and the depreciation (or amortisation) based on the
cost of that asset.
(see IAS 16 workbook.)
51
Income Taxes
If an undertaking makes such a transfer, the amount transferred is
net of any related deferred tax.
Similar considerations apply to transfers made on disposal of an
item of property, plant or equipment and any related revaluation
surplus.
When an asset is revalued for tax purposes, and that revaluation is
related to an accounting revaluation of an earlier period, or to a
future period, the tax effects of both the asset revaluation and the
adjustment of the tax base are credited (or charged) to equity, in
the periods in which they occur.
However, if the revaluation for tax purposes is not related to an
accounting revaluation, any tax effects of the adjustment of the tax
base are recorded in the income statement.
Current and deferred tax arising from share-based payment
transactions
An undertaking may receive a tax deduction that relates to
remuneration paid in shares, share options or other equity
instruments of the entity. The amount of that tax deduction may
differ from the related cumulative remuneration expense, and may
arise in a later accounting period.
For example, an entity may recognise an expense for the salaries
paid for in share options granted, in accordance with IFRS 2 Sharebased Payment, and not receive a tax deduction until the share
options are exercised, with the tax deduction based on the entity's
share price at the date of exercise.
The difference between the tax base of the employee services
received (the amount the taxation authorities will permit as a
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
deduction in future periods), and the carrying amount of nil, is a
deductible temporary difference that results in a deferred tax asset.
If the amount of the tax deduction for future periods is not known at
the end of the period, it shall be estimated, based on information
available at the end of the period.
For example, if the amount that the tax deduction in future periods
is dependent upon the undertaking's share price at a future date,
the measurement of the deductible temporary difference should be
based on the entity's share price at the end of the period.
Revaluations under IAS 16 + IAS 40
If a deferred tax liability or deferred tax asset arises from a nondepreciable asset measured using the revaluation model in IAS 16
or IAS 40, the measurement of the deferred tax liability or deferred
tax asset shall reflect the tax consequences of recovering the
carrying amount of the non-depreciable asset through sale,
regardless of the basis of measuring the carrying amount of that
asset.
Accordingly, if the tax law specifies a tax rate applicable to the
taxable amount derived from the sale of an asset that differs from
the tax rate applicable to the taxable amount derived from using an
asset, the former (sale) rate is applied in measuring the deferred
tax liability or asset related to a non-depreciable asset.
In the case of IAS 40, this assumption can be rebutted.
Other Comprehensive Income
Deferred tax on revaluation movements listed in Other
Comprehensive Income will be included with them in that financial
52
Income Taxes
statement. The notes will identify the amount of deferred tax
relating to each component.
(3) the amount of deferred tax expense (income) relating to the
start, and reversal, of temporary differences;
13 Disclosure
(4) the amount of deferred tax expense (income) relating to
changes in tax rates, or new taxes;
(Please also refer to ‘Illustrated Corporate Consolidated
Financial Statements’ and ‘Illustrative consolidated financial
statements for Banks’ published by PricewaterhouseCoopers and
available on its website. This provides sample notes illustrating
some of the disclosures listed here.)
(5) the amount arising from a previously unrecorded tax loss,
tax credit, or temporary difference of a prior period, that is
used to reduce current tax expense;
The major components of tax expense (income) should be
disclosed separately.
Components of tax expense (income) may include:
(1) current tax expense (income);
(2) any adjustments, recorded in the period, for current tax of
prior periods;
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(6) the amount from a previously unrecorded tax loss, tax
credit, or temporary difference of a prior period, that is used
to reduce deferred tax expense;
(7) deferred tax expense arising from the write-down, or
reversal of a previous write-down, of a deferred tax asset;
and
(8) the amount of tax expense (income) relating to those
changes in accounting policies, and errors, which are
included in the net profit for the period.
53
Group’s reconciliation between tax expenses and accounting profit when there are several subsidiaries with different tax rates
Issue
Management should disclose an explanation of the relationship between tax expense and accounting profit, by presenting a numerical
reconciliation either between tax expense and accounting profit or between the average effective tax rate and the applicable tax rate.
How should management present such a reconciliation in a group’s financial statements when there are several subsidiaries with different tax
rates?
Background
Entity L is incorporated in Luxembourg and is a non-operating holding entity. L has subsidiaries in Italy, Finland and Brazil. The following table
provides information for each member of the group in respect of its statutory tax rate and its profit before tax:
Country
Statutory tax
rate (A)
Profit before tax
(B)
Tax at
statutory tax
rate (AxB)
Tax at difference
between
Luxembourg rate
and statutory rate
Tax charge per
consolidated
financial statements
(A-25%)x(B)
Luxembourg
25%
20
5
-
Italy
37%
700
259
84
Finland
29%
400
116
16
Brazil
33%
500
165
40
1,620
545
140
Total
Management would prefer to present a reconciliation of monetary amounts rather than a reconciliation of the tax rates.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
520
Income Taxes
Solution
Management may choose to reconcile the tax charge to the tax rate of the parent, L, or to reconcile to an aggregate of separate reconciliations
for each country. The following illustrates the two alternative methods:
Reconciliation of tax expense
Profit before tax
Tax at the domestic rate of 25%
Tax rate of parent
Average tax rate
1,620
1,620
405
NA
Tax calculated at the domestic rates applicable
to profits in the country concerned
Income tax not subject to tax
Expenses not deductible for tax purposes
Effect of different tax rates in countries in which the group operates
Tax charge
NA
545
(50)
(50)
25
25
140
NA
520
520
Management should take into consideration what is the most meaningful information to the users of its financial statements when selecting the
way to present the reconciliation.
The following should also be disclosed separately:
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
55
Income Taxes
(1) the total current and deferred tax relating to items that are
charged, or credited, to equity;
(2) an explanation of the relationship between tax expense
(income) and accounting profit, in either, or both, of the
following forms:
(i) a numerical reconciliation between tax expense
(income) and the product of accounting profit multiplied
by the applicable tax rate(s), disclosing also the basis on
which the applicable tax rate(s) is (are) computed, or
(ii) a numerical reconciliation between the average effective
tax rate and the applicable tax rate, disclosing also the
basis on which the applicable tax rate is computed;
(3) an explanation of changes in the applicable tax rate(s)
compared to the previous accounting period;
(4) the amount (and expiry date, if any) of deductible temporary
differences, unused tax losses, and unused tax credits for
which no deferred tax asset is recorded in the balance
sheet;
(5) the total amount of temporary differences associated with
investments in subsidiaries, branches and associates, and
in joint ventures, for which deferred tax liabilities have not
been recorded;
(ii) the amount of the deferred tax income, or expense,
recorded in the income statement, if this is not apparent
from the changes in the amounts recorded in the
balance sheet;
(7) in respect of discontinued operations, the tax expense
relating to:
(i) the gain (or loss) on discontinuance; and
(ii) the profit (or loss) from the ordinary activities of the
discontinued operation for the period, with the
corresponding amounts for each prior period presented;
and
(8) the income tax consequences of dividends that were
proposed, or declared, before the financial statements
were approved for issue, but are not recorded as a liability
in the financial statements.
An undertaking should disclose the amount of a deferred tax asset,
and the evidence supporting its recognition, when:
(1) the undertaking has suffered a loss, in either the current, or
preceding, period in the tax jurisdiction to which the
deferred tax asset relates; and
(2) the utilisation of the deferred tax asset is dependent on
future taxable profits, in excess of the profits arising from
the reversal of existing taxable temporary differences.
(6) for each type of temporary difference, and for each type of
unused tax losses and credits:
(i) the amount of the deferred tax assets, and liabilities,
recorded in the balance sheet for each period presented;
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
56
Income Taxes
In these circumstances, an undertaking should disclose the nature
of the potential tax consequences that would result from the
payment of dividends to its shareholders.
It would often be impracticable to compute the amount of
unrecorded deferred tax liabilities arising from investments in
subsidiaries, branches and associates, and joint ventures.
In addition, the undertaking should disclose the amounts of the
potential tax consequences determinable, and whether there are
any potential tax consequences not determinable.
Therefore, IAS 12 requires an undertaking to disclose the
aggregate amount of the underlying temporary differences.
These disclosures enable users to understand whether the
relationship between tax expense (income) and accounting profit is
unusual, and to understand the factors that could affect that
relationship in the future.
The relationship between tax expense (income), and accounting
profit may be affected by such factors as:
- revenue that is exempt from tax,
- expenses that are not deductible in determining taxable profit,
- the effect of tax losses, and
- the effect of foreign tax rates.
In explaining the relationship between tax expense (income) and
accounting profit, an undertaking uses an applicable tax rate that
provides the most meaningful information to the users.
Usually the most meaningful rate is the undertaking’s local rate of
tax.
For an undertaking operating in several countries, it may be more
meaningful to aggregate separate reconciliations, prepared using
the domestic rate in each individual jurisdiction.
The average effective tax rate is the tax expense (income) divided
by the accounting profit.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Undertakings may also disclose the amounts of the unrecorded
deferred tax liabilities, as users may find such information useful.
An undertaking discloses the important features of the income tax
systems, and the factors that will affect the amount of the potential
income tax consequences (to the undertaking) of dividends, if any.
It may not be practicable to compute the tax consequences from
the payment of dividends to shareholders. This may be the case
where an undertaking has a large number of foreign subsidiaries.
However, even in such circumstances, some portions of the total
amount may be easily determinable. For example, in a
consolidated group, a parent, and some of its subsidiaries, may
have paid taxes at a higher rate on undistributed profits, and be
aware of the amount that would be refunded on the payment of
future dividends, from consolidated retained earnings. In this case,
that refundable amount is disclosed.
If applicable, the undertaking also discloses that there are
additional tax consequences not determinable.
In the parent's separate financial statements, if any, the disclosure
of the tax consequences relates to the parent's retained earnings.
An undertaking, required to provide these disclosures, may also be
required to provide disclosures related to temporary differences,
associated with investments in subsidiaries, branches and
associates or joint ventures.
57
Income Taxes
For example, an undertaking may be required to disclose the
aggregate amount of temporary differences associated with
investments in subsidiaries, for which no deferred tax liabilities have
been recorded.
If it is impracticable to compute the amounts of unrecorded deferred
tax liabilities, there may be tax consequences of dividends not
determinable, related to these subsidiaries.
An undertaking discloses any tax-related contingent liabilities and
contingent assets (see IAS 37). Contingent liabilities, and
contingent assets, may arise from unresolved disputes with the tax
authorities.
14 Appendix – Some IFRS / Russian Accounting Comparisons.
This document was written based on the assumption that the client
will undertake all reasonable legal efforts to calculate current tax
liability correctly. At the same time tax planning schemes, which are
not present at balance sheet date, are not taken into account for
IAS 12 does not allow this.
Abbreviations used:
1. TAX - Russian tax calculation
2. IFRS - IFRS accounting
Similarly, where changes in tax rates, or tax laws, are enacted, or
announced, after the balance sheet date, an undertaking discloses
any significant effect of those changes on its current and deferred
tax assets and liabilities.
3. DTL - Deferred tax liability
4. DTA - Deferred tax asset
Exchange Differences on Deferred Foreign Tax Liabilities or
Assets
Exchange differences that arise on foreign deferred tax assets and
liabilities, may be included as part of the deferred tax expense
(income).
A more usual presentation would be to include the exchange
differences on deferred taxes as part of the foreign exchange gains
and losses (see IAS21).
Foreign currency-denominated deferred tax assets and liabilities
are non-monetary items that are translated at the closing balance
sheet rate, being the date at which they are measured (see IAS21).
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
58
Tax treatment
IAS 12
treatment
Rationale
Accruals are taxable and
deductible.
Temporary
The differences may arise when
special types of accrual are used (e.g.
amortized cost). Result recognized in
IFRS will be recognized later in TAX.
Interest expenses in
excess of 1.1 of CBR
refinancing rate for RR
and 15% for USD (article
#269 of the Tax Code) are
not deductible.
Permanent
Excess expenses won’t be ever
recognized.
Balance sheet Nature of difference
area
All financial
assets and
liabilities
Interest income and
expenses/
Accruals
Permanent
All financial
assets and
liabilities
Fair value adjustment
under IFRS 9
Non-market
income/expenses (article
#40 of the Tax Code) not
adjusted for the purposes
of IAS 39.
These adjustments are not Temporary
taxable/deductible. But if
the financial instrument is
exchanged for the similar
instrument with market
interest rate the resulting
interests will be taxed /
deducted.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Consult
with tax
specialist
?
Yes
Yes
Excess expenses recognized in IFRS
won’t be ever recognized in TAX.
Excess income recognized in TAX
won’t be ever recognized in IFRS.
Result recognized in IFRS will be
recognized later in TAX. E.g. when the
instrument will be disposed off before
maturity.
Income Taxes
Tax treatment
IAS 12
treatment
Rationale
Provisions created for first
group of risk are not
deductible.
There is no difference
between secured and
unsecured loans.
Provisions are not
deductible.
Temporary
Result recognized in IFRS will be
recognized later in TAX since all
accounting ‘losses’ become deductible
when REAL problems occur and the
company can assign to loan higher
group of risk.
Result recognized in IFRS will be
recognized later in TAX when all
accounting ‘losses’ become deductible
(eg. through sale of the bad
promissory note with loss).
Balance sheet Nature of difference
area
Loans/
Interbank
Provision for loan
impairment
Loans/
Interbank/
Securities
Provision for
promissory notes
Exceptions for securities
Provisions are deductible
only for professional
participants holding the
dealer’s license.
When promissory notes
become overdue and
there is legal evidence that
the Bank would incur
losses (decision of the
court; sale of the
promissory note to third
party with losses; etc.) it is
deductible.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Temporary
Consult
with tax
specialist
?
Yes
60
Income Taxes
Tax treatment
IAS 12
treatment
Rationale
Revaluation is not
deductible/taxable. Only
realized results are
deductible/taxable.
Temporary
The MTM will be realized in future
periods when the security will be
disposed off. Thus it will be recognized
in TAX.
Balance sheet Nature of difference
area
Securities
Dealing gains/
losses
Consult
with tax
specialist
?
Yes
Note that clients not
possessing professional
licenses have to account
for dealing gains/losses
using different baskets.
The result of each basket
can’t be offset against
each other.
Securities
Interest income
Yes
Permanent
Non-market
income/expenses (articles
#40 and #280 of the Tax
Code). E.g. the Tax
authorities may recalculate
the prices of deals for
listed securities using
“convenient” quotations.
All results are taxable
Temporary
(including accruals). But
different tax rates are used
(see below).
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Excess expenses recognized in IFRS
won’t be ever recognized in TAX.
Excess income recognized in TAX
won’t be ever recognized in IFRS.
The differences may arise when
special types of accrual are used (e.g.
amortized cost). Result recognized in
IFRS will be recognized later in TAX.
61
Income Taxes
Tax treatment
IAS 12
treatment
Rationale
All results are taxable
(including accruals).
Special rate applies to
these gains – 15%.
Temporary
The differences may arise when
special types of accrual are used (e.g.
amortised cost).
Balance sheet Nature of difference
area
Securities
Coupon income on
RR federal, subfederal
and municipal bonds
Permanent
(reconciling
item)
Securities
Dividend income
All results are taxable at
source. Special rate
applies to these gains –
6%.
Permanent
(reconciling
item)
Consult
with tax
specialist
?
The difference between the basic rate
of 20% and 15% should be shown as
reconciling item.
If they are material we should gross
them up.
Dr. Income tax paid
Cr. Dividends received
The difference between the basic rate
of 20% and 6% should be shown as
reconciling item.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
62
Income Taxes
Tax treatment
IAS 12
treatment
Rationale
Capital gains are taxed at
20%.
Temporary
The difference may be recognized in
TAX later when the investment will be
sold.
Balance sheet Nature of difference
area
Investments
in subs,
associates
Equity accounting
Permanent
But the company may
(reconciling
decide to receive the gains item)
from the investment in the
form of dividends. Then
6% is applicable.
If the company doesn’t
have intentions to sell
investment forever and
has the same intentions
concerning dividends
THEN these differences
will never have tax
implications.
Investments
available for
sale
Fair value accounting
The same rules (see
preceding para) are
applicable to these
gains/losses.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Permanent
(but these
differences are
not disclosed
in reconciling
table. They
are shown
separately)
Temporary
Consult
with tax
specialist
?
If the management plans to receive
dividends use 6%.
The differences from investments may
not be recognized if:
1) the parent, investor or venturer is
able to control the timing of the
reversal of the temporary difference;
2) and it is probable that the temporary
difference will not reverse in the
foreseeable future
To identify the type of difference we
should consider the intentions of the
management (sale or dividends).
The provisions of IAS 12 allowing not
to recognize DTL if the company can
control the timing of the reversal of the
temporary difference are not
applicable here since the definition of
the investment available for sale
involves the point that it will be
realized in the foreseeable future.
63
Income Taxes
Tax treatment
Balance sheet Nature of difference
area
Investments
in subs,
associates
Fixed assets
Fixed assets
Goodwill
Fixed assets
revaluation
Depreciation
IAS 12
treatment
Amortization of goodwill is Permanent
not deductible under Tax
rules.
Revaluation performed
Temporary
before 1 January 2002 is
deductible.
Revaluation performed in
RAS accounts after 1
January 2002 is not
deductible.
Revaluation performed on
1 January 2002 may be
deductible (not more that
30% of the book value as
at 01 January 2001).
There is ambiguity in tax
legislation. But the
treatment may be in favour
of client.
Only depreciation within
Temporary
tax rates is deductible.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Rationale
IAS 12 states that if amortization of
goodwill is not deductible than this
difference should be permanent.
Difference will be realized either
through sale of a fixed asset or
through cash flows generated by the
asset in the future.
Consult
with tax
specialist
?
Yes
If the tax treatment is approved by the
client and our tax specialist we should
calculate the temporary difference
between two revaluations (RAS and
IFRS) and recognize the deferred tax
liability (DTL) or deferred tax asset
(DTA). The corresponding entry will be
to equity.
Differences between TAX and IFRS
rates will become deductible either
through sale of a fixed asset or
through cash flows generated by the
asset in the future. Thus they will lead
to either to DTA or DTL.
64
Income Taxes
Tax treatment
IAS 12
treatment
Rationale
Depreciation and losses
from sale of fixed assets
used for non-production
purposes are never
deductible.
Permanent
If cost of purchase is greater than
IFRS value than the tax value must be
equal to IFRS value.
Temporary
The excess of an IFRS value of the
asset and tax base leads to DTL.
Temporary
This is an example of tax loss carried
Yes
forward. It can be used to decrease
the current tax liabilities in future
periods. We should estimate the
recoverability of the asset and
consider the creation of provision for it.
Temporary
Irrespective of taxability/deductibility
Yes
the revaluation will be realized in
future periods when the delivery or
offset will occur. Thus it will be
recognized in TAX.
Tax base equals zero. Thus IFRS
value multiplied by tax rate =
DTL/DTA.
When the payment under the
Yes
guarantee is made and there is legal
evidence that the Bank will incur
losses (decision of the court; sale of
the debt to third party with losses; etc.)
it will be deductible.
Balance sheet Nature of difference
area
Fixed assets
Non-production Fixed
Assets
Other Assets/
Liabilities
Forex
Other Assets/
Liabilities
Forex/
Securities/Precious
metals (Term deals)
Other
liabilities
Provision for credit
related commitments
BUT gains received from
the sale are likely to be
taxable.
Net losses from nondeliverable forwards on
OTC market may be
carried forward to future
periods (not more than 10
years, not more than 30%
of the taxable profit).
Revaluation of off-balance
sheet position is
taxable/deductible
depending on the policy
chosen by the company.
Provisions for credit
related commitments are
not deductible.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Temporary
Consult
with tax
specialist
?
Yes
65
Income Taxes
Tax treatment
IAS 12
treatment
General rule: all expenses
are deductible.
Temporary
But expenses in excess of
norms are not deductible:
1) Advertisement (% from
salary)
2) Representative
expenses (% from salary)
3) R&D expenses (less
than 70% of the incurred
expenses.
It can be used during 10
years but not more than
30% of the current year
profits.
Permanent
N/A
N/A
Balance sheet Nature of difference
area
Other
liabilities
Accruals of expenses
on other operations
Other assets
Unused tax loss
carried forward
Other assets
DTA
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Rationale
Consult
with tax
specialist
?
Accruals in IFRS will be paid in cash in Yes
future periods thus they will be
deductible in TAX.
Excess expenses recognized in IFRS
won’t be ever recognized in TAX.
Temporary
It can be used to decrease the current
tax liabilities in future periods. We
should estimate the recoverability of
the asset and consider the creation of
provision for it.
We should consider the recoverability
of DTA. The major question is if the
company will have enough taxable
profits in next periods to utilize the
DTA in full.
Yes
66
Income Taxes
Tax treatment
IAS 12
treatment
Rationale
The treatment of income and
expenses earned and incurred
in SPVs, offshore zones
depends on the tax regulations
valid for those territories.
THUS the calculation of DTL for
the consolidating SPV should
be separate from the major one.
Subsequently the calculations
are consolidated.
Permanent
(reconciling
item)
The difference between the basic rate
of 20% and offshore rate should be
shown as reconciling item.
Temporary/
Permanent
If the gains will be transferred to
Russian entity then they will be subject
to Russian tax rules. E.g. interest will
be taxed at 20%.
Balance sheet Nature of difference
area
General
Income/
expenses created
through SPVs and
offshore zones
Examples:
1) Dealing gains and
losses;
2) Interest earned/
incurred in other tax
zones while the asset/
liability is located in
main zone.
Usually such income and
expenses are subject to the tax
rate different from the major
rate.
BUT if there is an agreement
between the SPV and Russian
entity of the group to transfer
the income/expenses then
transferred results will be taxed
using Russian tax rules.
The rules of non-market
income/expenses (articles #40
and #280 of the Tax Code) may
be applicable. E.g. the Tax
authorities may recalculate the
prices of deals for listed
securities using “convenient”
Permanent
Consult
with tax
specialist
?
Yes
Excess expenses recognized in IFRS
won’t be ever recognized in TAX.
Excess income recognized in TAX
won’t be ever recognized in IFRS.
quotations.
1.IAS 12 prescribes the accounting treatment for income taxes,
and the tax consequences of:
15 Multiple Choice Questions
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
(i)
Transactions of the current period that are recorded in
an undertaking's financial statements.
67
IAS 11 CONSTRUCTION CONTRACTS
(ii)
The future liquidation of the of assets and liabilities that
are recorded in an undertaking's balance sheet.
Tax planning opportunities.
(iii)
1. (i)
2. (i)-(ii).
3. (i)-(iii)
2. If liquidation of carrying amounts will make future tax
payments larger or smaller, IAS 12 generally requires an
undertaking to record a
1. Deferred tax liability (or deferred tax asset).
2. Provision.
3. Contingent liability.
(ii)
Unused tax losses.
(iii)
Unused tax credits.
(iv)
Taxable temporary differences.
1. (i)
2. (i)-(ii).
3. (i)-(iii)
4. (i)-(iv)
3. Permanent differences require:
1.Deferred tax liability (or deferred tax asset).
2. Provision.
3. Contingent liability.
4. None of these.
4. Permanent differences require adjustments in the:
1. Periods prior to the transaction.
2. The periods relating to the transaction.
3. Periods following the transaction.
4. Both 2 & 3.
5. Deferred tax assets are the taxes recoverable, in future
periods, in respect of:
6. Deferred tax relates to:
(i)
Deductible temporary differences.
(ii)
Unused tax losses.
(iii)
Unused tax credits.
(iv) Taxable temporary differences.
(v) Permanent differences.
(i)
Deductible temporary differences.
1. (i).
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
68
IAS 11 CONSTRUCTION CONTRACTS
2. (i)-(ii).
3. (i)-(iii).
4. (i)-(iv).
5. (i)-(v).
2. Is the amount of the deduction that can be claimed in
future periods.
3. Is the amount expensed.
7. Deferred tax
1. Reverses over time.
2. May reverse over time.
3. Does not reverse.
12. Temporary differences arise:
1. When the carrying amount of an asset or liability differs
from its tax base.
2. When deferred tax is applied.
3. When deferred tax differs from current tax.
8. The use of deferred tax:
1. Change the dates of payment of tax.
2. May change the dates of payment of tax.
3. Does not change the dates of payment of any tax.
13. A deductible temporary difference generates a
1. Deferred tax Liability.
2. Deferred tax Asset.
3. Either 1 or 2.
9. If the tax already paid exceeds the tax due for the period, the
excess will be recorded as:
1. Deferred tax.
2. A permanent difference.
3. An asset.
14. A taxable temporary difference gives rise to:
1. Deferred tax Liability.
2. Deferred tax Asset.
3. Either 1 or 2.
10. If revenue is taxed in the period received, the tax base:
1. Is nil.
2. Is only nil if the revenue is recognised in the same
period.
3. Is only nil if the revenue is recognised in the following
period.
4. Is the amount received.
11. Research and development costs may be expensed in the
current period, but deductible for tax purposes over subsequent
periods. The tax base:
1. Is nil.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
15. Taxable temporary differences occur when tax is charged in a
period:
1. Before the accounting period benefits from the income
in the financial accounts.
2. After the accounting period benefits from the income in
the financial accounts.
3. Either 1 or 2.
16. Deductible temporary differences occur when tax is charged
in a period:
69
IAS 11 CONSTRUCTION CONTRACTS
1. Before the accounting period benefits from the income
in the financial accounts.
2. After the accounting period benefits from the income in
the financial accounts.
3.
19. The realisation of deferred tax assets depends on:
1. Accounting profits being available in the future.
2. Taxable profits being available in the future.
3. No increase in the rate of income tax.
Either 1 or 2.
17. Differences arising from fair value adjustments are treated:
1.The same as any other taxable and deductible
differences.
2. Differently depending on whether they arise on
acquisition or otherwise.
3. Separately for deferred tax.
18. Not all temporary differences are recognised as deferred tax
balances.
20. When different rates of tax apply to different types and
amounts of taxable income:
1. An average rate is used.
2. No deferred tax is charged.
3. Each item must be listed.
21. An undertaking should review unrecorded deferred tax assets
to determine whether new conditions will permit the recovery of
the asset:
1. Every 3 years.
2. Every 5 years.
3. At each balance sheet date.
The exceptions are:
(i) Goodwill.
22. The carrying amount of a deferred tax asset should be
reviewed for:
(ii) Initial recognition of certain assets and liabilities.
(i) Changes in tax rates.
(iii) Certain investments.
(ii) Changes in the expected manner of recovery of an asset.
(iv) Property revaluations.
1. (i).
2. (i)-(ii).
3. (i)-(iii).
4. (i)-(iv).
(iii) Changes in future profits.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
1. (i).
2. (i)-(ii).
3. (i)-(iii).
70
IAS 11 CONSTRUCTION CONTRACTS
23. The difference between the carrying amount of a revalued
asset and its tax base is a:
1. Temporary difference.
2. Permanent difference.
3. Either 1 or 2.
24. Standards require or permit certain items to be credited, or
charged, directly to equity. Examples of such items are:
(i) A change in carrying amount arising from the revaluation
of property, plant and equipment;
(2) An adjustment to the opening balance of retained
earnings, resulting from either a change in accounting
policy applied retrospectively, or the correction of an
error. IAS 8 has seriously limited this application.
(iii) Exchange differences, arising on the translation of the
financial statements of a foreign undertaking.
(iv) Amounts arising on initial recognition of the equity
component of a compound financial instrument.
1. (i).
2. (i)-(ii).
3. (i)-(iii).
4. (i)-(iv).
16 Answers to multiple choice questions
Question
Answer
1.
2
2.
1
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
4
2
3
4
1
3
3
1
2
1
2
1
2
1
1
3
2
1
3
3
1
4
17 NUMERICAL QUESTIONS
1. -Permanent Differences
Your firm receives a $80million grant to employ more staff. It is
tax- free. It is later fined $20m for environmental misuse, after
illegally discharging chemicals into a river. The fine cannot be
deducted for tax.
Your tax computation will reconcile these adjustments to the
accounting profit.
71
IAS 11 CONSTRUCTION CONTRACTS
Accounting Profit =
$ 4.860 m
Assuming that both items are taken into profit in full in the same
period, calculate the tax computation.
2. If a transaction takes place in year 1 and tax is paid in year 2,
year 1 will show a transaction without a tax charge, and year 2
will show a tax charge without a transaction:
Expense
Tax income @
20%
Net profit
Year 1
-1000
0
Year 2
0
+200
-1000
+200
Calculate the deferred tax.
5. Tax is credited on payment of the money in period 1, but only
treated as an expense in period 2.
Income
Tax expense @
20%
Net profit
Year 1
400
0
Year 2
0
-80
400
-80
Expense
Tax income @
20%
Net profit
Year 1
0
+60
Year 2
-300
0
+60
-300
Calculate the deferred tax.
Calculate the deferred tax
3. In the next example, the cash is received and taxed in year 1,
but the income is split between years 1, 2 and 3.
Income
Tax expense @
20%
Net profit
Year 1
2000
-1200
Year 2
2000
0
Year 3
2000
0
800
2000
2000
6. The cash is paid and credited for tax in year 1, but the expense
is split between years 1, 2 and 3.
Year 1
Year 2
Year 3
Expense
-2000
-2000
-2000
Tax income @
+1200
0
0
20%
Net profit
-800
-2000
-2000
Calculate the deferred tax.
Calculate the deferred tax
4. If a transaction takes place in year 1 and tax is credited in year
2, year 1 will show a transaction without a tax credit, and year 2
will show a tax credit without a transaction:
7. Tax expense split between the income statement and equity.
Your tax computation shows an expense of $187m for the year,
of which $30m relates to a property revaluation.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
72
IAS 11 CONSTRUCTION CONTRACTS
Provide the journal entries.
12. Pension payments of 1.000 are recorded in year 1 for
accounting purposes and but only for tax purposes when paid in
cash in year 2.
8. Tax loss: asset
Your tax computation shows a loss of $16m for the year, which
can be carried back to recover tax of a previous tax period.
Provide the journal entries for years 1 & 2.
Provide the journal entries.
9. Research and development costs
You spend $200m on research in the current period, and it is
treated as an expense. Tax authorities only allow the expense to
be deducted over a 4-year period. Only $50m is allowed in this
period.
The remaining $150m is the tax base at the end of year 1, and
will be allowed over the next 3 years.
13. An impairment loss of $100m of property is recorded for
accounting purposes is ignored for tax purposes.
Provide the journal entries.
14. Financial instruments are carried at fair value, revaluing them
with a gain of 400, but no matching revaluation is made for tax
purposes.
Provide the journal entries.
Provide the journal entries for years 1 & 2.
10. Revenue of 400 from the sale of goods is included in pre-tax
accounting profit when goods are delivered in year 1, but may be
included in taxable profit when cash is collected in year 2.
Provide the journal entries for years 1 & 2.
11. Development costs of 1.000 have been capitalised for
accounting purposes and will be amortised to the income
statement, but have been deducted as an expense in determining
taxable profit in the period in which they were incurred. Amortised
over 4 years starting in year 2.
15. Goodwill impairment charge of 4.000 is not deductible for tax
purposes.
Provide the journal entries.
16.
40.000 of the retained earnings of controlled undertakings are
included in consolidated retained earnings, but taxes are only
paid on profits when distributed to the parent.
Provide the journal entries.
17. Tax rates changes
Provide the journal entries for years 1 & 2.
You have a temporary taxable difference of $400m. The rate of
income tax is 24%.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
73
IAS 11 CONSTRUCTION CONTRACTS
In the next year, an official announcement is made that the
income tax rate will fall to 20%.
Provide the journal entries for years 1 & 2.
18. Offset
Your firm has carry-forward tax losses of $55m that are recorded
as a current asset.
You have a tax charge for the year in the same tax jurisdiction.
This is a current liability of $700. The tax authorities agree that
the loss
may be used to reduce the liability.
Provide the journal entries for years 1 & 2.
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
74
IAS 11 CONSTRUCTION CONTRACTS
Net profit
1600
1600
1600
18 ANSWERS TO NUMERICAL QUESTIONS
4.
1.
$m
4.860
-80
+20
4.800
Accounting Profit
Less grant
Plus fine
=Taxable profit
Tax charge = 4.800 * 20% = 960
Tax expense
Accrual for income tax
Tax expense for the period
I/B
I
B
DR
0.96m
0.96m
2.
Income
Tax expense @
20%
Deferred tax @
20%
Net profit
Year 1
400
0
Year 2
0
-80
-80
80
320
0
Year 1
-1000
0
Year 2
0
+200
+200
-200
-800
0
Year 1
0
+60
Year 2
-300
0
-60
+60
0
-240
5.
Expense
Tax income @
20%
Deferred tax @
20%
Net profit
6.
3.
Income
Tax expense @
20%
Deferred tax @
20%
CR
Expense
Tax income @
20%
Deferred tax @
20%
Net profit
Year 1
2000
-1200
Year 2
2000
0
Year 3
2000
0
+800
-400
-400
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Expense
Tax income @
20%
Deferred tax @
20%
Net profit
Year 1
-2000
1200
Year 2
-2000
0
Year 3
-2000
0
-800
+400
+400
-1600
-1600
-1600
7.
75
IAS 11 CONSTRUCTION CONTRACTS
Tax expense split between the income statement and equity.
Your tax computation shows an expense of $187m for the year,
of which $30m relates to a property revaluation.
I/B
DR
CR
Tax expense – income statement
I
157m
Tax expense-revaluation reserve
B
30m
Tax accrual
B
187m
Tax expense split between the income
statement and equity
Tax credit @ 20%
Current tax liability (reduction)
Deferred tax asset
Research cost and tax income -period
1
Current tax liability (reduction)
Deferred tax asset
Tax income -period 2 (and the same
for periods 3 & 4)
8.
Tax loss: asset
Your tax computation shows a loss of $16m for the year, which
can be carried back to recover tax of a previous tax period.
I/B
DR
CR
Tax recoverable
B
16m
Tax income
I
16m
Recording recoverable tax loss
10.
Revenue from the sale of goods is included in pre-tax accounting
profit when goods are delivered, but may be included in taxable
profit when cash is collected.
I/B
DR
CR
Accounts receivable
B
400
Revenue
I
400
Deferred tax liability
B
80
Tax expense @ 20%
I
80
Receipt of cash and tax recognition -period
1
Cash
B
400
Accounts receivable
B
400
Deferred tax liability
B
96
Current tax liability
B
96
Receipt of cash and tax liability recognition
-period 2
9.
Research and development costs
You spend $200m on research in the current period, and it is
treated as an expense. Tax authorities only allow the expense to
be deducted over a 4-year period. Only $50m is allowed in this
period.
The remaining $150m is the tax base at the end of year 1, and
will be allowed over the next 3 years.
Research cost
Cash
I/B
I
B
DR
200m
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
CR
I
B
B
B
B
40m
10m
30m
10m
10m
11.
200m
76
IAS 11 CONSTRUCTION CONTRACTS
Development costs have been capitalised for accounting
purposes and will be amortised to the income statement, but
have been deducted as an expense in determining taxable profit
in the period in which they were incurred. Amortised over 4 years,
starting from the year after they were incurred.
I/B
DR
CR
Development costs (capitalised)
B
1000
Cash
B
1000
Current tax (reduction) @ 20%
B
200
Deferred tax liability
B
200
Development costs capitalised but
allowed for tax credit -period 1
Depreciation – development costs
I
250
Accumulated depreciation
B
250
Deferred tax liability
B
50
Tax income @ 20%
I
50
Depreciation and adjustment for tax period 2
12.
Pension payments of 1.000 are recorded in year 1 for accounting
purposes and but only for tax purposes when paid in cash in year
2.
I/B
DR
CR
Pension expense
I
1000
Accrual
B
1000
Deferred tax asset
B
200
Tax income @ 20%
I
200
Accrual of pension costs
Cash
B
1000
Accrual
B
1000
Current tax (reduction) @ 20%
B
200
Deferred tax asset
B
200
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Cost and tax income recognition period 2
13.
An impairment loss of $100m of property is recorded for
accounting purposes is ignored for tax purposes;
I/B
DR
Impairment of property
I
100m
Accumulated depreciation of property
B
Tax income @ 20%
I
Deferred tax asset
B
20m
Recording impairment charge and
(deferred) tax charge
CR
100m
20m
14.
Financial instruments are carried at fair value, revaluing them
with a gain of 400, but no matching revaluation is made for tax
purposes.
I/B
DR
CR
Financial instrument
B
400
Gain – fair value adjustment
I
400
Tax expense @ 20%
I
80
Deferred tax liability
B
80
Revaluation of financial instrument
15.
Goodwill impairment charge of 4.000 is not deductible for tax
purposes.
77
IAS 11 CONSTRUCTION CONTRACTS
Impairment-goodwill
Goodwill
Impairment of goodwill.
NO DEFERRED TAX LIABILITY IS
RECORDED.
I/B DR
CR
I 4000
B
4000
16.
40.000 of the retained earnings of controlled undertakings are
included in consolidated retained earnings, but taxes are only
paid on profits when distributed to the parent.
I/B
DR
CR
Net assets of subsidiary
B
40000
Profits/retained earnings
I/B
40000
Deferred tax liability
B
8000
Tax expense @ 20%
I
8000
17.
Tax rates changes
You have a temporary taxable difference of $400m. The rate of
income tax is 24%.
In the next period, an official announcement is made that the
income tax rate will fall to 20%.
The deferred tax liability will be reduced to $400m * 20% = $80m.
(This example assumes that all of the deferred tax relates to the
income statement.)
I/B
DR
CR
Deferred tax liability
B
96m
Tax expense – deferred tax
I
96m
Creation of a deferred tax liability
http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng
Deferred tax liability
B
16m
Tax income (or reduction of tax expense) –
I
16m
deferred tax
Change of rate of deferred liability
18.
Offset
Your firm has carry-forward tax losses of $55m that are recorded
as a current asset.
You have a tax charge for the year in the same tax jurisdiction.
This is a current liability of $700. The tax authorities agree that
the loss
may be used to reduce the liability.
I/B
DR
CR
Tax loss-current asset
B
55m
Tax income
I
55m
Recording previous year tax loss
Tax expense
I
700m
Tax liability
B
700m
Recording tax charge
Tax liability
B
55m
Tax loss-current asset
B
55m
Offsetting carry- forward loss against
current liability
Note: Material from the following PricewaterhouseCoopers
publications has been used in this workbook:
-Applying IFRS, IFRS News, Accounting Solutions
78