The Impact of FRS
on Taxation
Tan Hooi Beng
11 August 2009
Agenda
• Our progress
• FRS 139 – Financial Instruments : Recognition and measurement
‒ Current tax treatment for financial assets and liabilities
‒ Regional experience/position on FRS 39
‒ Guidelines from the Ministry of Finance
‒ Other issues
• Other FRSs
• The way forward
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Our Progress
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Our Progress
•
1978 - First adoption of few international accounting standards, IAS
•
1997 - Parliamentary Act established MASB, conferring MASB standards a
legal standing for all companies
•
2005 - Renaming of MASB standards to Financial Reporting Standards (FRS)
in line with International Financial Reporting Standards (IFRS)
•
2006 - Introduction of two-tier financial reporting for private and non-private
entities
•
2007 - FRS made identical to IFRS
•
1 April 2008 – MOF issued "Guidelines On Income Tax Treatment From
Adopting FRS 139" which are applicable to FIs
•
1 August 2008 - Announcement of convergence plan with IFRS by 1 January
2012 by MASB and FRF
•
22 Apr 2009 - Establishment of Joint Tax Working Group on Financial
Reporting Standards (JTWG-FRS)
FRS 139 - Financial
Instruments : Recognition and
measurement
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Current Tax Treatment for Financial Assets and Liabilities
•
Capital vs revenue
•
Disposal of financial assets (revenue account):
- Realized gain – taxable
- Realized loss – deductible
•
If financial assets (revenue account) are carried at lower of cost or MV and
such assets has been written down to MV, the difference write down or
diminution in value will be allowed as deduction
Current Tax Treatment for Financial Assets and Liabilities
(Cont’d)
• Capital account (e.g. investment in subsidiary)
- Gain – not taxable
- Loss – not deductible
• Diminution in value – not deductible
• Interest on financial liabilities
- Deductible if tax deductions rules are met
Regional Experience
Hong Kong
•
•
•
•
•
•
Departmental Interpretation and Practice Notes No 42 (DIPN No 42) by HKIRD
Tax treatment of gains or losses on financial instruments
Timing of assessing gains on financial instruments
Legal form vs economic substance
Transitional adjustments
IRD adopted the well-know Secan principle i.e. the tax treatment should follow
accounting treatment if the latter is in accordance with GAAP and is not
inconsistent with the tax ordinance
Sri Lanka
• “We are trying to educate the tax authorities about the effect of IFRSs that have
a bearing on taxation. ICASL has asked IASB to consider separate disclosure of
‘unrealised gains’ as a result of fair value measurement.” – Sri Lankan
delegate’s response in the IASB's survey
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Regional Experience (Cont’d)
Singapore
•
•
•
•
FRS 39 - financial period begining on or after 1 January 2005
IRAS Circular dated 30 December 2005
Similar to Malaysian MOF's position
What were the Pre-FRS 139 tax treatments?
‒ Realised vs. unrealised
‒ Capital account vs. revenue account
‒ For banks, generally, accounting treatment for financial derivatives were
accepted
• What are the FRS 139 tax treatments?
‒ Alignment between accounting treatment and tax treatment
‒ Minimize tax adjustment
‒ For non-banks
• Revenue vs capital
• If revenue, taxable/deductible even unrealised
‒ For banks
• Mainly on revenue account
‒ Transitional tax rules
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MOF’s Tax Guidelines
•
FRS 139 - Accounting periods beginning on/after 1 January 2010
•
Before 1 April 2008, no tax guidelines
•
1 April 2008 – ‘Guidelines On Income Tax Treatment From Adopting FRS 139’
which are applicable to FIs regulated by BNM
‒ Issued by MOF
‒ FIs licensed under Banking and Financial Institutions Act 1989, Islamic
Banking Act 1983, Development Financial Institutions Act 2002
‒ W.e.f YA 2008
‒ Revised GP 8 has incorporated numerous principles of FRS 139
•
What is the position for non-FIs?
•
Establishment of Joint Tax Working Group on Financial Reporting Standards
(JTWG-FRS)
•
Principles in the Guidelines are likely to be adopted
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MOF’s Tax Guidelines (Cont’d)
•
Alignment between tax treatment and accounting treatment
•
Rationale – timing difference
•
Capital vs revenue analysis still crucial
•
Financial assets (revenue account)
a) Fair value through P/L (FVTPL)
- Unrealised gain – taxed upfront
- Unrealised loss – deductible upfront
b)
Available for sale (AFS)
- Unrealised gain – not taxed
- Unrealised loss – not taxed
- Realised gain – taxed
- Realised loss - deductible
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MOF’s Tax Guidelines (Cont’d)
•
Financial assets (revenue account)
• Interest calculated by EIR method taxed (HTM and LAR)
• Impairment losses – deductible
•
Financial assets (capital account)
• IRB to ascertain what is capital and what is not
• Traditional rules apply
‒ Gain – not taxed, even realised!
‒ Loss – not deductible, even realised!
‒ Impairment losses – not deductible
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MOF’s Tax Guidelines (Cont’d)
•
Application of the guideline:
• Wef YA 2008
• Tax treatment per guideline is the ‘default’ tax treatment
• Election in writing to maintain current tax treatment
• May exercise option to adopt tax treatment per guideline
• Transitional Issues:
‒ Prior year adjustment – taxable/deductible in the first YA FRS 139 tax treatment is
adopted
‒ Additional tax payable to be paid over 5 equal yearly instalment
‒ Concession for instalment applies if election to adopt tax treatment per guidelines is
exercised within 3 years from the date of release of the guidelines
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Other Issues
•
•
•
•
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Receivables & impairment
Inter-co loan
• Treatment of interest income and interest expense
• Investment/loan balance for tax purposes e.g. Sec 33(2) interest restriction
calculation
Inter-co loan (with no written terms)
• Debt vs equity
Impairment for bad debts – deductible?
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Other FRSs – A Quick Tour
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FRS 2 – Share based
payment
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Food for thought
“If stock options aren’t a form of compensation, what are they? If
compensation isn’t an expense, what is it? And, if expenses
shouldn’t go into the calculation of earnings, where in the world
do they go?” – Warren Buffett, CEO, Berkshire Hathaway
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Scope of FRS 2
Applicable to 3 types of share-based transactions:
Equity-settled transactions
Payment for goods & services settled in the form of the company’s equity
instruments
- Employees services (e.g. ESOS)
- Suppliers/ non-employees goods & services (e.g. purchase of asset/services)
Cash-settled transactions
Payment for goods & services made in cash but relies on the value of the
company’s equity instruments
- Employee services (e.g. Share Appreciation Rights)
- Suppliers/ non employees goods & services
Choice of settlement
Payment for goods & services that could be made either in cash or the company’s
equity instruments
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Accounting Treatment
Journal entries
Equity-settled
- Employee
services
Dr Staff cost
Cr Equity
xxx
xxx
Value
Fair value of
equity instrument
granted
Timing
Grant date
Tax Issues
1.
Is “staff cost” deductible?
2.
If affirmative, what is the value?
3.
If affirmative, when to claim?
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Group ESOS Scheme
With an inter-company charges by Parent Co
US Parent
Share option
Subsidiary A
Services
A’s
Employees
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Group ESOS Scheme
Holding co. charges for shares granted to employees of subsidiary
At grant date
Entity
Hold Co .
Sub. Co.
Journal Entries
Dr. Receivable from Sub.
Cr. Equity – ESOS Resv.
Dr. Expenses (P/L)
Tax Implications
Not deductible
Cr. Payable to Hold Co.
At exercise date
Hold Co.
Dr. Equity – ESOS Resv.
Dr. Cash from employee
Capital receipt- cash for
injection of new shares
Cr. Share cap
Cr. Share premium
At settlement
Hold Co.
Sub Co.
Dr. Cash from Sub Co
Cr. Receivable from Sub
Dr. Payable to Hold Co.
Cr. Cash (B/S)
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Can we claim a tax deduction
when payment is made??
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Tax Treatment
Tax Deductible?
??
Equity-settled
-Employee
services
(ESOS) – intercompany charge
for shares granted
to employees of
subsidiary
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Authority
Sec 33 of the Income Tax Act, 1967 –
wholly and exclusively incurred in the
production of gross income?
Inland Revenue Authority of Singapore –
NOT DEDUCTIBLE
“ as a matter of policy, no deduction is
allowed where new shares are used to
fulfill ESOS obligations (Lowry). As such,
a recharges on issue of new shares is
also similarly not allowed, so that the tax
treatment concerning new shares will be
consistent between cases involving the
employer’s parent. The tax treatment is
the same whether the parent is a foreign
or Singapore company”
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Tax Treatment
Cash-settled
- Employee
services
- (e.g. Share
appreciation right)
Journal entries
Deductible
Value
Actual amount
incurred
Timing
Goods – obtains
goods
Services:
- Suppliers –
services rendered
- Employees – upon
payment
SAR is granted to employees as part of their remuneration package.
An employee is entitled to cash payment (instead of equity instruments) in future,
based on the increase in the entity’s share price from a specified level over a
specified period of time
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Implications of recognising ESOS costs
•
Cost of ESOS recognised as expense in P &L – impacts accounting profits
•
However cost of ESOS not tax deductible
•
Effective tax rate increases
•
Impacts earnings-per-share (EPS)
•
Comparability of EPS distorted
•
ESOS cost is a real economic cost – contractual and in recognition of the
employees contribution
•
Singapore: deduction only available for treasury shares, purchase price of the
treasury shares LESS grant price)
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Summary of potential tax treatments
• Equity settled share based payments to suppliers for goods and services is
deductible
• Cash settled share based payments (suppliers & employees) is deductible upon
actual cash settlement
• Equity share based payments to employees (ESOS), not tax deductible save for
a situation where there actual cost is incurred in acquiring the options (e.g.
treasury shares in Singapore and parent issued options to subsidiary
employees for a consideration).
• Recharges from parent may not be tax deductible if Singapore’s treatment is
followed
• Keep adequate documents to substantiate tax deduction claim, primarily to
prove the value
• Keep proper schedules in the tax computation to monitor movement
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FRS 5 - Non-current
assets held for sale and
discontinued operations
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FRS 5 – Non-current asset held for sale (HFS)
•
Non-current asset whose carrying amount will be recovered principally through
a sale transaction rather than through continuing use
•
Non-current asset to be classified as HFS if:
- Available for immediate sale in its present condition
• Its sale must be highly probable
– Management commitment to sell
– Active programme to locate a buyer (advertisement)
– Sale to be completed within 1 year
• It must be genuinely sold, not abandoned
• To be classified as HFS, above conditions must be met at balance sheet date
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Held for Sale – Presentation & Disclosure
Balance Sheet (extract)
ASSETS
Non-current assets
Current assets
Trade receivable
Non-current assets classified as HFS
Total assets
EQUITY & LIABILITIES
Equity attributable to equity holders of parent
Share capital
Amounts recognised directly in equity relating
to non-current assets held for sale
Total equity
Non-current liabilities
Current liabilities
Liabilities directly associated with non-current
assets classified as held for sale
Total liabilities
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20x6
20x5
XX
XX
xx
xx
XX
xx
xx
XX
xx
xx
XX
XX
XX
XX
xx
XX
xx
XX
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FRS 5 Non-current assets held for sale
FRS 5
Non-current assets classified as HFS
Tax Implication
Deemed disposal? Compute BA/BC? ITA
Tax Implications
definition of disposal (Para 61*)
Asset continued to be used, temporary disuse No deemed disposal – continue to claim CA
?**
Disposal value
Para 62: Market Value?***
* Para 61, Schedule 3 – “Any plant or machinery which is used for the purposes of a business and in
respect of which qualifying expenditure has been incurred is disposed of within the meaning of this
Schedule if it is sold, discarded or destroyed or if it ceases to be used for the purposes of that
business”
** Para 56, Schedule 3 – “For the purposes of this Schedule, an asset which is temporarily disused in
relation to a business of a person shall be deemed to be in use for the purposes of the business if it
was in use for the purposes of the business immediately before becoming disused and if during the
period of disuse it is constantly maintained in readiness to be brought back into use for those
purposes”
*** Para 61, Schedule – “Subject to subparagraph (2), for the purposes of this Schedule, where an
asset is disposed of by a person, its disposal value shall be taken to be an amount equal to its market
value at the date of its disposal or, in the case of its disposal by way of sale, transfer or assignment..”
What is the tax treatment if asset HFS is reclassified as non-current asset (in use)?
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Other FRSs
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Other FRSs
•
FRS 121 – The Effects of Changes in Foreign Exchange Rates
- Foreign currency, functional currency and presentation currency
•
FRS 108 – Accounting Policies, Changes in Accounting Estimates & Errors
•
FRS 116 – Property, Plant and Equipment
•
Etc
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The Way Forward
•
Adoption of FRS has tax implications
•
Joint Tax Working Group on Financial Reporting
Standards (JTWG-FRS) to expedite effort
•
Tax authorities to be lenient in the earlier years
•
Overall objective: Alignment between accounting
treatment and tax treatment
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