Income Taxes:
IAS 12
Wiecek and Young
IFRS Primer
Chapter 23
Income Taxes
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Related standards
IAS 12
Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice
Related Standards
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FAS 109 Accounting for income taxes
Related Standards
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IAS 1 Presentation of financial statements
IAS 8 Accounting policies, changes in
accounting estimates and errors
IAS 37 Provisions, contingent liabilities and
contingent assets
IFRS 3 Business combinations
IAS 12 – Overview
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Objective and scope
Recognition of current tax liabilities and
assets
Recognition of deferred tax liabilities and
assets
Measurement
Recognition of current and deferred tax
Presentation
Disclosures
IAS 12 – Objective and Scope
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IAS 12 addresses the accounting issues
related to tax effects of
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Current period transactions and events
Unused tax losses or credits
Tax consequences when carrying amounts and
tax amounts differ
IAS 12 – Recognition of Current
Tax Liabilities and Assets
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Current tax = amount of income taxes
payable or recoverable on the taxable profit
or loss for the period
If current taxes payable > taxes paid, then
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If current income taxes payable < taxes paid,
then
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Income taxes payable
Income taxes recoverable/receivable
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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Underlying assumption of accounting model:
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Assets will be recovered for at least their carrying
amount
Liabilities will be settled for their carrying amount
If there are tax consequences when the
asset is recovered or liability settled, this
effect should be reported on the statement of
financial position now
Future tax effect = deferred tax liability or
deferred tax asset
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
Q. Why a tax consequence?
A. Because carrying amount of A & L may differ from
their tax amount or tax base = a temporary
difference
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Taxable temporary difference:
Taxable income is increased in future when asset
recovered/liability settled
Deductible temporary difference:
Taxable income is decreased in future when asset
recovered/liability settled
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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Example: Installment A/R carrying amount $40; revenues recognized on sale; taxable
when cash received. Tax base = $0
Why is tax base $0?
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When the $40 is received (asset’s carrying
amount is recovered), it is all taxable. No amount
($0) is deductible from the $40 received.
Taxable temporary difference = $40 - $0 =
$40
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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Example: Warranty liability carrying amount $90; deductible for tax only when warranty
expenditures are made. Tax base = $0
Why is tax base $0?
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When the obligation is settled, the full $90 is
deductible in calculating taxable income. Tax
base is carrying amount of $90 less amount
deductible in future of $90 = $0
Deductible temporary difference = $90 - $0 =
$90
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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Future tax consequence (assume tax rate of
40%):
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Taxable temporary difference × tax rate* =
deferred tax liability
Installment A/R temporary difference of $40 ×
40% = $16 deferred tax liability
* tax rate – statutory rate when temporary
difference is expected to reverse, i.e., enter
into calculation of taxable income
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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Future tax consequence (assume tax rate of
40%):
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Deductible temporary difference × tax rate* =
deferred tax asset
Warranty liability temporary difference of $90 ×
40% = $36 deferred tax asset
* tax rate – statutory rate when temporary
difference is expected to reverse, i.e., enter
into calculation of taxable income
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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Deferred tax assets
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Result from deductible temporary differences and
unused tax losses/credits
Rely on having taxable income in the future in
order to benefit
Recognize deferred tax asset only if probable
that taxable profit will be available
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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Probable that taxable income will be
available in future? Consider:
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Existence of taxable temporary differences that
will reverse in future resulting in taxable income
History of profitability
Tax planning opportunities
If so, recognize deferred tax asset and
benefit in same year as tax loss; recognize
full tax effect on temporary deductible
differences. Reassess each B/S date.
IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
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Complexities arise with differences between
carrying amounts and tax base of
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Goodwill
A & L in a business combination
Investments in subsidiaries, associates, joint
ventures
IAS 12 – Measurement
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Current tax liability
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Current tax asset – if past taxes can be
recouped
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Taxable income × current tax rate = current tax
payable
Taxable loss × tax rate of past year = current tax
receivable/recoverable
Current tax asset – if current year’s taxes
overpaid = current tax receivable/recoverable
IAS 12 – Measurement
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Deferred tax assets and liabilities
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Measured on an undiscounted basis
Use tax rates for period when asset is expected to
be recovered or liability settled
Use rates based on laws enacted or substantively
enacted at B/S date
Use average rates expected to apply to taxable
profit/loss in period of expected reversal of
temporary difference
Review carrying amount of deferred tax assets at
each reporting date
IAS 12 – Recognition of Current
and Deferred Tax
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Recognize current and deferred taxes in
profit or loss unless
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The related income or expense is recognized
elsewhere such as OCI or directly in other equity
item
Tax results from a business combination
IAS 12 – Presentation
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Classification - deferred taxes are noncurrent A/L (IAS 1)
Offsetting - both for current and deferred:
only if same taxation authority, legal right to
offset, intent is to settle net or at same time
Tax expense includes both current and
deferred taxes
Report tax expense on profit or loss
separately from tax expense in OCI
IAS 12 – Disclosures
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Report separately the major components of
tax expense or income
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Current tax expense/income
Adjustments for current tax of other periods
Deferred tax expense/income from each type of
temporary difference or change in tax rates or
new taxes
Benefits recognized currently from previously
unrecognized tax losses/credits, or other
temporary differences
IAS 12 – Disclosures
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Report (continued)
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Tax expense recognized directly in equity and in
each component of OCI
Reconciliation of expected tax rate to effective tax
rate
Tax expense for discontinued op’ns – separately
for operating results and other gain or loss
IAS 12 – Disclosures
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Related to statement of financial position:
Amount of deferred tax asset/liability for each
type of temporary difference
Deductible temporary differences and other
balances with unrecognized deferred tax
assets
Nature of evidence supporting recognition of
uncertain deferred tax assets
Current GAAP Comparisons
Pages 29 to 30 of 49
of
http://www.ey.com/Global/assets.nsf/International/IFRS
_US_GAAP_vs_IFRS/$file/US_GAAP_vs_IFRS.pdf
Pages 94 to 98 of 164
of
http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAA
PAnOverview(2008).pdf
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IFRS Financial Statement
Disclosures
The Nestlé Group
http://www.nestle.com/Resource.axd?Id=24E5A5E2-93F8-43A3956E-0F259448CB90
Accounting policy for tax
Income statement related disclosures
Deferred tax assets and liabilities
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Page 16 of 118
Page 31 of 118
Page 55 of 118
Looking Ahead
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Income taxes – part of short-term
convergence project with FASB
Both IASB and FASB have agreed on many
changes to eliminate exceptions to general
principles in the standards
IASB issued an exposure draft in 2009 and
expects to issue final standard in 2010
Exposure draft is for new draft IFRS, not
amendments to IAS 12
Looking Ahead
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Proposed changes likely in exposure draft
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Tax base becomes a measurement attribute
Existing non-recognition of deferred tax
assets/liabilities in specific cases to be eliminated
Clarification of substantively enacted tax rate
Change from non-recognition of deferred tax
assets (when not probable of realization) to
recognition with an associated valuation
allowance account
Probable will be defined as ‘more likely than not’
Looking Ahead
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Proposed changes (continued)
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Continuation of allocating tax expense/income
among P&L, OCI and equity, but subsequent
changes will go through P&L
Balance sheet classification of deferred taxes to
mirror U.S. requirements
Uncertain tax positions will be addressed – using
an expected outcome measure and changes
recognized in continuing operations
Disclosures added; others removed
Reconciliation will be of parent company statutory
rate to effective rate
End-of-Chapter Practice
23-1 IAS 12 provides much more guidance
on the recognition and measurement of the
tax effects derived from deductible temporary
differences than for the benefits from taxable
temporary differences.
Instructions
Write a short paragraph to explain this
situation.
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End-of-Chapter Practice
23-2 Listed below are a number of situations that affect the financial statements.
1.
Development costs have been capitalized on the statement of financial position and are
being amortized to profit or loss over three years, but deducted as an expense for tax
purposes as incurred.
2.
Revenue is recognized as goods are delivered for financial reporting purposes, but on a
cash basis for tax purposes.
3.
An entity borrows money and pays a transaction fee on the amount borrowed. The
transaction costs are added to the debt and amortized using the effective interest method
for financial reporting purposes, although they were deducted when they were paid for tax
purposes.
4.
Pension expense is charged to profit or loss each period although tax legislation allows
entities to deduct only the contributions to the pension trustee to be deducted for tax
purposes. Expenses have always exceeded the contributions.
5.
Investment property is measured according to the revaluation model for financial reporting
purpose, resulting in valuations in excess of original cost. This method is not permitted for
tax purposes.
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Instructions
For each situation described above, indicate whether the company has a deductible or a
taxable temporary difference and whether it will result in the recognition of a deferred tax
asset or a tax liability. Explain each briefly.
End-of-Chapter Practice
23-3 A company buys equipment for $1,000, uses it in the manufacturing of goods for resale,
and depreciates it on a straight-line basis over its five-year expected useful life. For tax
purposes, the equipment is depreciated at 25% a year on a straight-line basis. Tax losses may
be carried back against taxable profit of the previous five years. The tax rate for all years is
40%, and in 2004 the company’s taxable profit was $500. In each year from 2005 to 2009, the
company reported profits before depreciation expense and taxes of $200.
Instructions
a)
For each year from 2005 to 2009, determine the company’s taxable profit or loss and the
current tax expense recognized.
b)
For each year from 2005 to 2009, determine the amount of any year-end taxable or deductible
temporary difference and the related balance of the deferred tax asset or liability account
reported on the balance sheet, and the deferred tax expense reported for the year.
c)
To the extent possible with the information provided and the results of (a) and (b), prepare a
partial statement of comprehensive income for each year from 2005 to 2009.
(adapted from Appendix B of IAS 12)
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End-of-Chapter Practice
23-4 In this chapter, flag icons identify areas
where there are GAAP differences between
IFRS requirements and national standards.
Instructions
Access the website(s) identified on the inside
back cover of this book, and prepare a
concise summary of the differences that are
flagged throughout the chapter material.
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