Current tax [CT]
Objective IAS 12 covers 2 main areas
Deferred tax [DT]
Definition Amount of income taxes payable/recoverable based on its taxable profit/loss
= Taxable profit x tax rate %
Current year tax
Current tax [CT] Use tax rates that have been enacted or substantively enacted by year end
SOPL - ITE
Change in AE
Under/Over provision of previous year tax
Impact on FS
Prospective adjustment
SOFP - CL Current tax payable @ Current year tax
DT represents the amount of income taxes payable/recoverable
in future periods in respect of TEMPORARY DIFFERENCES
What is DT?
Recognition of DT ensures that the tax effects of all gains and losses are
Matching concept
recognised in the SAME PERIOD in which the transactions are recognised
Accounting profit Taxable profit Accounting base Tax base
Main cause: Accounting rules Tax rules
[AP TP] [AB TB]
What is this? Income and expenses recognised in SOPL, but not included in taxable profit
Income recognised in SOPL, but NOT TAXABLE Capital gain / Dividend income
Example
How DT arises? Permanent differences [PD] Expenses recognised in SOPL, but NOT DEDUCTIBLE Fines / penalties / entertainment expense
Ignored for deferred tax purpose
Assume AB = TB No DT impact
Income and expenses recognised in both SOPL and taxable profit
Two types of differences
What is this? different accounting period; or
But they are recognised in either: different amount; or
Deferred tax [DT] - Basic both
Temporary differences [TD] Example Depreciation based on a/c policy vs Capital allowances based on tax rules
Taxable temporary differences [TTD] More tax payable in future Resulting in DTL
Types of temporary differences
Deductible temporary differences [DTD] More tax deductible/recoverable in future Resulting in DTA
Must account for DT using SOFP Approach Compare AB with TB
Basic rule
Dr SOPL-ITE
Increase in DTL
Cr DTL
General rule Recognise DT movement in SOPL-ITE
Dr DTL
Decrease in DTL
A/c treatment Determine the MOVEMENT in DT Cr SOPl-ITE
Recognise DT movement in OCI or directly in equity if it
Exception
relates to items recognised in OCI or directly in equity
Matching concept
Recognise in OCI DTL arising from gain on revaluation of property (IAS 16)
An adjustment to the opening balance of retained
Example earnings resulting from a change in AP which is applied
retrospectively (IAS 8)
Recognise directly in equity
Initial recognition of equity component of a compound FI (IAS 32)
Equity-settled share based payment (IFRS 2) - the excess
To be recognised for ALL taxable temporary differences (TTD)
DTL Initial recognition of goodwill; or
Initial recognition exemption [IRE] DTL should NOT be recognised if it arises from:
Initial recognition of A/L in a transaction which:
is NOT a business combination [i.e. an asset acquisition]; and
does NOT affect AP or TP
IAS 12
DT - recognition criteria 1. Deductible temporary differences (DTD)
DTA can arise from: 2. Carry forward of unused tax losses
3. Carry forward of unused tax credit
DTA should be recognised to the extent that is is probable that sufficient taxable
profit will be available in the future to be offset
DTA
1. Whether the entity has sufficient TTD relating to same taxation
authority and same taxable entity
2. Whether it is probable that the entity will have sufficient taxable profits in future
Recognition criteria Forecast of future profitability must be based on reasonable and
supportable assumptions
More emphasis should be placed on the performance of existing products and
existing customers when assessing the likelihood of future trading profits
Existence of signed sales contracts
Criteria to consider for the assessment of probability of future taxable profit
Good profit history
Previously published budget expectations and actual results in the past
Announcements of new contracts which are confirmed rather
than those which are merely expected from improved trading
Profits arise from operating gains rather than non-operating gains
3. Whether the unused tax losses result from identifiable causes which are unlikely to recur
4. Whether tax planning opportunities are available
To be expensed off to SOPL over vesting period
A/c rule No recognised asset in SOFP
AB = 0 AB < TB DTD DTA
Deductible when share options are exercised (based on intrinsic value at exercise date)
IFRS 2 SBP & IAS 12 Tax rule
TB = Future tax deduction (cumulative) Estimated no of options x intrinsic value x cumulative vesting fraction
Dr DTA
Double entry Cr SOPL-ITE The excess is the cumulative future tax deduction (TB) over cumulative remuneration expenses
Cr Equity (Excess)
DT is measured based on the tax rates that are expected to apply when the A/L will
be realised/settled, based on tax rates and tax laws that have been enacted or
substantively enacted by YE (eg: announcement by government)
If tax rate changes DT must be remeasured using the new tax rate
Tax rates to be used?
Different tax rates apply to different levels of taxable income (tax brackets) Measure using the average tax rate
For sale
DT - measurement Tax rates used must be consistent with the expected manner of recovery or
settlement For continuing use
Discounting? Discounting is NOT PERMITTED as DT is highly complex and subjective
DTA and DTL must be recognised gross in SOFP
DT - presentation Offsetting in SOFP? there is a legally enforceable right; and
Can only be offset if:
relate to same tax authority for same entity or different entities that intend to settle net
A group does not legally exist and so is not subject to tax
How it arises?
Instead, tax is levied on the individual legal entities within the group
AB (Carrying amount) based on group FS
Basic rule To calculate the DT implications on group FS
TB (tax base) based on the entities' individual FS
Higher as a result of
AB
FV gain adjustment AB>TB TTD DTL
Fair value adjustment FV gain
TB No impact on TB
Any recognition of DTL/DTA arising
DT arising from from FV adjustments will affect
DTL CANNOT be recognised! [IRE]
Business Combination AB There will be goodwill recognised in consolidated FS goodwill. However, recognition of DTL
Goodwill AB>TB TTD DTL This is because goodwill is arising from GW itself is prohibited
TB Nil as goodwill is not recognised within the individual FS measured as a residual and
recognition of DTL would increase
the carrying amount of goodwill
URP is eliminated upon consolidation, i.e. carrying
AB
amount is reduced to original cost AB < TB DTD DTA
TB Based on individual FS which is at the higher selling price
Specific application URP on inv Recognition of DTA will ensure that the tax already charged to the individual
selling company is not reflected in the current year's CSOPL but will be
matched against the future period when the profit is recognised by the group
DTA must be provided at BUYER'S tax rate
AB RE of subsi/assoc/JV are included in CRE
Nil as income taxes will be payable only if the AB > TB TTD DTL
TB
profits are distributed to the reporting parent
the parent/investor is able to control the timing of the reversal of temporary differences; and
No DTL to be recognised if: Check if parent controls dividend policy
Undistributed profit of subsi/assoc/JV
it is probable that the temporary differences will not reverse in the foreseeable future
Subsi/assoc/JV will not distribute dividends in foreseeable future
In practice, entity will generally only recognise DTL for most associate, but not for
subsidiary
DTL must be created if: distribution is likely (eg: when parent intends to sell the subsi)
