The below is a guide to accounting for income taxes under International Financial Reporting Standards (IFRS). The guide is chapter 13 of PwC UK's 'Manual of accounting – IFRS 2014' (IFRS Manual) - a comprehensive practical guide to IFRS. Written by PwC's Global Accounting Consulting Services team, the IFRS Manual is full of insights based on PwC's IFRS experience around the world.
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13.1
Tax in financial statements comprises current tax and deferred tax. Current
tax is based on the taxable and deductible amounts that are included in the
income tax return for the current year. Management recognises unpaid current
tax expense for the current and prior periods as a liability in the balance
sheet. It recognises any overpayment of current tax as an asset.
13.2
The amount of tax payable on taxable profits of a particular period maybear
little relationship to the income and expenditure amounts in the financial
statements. Tax laws and financial accounting standards recognise and measure
income, expenditure, assets and liabilities in different ways. For example,
some items of income or expenditure in the financial statements might be
taxable or tax deductible in a period other than the one in which they were
recognised (timing differences). The amount of an asset or liability for tax
purposes (tax basis) might be different from the amount recognised in the
financial statements; this could result in taxable or deductible amounts in
the future when the amount of the asset is recovered or the liability is
settled (temporary differences). |
13.3
Deferred tax aims to address this mismatch. It is inherent in recognising an
asset or liability that a reporting entity expects to recover or settle the
carrying amount of the asset or liability. If that carrying amount is
recovered or settled, future tax payments will be larger (or smaller) than if
this recovery or settlement had no tax consequences. So, if the tax effects
of temporary differences resulting from the difference between tax and
accounting rules are recognised, the appropriate tax expense will be
recognised in the financial statements. The tax charge in the financial
statements comprises deferred tax as well as current tax. |
13.3.1
This chapter covers the accounting for taxation at a
period end. There are separate requirements in IAS 34 for determining the tax
charge for an interim period (see Manual of Accounting – Interim financial
reporting). |
13.4
This chapter contains a number of worked examples, using illustrative tax
rates. |
13.5
IAS 12 sets out the accounting treatment for income taxes. It deals with the
accounting for the current and future tax consequences of: |
■ |
Transactions and other events of the
current period recognised in the financial statements. |
■ |
The future recovery (settlement) of
the carrying amount of assets (liabilities) recognised in an entity's balance
sheet. |
13.6
An entity accounts for the tax consequences of transactions and other events
in the same way that it accounts for the transactions and other events
themselves. The tax effects of transactions and other events recognised in
profit or loss are also recognised in profit or loss. The tax effects of
transactions and other events recognised outside profit or loss (either in
other comprehensive income or directly in equity) are also recognised in the
same place. See paragraph 13.288 onwards. |
13.7
The standard also addresses how to recognise deferred tax assets arising from
unused tax losses or unused tax credits, the presentation of income taxes in
financial statements, and the disclosure of income tax-related information. |
13.8
IAS 12 applies to accounting for income taxes; that is, taxes based on
taxable profit. Income taxes include domestic and foreign income taxes and
withholding taxes payable by a subsidiary, associate or joint venture on
distributions to the reporting entity. [IAS 12 para 2]. |
13.9
The standard applies to taxes based on taxable profit. This implies that not
all taxes are within IAS 12's scope; but, as taxable profit is not the same
as accounting profit, taxes based on a figure that is not exactly accounting
profit might be within the standard's scope. This is also implied by the IAS
12 requirement to explain the relationship between tax expense and accounting
profit. 'Taxable profit' implies a net rather than gross taxable amount,
management might need to exercise judgement to determine whether some taxes
are income taxes. |
13.10
In some jurisdictions, tax might be assessed using a measure not directly
linked to accounting income. Tax might be assessed using a 'taxable margin',
which is calculated as revenue less specified costs. Such 'margin taxes' apply a
tax rate to income less expenses (an income tax structure); so they differ
from systems that assess tax based on sales or gross receipts (a non-income
tax structure). In this case, the tax is an income tax in nature, and IAS 12
applies. |
13.11 Where
a tax is assessed based on the lower of a percentage of revenue and a
percentage of revenue less expenses (that is, a 'taxable margin'), it
generally has the features of income tax and is within IAS 12's scope. The
tax attributes should be assessed based on the overall tax system, not on the
basis of the individual tax payers. The tax classification in an individual
entity does not change just because the basis of assessment differs from year
to year. |
13.12
As well as assessing whether a specific tax payment is based on a measure of
net income, management should consider the interaction with overall income
tax. If an initial tax payment is not based on net income but represents a
payment in advance that is subsequently trued-up to give a tax based on net
income, the initial payment forms part of the income tax and falls within IAS
12's scope. |
13.13 In
some jurisdictions, shipping entities can choose to be taxed on the basis of
tonnage transported, tonnage capacity or a notional income, instead of the
standard corporate income tax. Taxes on tonnage transported or tonnage
capacity are based on gross rather than net amounts; taxes on a notional
income derived from tonnage capacity are not based on the entity's actual
income and expenses. Such tonnage taxes are not therefore considered income
taxes under IAS 12 and are not presented as part of tax expense in the
statement of comprehensive income. |
13.14 In
some jurisdictions, certain items of income are received net of taxes
deducted at source. Examples include dividend and royalty income. Because the
tax is deducted at source the cash flows of the paying entity are affected.
But the tax amount is still payable by (or paid on behalf of) the recipients
and hence a tax on income to the receiving entity instead of a tax on income
to the paying entity. See further paragraph 13.48. |
13.15 Entities
may receive government grants or tax credits. The standard does not address
how to account for government grants (see chapter 9) or investment tax
credits. But the standard does deal with accounting for temporary differences
that arise from such grants or investment tax credits. [IAS 12 para 4].
Investment tax credits are considered in more detail in paragraph 13.275.2. |
13.16 An
entity does not generally recognise income taxes payable by an entity's
shareholders. Shareholders or other group entities might pay income taxes on
the entity's behalf in some circumstances – for example, if there is a
consolidated tax return, or if relief for one entity's losses is transferred
to another group entity. In such circumstances, the appropriate accounting is
determined by examining the arrangement's details and considering relevant
tax legislation. |
13.17 A
third party can indemnify an entity for income tax liabilities. Such an
indemnity is typically given by a vendor in a business combination, but they
can arise in other situations. An indemnity does not remove the entity's tax
charge in profit or loss. In addition to the income relating to the
indemnification asset receivable from the third party, there might be
subsequent changes in the asset's value. The asset usually changes in line
with changes in the indemnified liability, depending on the terms of the
arrangement. Income taxes are taxes based on taxable profit (see para 13.8).
An indemnification asset receivable from a third party in respect of a tax
uncertainty is not within IAS 12's scope. So, movements in a third-party
indemnification asset are not included in the income tax line item in the
statement of comprehensive income; they are reported as part of pre-tax
profits. |
13.18 Any
taxes not within IAS 12's scope are within the scope of IAS 37. That standard
is dealt with in chapter 21. |
13.42
A number of issues arise in respect of current tax. The following matters are
dealt with in this section: |
■ |
Recognition of current tax
liabilities and current tax assets on the balance sheet. |
■ |
Presentation of current tax in the
performance statements and in equity. |
■ |
The treatment of withholding and
underlying taxes in the context of dividends and other interest payable and
receivable. |
■ |
The treatment of income and expense
subject to non-standard rates of tax. |
■ |
Measurement of current tax
liabilities and assets. |
■ |
Uncertain tax positions. |
■ |
Presentation and disclosure of
current tax. |
Apart from the last item (considered
in para 13.276 onwards), these matters are discussed below. |
13.43
Management recognises unpaid current tax expense for the current and prior
periods as a liability in the balance sheet. Uncertain tax positions are
considered further in paragraph 13.74 onwards. The amount payable in respect
of the current tax expense is based on the taxable and deductible amounts
that are expected to be reported on the tax return for the current year. The
actual tax payable might differ from the tax liability recognised because a
tax rule has been applied or interpreted incorrectly or there is a dispute
with the tax authorities. Except where the adjustment is caused by a material
error (which should be treated under IAS 8), it is treated as a change in
accounting estimate and included in tax expense of the period when the
adjustment arises. Management should normally disclose a material adjustment
resulting from a change in accounting estimate. If the amount paid for
current and prior periods exceeds the amount due for those periods, the
excess is recognised as an asset. [IAS 12 para 12]. |
13.44
An entity may incur a tax loss for the current period that can be carried
back to set against the profits of an earlier accounting period. Management
should recognise the benefit of the tax loss as an asset in the period in
which the tax loss occurs, because the asset is reliably measurable and
recovery is probable. If the entity cannot carry back the tax loss, it might
be able to carry it forward to set against income in a future period. For
recognition of a deferred tax asset for carry-forward of unused tax losses,
see paragraph 13.144. [IAS 12 paras 13, 14]. |
13.45
Current tax is generally recognised as income or an expense and is included
in profit or loss unless it arises from a transaction or event that is
recognised (in the same or a different period), either in other comprehensive
income or directly in equity. [IAS 12 para 58]. |
13.46 Tax
follows the item; so, current tax on items recognised, in the same or a
different period in other comprehensive income is recognised in other
comprehensive income; and current tax on items recognised, in the same or a
different period directly in equity is recognised directly in equity. [IAS 12
para 61A]. The standard gives examples of items recognised in other
comprehensive income or credited or charged directly to equity; these are
shown in paragraphs 13.288.1 and 13.288.2. [IAS 12 paras 62, 62A]. |
13.47
Where an entity pays tax on all its profits, including elements recognised
outside profit or loss, it can be difficult to determine the amount of
current tax attributable to the amounts recognised outside profit or loss,
either in other comprehensive income or directly in equity. In those circumstances,
the attributable tax is calculated on a reasonable pro rata basis, or
other basis that is more appropriate in the circumstances. [IAS 12 para 63]. |
Example –
Allocation of tax on exchange loss On consolidation, the exchange loss of C500,000 is transferred to a
separate component in equity under IAS 21 and is recognised in other
comprehensive income. The total tax charge of C300,000 to be allocated
between the income statement and other comprehensive income is as follows:
The income statement would bear a tax charge of C450,000, with C150,000 of
tax relief being recognised in other comprehensive income in the consolidated
financial statements. (The subsidiary's results have been ignored to keep the
example simple.) |
13.48
In some jurisdictions, the recipient of a dividend receives a tax credit to
acknowledge that the income from which the dividend is paid has been subject
to tax in the entity paying the dividend (an imputed credit for underlying
tax). This situation differs from one where a withholding tax is deducted at
source and paid to the tax authorities on behalf of the recipient by the
entity paying the dividend. |
13.49
Withholding tax generally means tax on dividends and other income that has
been deducted by the payer of the income and paid to the tax authorities on
behalf of the recipient. IAS 12 contains no specific definition of
withholding tax but includes as an example the portion of a dividend that is
paid to the tax authorities on behalf of the shareholders. [IAS 12 para 65A].
This situation is distinct from one where the entity's tax rate depends on
the level of profits that are distributed to shareholders (see para 13.175). |
13.49.1
Withholding taxes can vary in their characteristics. Some indicators are
given below: |
■ |
The recipient of the dividend
receives a net amount of income (that is, the amount of dividend received is
lower than the amount declared in the paying entity's documentation), instead
of the recipient being paid the full amount of the dividend declared and an
additional amount being payable to the taxation authorities. |
■ |
The correspondence with the tax
authorities concerning the tax payment notes that the tax is being paid on
the recipient's behalf, rather than being an additional tax on the entity
paying the dividend. |
■ |
For a dividend received with an
imputed tax credit not to be subject to further tax in the recipient, it will
have to be subject to specific tax relief. But, where a withholding tax has
been charged, this might discharge the liability to the tax authority, so the
item is not subject to further tax in the recipient. |
13.50
The tax treatment of dividends and other income subject to withholding tax is
often different from dividends and other income received with an imputed tax
credit. |
13.51 The
different tax treatments are considered to be sufficiently significant to
require different accounting treatments for dividends and other income
subject to imputed or underlying tax credits (these are notional and should
not be taken into account as income tax of the recipient entity) from those
that are subject to withholding tax (these are real and should be taken into
account as income tax of the recipient entity). |
13.52
Outgoing dividends, interest and similar amounts should be recognised at an
amount that includes withholding taxes (that is, gross including the amount
of the withholding tax) and excludes any other taxes (such as attributable
tax credits) not payable wholly on behalf of the recipient. As distributions
to owners are charged to equity any withholding tax should also be charged to
equity as part of the dividend. [IAS 1 para 107; IAS 12 para 65A]. |
13.54
IAS 12 is silent on the treatment of withholding taxes in the recipient's
financial statements. Withholding tax is tax actually suffered by the
recipient entity; so management should recognise incoming dividends, interest
and other income receivable in the income statement at an amount including
(that is, gross of) any withholding taxes, but excluding other taxes, such as
attributable tax credits, not payable wholly on behalf of the recipient. This
treatment mirrors the treatment for outgoing dividends. |
13.55
Where tax has been deducted at source on interest income and has been paid by
the payer of the interest to the tax authorities on behalf of the recipient,
the interest income should be recorded gross of the tax deducted at source.
The tax should be shown as part of the tax charge. |
13.61 In some
situations, relief is also available for foreign 'underlying tax' (that is,
tax on the entity's profits out of which the dividends are paid). |
13.62 An entity can
claim double tax relief for both withholding and underlying tax, but
dividends or other income received should not be grossed up for the
underlying rate of tax. This is because the underlying tax is the liability
of another entity (the payer of the dividend) and is not tax that has been
suffered by the recipient. The underlying tax rate is simply used by the
entity's tax authority to calculate the tax due on the dividend income and to
work out the total relief that should be given for the double tax suffered.
The only tax that the recipient suffers is the withholding tax, which is a
'real tax', as opposed to the underlying tax that, from the perspective of
the recipient, is a 'notional tax'. |
13.63 Consider the
following example: |
|
13.64 Income received
after tax has been deducted is distinguished from income taxable at
non-standard rates. Entities often enter into transactions that give rise to
income or expense that is not subject to the standard rate of tax. Examples
include some leasing transactions, and advances and investments made by
financial institutions. In some situations, after taking account of the
financing cost, the transaction might result in a pre-tax loss and a post-tax
profit. Consider the following example: |
Example – Income taxed at
non-standard rate |
||
|
||
A
financial institution borrows C10 million that bears interest at 9% per
annum. The proceeds are immediately invested in an instrument that yields 8%
per annum, but the income is taxable at 20%. The standard rate of tax is 33%.
The entity makes a pre-tax loss of C100,000, but the transaction is
profitable, after tax effects are taken into account, as shown below: |
||
|
|
|
Income statement |
C'000 |
C'000 |
Investment
income @ 8% |
800 |
|
Less:
interest expense |
(900) |
|
|
|
|
Pre-tax
loss |
(100) |
|
Taxation: |
||
On
income @ 20% |
(160) |
|
Tax
relief on interest @ 33% |
297 |
|
|
|
|
Tax
credit |
137 |
|
|
|
|
Post-tax
profit |
37 |
|
|
|
13.65 Banks and other
institutions enter into such transactions precisely because they are
profitable after tax. But they might argue that the presentation above makes
it difficult to interpret the income statement and inhibits comparison
between different entities, especially since pre-tax profits are an important
measure of performance. They might prefer that income subject to the non-standard
rate of tax should be presented on a grossed-up basis (as shown below). This
would eliminate the distortion between pre- and post-tax profits, by
reporting tax at the standard rate. |
Income statement (grossed-up) |
C'000 |
Investment
income (grossed up): 640/(100% − 33%)* |
955 |
Less:
interest expense |
(900) |
|
|
Pre-tax
profit * |
55 |
Tax
charge @ 33% † |
(18) |
|
|
Post-tax
profit |
37 |
|
|
*
Includes notional income of C155 |
|
†
Includes notional tax charge of C155 |
|
13.66 However, we
believe that grossing up, because it is notional, fails to report the
transaction's true nature. In our view, if a transaction results in a pre-tax
loss and a tax benefit, it is reported as such, to achieve a faithful
representation. Grossing up reports a false amount, both as pre-tax profits and
as the tax charge for the year. The tax treatment of the transaction should
have no bearing on the way it is reported for financial reporting purposes.
If grossing up were allowed as a general rule, non-deductible expenditure
could be presented on a grossed-up basis. This treatment would be
inconsistent with generally accepted practice in accounting for such items,
where no adjustments are usually made. |
13.67 So, in our view,
no adjustment should be made to reflect a notional amount of tax that would
have been paid or relieved in respect of the transaction if it had been
taxable, or allowable for tax purposes, on a different basis. |
13.68 Entities whose
results are significantly affected by transactions not at a standard rate of
tax should disclose the full effects of such transactions in their financial
statements. |
13.69 Current tax
liabilities and assets are measured at the amounts expected to be paid or
recovered using the tax rates and laws that have been enacted or
substantively enacted by the balance sheet date. [IAS 12 para 46]. |
13.70 Where the
government has announced changes in tax rates and laws at or before the
balance sheet date, but the formalities of the enactment process are not yet
finalised, management should consider whether the announcement has the effect
of substantive enactment. In some tax jurisdictions, such announcements have
the effect of substantive enactment; so the announcement of new tax rates and
laws should be taken into account in the measurement process. [IAS 12 para
48]. |
13.71 Substantive
enactment occurs when any future steps in the enactment process will not
change the outcome. This underlying principle should be used to determine if
a rate is substantively enacted in a particular territory. |
13.72
Entities might have tax refunds due from or tax liabilities due to the tax
authorities that are receivable or payable more than 12 months from the
balance sheet date, but are not interest bearing. Deferred tax assets and
liabilities cannot be discounted; but the standard is silent on discounting
current tax balances. [IAS 12 para 53]. |
13.73
Current tax assets and liabilities are measured at the amounts expected to be
recovered from or paid to the tax authorities. [IAS 12 para 46]. Management
does not need to discount long-term current tax balances; but entities can
measure these balances at a discounted value as a matter of accounting policy
choice. The impact of unwinding any discount would be presented as finance
income or expense. |
13.74 An entity's tax position might be
uncertain; for example, where the tax treatment of an item of expense or
structured transaction may be challenged by the tax authorities.
Uncertainties in income taxes are not addressed specifically in IAS 12. IAS
37 excludes income taxes from its scope and is not used to measure uncertain
tax positions. The general measurement principles in IAS 12 should be
applied: "Current tax liabilities
(assets) for the current and prior periods shall be measured at the amount
expected to be paid to (recovered from) the taxation authorities using the
tax rates (and tax laws) that have been enacted or substantively enacted at
the balance sheet date". [IAS 12 para 46]. The standard does not specify the unit
of account and measurement method, several methods are observed in practice. |
13.75 We believe the unit of account is an
accounting policy choice under IFRS. Management might consider uncertain tax
positions individually or grouped together for related uncertainties. Or it
might consider tax uncertainties in relation to each taxing authority. |
13.76 When management considers uncertain
tax positions individually, it should first consider whether each position
taken in the tax return is probable of being sustained on examination by the
taxing authority. It should recognise a liability for each item that is not
probable of being sustained. The liability is measured using either an
expected value (weighted average probability) approach or a single best
estimate of the most likely outcome. The current tax liability includes the
total liability for uncertain tax positions. |
13.77 When management considers uncertain
tax positions in relation to each taxing authority, the key issue is the
measurement of the tax liability. It is usually probable that an entity will
pay tax, so the recognition threshold has been met. Management should
calculate the total amount of current tax it expects to pay, taking into
account all the tax uncertainties, using either an expected value (weighted
average probability) approach or a single best estimate of the most likely
outcome. |
13.78 The examples below assume that
management considers tax uncertainties individually. They show that the
measurement methods referred to in paragraph 13.76 can give rise to different
amounts of liability. All the examples assume that it is probable (more
likely than not) that tax is payable. |
|
|
|
13.79 Where an entity has paid more than
the amount payable under the relevant tax legislation, it will estimate the
recovery of a tax asset. On the other hand, where an entity has not remitted
taxes related to an uncertain tax position, it will evaluate the uncertainty
surrounding the potential liability. We believe that the same considerations
apply where this evaluation relates to the recovery or payment of taxes (as
opposed to interest and penalties, dealt with in para 13.81). Under IAS 12,
uncertain tax positions (whether assets or liabilities) are reflected at the
amount expected to be recovered from or paid to the taxation authorities.
Consistent accounting policies should be applied to uncertain tax assets and
liabilities. |
13.79.1 An entity discloses tax-related
contingent liabilities and contingent assets in accordance with IAS 37 (see
para 13.308). [IAS 12 para 88]. So, if IAS 12's recognition threshold is not
met, IAS 37's disclosure requirements for contingent liabilities and
contingent assets apply to uncertain tax positions. These disclosure
requirements are dealt with in chapter 21. |
13.80 Once an uncertain tax position is
determined, in later periods management need to decide whether a change in
the tax estimate is justified. We expect that a change in recognition and
measurement is justified where circumstances change or where new facts
clarify the probability of estimates previously made. Such changes might be:
further judicial developments related to a specific case or to a similar
case; substantive communications from the tax authorities; or a change in
status of a tax year (for example, moving from open to closed in a particular
jurisdiction). |
13.81 An entity might incur interest or
penalties in relation to taxation; for example, where uncertain tax positions
have been successfully challenged by the tax authorities. IAS 12 does not
specifically address the treatment of uncertain tax positions or associated
interest and penalties. The liability for the uncertain tax position is for a
tax based on taxable profits, and is therefore an income tax liability. This
liability is recognised and measured under IAS 12 (see further para 13.74). |
13.82 There is a strong argument that
interest and penalties differ from income tax liabilities, because they are
not measured and settled by the tax authorities on the basis of taxable
profits. This suggests that interest and penalties should be recognised,
measured and presented as provisions under IAS 37, and classified as finance
or other operating expense, respectively, in the income statement. This is
because: |
■ |
such
obligations are not based on taxable profits and so they fall outside IAS
12's scope; and |
■ |
the
economic substance of reducing or delaying a tax payment is no different from
other financing arrangements. Interest that increases with time and is in
substance a financing cost of the liability is interest expense; other
penalties represent operating costs. |
13.83 Practice varies with regard to these
items. In some cases, interest and penalties are accounted for as if they are
within IAS 12's scope, either because they are rolled up into a lump sum
settlement and cannot be separated from the taxes, or as a matter of
accounting policy. Any associated charge is normally included within the tax
line in the income statement; and the liability is included within the income
tax liability on the balance sheet. |
13.84 The accounting policy for interest
and penalties applies to both interest payable (and any related penalties)
and to interest recoverable (and any related damages). For interest and
damages recoverable, a contingent asset cannot be recognised under IAS 37 until
it is 'virtually certain'; but uncertain tax assets are recorded under IAS 12
on the basis of the amount expected to be recovered. IAS 37 establishes a
higher threshold for recognition than IAS 12; so an entity's accounting
policy will determine when interest and damages recoverable will be
recognised. |
13.84.1 The accounting policy used to
recognise, measure and classify interest and tax-related penalties or damages
should be disclosed clearly in the financial statements and applied
consistently. |
13.85 An entity might incur expenses that
are indirectly linked to the income tax expense, such as fees payable to tax
consultants that are based on a percentage of savings made under a specific
tax scheme. These fees are not 'tax expense' under IAS 1. |
13.86 Most transactions and events
recorded in the financial statements have a tax consequence, which can be
immediate or deferred. Often, income is taxable and expenses are deductible
for tax purposes when incurred. However, the taxation or deduction for tax
purposes might be delayed to a later period (for example, when cash flows
occur under the transaction). Also, the recovery or settlement of an asset or
liability might have tax consequences. |
13.87 Where transactions and events have
occurred by the balance sheet date, future tax consequences cannot be
avoided; the entity might have to pay less or more tax than if those
transactions and events had not happened. Therefore, management recognises
the tax effects of all income and expenditure, gains and losses, assets and
liabilities in the same period in which they are recognised themselves and
not in the period in which they form part of taxable profit. This matching of
transactions and events with their tax effects gives rise to current tax; it
also gives rise to deferred tax assets and liabilities. |
13.88 An asset recorded in the financial
statements is realised, at least for its carrying amount, in the form of
future economic benefits that flow to the entity in future periods; this is
the basis for the balance sheet liability method used by IAS 12. When such
benefits flow to the entity, they give rise to amounts that may form a part
of taxable profits. The asset's tax base (see para 13.111 onwards) can be
deducted in determining taxable profits in either the same or a different
period. When the asset's carrying amount is greater than its tax base, the
amount of the future taxable economic benefits is greater than the amount
allowed as a deduction for tax purposes; as a result, it gives rise to a
deferred tax liability in respect of taxes payable in future periods. For
assets and liabilities within subsidiaries, branches, associates and joint
ventures, the principle extends to the tax consequences of recovering the
reporting group's investments in those entities, when the reporting group has
control over that recovery and expects such recovery to occur in the
foreseeable future. |
13.89 The balance sheet liability method
can instead be viewed as a valuation adjustment approach; under this
approach, management needs to provide for deferred tax to ensure that other
assets are not valued at more than their economic (that is, post-tax) values
to the business. Management should provide for deferred tax to reflect the
fact that the economic value to the business of an asset is not the market
value of, say, C150. Rather it is the market value of C150 less the present
value of the tax that would be payable on selling the asset for C150. In
theory, the appropriate method for recognising deferred tax provided for as a
valuation adjustment rather than as a liability might be to net the tax
provision against the asset's carrying amount. However an entity's results
and position are more clearly communicated if tax effects are shown
separately from the items or transactions to which they relate. |
13.90 A deferred tax liability or asset is
recognised if the recovery of
the carrying amount of an asset or the settlement of a liability will result
in higher (or lower) tax payments in the future than if that recovery or settlement had no tax
consequences. [IAS 12 para 10]. A deferred tax liability or asset is
recognised for all such tax consequences that have originated but have not
reversed by the balance sheet date. Exceptions to this general principle are
discussed later in this chapter. |
13.91 The word 'recovery' in italics above
is particularly relevant for measuring deferred tax liabilities that arise on
assets. An entity generally expects to recover the carrying amount of an
asset through use, through sale, or through use and subsequent sale. Tax
authorities might levy different rates of tax depending on whether the asset
is recovered through use (income tax) or through sale (capital gains tax).
Also, some assets are revalued for tax purposes (increase due to indexation
to eliminate the effects of inflation) only if the asset is sold. Therefore,
the manner in which the entity expects, at the balance sheet date, to recover
the asset directly affects the amount of tax that is payable in future; and
this should be reflected in the measurement of deferred tax at the balance
sheet date (see further para 13.170 onwards). Other measurement issues are
considered in paragraph 13.165 onwards. |
13.92 Deferred tax income or expense
should be reported in profit or loss if it relates to items that are
themselves reported in profit or loss. For transactions and other events
recognised outside profit or loss, any related tax effects are also
recognised outside profit or loss. Presentation of deferred tax in performance
statements or equity is considered in paragraph 13.286 onwards. |
13.92.1 The approach to determining deferred
tax can be summarised as follows: |
||
|
||
■ |
Consider
the entity's structure (for example, a company/corporation or a partnership;
a parent or a subsidiary) and the tax jurisdictions that apply to the entity. |
|
|
|
|
■ |
Calculate
current income tax. |
|
|
Current
tax payable to the taxation authorities is calculated based on the tax
legislation in the relevant territory. Accounting for current tax is
addressed in paragraph 13.42 onwards. |
|
|
|
|
■ |
Determine
the tax base. |
|
|
The
tax base reflects the tax consequences arising from the manner in which
management expects, at the balance sheet date, to recover or settle the
carrying amount of an asset or liability. |
|
|
|
|
|
In
simple situations, an asset's tax base equals the future deductible amounts
when the asset's carrying amount is recovered. A liability's tax base equals
its carrying amount less future deductible amounts. If there are no tax
consequences of recovery, there is no deferred tax. Tax bases for assets are
addressed in paragraph 13.111 onwards, and for liabilities in paragraph
13.120 onwards. |
|
|
|
|
■ |
Calculate
temporary differences. |
|
|
Temporary
difference is defined as the difference between an asset or liability's
carrying amount and its tax base. Temporary differences are addressed in
paragraph 13.93 onwards and summarised in paragraph 13.106. |
|
|
|
|
■ |
Consider
the exceptions to recognising deferred tax on temporary differences. |
|
|
Three
exceptions relating to temporary differences arise in the following
situations: |
|
|
■ |
Initial
recognition of goodwill arising in a business combination (for deferred tax
liabilities only) (see para 13.158 onwards). |
|
■ |
Initial
recognition of an asset or liability in a transaction that is not a business
combination and does not affect accounting profit or taxable profit (see para
13.162 onwards). |
|
■ |
Investments
in subsidiaries, branches, associates and joint ventures, but only where
certain criteria apply (see para 13.233 onwards for individual financial
statements and para 13.253 onwards for consolidated financial statements). |
|
|
|
■ |
Assess
deductible temporary differences, tax losses and tax credits for
recoverability. |
|
|
A
deferred tax asset is recognised to the extent that it is probable that taxable profit will be
available against which a deductible temporary difference or unused tax
losses or tax credits can be utilised (see para 13.128 onwards). |
|
|
|
|
■ |
Determine
the tax rate that is expected to apply when the temporary differences
reverse; and calculate deferred tax. |
|
|
Deferred
tax is measured at the tax rates that are expected to apply to the period
when the asset is realised or the liability is settled, based on tax rates
and tax laws that have been enacted or substantively enacted by the balance
sheet date (see para 13.165 onwards). |
|
|
|
|
|
Measurement
of deferred tax reflects the tax consequences that follow from the manner
that management expects, at the balance sheet date, to recover or settle the
carrying amount of an asset or liability (see para 13.170 onwards). |
|
|
|
|
■ |
Recognise
deferred tax. |
|
|
Deferred
tax is calculated by multiplying the temporary difference by the tax rate. |
|
|
|
|
■ |
Consider
the presentation and offsetting of current and deferred tax. |
|
|
The
requirements for presenting current and deferred tax are addressed in
paragraph 13.278 onwards. The rules for offsetting current and deferred tax
assets and liabilities are addressed in paragraph 13.281 onwards. |
|
|
|
|
■ |
Disclose
details of current and deferred tax. |
|
|
Disclosure
requirements relating to current and deferred tax are addressed in paragraph
13.290 onwards. |
13.93 The concept of temporary differences
is central to the calculation of deferred taxes under IAS 12. Temporary
differences are defined as differences between the carrying amount of an
asset or liability and its tax base (see para 13.107 onwards). [IAS 12 para
5]. The term 'temporary difference' is used because ultimately all
differences between the carrying amounts of assets and liabilities and their
tax bases will reverse. An entity might delay the reversal of temporary
differences by delaying the events that give rise to those reversals; for
example, it might defer indefinitely the sale of a revalued asset. The
carrying amount of assets and liabilities will always be recovered or
settled. So the key questions are when and not whether temporary differences will
reverse; and to what extent, on reversal, this will result in taxable or tax
deductible amounts in future years.All such tax consequences will crystallise at some point. If the
recovery of an asset has no tax consequences, the tax base is equal to the carrying
amount and there is no temporary difference (see further para 13.111). |
13.94 The following are examples of
temporary differences: |
■ |
An
item of income or expenditure is included in accounting profit of the period,
but recognised in taxable profit in later periods. For example, income
receivable might be accrued in the financial statements in one year, but it
is taxed in the next year when received. Similarly, management might make
provisions for restructuring costs in the financial statements in one period,
but those costs would qualify for tax deduction in a later period when the
expenditure is incurred. |
■ |
An
item of income or expenditure is included in taxable profit of the period,
but recognised in accounting profit in later years. For example, development
expenditure might be tax deductible in the year in which it is incurred, but
it is capitalised and amortised over a period for financial reporting
purposes. Similarly, income received in advance might be taxed in the period
of receipt, but treated in the financial statements as earned in a later
period. |
■ |
Where
assets are acquired and liabilities assumed in a business combination, these
are generally recognised at their fair values; but no equivalent adjustment
is made for tax purposes (see para 13.238). |
■ |
Assets
are revalued and no equivalent adjustment is made for tax purposes (see para
13.208). |
■ |
Goodwill
arises in a business combination (see para 13.158). |
■ |
An
asset or liability's tax base on initial recognition differs from its initial
carrying amount; for example, when an entity benefits from non-taxable
government grants related to assets (see para 13.162). |
■ |
The
carrying amount of investments in subsidiaries, branches and associates or
interests in joint ventures differs from the tax base of the investment or
interest (see para 13.253). |
■ |
An
entity's non-monetary assets and liabilities are measured in its functional
currency, but the taxable profit or tax loss (and so the tax base of its
non-monetary assets and liabilities) is determined in a different currency
(see para 13.274). |
[IAS
12 paras IN2, 18]. |
|
13.96 Not all of the temporary differences
listed above give rise to deferred tax assets or liabilities. Some are
specifically exempted from recognition in the standard (see further para
13.157 onwards). |
13.97 The carrying amounts of assets and
liabilities used to calculate the temporary differences are determined from
the entity's balance sheet. The applicable carrying amount is generally a
question of fact; but judgement might be needed to determine the appropriate
carrying amounts for use in deferred tax calculations that are based on the
dual manner of recovery (see further para 13.172.2). Where applicable, the
carrying amounts of assets are included in the computation of temporary
differences net of any provision for doubtful debts or impairment losses. Similarly,
the carrying amounts of liabilities, such as debts recorded at amortised
cost, are included net of any issue costs. The carrying amounts of assets and
liabilities in consolidated financial statements are obtained from the
consolidated balance sheet. The tax base is determined by reference to a
consolidated tax return in jurisdictions that require such a return; and by
reference to the tax returns of each individual group entity in other
jurisdictions. [IAS 12 para 11]. |
13.98 The tax base of assets and
liabilities is defined so that it equals the carrying amount of the item if
reversal will not give rise to taxable or tax deductible amounts. So,
temporary differences are either taxable temporary differences or deductible
temporary differences. Taxable temporary differences give rise to future
taxable amounts, and so to deferred tax liabilities. Deductible temporary
differences give rise to future tax deductible amounts, and so to potential
deferred tax assets. |
13.99 Taxable temporary differences are
temporary differences that will result in taxable amounts in determining
taxable profit (tax loss) of future periods when the carrying amount of the
asset or liability is recovered or settled. [IAS 12 para 5]. |
13.100 The recognition of an asset implies
that its carrying amount will be recovered in the form of economic benefits
that flow to the entity in future periods. The recovery of the carrying
amount of many assets gives rise to taxable and deductible amounts; for
example, machinery that produces goods that are in turn sold to generate
revenue that enters into the determination of taxable profits and that gives
rise to depreciation that is deductible for tax purposes against those
taxable profits. When the carrying amount of an asset (the minimum expected
future economic benefits) exceeds its tax base (the amount that can be
deducted for tax purposes from those future economic benefits – see further
para 13.111 onwards), the amount of taxable economic benefits will exceed the
amount that is allowed as a deduction for tax purposes. This difference is a
taxable temporary difference; and the obligation to settle the resulting
income taxes in future periods is a deferred tax liability. The following example
shows how a deferred tax liability can arise. |
Example – Deferred tax liability
relating to an asset |
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|
|||
An
asset that cost C150 has a carrying amount of C100. Cumulative depreciation
for tax purposes is C90 and the tax rate is 30%. |
|||
|
|
|
|
Carrying amount |
Tax base |
Temporary difference |
|
At
acquisition |
150 |
150 |
|
Accumulated
depreciation |
50 |
90 |
|
|
|
||
Net
amount |
100 |
60 |
40 |
|
|
||
Tax
rate |
30% |
||
Deferred
tax liability |
12 |
||
|
|
|
|
The
tax base of the asset is C60 (cost of C150 less cumulative tax depreciation
of C90). In recovering the carrying amount of C100, the entity will earn
taxable income of C100, but will only be able to deduct tax depreciation of
C60. The entity will pay income tax on the excess. The difference between the
carrying amount of C100 and the tax base of C60 is a taxable temporary
difference of C40. So the entity recognises a deferred tax liability of C12
(C40 × 30%) representing the income tax that it will pay when it recovers the
asset's carrying amount. |
13.101 When the asset's carrying amount and
its tax base are the same, the amount included in taxable profit on the
asset's recovery is offset by the amount allowed as a deduction in
determining taxable profit. So the recovery of the carrying amount has no net
effect on the entity's taxable profit. Hence, no deferred tax arises. |
13.102 A taxable temporary difference
arises when the carrying amount of a liability is less than its tax base (see
further para 13.120 onwards). |
Example – Deferred tax liability
relating to a liability |
|||
|
|||
An
entity has taken out a foreign currency loan of FC1,000 that is recorded at
C625. At the reporting date, the carrying amount of the loan is C575. The
unrealised exchange gain of C50 is included in profit or loss, but will be
taxable when the gain is realised on repayment of the loan. |
|||
|
|
|
|
|
Carrying amount |
Tax base |
Temporary difference |
At
inception |
625 |
625 |
|
Exchange
gain |
50 |
– |
|
|
|
||
Net
amount |
575 |
625 |
50 |
|
|
||
Tax
rate |
30% |
||
|
|
|
|
Deferred
tax liability |
15 |
||
|
|
|
|
|
|||
The
tax base of the loan is C625 (carrying amount of C575 plus the C50 of gain
that will be taxable in future periods). In settling the liability at its
carrying amount of C575, the entity will make a gain of C50; but it will not
be able to deduct any amount for tax purposes. The entity will pay income tax
of C15 (C50 × 30%) as a result of settling the carrying amount of the
liability. The difference between the carrying amount of C575 and the tax
base of C625 is a taxable temporary difference of C50. Therefore, the entity
recognises a deferred tax liability of C15 (C50 × 30%) representing the
income tax to be paid when the carrying amount of the loan is settled at an
amount below the original proceeds. |
13.103 Deductible temporary differences are
temporary differences that will result in deductible amounts in determining
taxable profit (tax loss) of future periods when the carrying amount of the
asset or liability is recovered or settled. [IAS 12 para 5]. |
13.104 The recognition of a liability
implies that its carrying amount will be settled through an outflow of
economic benefits from the entity in future periods. When such economic
benefits flow from the entity, they give rise to amounts that might be
deductible when the taxable profits of a later reporting period (that is,
after the period when the liability is recognised) are determined. In such
situations, there is a difference between the carrying amount of the
liability and its tax base (see further para 13.120 onwards). So a deferred
tax asset arises in respect of the income taxes that will be reduced or
recoverable in the future periods when the settlement amounts are allowed as
a deduction in determining taxable profit. |
Example – Deferred tax asset
relating to a liability |
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|
|||
An
entity recognises a liability of C1,000 for product warranty costs. For tax
purposes, the warranty costs are deductible only when claims are made. |
|||
|
|
|
|
|
Carrying |
Tax base |
Temporary difference |
Accrued
warranty cost |
1,000 |
– |
1,000 |
Tax
rate |
|
|
30% |
|
|
|
|
Deferred
tax asset |
|
|
300 |
|
|
|
|
|
|||
The
tax base of the warranty is nil (carrying amount of C1,000 less the amount of
C1,000 that will be deductible in future periods when the claim is made – see
further para 13.120). When a claim is made and the liability is settled at
its carrying amount of C1,000, the entity obtains a deduction against taxable
profits of the period in which the claim is made. So the entity will pay less
income tax of C300 (C1,000 × 30%) as a result of settling the carrying amount
of the liability. The difference between the carrying amount of C1,000 and
the nil tax base is a deductible temporary difference of C1,000. Therefore,
the entity recognises a deferred tax asset of C300 (C1,000 × 30%)
representing the income tax that will be recoverable (reduced) in the future. |
13.105 In the context of assets, a
deductible temporary difference arises when an asset's carrying amount is
less than its tax base (see further para 13.111 onwards). The difference
gives rise to a deferred tax asset to the extent that income taxes will be
reduced or recoverable in future periods. |
Example – Deferred tax asset
relating to an asset |
|||
|
|||
An
asset was acquired at a cost of C1,500. It has a carrying amount of C700
after an impairment write-down of C300 was recognised in the year. Cumulative
depreciation for tax and accounting purposes amounted to C500 and the tax
rate is 30%. |
|||
|
|
|
|
|
Carrying Amount |
Tax Base |
Temporary Difference |
|
C |
C |
C |
At
acquisition |
1,500 |
1,500 |
|
Accumulated
depreciation |
500 |
500 |
|
Impairment
loss in year |
300 |
– |
|
|
|
||
Net
amount |
700 |
1,000 |
300 |
|
|
||
Tax
rate |
30% |
||
Deferred
tax asset |
90 |
||
|
|
|
|
The
tax base of the asset is C1,000 (cost of C1,500 less cumulative tax
depreciation of C500). In recovering the carrying amount of C700, the entity
will earn taxable income of C700, but will be able to deduct tax depreciation
of C1,000. The entity will recover income tax. The difference between the
carrying amount of C700 and the tax base of C1,000 is a deductible temporary
difference of C300. So the entity recognises a deferred tax asset of C90
(C300 × 30%) representing the income tax that will be recovered (reduced)
when it recovers the asset's carrying amount. |
|||
13.106 The relationship between the
carrying amount and tax bases of assets and liabilities on the one hand, and
the resulting deferred tax assets and liabilities that arise on the other,
can be summarised as follows: |
Relationship |
For assets |
For liabilities |
Carrying
amount is more than the tax base |
Taxable temporary difference |
Deductible temporary difference |
Deferred
tax liability (DTL) |
Deferred
tax asset (DTA) |
|
|
|
|
Carrying
amount is less than the tax base |
Deductible temporary difference |
Taxable temporary difference |
Deferred
tax asset (DTA) |
Deferred
tax liability (DTL) |
|
|
|
|
Carrying
amount = tax base |
None |
None |
13.107
The
tax base of an asset or liability is the amount attributed to that asset or
liability for tax purposes. [IAS 12 para 5]. The concept of tax base of an
asset or liability is fundamentally important in applying the standard's
provisions. The calculation of temporary difference depends on correctly
identifying the tax base of each asset and liability in the entity's balance
sheet. There is also a specific definition of 'tax base' for assets and
liabilities (see paras 13.111 and 13.120 respectively). These definitions
modify the general definition so that tax base equals the carrying amount in
some circumstances. The standard provides a number of examples for
determining the tax bases of assets and liabilities in particular situations. |
13.107.1 An asset or liability might have
more than one tax base; this depends on how the entity intends to recover or
settle the asset or liability. See further paragraph 13.170 onwards. |
13.108 The tax base as defined in the
standard is generally the amount shown as an asset or liability in a tax balance
sheet (that is, using tax laws as a basis for accounting). Example 2 of
appendix B of the standard shows the preparation of a tax balance sheet.
There may be that there is no requirement or custom to prepare or file a tax
balance sheet with the tax authorities. In such cases, the tax bases can be
obtained from the tax return or from the working papers for the taxable
profit calculation. |
13.108.1 The tax base might be different from
the amount shown as an asset or liability in a tax balance sheet if there is
uncertainty about the tax position. The entity might declare amounts in the
tax return that could be subject to challenge by the tax authorities. In this
case, management considers what it expects the outcome of any uncertainty
will be; and it determines the appropriate tax base on this basis. If it is
more likely than not that the uncertain item included in the tax return will
be accepted by the tax authorities, the tax base used in the deferred tax
calculation will be equal to the amount in the tax return. Otherwise,
management calculates the tax base for use in the deferred tax calculation
based on its expectations of the future tax consequences. |
13.109 The definitions of tax base can be
difficult to apply. A number of formulae exist for calculating tax bases;
these are shown in the following paragraphs. These formulae can help to
determine the tax base and apply the fundamental principle in paragraph 10 of
IAS 12; this principle states that, with limited exceptions, an entity
recognises a deferred tax liability (asset) whenever recovery or settlement
of the carrying amount of an asset or liability would make future tax
payments larger (smaller) than if such recovery or settlement had no tax
consequences (see para 13.125). |
|
|
13.111 The tax base of an asset is the
amount that will be deductible for tax
purposes against any taxable
economic benefits flowing 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. [IAS 12 para 7]. The words
in italics are included in the formula below; so their meaning needs to be
understood. |
13.112 An amount is 'deductible for tax purposes'
if the deduction is allowed under the tax laws in determining taxable
profits. For example, deductible amounts might include depreciation (or
capital allowances) as an allowable deduction for tax purposes, and any
indexation benefits for assets subject to tax on disposal. The deduction
might be for the full amount, a portion or none of the asset's cost. The
deduction might be allowed in the period when the asset is acquired or over a
number of periods. If the tax laws allow an asset's full cost on acquisition
to be deductible, the asset's tax base on initial acquisition is its cost.
But if the asset's cost cannot be deducted in determining taxable profit,
either over a number of periods or on disposal, the asset's tax base is nil. |
13.113 'Taxable economic benefits' that flow to the
entity in future periods are income earned from the asset's use or proceeds
arising from its disposal that are included in determining taxable profits.
Although an entity often generates economic benefits in excess of an asset's
carrying amount through use or sale, the standard does not require an entity
to estimate the excess economic benefits that will be generated by the asset.
Rather, the standard focuses on the future tax consequences of recovering an
asset only to the extent of the asset's carrying amount at the balance sheet
date. |
13.114 In some circumstances, the economic
benefits might not be taxable. Where this is so, the recovery of the asset's
carrying amount has no future tax consequences; and so no deferred tax
arises. It follows that the temporary difference is zero and the asset's tax
base is equal to its carrying amount. This is consistent with the definition
in paragraph 13.111. In other circumstances, only a proportion of the asset's
carrying amount might be taxable (see example 2 in para 13.163). |
|
13.117 The formula to determine an assets
tax base can be used at the end of any reporting period; it is as follows: |
Tax base of asset = Carrying amount −
Future taxable amounts1 + Future deductible amounts |
|
1 As noted in paragraph 13.113, IAS 12 focuses on the
future tax consequences of recovering an asset only to the extent of the
asset's carrying amount at the balance sheet date. So the taxable amount
arising from recovery of the asset is limited to the asset's carrying amount.
|
13.117.1 The temporary difference on an asset
is the difference between the asset's carrying amount and tax base. The
formula for the temporary difference on an asset is as follows: |
Temporary difference = Future taxable
amounts − Future deductible amounts |
13.118 The future taxable amounts at the
end of a reporting period will often be the same as the asset's carrying
amount; so the first two terms in the formula will net to zero, leaving the
future deductible amounts equal to the tax base at the end of the reporting
period; this is also the asset's tax written down value. If the income
generated by the asset is non-taxable, both the future taxable amounts and
the future deductible amounts are nil; so the tax base is equal to the
carrying amount (as stated in para 13.114) and there is a nil temporary
difference. |
13.119 The above formula depends on taxable
amounts and deductible amounts for the recovery of an asset's carrying
amount, so a number of different scenarios are possible; each scenario below
has examples that apply the formula. |
|
Scenario A − Recovery of asset gives
rise to both taxable and deductible amounts |
Example 1 – Tax base of a
machine |
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A
machine cost C1,000. For tax purposes, depreciation of C300 has been deducted
in the current and prior periods; and the remaining cost will be deductible
in future periods, either as depreciation or through a deduction on disposal.
Revenue generated by using the machine is taxable; and any gain or loss on
disposal of the machine will be taxable or deductible for tax purposes
through a balancing adjustment (such as claw back of capital allowances
claimed). For accounting purposes, the machine has been depreciated by C200. |
|||||||||||||||||||||||
The
tax written down value of the asset is C700 (cost of C1,000 less tax
depreciation claimed to date of C300), which is also the tax base. |
|||||||||||||||||||||||
Applying
the formula, we have: |
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|
Example 2 – Tax base of
inventory |
|||||||||||||||||||||||
Inventory
at the balance sheet date has a carrying amount of C1,000. The inventory will
be deductible for tax purposes when sold. |
|||||||||||||||||||||||
The
amount that will be deductible for tax purposes if the inventory is sold is
C1,000, which is its tax base. |
|||||||||||||||||||||||
Applying
the formula, we have: |
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|
Example 3 – Tax base of revalued
land |
|||||||||||||||||||||||||
Land
was acquired for C1,000 at the beginning of the financial year. It is
revalued to C1,500 at the balance sheet date. The indexed cost of the land at
the balance sheet date for tax purposes is C1,100. |
|||||||||||||||||||||||||
If
the land is sold at its carrying amount of C1,500, the amount deductible for
tax purposes is the indexed cost of C1,100, which is the tax base. |
|||||||||||||||||||||||||
Applying
the formula, we have: |
|||||||||||||||||||||||||
|
Example 4 – Tax base of land
carried at cost |
|||||||||||||||||||||||
Land
was acquired for C1,000 at the start of the financial year. It is not
revalued. The indexed cost of the land at the balance sheet date for tax
purposes is C1,100. Under the tax rules applicable to the entity, indexation
adjustments cannot create or increase a loss. |
|||||||||||||||||||||||
If
the land is sold for the carrying amount of C1,000, the amount that will be
deductible for tax purposes is C1,000 and not the indexed cost of C1,100. |
|||||||||||||||||||||||
Applying
the formula, we have: |
|||||||||||||||||||||||
|
Example 5 – Tax base of asset
held for disposal |
|||||||||||||||||||||||||
An
asset costing C500 is carried in the balance sheet at a revalued amount of
C700. The asset is held for disposal. For tax purposes, depreciation of C100
has been deducted in the current and prior periods. The gain on disposal will
be taxed but limited to the tax allowance previously claimed. |
|||||||||||||||||||||||||
The
definition of tax base would suggest that the tax base is the amount that
would be deductible in the future; that is, cost of C500 less tax
depreciation claimed to date of C100 = C400, which is also the asset's tax
written down value. But this is not the case, because not all of the asset's
carrying amount of C700 at the balance sheet date would be taxable. The
taxable gain is limited to tax allowances previously claimed, so the
revaluation surplus of C200 is not taxable. Because the recovery of part of
the asset is not taxable, this is equivalent to a tax deduction being
available for that same amount. Applying the formula, the tax base becomes: |
|||||||||||||||||||||||||
|
Example 6 – Tax base of asset
held for disposal |
|||||||||||||||||||||||||
Facts
are the same as in example 5, except that the gain on disposal will be taxed
and past tax allowances will be claimed back if the asset is sold at above
cost. |
|||||||||||||||||||||||||
The
tax base is the amount that would be deductible in the future (that is, cost
of C500 less tax depreciation claimed to date of C100 = C400), which is also
the asset's tax written down value. Applying the formula, the tax base
becomes: |
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|
Scenario B − Recovery of asset gives
rise to taxable amounts but not to deductible amounts |
Example 1 – Tax base of interest
receivable |
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Interest
receivable has a carrying amount of C1,000. The related interest will be
taxed on a cash basis. |
|||||||||||||||||||||||
The
amount of the receivable that will be deductible for tax purposes when the
interest is received is Cnil, which is its tax base. |
|||||||||||||||||||||||
Applying
the formula, we have: |
|||||||||||||||||||||||
|
Example 2 – Tax base of foreign
currency debtor |
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Foreign
currency debtor has a carrying amount of C1,150 after recognising an exchange
gain of C50 in profit or loss. The original amount of C1,100 was included in
taxable profit. Exchange gains are taxable only when realised. |
|||||||||||||||||||||||||
Because
the original amount of C1,100 has already been included in taxable profit, it
will not be taxable in the future when the asset is recovered. So an element
of the foreign currency debtor is not taxable. This is similar to scenario A
example 5. Where part of the carrying amount is not taxable, it is equivalent
to a tax deduction being available for that amount. Applying the formula, we
have: |
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|
Example 3 – Tax base of
development expenditure |
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Development
expenditure with a carrying amount of C1,000 is claimed as a deduction when
paid. For accounting purposes, the development expenditure is amortised over
5 years. |
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When
the development expenditure's carrying amount is recovered in the future
through amortisation, the amount that will be deductible for tax purposes is
Cnil, which is its tax base. |
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Applying
the formula, we have: |
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|
Example 4 – Tax base of interest
paid |
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Interest
paid of C1,000 is capitalised as part of the asset's carrying amount. Tax
deductions were obtained when the interest was paid. |
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When
the asset's carrying amount is recovered in the future through amortisation,
the amount of the interest expenditure that will be deductible for tax
purposes is Cnil, which is its tax base. |
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Applying
the formula, we have: |
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|
Scenario C − Recovery of asset does
not give rise to taxable amounts but gives rise to deductible amounts |
Example – Tax base of trade
debtors |
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A
portfolio of trade debtors with similar credit risk characteristics has a
carrying amount of C5,000 after recognising a bad debt provision of C250. The
original amount of C5,250 has already been included in taxable profits. The
provision for bad debt is not tax deductible, but would be so when the
individual assets are derecognised. |
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The
first part of the definition of tax base would suggest that the debtor's tax
base is C250, because that is the amount that will be deductible for tax
purposes when the carrying amount of C5,000 is recovered. The second part of
the definition would suggest that the tax base is equal to the carrying
amount of C5,000, because the economic benefits are not taxable. But that is
not the case, as noted in scenario A example 5. Applying the formula, we
have: |
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|
Scenario D − Recovery of asset does
not give rise to either taxable amounts or deductible amounts |
Example 1 – Tax base of trade
debtors with specific bad debt provision |
|||||||||||||||||||||||
Trade
debtors have a carrying amount of C5,000 after recognising a specific
provision of C250. The original amount of C5,250 has already been included in
taxable profits. Specific provision of C250 is deductible for tax purposes
when it is made. |
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Applying
the formula, we have: |
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|
Example 2 – Tax base of dividend
receivable |
|||||||||||||||||||||||
Management
has recognised a dividend receivable of C100,000 from a wholly owned
subsidiary in a single-entity set of financial statements. The dividend is
not taxable. |
|||||||||||||||||||||||
Applying
the formula, we have: |
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|
13.120 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. For revenue that is received in
advance, the tax base of the resulting liability is its carrying amount less
any amount of the revenue that will not be taxable in future periods. [IAS 12
para 8]. |
13.121 The standard focuses on the future
tax consequences of settling a liability at its carrying amount, as it does
for assets. Management does not need to estimate the amount that might be
payable on settlement. For example, where a premium is payable on redemption
of a debt instrument, the tax base of the liability is calculated using the
premium that has been accrued at the balance sheet date and not the premium
that would be payable on redemption. Similarly, where a liability is recorded
at a discounted amount under IAS 37, its tax base is determined using that
amount and not the gross amount payable in the future; for example, where a
tax deduction is available on settlement of a decommissioning liability. |
13.122 A formula can be derived from first
principles for determining a liability's tax base. But because the settlement
of a liability's carrying amount involves the outflow rather than an inflow
of economic resources, a liability can be regarded as a negative asset;
therefore the equation for a liability's tax base can be obtained simply by
changing the sign of each term in the formula for an asset's tax base as
follows: |
Tax base of liability = Carrying
amount − Future deductible amounts + Future taxable amounts |
13.122.1 The temporary difference on a
liability is the difference between the liability's carrying amount and tax
base. The formula is as follows: |
Temporary difference = Future
deductible amounts − Future taxable amounts |
The
future taxable amount of a liability is often nil, because no part of a
liability's carrying amount (for example, a loan of C1,000) would normally be
taxable or deductible when the liability is settled (but see example 3
below). So the formula above is consistent with the standard's definition in
paragraph 13.120. Various examples are given below. |
Example 1 – Tax base of a loan
payable |
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A
loan payable has a carrying amount of C1,000 at the balance sheet date. The
repayment of the loan will have no tax consequences. |
|||||||||||||||
Applying the formula, we have:
|
Example 2 – Tax base of accrued
fines and penalties |
|||||||||||||||
Accrued
fines and penalties that are not deductible for tax purposes have a carrying
amount of C1,000 at the balance sheet date. |
|||||||||||||||
Applying the formula, we have:
|
Example 3 – Tax base of foreign
currency loan payable |
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|
|||||||||||||||
Foreign
currency loan payable has a carrying amount of C950 after recognising an
exchange gain of C50 in profit or loss. Exchange gains are taxable only when
realised. |
|||||||||||||||
When the loan is repaid at its
carrying amount at the balance sheet date, the amount that would be included
in future taxable amount is C50; and no part of the carrying amount would be
deductible. Applying the formula, we have:
|
Example 4 – Tax base of accrued
wages |
|||||||||||||||
Wages
payable to employees amounting to C1,000 were accrued at the balance sheet
date and allowed as a tax deduction when the expense was recognised. |
|||||||||||||||
Because
wages have already been allowed as a deduction for tax, no further deductible
or taxable amounts would arise in the future when the wages are paid. |
|||||||||||||||
Applying the formula, we have:
|
Example 5 – Tax base of accrued
long-service leave |
|||||||||||||||
A
liability of C150,000 for long-service leave has been accrued at the balance
sheet date under IAS 19. No deduction will be available for tax until the
long-service leave is paid. |
|||||||||||||||
Applying the formula, we have:
|
13.123 The formula for the tax base of a
liability that is 'revenue received in advance' is consistent with the
definition in paragraph 13.120. |
Tax base = Carrying amount − Amount
of revenue that will not be taxable in future periods |
Where
revenue is taxed on a cash basis, amounts recognised in the balance sheet as
'revenue received in advance' will not be taxed in a future period when
recognised as revenue for accounting purposes. In this case (or if the
revenue is not taxed at all), the tax base of the revenue received in advance
is equal to zero. But the tax base of revenue received in advance is equal to
its carrying amount if the entire amount is taxed when subsequently
recognised as revenue. These situations are dealt with in the following
examples. |
Example 1 – Tax base of rents
received in advance |
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Rents
received in advance amounted to C1,000 at the balance sheet date. The rental
income will be taxed in future periods when accommodation is provided to
tenants. |
||||||||||
Applying
the formula, we have: |
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|
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|
Example 2 – Tax base of government
grant |
||||||||||
A
government grant of C1,000 is recognised at the balance sheet date as
deferred income rather than being deducted against the cost of the asset. No
tax is payable on receipt of the grant or on amortisation. The cost of the
asset is fully deductible. |
||||||||||
Applying
the formula, we have: |
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|
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|
Example 3 – Tax base of
royalties |
||||||||||
Royalties
from users of licensed technology for the following financial year amounted
to C25,000 at the balance sheet date. Royalties are taxed on a cash receipts
basis. The royalty income is deferred in the balance sheet until the period
that it relates to. |
||||||||||
Applying
the formula, we have: |
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|
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|
13.124 Some items might have a tax base but
are not recognised as assets or liabilities on the balance sheet. Where a
transaction during the reporting period does not give rise to an asset or
liability on the balance sheet but affects taxable profits of future periods,
its tax base is calculated using the amount that would affect taxable profits
in future periods; for example, expenditure incurred during the year that is
written off for accounting purposes but is carried forward in the tax balance
sheet at an amount that will be allowable as a deduction in future periods.
The difference between the tax base of the costs expensed and the carrying
amount of nil is a deductible temporary difference that gives rise to a
deferred tax asset. [IAS 12 para 9]. |
13.125 The above formulae for determining
the tax bases of assets and liabilities should give the correct result in
most circumstances. There may be circumstances where the formulae cannot be
readily applied or where the tax base of an asset or liability is not
immediately apparent. An entity should consider the fundamental principle of
recognition of deferred tax: a deferred tax liability (asset) is recognised
whenever recovery or settlement of the carrying amount of an asset or
liability would make future tax payments larger (smaller) than if such
recovery or settlement had no tax consequences. [IAS 12 para 10]. Example C
of paragraph 51A of IAS 12 (not reproduced here) illustrates how the
fundamental principle is applied where the tax base of an asset or a
liability depends on the expected manner of recovery or settlement (see
further para 13.170). An example is given in paragraph 13.172. |
13.126 All taxable temporary differences give
rise to deferred tax liabilities and, with some exceptions, are recognised in
the financial statements. A deferred tax liability is recognised even if
future tax losses are expected to settle the tax liability. A taxable
temporary difference might be expected to reverse in a period in which a tax
loss arises. The entity may not have to pay any tax for the reversing
temporary difference; but the entity will still suffer a sacrifice of future
economic benefits. The benefit derived from the tax loss in future periods
will be reduced by the amount of the reversing taxable temporary difference.
All deferred tax liabilities are recognised, except in the limited
circumstances described below. |
13.127 A deferred tax liability should be
recognised for all taxable temporary differences, except where it arises
from: |
■ |
The
initial recognition of goodwill (see para 13.158 onwards). |
■ |
The
initial recognition of an asset or liability in a transaction which: |
|
|
■ |
is
not a business combination; and |
|
■ |
at
the time of the transaction, does not affect accounting profit or taxable
profit (tax loss) (see para 13.162 onwards). |
■ |
Investment
in subsidiaries, branches and associates, and interests in joint ventures,
where: |
|
|
■ |
the
parent, investor or venturer 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 (see paras 13.233.2 onwards and 13.255 onwards). |
[IAS
12 paras 15, 39]. |
13.127.1 The method of accounting for a
taxable temporary difference depends on the nature of the transaction that
led to the asset or liability being recognised initially. A transaction that
is not a business combination and does not affect accounting profit or
taxable profit, an entity would, in the absence of the exemption described in
the second bullet point above, recognise any resulting deferred tax liability
(or deferred tax asset – see para 13.128) and adjust the asset or liability's
carrying amount by the same amount. The standard states that such adjustments
would make the financial statements less transparent. So an entity does not
recognise the resulting deferred tax liability (or asset), either on initial
recognition or subsequently. Also, an entity does not recognise changes in
the unrecognised deferred tax liability or asset as the asset is depreciated.
[IAS 12 para 22(c)]. See further paragraph 13.162 onwards. |
13.127.2 Tax planning opportunities are not
considered in determining the amount of a deferred tax liability to be
recognised. For example, an entity cannot avoid recognising an existing
deferred tax liability on the grounds that future tax losses will prevent the
transfer of economic benefits. Tax planning opportunities can only be
considered in determining the extent to which an existing deferred tax asset will be recovered, as explained
in paragraph 13.138. |
13.128 An asset is recognised in the
balance sheet when it is probable that the future economic benefits will flow
to the entity and the asset has a cost or value that can be measured
reliably. When deductible temporary differences reverse in future periods,
they result in deductions in calculating the taxable profits of those future
periods. But economic benefits of the tax deductions can only be realised if
the entity earns sufficient taxable profits against which the deductions can
be offset. So 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 difference can be utilised, unless the
deferred tax asset arises from: |
■ |
The
initial recognition of an asset or liability in a transaction which: |
|
|
■ |
is
not a business combination; and |
|
■ |
at
the time of the transaction, does not affect accounting profit or taxable
profit (tax loss). |
[IAS
12 para 24]. |
13.129 An entity should also recognise a
deferred tax asset for all deductible temporary differences associated with
investments in subsidiaries, branches and associates, and interests in joint
ventures, to the extent that it is probable that: |
■ |
the
temporary difference will reverse in the foreseeable future; and |
■ |
taxable
profit will be available against which the temporary difference can be
utilised. |
[IAS
12 para 44]. |
13.129.1 Deferred tax assets arising on the
initial recognition of goodwill are not included in the exception in
paragraph 24 of IAS 12. If the carrying amount of goodwill arising in a
business combination is less than its tax base, the difference gives rise to
a deferred tax asset. The deferred tax asset arising from the initial
recognition of goodwill is recognised as part of the accounting for a
business combination; to the extent that it is probable that taxable profit
will be available against which the deductible temporary difference could be
utilised. [IAS 12 para 32A]. This differs from the situation where a deferred
tax liability arises on the initial recognition of goodwill, where an
exception does apply (see paras 13.159 and 13.161.1). |
13.130 The term 'probable' (referred to in
para 13.128) is not defined in IAS 12; but IFRS 5 states: "For the purposes of IFRSs, probable is defined as
'more likely than not'". [IFRS 5 App A, BC 81]. In other words,
if it is more likely than not that all or some of the deferred tax asset will
be recovered, a deferred tax asset should be recognised for the whole or the
part that is more likely than not to be recovered. |
13.131 In order to recover a deferred tax
asset, an entity would have to do more than simply not make losses in future: it would
have to make sufficient taxable profits.
|
13.132 All available evidence has to be considered
to support recognising deferred tax assets; this means both favourable and
unfavourable evidence. If there is no unfavourable evidence, and the entity
has historically been profitable and paid taxes, it may well be concluded
that the situation will continue in the
absence of knowledge of facts to the contrary; and, since there
is an expectation of sufficient future taxable profit, that recording a
deferred tax asset is appropriate. However, greater care is needed if the
losses are very significant relative to expected annual profits. Any
unfavourable evidence should also be considered carefully. Unfavourable
evidence can often be objectively verified where it arises from a past event.
But it is more difficult to objectively verify positive evidence of future
taxable profits. Therefore, evidence of future taxable profits might be
assigned lesser weight in assessing whether a deferred tax asset should be
recorded when there is other unfavourable evidence. The assessment of future
taxable profits, including the period over which such an assessment is made,
is considered further in paragraph 13.135.3. |
13.133 The future realisation of deferred
tax assets depends on whether sufficient taxable profit of the appropriate
type (trading profit or capital gain) is expected to be available for the
utilisation of deductible temporary differences or unused tax losses. The
sufficient taxable profit must be available to the 'taxable entity' where
those deductible temporary differences or unused tax losses originated, in
order for an asset to be recognised by that entity. The meaning of 'taxable
entity' is considered further in paragraph 13.156. The following sources of
future taxable profit might be available under the tax law to offset
deductible temporary differences. |
13.134 The future reversal of existing
taxable temporary differences gives rise to an increase in taxable income.
So, to the extent that those profits: |
■ |
relate
to the same taxable entity (see para 13.156 onwards); |
■ |
are
assessed by the same taxation authority; and |
■ |
arise
in the same period in which existing deductible temporary differences are
expected to reverse or in a period to which a tax loss arising from the
reversal of the deferred tax asset might be carried back or forward; |
|
|
the
asset is regarded as recoverable. [IAS 12 para 28]. In other words, where
deferred tax liabilities meeting the above offset criteria exceed deferred
tax assets at the balance sheet date and the reversal periods are consistent,
a deferred tax asset is recognised. |
Example 1 – Recovery of capital
tax losses |
An
entity has a portfolio of properties and has brought forward capital tax
losses that can be carried forward indefinitely. In the current year, the
entity has revalued its land and buildings; this has resulted in a deferred
tax liability for land on a capital gains tax basis being recognised in
respect of land and buildings. The entity does not expect to realise the
capital gain arising from the revaluation for a number of years. Is the
entity required to recognise a deferred tax asset now in respect of the
capital losses? |
Deferred
tax assets are recognised for all deductible temporary differences to the
extent that taxable profit will be available against which the deductible
temporary differences can be utilised. The entity is required 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. |
If
there is no current intention to realise the capital gain by selling the
properties, the recognition of the deferred tax liability is not affected.
The difference between the tax base (which remains the same despite the
revaluation) and the asset's revalued carrying amount is a temporary
difference that gives rise to a deferred tax liability. |
In
terms of presentation, the entity offsets 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 paragraph 74 of IAS 12 (that is, if there is a
legal right to offset the deferred tax assets and liabilities and they relate
to the same taxation authority). |
Example 2 – Recovery of deferred
tax asset against deferred tax liabilities |
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An
entity has taxable temporary differences of C80,000 in respect of fair value
adjustments in a business combination; these are expected to be included in
taxable income at a rate of C20,000 a year in years 1 to 4. The entity also
has a warranty provision of C40,000 that is expected to be deductible for tax
purposes as follows: C30,000 in year 2 and C10,000 in year 3. In addition,
the entity has unused tax losses of C60,000. A schedule of the reversal of
temporary differences and the utilisation of tax losses carried forward is
shown below: |
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|
13.134.1 The implications of existing
deferred tax liabilities with regards to recognising a deferred tax asset in
relation to a deficit on a defined benefit pension scheme are considered in
paragraph 13.203.1. |
13.135 Where there are insufficient taxable
temporary differences against which the deferred tax asset can be offset,
management should consider the likelihood that taxable profits will arise in
the same period(s) as the reversal of the deductible temporary differences
(or in the periods into which a tax loss arising from the deferred tax asset
can be carried back or forward). [IAS 12 para 29(a)]. The assessment of
taxable profits should take account of the tax rules governing the relief of
losses, such as the type of profits permitted to be used (that is, trading
profit or capital gain). Also, management needs to consider if the assessment
of taxable profits is restricted to the entity with the losses, or whether
group relief is available. |
13.135.1 Deductible temporary differences
that originate in future periods are generally not taken into consideration
in determining future taxable profits. The deferred tax asset arising from
them will require future taxable profit in order to be utilised. [IAS 12 para
29(a)]. |
Example – Determining future
taxable profits |
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An
entity has tax losses carried forward of C125, which expire after 5 years,
and is considering how much of this total can be recognised as a deferred tax
asset. Profits before tax allowances for depreciation of plant are expected
to be C25 for each of the next 5 years (that is, C125 in total), less tax
deductions of C10 per annum; this would result in profits after tax
allowances of C15 per annum for the five years (C75 in total). Profits
after 5 years are expected to be nil; so, if the tax allowances are deferred,
profits will not support their subsequent recovery. |
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If the tax allowances are claimed
in years 1 to 5, the taxable profits will be as follows:
|
13.135.1.1 In determining the sufficiency of
taxable profits, taxable amounts arising from future deductible temporary differences
are generally ignored. Careful analysis is needed where losses cannot be
carried forward indefinitely. A deferred tax asset is recognised where an
entity has tax planning opportunities that will create taxable profit in
appropriate periods (see para 13.136 onwards). This can mean that unused
losses are recoverable out of taxable profits made available by deferring
claims for deductions, as this creates a deductible temporary difference. A
similar situation arises without tax planning where deductions are given
under the relevant tax rules in later periods than the related accounting
charge; this also creates a deductible temporary difference. |
13.135.1.2 Particular issues arise where profit
forecasts include the amounts relevant for tax purposes (rather than the
accounting deductions); and where losses that would otherwise expire are only
recoverable against taxable profits arising as a result of future deductible
temporary differences. In such cases, those taxable profits can only be taken
into account if the deferred tax assets relating to the future deductible
temporary differences can also be recovered. |
Example – Interaction of losses and
deductible temporary differences |
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An
entity has unused losses of C300 and is assessing whether it can recognise a
deferred tax asset. The losses expire in 5 years' time. The entity is
forecasting an accounting loss of C100 in year 1, but this is after charging
C400 for a loss on a loan. The tax deduction for the loan can be deferred,
and the entity intends to claim this after year 5 (that is, in years 6 to
10). |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounting profits in years 2 to 5
are forecast to be nil, and in years 6 to 10 to be C600 in total.
|
13.135.1.3 A deferred tax asset is not
recognised when it is only recoverable through the future creation of, or
replacement with, a new unrecoverable deferred tax asset. But a deferred tax
asset is recognised where an otherwise profitable entity has expiring unused
losses that can be recovered by tax planning (or other deferral of
deductions), and those losses create originating deductible temporary
differences that are themselves recoverable. |
13.135.2 To avoid double counting, taxable
profits resulting from the reversal of deferred tax liabilities are excluded
from the estimation of future taxable profits where they have been used to
support the recognition of deferred tax assets in accordance with paragraph
28 of IAS 12 (see para 13.134). |
13.135.3
A
strong earnings history can provide objective evidence of future
profitability when assessing the extent to which a deferred tax asset can be
recognised. Hence, there would be less need for profitable entities to
consider the pattern and timing of the reversals of existing temporary
differences. |
13.135.4 Where there is a balance of
favourable and unfavourable evidence, careful consideration is given to
recoverability of a deferred tax asset based on the entity's projections for
taxable profits for each year after the balance sheet date. The amount of
taxable profits considered more likely than not for each period is assessed.
Management should have regard to any time limit on carry forward of tax
losses. The level of taxable profit might be more difficult to predict the
further into the future an assessment is required; but there should be no
arbitrary cut-off in the time period over which such an assessment is made.
Management should also ensure that the projections on which such assessments
are based are broadly consistent with the assumptions made about the future
in relation to other aspects of financial accounting (for example, impairment
testing), except where relevant standards require a different treatment.
Consideration should be given to the disclosures about key sources of
uncertainty required by paragraph 125 of IAS 1 (see para 13.307.1). |
13.135.5
Some
entities by their nature would not ordinarily recognise deferred tax assets
not supported through reversals of existing temporary differences. Examples
of such entities are development stage enterprises and start-up businesses.
The lack of a track record for profits means that a deferred tax asset is
unlikely to be recognised. Evidence of future taxable profits might be
assigned lesser weight in assessing whether a deferred tax asset should be
recorded when there is other unfavourable evidence (such as actual trading
losses). |
13.135.6 The assessment of the likelihood
that taxable profits will arise when there has been a history of trading
losses is discussed in paragraph 13.144 onwards. |
13.136 Entities sometimes take advantage of
tax planning opportunities to reduce their future tax liabilities. An entity
should consider whether it expects to create suitable taxable profits by
undertaking tax planning opportunities. [IAS 12 para 29(b)]. |
13.137 A tax planning opportunity is an
action that the entity would not normally take – except to prevent, say, an
unused tax loss from expiring. Such actions could include: |
■ |
Accelerating
taxable amounts or deferring claims for writing-down allowances to recover
losses being carried forward (perhaps before they expire) – see paragraph
13.137.1. |
■ |
Changing
the character of taxable or deductible amounts from trading gains or losses
to capital gains or losses, or vice versa. |
■ |
Switching
from tax-free to taxable investments. |
[IAS
12 para 30]. |
13.137.1 Where tax planning opportunities
bring taxable profit from a later period to an earlier period, a tax loss or
tax credit carry-forward can only be utilised where there is future taxable
profit from sources other than future originating temporary differences. [IAS
12 para 30]. This is considered further in paragraph 13.135.1.1 onwards. |
13.138 Tax planning opportunities should
only be considered to determine the extent to which an existing deferred
tax asset will be realised. They cannot be used to create a new deferred tax
asset or to avoid recognising or reducing a deferred tax liability (see para
13.141). The feasibility of the tax planning opportunity is assessed based on
the individual facts and circumstances of each case. Whatever tax planning
opportunities are considered, management should be capable of undertaking and
implementing them, and should have the expectation that it will implement
them. |
13.139 An entity might incur various
expenses in implementing a tax planning opportunity. A question arises
whether the tax benefit of the expenses could be included in the carrying
amount of any deferred tax asset recognised as a result of the plan's
implementation, or included in current tax expense. We believe that any
deferred tax asset recognised as a result of implementing a tax planning
opportunity should be recorded net of the tax effects of any expenses or
losses expected to be incurred as a result of the opportunity; this is
because that is the net amount by which future tax payments will be reduced
as a result of implementing it. |
Example – Expenses of tax
planning opportunity |
An
entity has gross deductible temporary differences of C1,000 in respect of a
deferred tax asset that is not recognised in the balance sheet. The tax rate
is 30% and so the unrecognised deferred tax asset is C300. As a result of
implementing a tax planning opportunity, the entity expects to generate
taxable profits of at least C1,000. But the cost of implementing the
opportunity is expected to be C200. Therefore, only C800 of future taxable
profits would be available against which the deferred tax asset can be
offset. A maximum deferred tax asset of C240 (C800 @ 30%) would qualify for
recognition. The remaining C60 will remain unrecognised. In other words, the
deferred tax asset of C300 is reduced by C60, which is the tax benefit of the
expenses that the entity expects to incur for implementing the tax planning
opportunity. |
13.140 Where a tax planning opportunity is
used to support realisation of unused tax losses in a business combination,
the same principles apply; so the benefit of any deferred tax asset
recognised should also be reduced by the tax effects of any expenses or
losses incurred to implement a tax planning opportunity. |
13.141 Tax planning opportunities cannot be
taken into account to reduce a deferred tax liability. For instance, an
entity cannot avoid recognising an existing deferred tax liability on the
grounds that future tax losses will prevent the transfer of economic
benefits. See also paragraph 13.126. |
13.142 Some examples of tax planning
opportunities are considered below: |
Example 1 – Sale of appreciated
assets when operating losses are projected |
An
entity has experienced operating losses over the last five years; accumulated
tax losses of C20m have given rise to a potential unrecognised deferred tax
asset of C6m. Based on its plans to introduce a new product line, management
is currently projecting that for the next three years it will experience
losses of at least C1m per year (and of approximately C5m in total); it then
expects to 'turn the corner' and become profitable. Because of appreciation
in the property market, the entity's investment in a shopping centre property
is now valued at approximately C500,000 more than the carrying amount in the
balance sheet. The entity proposes to recognise a deferred tax asset of
C150,000 (C500,000 × 30%) based on a tax planning opportunity to sell the
investment. The shopping centre property is not a 'core' asset of the entity;
and management says that it would sell the property, if necessary, before it
would permit the unused tax losses to expire. |
We
believe that this tax planning opportunity does not justify recognising a
deferred tax asset. A tax planning opportunity to sell appreciated assets
constitutes a subset of the broader source of future taxable profit from
operations. So a deferred tax asset is not recognised when the tax planning
opportunity appears merely to reduce an expected future loss. In the above
case, based on (a) the entity's history of losses, (b) an unproved new
product line, and (c) the fact that the entity does not anticipate being
profitable for at least three years, little weight can be assigned to the
projected profitability. Accordingly, there is no incremental tax benefit (at
least for the foreseeable future), as the potential gain on the sale of the
shopping centre property would only reduce what is otherwise a larger
operating loss. |
Example 2 – Acquisition of a
profitable entity |
An
entity that has incurred losses for many years proposes a tax planning
opportunity to support its deferred tax asset related to unused tax losses.
The entity will use a portion of the cash balances it received from a recent
public share offering to acquire an entity that generates significant taxable
profits. Could such a tax planning opportunity be considered to recognise the
deferred tax asset? |
No. We believe that a proposed
business combination and the accompanying availability of sufficient taxable
profits should not be anticipated for the purpose of supporting a deferred
tax asset. Until the acquisition of the entity is irrevocable and there are
no further statutory or regulatory impediments, the acquirer needs the
co-operation of others to make the tax planning opportunity effective. That
is, the acquirer does not control an essential part of the tax planning
opportunity (the target entity). It would not be appropriate to use future
taxable profits in the target entity to support recognising the acquirer's
tax losses, as the target entity does not form part of the group holding the
tax losses and will not do so until the business combination occurs. As a
result, the tax effects of an event such as the acquisition of an entity
should not be recognised before the event has occurred. However, once the
acquisition has taken place, the acquirer can recognise a deferred tax asset
as a credit to the tax charge in the post-acquisition period under
paragraph 67 of IAS 12 (see further para 13.250). |
Example 3 – Unused tax losses in an
acquiree |
Entity
B has unrecognised deferred tax assets related to unused tax losses. Entity C
bought entity B in December 20X3. |
Entity
C's management intends to integrate entity B's operations into entity C in
the first quarter of 20X4 to take advantage of the tax losses. Entity C has a
track record of generating taxable profits; and management expects this to
continue for the foreseeable future. |
In
this situation, management should recognise a deferred tax asset in respect
of the unused tax losses in the consolidated financial statements for the
period ended 31 December 20X3 if it is probable that management will carry
out the integration, and also that entity C will generate enough taxable
profit to absorb entity B's unused tax losses. This will impact the goodwill
calculation in the consolidated financial statements. |
This
contrasts with the situation in example 2, as both the newly acquired entity
holding the losses (entity B) and the profitable entity (entity C) are part
of the same group at the balance sheet date. |
|
13.144 Where an entity has tax losses that
can be relieved against a tax liability for a previous year, those losses are
recognised as an asset, because the tax relief is recoverable by refund of
tax previously paid. [IAS 12 para 14]. This asset can be shown separately in
the financial statements as a debtor, or it can be offset against an existing
current tax balance. |
13.145 Where tax losses can be relieved
only by carry-forward against taxable profits of future periods, a deductible
temporary difference arises. If an entity maintains a deferred tax account that
will result in future tax payable, the tax losses will be recoverable by
offset against taxable income that arises when those taxable temporary
differences reverse. [IAS 12 para 36(a)]. So losses carried forward can be
offset against deferred tax liabilities carried in the balance sheet, as
discussed in paragraph 13.134. |
13.146 Where the deferred tax liabilities
are not sufficient to absorb all the tax losses, management should consider
other convincing evidence suggesting that suitable taxable profits will be
generated in future (see the example in para 13.134). This consideration
becomes difficult, because the very existence of unrelieved tax losses is
strong evidence that future taxable profit might not be available. Because of
this significant uncertainty about future taxable profits being available, in
the absence of profits arising from the reversals of existing temporary
differences, the amount of the deferred tax asset and the nature of the
evidence supporting its recognition should be disclosed (see para 13.306).
[IAS 12 para 35]. |
13.147 The standard includes criteria that
should be considered to determine whether a deferred tax asset in respect of
unused tax losses or unused tax credits should be recognised. Some of these
criteria are the same as for recognising deferred tax assets in respect of
deductible temporary differences, such as the availability of sufficient
taxable temporary differences and tax planning opportunities (discussed
above). |
13.148 For unrelieved trading losses resulting
from identifiable causes, it is important to consider whether those losses
are likely to recur. Where they are likely to recur, it is unlikely that a
deferred tax asset can be recognised. Another criterion considered by the
standard is the availability of taxable profits before unused tax losses or
unused tax credits expire. [IAS 12 para 36(b)]. |
13.149
A
strong earnings history may provide objective evidence of future
profitability when assessing the extent to which a deferred tax asset can be
recognised. This justification becomes stronger if the tax loss arises from
identifiable causes that are unlikely to recur, as stated above. |
13.150 For entities with no record of
profit in recent years, a more rigorous assessment is required of the
probability that taxable profit will be available against which unrelieved
tax losses can be utilised. A history of recent losses creates a level of
uncertainty about an entity's future profitability that could be difficult to
rebut. If it is not probable that taxable profit will be available, the
deferred tax asset is not recognised. [IAS 12 para 35]. See also paragraph
13.135.5 for start-up businesses. |
13.150.1 For entities with only a limited
record of profits in recent years, it might be difficult to place significant
reliance on internal management projections. If the future taxable profits
are nonetheless considered probable, the entity will need to develop
projections on which to measure the recoverable deferred tax asset. The
further into the future it is necessary to look for sufficient taxable
profits, the more subjective the projections become. In the past, one
approach has been to project income into the future using the average annual
income for a past period. This approach would ultimately need to be
reconciled with the requirement to assess the probable future taxable
profits. |
13.150.2 There should be no arbitrary cut-off
in the time period over which an assessment of expected taxable profits is
made (for example, the recoverability test should not be limited using an
arbitrary look-out period solely because budget information is not available
after a certain number of years). The assessment should be broadly consistent
with the assumptions used for impairment testing (see further chapter 18),
allowing for adjustments for the different time-frame (if the tax losses have
expiry dates) and the different methods; these include discounting and the
value in use model in IAS 36 as compared to a calculation with no discounting
and including the impact of future asset improvements under IAS 12. |
13.150.3 It could be argued that the
probability of taxable profits decreases over time; so there could be a point
when taxable profits are no longer probable. However, we consider that management
should not generally assume without specific facts (for example, significant
contracts or patent rights terminating at a specific date) that no taxable
profits are probable after a specified date. The calculation should include
the maximum taxable profits that are more probable than not until the expiry
of tax losses. This could result in lower estimates for years in the distant
future, but it does not mean that those years should not be considered. |
13.150.4 Another issue is whether a limited
look-out period might be acceptable for industries that historically have
profit- and loss-making cycles. Similar to the arguments above, we consider
that management cannot generally assume that the entity will not make taxable
profits after a limited number of years of industrial upturn. The cyclical
downturns should be considered in determining the 'probable' future cash
flows, but they should not be used to introduce an arbitrary cut-off date for
the recoverability test. |
13.150.5 This approach should not lead to
recognising only the full or a nil deferred tax asset (that is, an 'all or
nothing' approach). An assessment should be made of future taxable profits
looking forward, with no arbitrary or specified cut-off period. A deferred
tax asset is recognised to the extent it is probable that there will be
future taxable profits. |
13.150.6 In considering whether to provide
guidance on how to apply the probability criterion for recognising deferred
tax assets arising from unused tax losses, in June 2005 the IFRS IC noted
that the criterion should be applied to portions of the total amount of
unused tax losses and not just to the amount of unused tax losses taken as a
whole. This is consistent with the guidance above. |
13.150.7 Where an entity determines its
future taxable profits to support recognising a deferred tax asset for
trading losses, management should consider a tax planning opportunity that
could be undertaken to allow the deferred tax asset to be recovered (see para
13.138). A restructuring or exit plan is normally regarded as an ordinary
part of running a business and might be considered, depending on the
likelihood of implementing the plan and its expected success. |
Example – Strategy to implement an
exit plan |
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|
|
An
entity has a history of recent losses. Management has developed an exit plan
in which a loss-making activity will be discontinued. Management intends to
implement the measures from March 20X4. The current date is January 20X4 and
the plan has not yet been made public. |
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|
|
Management
expects to reverse the losses over the two years following the implementation
of the exit plan, and proposes to recognise a deferred tax asset in respect
of the losses in the 31 December 20X3 financial statements, using the exit
plan to justify the recognition of the deferred tax asset. |
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|
|
A
deferred tax asset should be recognised in respect of the losses to the
extent that it is probable that future taxable profit will be available
against which the unused tax losses can be utilised. |
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|
|
The
probability of future taxable profits should be assessed based on
circumstances as at the balance sheet date. |
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|
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The
following factors should be considered: |
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|
|
■ |
The
probability that management will implement the plan. |
■ |
Management's
ability to implement the plan (for example, obtaining concessions from labour
unions or regulatory approval). |
■ |
The
level of detailed analysis and sensitivity analysis that management has
prepared. |
|
|
Judgement
will be required to establish whether it is probable that the exit plan will
go ahead and that taxable profits will be earned. If, at the balance sheet
date, management has not finalised its decision to sell, it could be
difficult to argue that it is more likely than not that the exit plan will be
implemented. |
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|
|
In
some cases, management will also need to assess the probability of the
disposal at the balance sheet date for the purposes of IFRS 5. If a
subsidiary's disposal is considered 'highly probable' for the purposes of
IFRS 5 and a taxable profit is expected to be made on the transaction, this
would strongly indicate that a deferred tax asset should be recognised in
respect of the previously unrecognised losses. |
13.151 The offset rules in tax legislation
might mean that a deferred tax asset in respect of a capital loss cannot be
offset against deferred tax liabilities arising from trading items. A
deferred tax asset will be recognised only if it can be offset against
recognised deferred tax liabilities on unrealised capital gains, or there is
strong evidence that it will be recoverable against capital gains that are
expected to arise in the future. Capital gains might arise in the future as a
result of taxable temporary differences in existence at the balance sheet
date, from generating future taxable profits, or through tax planning
opportunities (see para 13.134 onwards). |
|
13.153 Disclosure is required when
management concludes that there is uncertainty regarding an entity's ability
to continue as a going concern for a reasonable period of time (see chapter
4). [IAS 1 para 25]. The inclusion of such disclosure would generally
constitute significant unfavourable evidence under IAS 12; so recognising all
or a portion of a deferred tax asset would not be justified, unless
realisation is assured by either (a) carry-back to prior tax years or (b)
reversals of existing taxable temporary differences. But there could be
circumstances where the cause of the going concern uncertainty is not
directly related to the entity's profitability. For example, the uncertainty
might arise from concerns relating to liquidity or other issues unrelated to
profitability (such as uncertainty about the renewal of an operating licence)
while it is expected that the entity will continue to generate taxable
profits. In these situations, it might be appropriate to recognise a deferred
tax asset, provided it is probable that future taxable profits will be available.
The specific facts and circumstances giving rise to the uncertainty should be
considered in determining whether a deferred tax asset is recoverable. Also,
the absence of significant uncertainty regarding an entity's ability to
continue as a going concern does not, by itself, constitute favourable
evidence that deferred tax assets will be realised. |
|
13.155 A deferred tax asset's carrying
amount should be reviewed at each balance sheet date. Management needs to
assess whether a net deferred tax asset recognised in the balance sheet is
still recoverable and has not been impaired. For example, an entity might
have recognised a deferred tax asset in respect of tax losses in a previous
period based on information available at that time. A year later,
circumstances might have changed so that it is no longer probable that the
entity would earn sufficient future taxable profits to absorb all the tax
benefit. The asset has suffered an impairment and should be written down. If
circumstances giving rise to the previous write down no longer apply or it is
probable that sufficient future taxable profit will be available, the
reduction should be reversed. [IAS 12 para 56]. |
13.155.1 Similarly, where an entity has been
unable to recognise a deferred tax asset because sufficient taxable profit is
unavailable, management should review the situation at each subsequent
balance sheet date to ascertain whether some or all of the unrecognised
balance should now be recognised. For example, an improvement in trading
conditions or the acquisition of a new subsidiary might make it more likely
that a previously unrecognised tax loss in the acquiring entity will be
recovered. [IAS 12 para 37]. Where a previously unrecognised deferred tax
asset is recognised, this is a change in estimate that should be reflected in
the results for the year under IAS 8. |
13.156 In various jurisdictions, entities
can form 'tax groups' within which tax losses or other deductible temporary
differences could be transferred between entities. This means that tax losses
or other deductible temporary differences in an unprofitable entity could be
used to reduce the taxable profits of another entity within the tax group,
thus benefiting the group as a whole. |
13.156.1 The recoverability of deferred tax
assets should be assessed with reference to the 'taxable entity'. [IAS 12
paras 28-30, 36]. In our view, it is reasonable to interpret the 'taxable
entity' to mean the wider group of entities in the same tax group. In
assessing whether a deferred tax asset should be recognised in consolidated
financial statements, taxable profits of all entities in the wider tax group
could be taken into account. To the extent that tax losses or deductible
temporary differences generated can be recovered by a tax group, we consider
that it would be appropriate to recognise a deferred tax asset in
consolidated financial statements that include the entities of that tax
group. |
13.156.2 Where tax losses or other deductible
temporary differences are transferred within a tax group, the question arises
whether a deferred tax asset should be recognised at the entity level. The
entity that generated the losses (or where the deductible temporary
differences originated) might not itself have sufficient taxable profits to
support recognising a deferred tax asset. In such cases, asset recognition at
an entity level will depend on whether future economic benefit will flow to
the entity; for example, the surrendering entity might have a contract in
place to receive payment for transferring its tax benefits. This would
indicate that an asset should be recognised at the entity level. In each
case, the relevant facts and circumstances should be taken into account to
determine the appropriate treatment. |
13.157 Deferred tax liabilities and deferred
tax assets (subject to the availability of future taxable profits) should be
recognised for all temporary differences, subject to the exceptions in
paragraphs 13.127 to 13.129. These exceptions are not based on any conceptual
thinking that underpins the balance sheet liability method. Rather they
relate to situations where applying the general rule for deferred tax on
temporary differences was in the past considered undesirable and meaningless.
The specific situations are as follows: |
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■ |
Initial
recognition of goodwill arising in a business combination (for deferred tax
liabilities only) (see para 13.158 onwards). |
■ |
Initial
recognition of an asset or liability in a transaction that is not a business
combination and does not affect accounting profit or taxable profit (see para
13.162 onwards). |
■ |
Investments
in subsidiaries, branches, associates and joint ventures, but only where
specified criteria apply (see para 13.233 onwards for separate financial
statements and para 13.253 onwards for consolidated financial statements). |
13.158 Goodwill arising on a business
combination is recognised as an asset and is not amortised. Instead, it is
tested annually for impairment or more frequently if events or changes in
circumstances indicate that it is impaired; if it is impaired, it is written
down to its recoverable amount. See chapter 25. |
13.159
Where
goodwill arising on a business combination is non-deductible for tax
purposes, the goodwill has a tax base of nil. Reductions in the carrying
amount of the goodwill for impairment are not allowed as a deductible expense
in determining taxable profits, and the cost of the goodwill is not
deductible when the subsidiary is sold. Any difference between the carrying
amount of the goodwill and its tax base of nil gives rise to a taxable
temporary difference; this would usually result in a deferred tax liability.
But such a deferred tax liability is not recognised because goodwill is
measured as a residual; and recognition of the deferred tax liability would
increase the carrying amount of the goodwill (which would not add to the
relevance of financial reporting). [IAS 12 para 21]. Thus, there is an
assumption that the carrying amount of the goodwill is recovered on an
after-tax basis, while other assets and liabilities are recovered and settled
at their carrying amounts. |
13.160 If an entity recognises an
impairment loss on goodwill that is not tax deductible, the amount of the
unrecognised taxable temporary difference (and the unrecognised deferred tax
liability) on goodwill is reduced. This decrease in the value of the
unrecognised deferred tax liability is also regarded as relating to the
initial recognition of the goodwill; it is not recognised. [IAS 12 para 21A]. |
13.161 Where the goodwill arising in a
business combination is deductible for tax purposes, a taxable temporary
difference will arise on which a deferred tax liability should be recognised.
This situation is considered further in paragraph 13.240 onwards. |
13.161.1 Where a deductible temporary difference results from the initial
recognition of goodwill arising on a business combination, there is no
exception. Where sufficient future taxable profits are available, a deferred
tax asset is recognised as part of the accounting for the business
combination. The initial recognition exception does not apply in this case,
as the deferred tax asset reduces, rather than increases, goodwill. The
accounting for a deferred tax asset reflects the fact that there will be a
tax deduction in future periods, and any tax deduction greater than the
goodwill's book value will alter the effective tax rate. |
13.162 Where a temporary difference arises
on initial recognition of an asset or liability, other than on a business
combination, and the recognition does not affect accounting profit or taxable
profit at the time of the transaction, any deferred tax asset or liability in
respect of that temporary difference is not recognised [IAS 12 paras 15, 24].
Also, an entity does not recognise subsequent changes in the unrecognised
deferred tax liability or asset as the asset is depreciated (see para
13.164). [IAS 12 para 22(c)]. |
13.163 For example, if an asset's cost is
not deductible for tax purposes, either over a number of periods or on
disposal, the asset's tax base is nil (as explained in para 13.112). This
creates a taxable temporary difference because the recovery of the asset's
carrying amount gives rise to taxable profits; but no deduction for the
asset's cost is available. The resulting deferred tax liability is not
immediately recognised by debiting profit or loss, because that does not
allocate the tax expense over the asset's life. Also the deferred tax expense
is not added to the asset's cost, because it is difficult to assess whether
the consideration paid for the asset takes into account the tax treatment
applied by the tax authorities. Therefore the standard does not permit a
deferred tax liability to be recognised for the origination or reversal of
such temporary difference. The following flow chart and examples illustrate
the application of the above rules. |
Temporary difference arising on
initial recognition of an asset or liability |
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Example 1 – Initial recognition –
none of the cost of an asset is deductible for tax purposes |
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An
entity acquired an intangible asset (a licence) for C100,000 that has a life
of five years. The asset will be solely recovered through use. No tax
deductions can be claimed as the licence is amortised or when it expires. No
tax deductions are available on disposal. Trading profits from using the
licence will be taxed at 30%. |
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As
the cost of the intangible asset is not deductible for tax
purposes (either in use or on disposal), the tax base of the asset is
nil. A temporary difference of C100,000 arises; prima facie a deferred tax liability of
C30,000 should be recognised on this amount. But no deferred tax is
recognised on the asset's initial recognition that arose from a transaction
that was not a business combination and did not affect accounting or taxable
profit at the time of the recognition. At the end of year 1, the asset will
have a carrying amount of C80,000. In earning taxable amounts of C80,000, the
entity will pay tax of C24,000. The deferred tax liability is not recognised,
because it arises from initial recognition of an asset. Similarly, no
deferred tax is recognised in later periods. |
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Although
it might appear imprudent not to recognise the deferred tax liability in
these circumstances, this can be understood in the following context. If the
entity acquired the asset in an arm's length transaction, the price would
reflect the asset's non-deductibility for tax purposes. So it would not be
appropriate to recognise a loss on the date of purchase. |
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The
above exception does not apply if the intangible asset was acquired in a
business combination. The recognition of a deferred tax liability on
acquisition increases goodwill and does not result in overstating the asset's
cost or recognising an expense. |
Example 2 – Initial recognition – a
proportion of the asset's cost is deductible for tax purposes and book and
tax depreciation rates are identical |
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An entity acquired an asset for
C120,000, which it expects to recover solely through use in the business. For
tax purposes, only 60% of the asset is deductible when the asset's carrying
amount is recovered through use. The asset is depreciated for both tax and
accounting purposes at 25% per annum. The tax rate is 30%.
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As
it recovers the asset's carrying amount, the entity will earn taxable income
of C120,000, but 60% of C120,000 = C72,000 will be deductible for tax
purposes. No deferred tax is recognised on the temporary difference of
C48,000 as it arises on initial recognition. At the end of year 1, the entity
will be expected to generate C90,000 of taxable income, but 60% of C90,000 =
C54,000 will be deductible for tax purposes. No deferred tax is recognised on
the temporary difference of C36,000, because it results from the asset's
initial recognition |
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An
alternative approach is to consider that the asset effectively consists of
two assets: one that is deductible for tax purposes and so should be tax effected;
and the other that is not deductible and should be ignored, because it arises
on initial recognition. On this basis, 60% of the cost of the asset that is
deductible in full (that is, C72,000) would be tax effected in the normal
way. |
Example 3 – Initial recognition – a
proportion of the asset's cost is deductible for tax purposes and book and
tax depreciation rates are different |
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Where
an asset is depreciated at a different rate for accounting and tax purposes,
a question arises as to how the accounting depreciation should be allocated
to the asset. In our view, the accounting depreciation should be allocated pro rata between the
deductible and non-deductible portions of the asset. |
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The facts are the same as in
example 2, except that the asset is depreciated at 25% for accounting
purposes and 33⅓% per annum for tax purposes.
The tax rate is 30%.
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The
asset's carrying amount of C120,000 exceeds the tax base of C72,000; this
gives a taxable temporary difference of C48,000. This amount is covered by
the initial recognition exception, so no deferred tax is recognised. The
asset is consumed at a rate of 25% per year (C30,000 accounting
depreciation). So the amount of depreciation that relates to the temporary
difference of C48,000 is C12,000 (48,000 × 25%). This amount is treated as a
reversal of the temporary difference covered by the initial recognition
exception. |
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In
addition, there is a new originating taxable temporary difference of C6,000;
this results from the difference in depreciation rates used for book and tax,
that is between the remaining book depreciation (C18,000) and the tax
deductions (C24,000). |
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In summary, the overall reduction
of C6,000 in the temporary difference comprises:
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The
same result is obtained by carrying out the analysis on the basis that the
entity has acquired two assets. As in example 2, no deferred tax is
recognised on the part of the asset costing C48,000 with a tax base of nil,
because it arises on initial recognition. The other part of the asset costing
C72,000 is subject to tax effect accounting. At the end of year 1, the
carrying amount of this part of the asset is C54,000 (after book depreciation
of C18,000), and the tax base is C48,000 (after tax depreciation of C24,000).
To recover the carrying amount of C54,000, the entity will have to earn
taxable income of C54,000, but will only be able to deduct tax depreciation
of C48,000. The difference between the carrying amount of C54,000 and the tax
base of C48,000 gives rise to a taxable temporary difference of C6,000. So
the entity recognises a deferred tax liability of C1,800 (C6,000 @ 30%)
representing the tax that it would pay when it recovers the asset's carrying
amount. Similar reasoning applies in years 2 and 3. At the end of year 4, any
deferred tax liability is reversed when the asset is fully depreciated. |
Example 4 – Initial recognition –
subsequent revaluation of an asset |
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The facts are the same as in
example 2, except that the asset is revalued to C100,000 at the beginning of
year 3.
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As
in example 2, no deferred tax is recognised on the initial temporary
difference of C48,000 or in years 1 and 2. At the beginning of year 3, the
asset is revalued to C100,000; but the asset's tax base is C36,000,
giving rise to a temporary difference of C64,000. Of this amount, only
C24,000 arises on initial recognition. The remaining C40,000 arises on the
asset's subsequent revaluation; deferred tax of C12,000 (C40,000 @ 30%)
should be provided on this amount. The deferred tax liability that arises on
the asset's revaluation is debited direct to the revaluation reserve (see
para 13.288.1). By the end of year 3, half of the temporary difference
reverses; this results in a corresponding reduction in the deferred tax
liability to C6,000. In year 4, the remaining temporary difference reverses
when the asset is fully depreciated. |
13.163.1 A deferred tax asset may arise on an
asset's initial recognition. For example, a building costing C1 million is
constructed in an enterprise zone that attracts 150% tax-deductible
allowances on that building. The asset's tax base on initial recognition
is C1.5 million. The difference between the carrying amount of C1 million and
the tax base of C1.5 million gives rise to a deductible temporary difference
of C0.5 million that would reduce future tax payable as the asset is
recovered through use. The resulting deferred tax asset is not immediately
recognised by crediting profit or loss, because that does not allocate the
tax income over the asset's life. Also the deferred tax income is not
deducted from the asset's cost, because it is difficult to assess whether the
consideration paid for the asset takes into account the tax treatment applied
by the tax authorities. And the standard does not permit a deferred tax asset
to be recognised for the origination or reversal of such temporary
difference. Another example where a deferred tax asset arises on initial
recognition is the receipt of a non-taxable government grant. This situation
is dealt with in paragraph 13.194 onwards. |
13.163.2 In addition to revaluing an asset's
carrying amount after initial recognition, it is also possible to 'revalue'
the tax base after initial recognition. This can occur if the tax base is
subject to an inflation adjustment, such as 'indexation'. Changes such as
these (after the initial recognition exception has been applied) are considered
in the following paragraphs. |
13.164 The examples in paragraph 13.163
show how subsequent changes in the temporary difference relating to an asset
are treated, for instance where the asset is depreciated or revalued upwards.
Where a deferred tax liability or asset has not been recognised as a result
of the initial recognition exception, an entity does not recognise changes in
the unrecognised deferred tax liability or asset as an asset is depreciated.
[IAS 12 para 22(c)]. |
13.164.1 It might not be clear in practice
whether subsequent changes in a temporary difference represent (i) a reversal
of an amount covered by the initial recognition exception or (ii) a new
temporary difference on which deferred tax is recognised. Where changes in a
temporary difference (because of subsequent movements in the carrying amount
or the tax basis) result from changes in the underlying economics, the
general principle is that these should be properly reflected in the deferred
tax accounting. The temporary difference on initial recognition arises
because one element (carrying amount or tax base) exceeds the other. As a
general rule, we consider that a reduction of this excess amount (due to a decrease
in the larger element) is treated as a reversal of the unrecognised temporary
difference and no deferred tax arises. But an increase of the larger element
or a reduction of the other element (that is, the smaller amount) is treated
as a new temporary difference; and deferred tax is recognised (subject to the
criteria for deferred tax assets in IAS 12). The situation is more
complicated where a subsequent change increases the smaller element (and so
reduces the temporary difference); and there may be diversity in practice. |
13.164.2 This concept is illustrated in the
following examples for an asset with a carrying amount of C100,000 and a tax
base of C90,000 on initial recognition. The resulting taxable temporary
difference of C10,000 is subject to the initial recognition exception.
Subsequent changes that reduce the carrying amount (up to C10,000) are
reversals of the amount covered by the initial recognition exception (see
example 1). Changes that increase the temporary difference result in a new
temporary difference, and so deferred tax is recognised (see examples 2 and
3). If the temporary difference reduces because of an increase in the tax
base (the smaller element), there are alternative acceptable views (as set
out in example 4). |
Example 1 – Subsequent accounting
downwards revaluation |
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|
|
|
|
|
Carrying amount |
Tax base |
Temporary difference |
Unrecognised temporary difference |
Recognised temporary difference |
Deferred tax liability/(asset)@ 30% |
|
C |
C |
C |
C |
C |
C |
Initial
recognition |
100,000 |
90,000 |
10,000 |
10,000 |
– |
– |
Devaluation |
(30,000) |
– |
(30,000) |
(3,000) |
(27,000) |
(8,100) |
|
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|
70,000 |
90,000 |
(20,000) |
7,000 |
(27,000) |
(8,100) |
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In
this case, the accounting devaluation is similar to depreciation and reduces
the asset's carrying amount. Consistent with the pro rata approach in example 3 in
paragraph 13.163, the amount of devaluation that relates to the temporary
difference of C10,000 is C3,000. This amount is treated as a reversal of the
temporary difference covered by the initial recognition exception. The
remaining devaluation of C27,000 is treated as a new deductible temporary
difference; a deferred tax asset is recognised on this amount (provided it
meets the recognition criteria). |
Example 2 – Subsequent accounting
upward revaluation |
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|
|
|
|
|
|
Carrying amount |
Tax base |
Temporary difference |
Unrecognised temporary difference |
Recognised temporary difference |
Deferred tax liability/(asset)@ 30% |
|
C |
C |
C |
C |
C |
C |
Initial
recognition |
100,000 |
90,000 |
10,000 |
10,000 |
– |
– |
Revaluation
gain |
30,000 |
– |
30,000 |
– |
30,000 |
9,000 |
|
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|
130,000 |
90,000 |
40,000 |
10,000 |
30,000 |
9,000 |
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The
revaluation of C30,000 increases the asset's carrying amount and the
temporary difference. This results in a new taxable temporary difference on
which a deferred tax liability is recognised. |
Example 3 – Subsequent tax
devaluation |
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|
|
|
|
|
|
|
Carrying amount |
Tax base |
Temporary difference |
Unrecognised temporary difference |
Recognised temporary difference |
Deferred tax liability/(asset)@ 30% |
|
C |
C |
C |
C |
C |
C |
Initial
recognition |
100,000 |
90,000 |
10,000 |
10,000 |
– |
– |
Devaluation |
– |
(30,000) |
30,000 |
– |
30,000 |
9,000 |
|
|
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|
100,000 |
60,000 |
40,000 |
10,000 |
30,000 |
9,000 |
|
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|
|
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The
change of C30,000 reduces the asset's tax base and increases the temporary
difference. This represents a new taxable temporary difference on which a
deferred tax liability is recognised. |
Example 4 – Subsequent tax upward
revaluation |
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|
|
|
|
|
|
|
|
Carrying amount |
Tax base |
Temporary difference |
Unrecognised temporary difference |
Recognised temporary difference |
Deferred tax liability/(asset)@ 30% |
|
C |
C |
C |
C |
C |
C |
Initial
recognition |
100,000 |
90,000 |
10,000 |
10,000 |
– |
– |
Revaluation
gain |
– |
30,000 |
(30,000) |
– |
(30,000) |
(9,000) |
|
|
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|
100,000 |
120,000 |
(20,000) |
10,000 |
(30,000) |
(9,000) |
|
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|
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The
change of C30,000 reduces the taxable temporary difference (and changes it to
a deductible temporary difference). But this is because an increase in the
tax base rather than a reduction in the carrying amount that gave rise to the
unrecognised temporary difference. So, under the general principle in
paragraph 13.164.1, the C30,000 represents a new deductible temporary
difference on which a deferred tax asset is recognised (provided it meets the
recognition criteria). |
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|
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There
is an alternative acceptable view: an increase in the smaller component (in
this example, the tax base) reduces the previously unrecognised temporary
difference. Under this view, C10,000 is a reversal of the temporary
difference covered by the initial recognition exception. The remaining
C20,000 is treated as a new deductible temporary difference. |
13.164.3 The above examples show the position
where the initial recognition exception applies to a taxable temporary
difference on an asset. A similar approach applies in relation to a
deductible temporary difference. In this case, the temporary difference
arises because the asset's tax base is higher than the carrying amount. An
entity does not recognise changes in the unrecognised deferred tax liability
or asset as an asset is depreciated. [IAS 12 para 22(c)]. In our view,
'depreciation' applies to the tax base (as well as the carrying amount) where
this represents a reversal of the unrecognised temporary difference. So, for
an unrecognised deductible temporary difference on an asset, depreciation or
devaluation of the tax base will represent a reversal of the unrecognised
temporary difference (on a pro rata basis, as above). |
13.164.4 Changes that increase the deductible
temporary difference (such as an accounting or tax or depreciation) are not
reversals, but represent new temporary differences on which deferred tax is
recognised. The situation is more complicated where the temporary difference
is reduced because of an increase in the asset's carrying amount, as
illustrated in the following example. |
Example – Subsequent accounting
upward revaluation |
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|
|
|
|
|
|
|
Carrying amount |
Tax base |
Temporary difference |
Unrecognised temporary difference |
Recognised temporary difference |
Deferred tax liability/(asset)@ 30% |
|
C |
C |
C |
C |
C |
C |
Initial
recognition |
90,000 |
100,000 |
(10,000) |
(10,000) |
– |
– |
Revaluation
gain |
30,000 |
– |
30,000 |
– |
30,000 |
9,000 |
|
|
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|
120,000 |
100,000 |
20,000 |
(10,000) |
30,000 |
9,000 |
|
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|
|
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The
change of C30,000 reduces the deductible temporary difference (and changes it
to a taxable temporary difference). But this is because of an increase in the
carrying amount rather than a reduction in the tax base that gave rise to the
unrecognised temporary difference. So, under the general principle in
paragraph 13.164.1, the C30,000 represents a new taxable temporary difference
on which a deferred tax liability is recognised. |
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|
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There
is an alternative acceptable view: an increase in the smaller component (in
this case, the asset's carrying amount) reduces the previously unrecognised
temporary difference. Under this view, C10,000 is a reversal of the temporary
difference covered by the initial recognition exception. The remaining
C20,000 is treated as a new taxable temporary difference. |
13.164.5 The above examples show that where
the initial recognition exception applies, any changes in the temporary difference
needs to be analysed to determine if they represent a reversal of the amount
covered by the initial recognition exception or a new temporary difference. |
13.164.6 The above examples show the position
where a temporary difference on an asset is subject to the initial
recognition exception. The principle and approach in paragraph 13.164.1 apply
similarly to temporary differences (taxable or deductible) on liabilities
that are subject to the initial recognition exception. |
13.165 Deferred tax is measured at the tax
rates that are expected to apply when the asset is realised or the liability
is settled. The tax rates are based on laws that have been enacted or
substantively enacted at the balance sheet date. [IAS 12 para 47]. |
13.166 Realising an asset or settling a
liability could take many years. But the tax rate is not normally known in
advance. An entity uses the rate that has been enacted or substantively
enacted by the balance sheet date. Enacted means that the rate is part of tax
law.See paragraph 13.69 onwards for the meaning of 'substantively
enacted'. |
13.166.1 An entity's tax rate might change as
a result of new legislation. The impact of changes in rates depends on the
nature and timing of the legislative changes. Any impact is recognised in
accounting periods ending on or after the date of substantive enactment (and
might be disclosable before that date). Changes in tax rates are often prospective,
so there may be no impact on current tax assets and liabilities that arose
before the change's effective date. But deferred tax balances are likely to
be affected. |
Example – Change in tax rates |
A
change in tax rate from 30% to 28% was substantively enacted on 26 June 20X7
with effect from 1 April 20X8. The change has no impact on current tax
liabilities arising before its effective date. But the measurement of
deferred tax assets and liabilities will be affected for accounting periods
(including interim periods) ending on or after 26 June 20X7. |
Management
needs to determine when the deferred tax balance is expected to reverse and
what tax rate will apply in the reversal period. The reduction in tax rate
will not affect deferred tax that is expected to reverse before 1 April 20X8,
but it will affect later reversals. It will be more complicated for entities
with a financial year that straddles 1 April 20X8. They will need to
calculate an effective tax rate for reversals in the financial year in which
the change takes effect. |
The
impact of this reduction in tax rate might affect profit or loss, or other
comprehensive income or equity (see further para 13.288.7). |
The
change in tax rate might be disclosable as a non-adjusting post-balance sheet
event for accounting periods ending before 26 June 20X7. [IAS 10 para 22(h)]. |
13.167 Management normally needs to
calculate an average tax rate only if the enacted or substantively enacted
tax rates are graduated; that is, if different rates apply to different
levels of taxable income. This average rate is the rate expected to apply to
taxable profit (or loss) in the years in which management expects the temporary
differences to reverse. [IAS 12 para 49]. Assume the first C5m of profit is
taxed at 20%, and profit above that is taxed at 30%. Management needs to
estimate the average rate where it expects to earn annual taxable profit in
excess of C5m in the future. To determine the rate (which would be between
20% and 30%), management estimates future annual taxable profits, including
reversing temporary differences. It is not usually necessary in practice to
determine the net reversals of temporary differences for deferred tax assets
and liabilities. But management should consider the effect of an abnormal
level of taxable profit or any abnormally large temporary difference that
could reverse in a single future year and distort the average rate. |
Example – Different tax rates applicable to different levels of
income
|
13.168 The requirement to calculate an
average tax rate applies to different levels of profit; but it is not used
for different rates that are expected to apply to different types of taxable
profit or in different tax jurisdictions. If different rates apply to
different types of taxable profit (for example, trading profits and capital
gains), the rate used will reflect the nature of the temporary difference.
The rates used for measuring deferred tax arising in a specific tax
jurisdiction will be the rates expected to apply in that jurisdiction.
Management should take care when considering tax in countries where state or
provincial tax systems apply. Management should apply the appropriate rates
for each state or province to the transactions in those states or provinces
and avoid using an average rate for the country unless the impact is
immaterial. |
|
13.170 The tax consequences of recovering
or settling the carrying amount of assets and liabilities might depend on the
manner in which the asset is recovered or the liability is settled. So the
tax base might be different depending on how the asset or liability is
recovered or settled in practice. The carrying amount of an asset is normally
recovered through use, sale, or use and sale. The cumulative amount that is
deducted for tax purposes if the asset is recovered through use might be
different from the amount that would be deductible on the asset's sale, for
example, because of indexing the cost. |
13.171
In
some jurisdictions, different tax rates apply to income and capital gains.
For example, if an entity expects to sell an asset, and the transaction would
be subject only to capital gains tax, it should measure the related deferred
tax liability at the balance sheet date at the capital gains rate. But if it
expects to retain the asset and recover its carrying amount through use, it
should measure the deferred tax at the rate applicable to taxable income. |
13.172 Entities should measure deferred tax
assets and liabilities using the tax rates and tax bases that are consistent
with the manner in which the entity expects, at the balance sheet date, to
recover or settle the carrying amount of assets and liabilities. [IAS 12 para
51A]. See guidance on the expected manner of recovery of investment
properties measured at fair value in paragraph 13.219.4 onwards. |
13.172.1 There is debate over the deferred
tax accounting where a group holds a single asset within a corporate entity
(or 'corporate wrapper') and expects to ultimately 'recover' the asset by
selling the investment in the corporate entity. In our view, management
should determine the asset's expected manner of recovery for the purpose of
calculating the related deferred tax on the basis of the asset's recovery
within the corporate entity, not by reference to the expected manner of
recovery of the investment in the corporate entity. This applies even if the
group expects to recover its investment in the corporate entity without an
impact on taxable profit (or with a lesser impact than from selling the asset
itself). Deferred tax is recognised on temporary differences; a temporary
difference is defined as the difference between an asset's carrying amount
and its tax base (see para 13.93). As it is the asset itself that is
recognised in the group's balance sheet (as opposed to the investment in the
corporate entity in which the asset resides), the relevant tax base is that
of the asset, not that of the investment. |
13.172.1.1 Where a group holds assets within a corporate
entity (for example, in a subsidiary or a joint venture), it should determine
the assets' expected manner of recovery on the basis of their recovery within
that corporate entity. The resulting temporary differences are sometimes
referred to as 'inside basis' differences. There could be a further temporary
difference: the difference between the carrying amount of the investment in
the corporate entity and its tax base (sometimes referred to as 'outside
basis' difference). See paragraph 13.254 for more guidance on temporary
differences arising on investments in subsidiaries, branches, associates and
joint ventures. |
13.172.1.2 The impact of management
expectations on the measurement of deferred tax assets and liabilities is an
important principle in the standard. This is true particularly where the tax
base of an asset or liability is not immediately apparent. |
Example – Expected manner of recovery
based on use |
|
A
parent entity acquired a subsidiary that held a piece of plant. The fair
value of the plant was C10m and it will be depreciated over 10 years to its
residual value of nil. The accounting depreciation of C1m charged in year 1
and later years is not deductible for tax purposes. If the plant is used in
the business for its full 10-year life, it will be fully consumed and will
have to be scrapped. No tax deductions will be available for scrapping the
asset. But if the asset is sold, the cost of the asset to the subsidiary of,
say, C8m (after adjusting for inflation) is deductible on sale. The tax rate
is 30% for income and 25% for capital gains. |
|
In
this example, the tax base is not immediately apparent. It could be nil if
the asset is to be used; or it could be C8m if the asset is to be sold. So
management needs to consider how it expects to recover the asset's carrying
amount. Management will use the plant for carrying out its business
(supported by the fact that the asset is being depreciated to a nil residual
value). The plant's full carrying amount is expected to be recovered through
use; and there are no tax consequences of scrapping the asset at the end of
its life. The tax base that is consistent with the expected manner of
recovery through use is nil, as no part of the carrying amount is deductible
for tax purposes against the future economic benefits expected to flow from
the plant's use. So a temporary difference arises of C10m, which is the
difference between the carrying amount on initial recognition and the tax
base of nil. This temporary difference reduces to C9m because part of the
carrying amount is recovered through depreciation in year 1. On this basis,
management would provide a deferred tax liability of C3m at the income tax
rate of 30% on the date of the business combination. This deferred tax
liability will have reduced to C2.7m at the balance sheet date. |
13.172.1.3 The standard has some examples (in
para 51A) of how this principle is applied. Other examples are considered
elsewhere in this chapter; for example, the expected manner of recovery of
revalued non-monetary assets is discussed in paragraph 13.211 onwards. |
13.172.2 An entity might plan to use an asset
for a number of years and then sell it. The deferred tax should reflect this
expected 'dual manner of recovery'. It is recognised on the basis of normal
income tax rules for the portion of the asset's carrying amount that is
expected to be recovered through use; and it is recognised using disposal tax
rules for the remainder of the asset's carrying amount that is expected to be
recovered through sale. |
13.172.3 The 'dual manner of recovery'
expectation will often affect assets such as properties and intangible
assets. A residual value might indicate that the dual manner of recovery is applicable.
Paragraph 6 of SIC 21 supports this. The dual manner of recovery could still
apply even when there is no residual value; for example, where the asset is
expected to be disposed of or abandoned (either during or at the end of its
useful life) in order to recover any tax base available on disposal or
abandonment. This might affect properties or intangibles with nil residual
values or other types of asset such as mining assets. The guidance in SIC 21
has been incorporated into IAS 12 by the amendment to IAS 12 issued in
December 2010. For guidance on the expected manner of recovery for investment
properties measured at fair value, refer to paragraph 13.219.7 onwards; and
for guidance on intangible assets with indefinite lives, refer to paragraph 13.225.1
onwards. |
13.172.3.1 Where an asset has a nil residual
value, it might appear that it will be recovered solely through use. But it
is likely that management will take the commercial decision to sell the asset
at the end of its useful life if this would recover the asset's tax base.
Proceeds are likely to be low (as the asset is at the end of its life), but
the asset's cost or indexed cost might be tax deductible. Thus the sale could
generate a significant capital loss. If there is a valid expectation that
management would sell the asset, a dual manner of recovery expectation would
apply. |
13.172.4 When a dual manner of recovery
expectation applies, deferred tax is calculated as follows: |
■ |
Ascertain
the expected manner of recovery of the asset's carrying amount. |
|
For
instance, where assets are depreciable (such as buildings), they are expected
to be held during their useful life and a portion of the carrying amount
recovered through use, with the residual amount (which might be nil)
recovered through a disposal at the end of the useful life. Land is not
depreciable and it can only be recovered through ultimate disposal (see
further para 13.213). |
|
|
■ |
Split
the asset's carrying amount between amounts to be recovered through use and
through sale. |
|
The
split might be based on the residual value determined for the purpose of
depreciation under the cost model of IAS 16 or IAS 38. This residual value is
the estimated value (in present prices at the balance sheet date) of the
relevant asset in its expected state at the end of its useful life. But the
split could arguably be based on a residual value measured on the same price
basis as the carrying amount (that is, based on prices ruling at the date the
asset was acquired). |
|
|
|
Under
the revaluation model in IAS 16, the residual value is likely to be measured
on the same price basis as the carrying amount. |
|
|
■ |
Determine
the expected period of recovery through use and the expected date of sale or
abandonment. |
|
For
depreciable assets accounted for under the cost or revaluation model, the
expected period of recovery through use is normally the asset's useful life
as defined in IAS 16 or IAS 38. |
|
|
■ |
Determine
the tax consequences of recovery through use and the temporary differences
that will arise. |
|
The
future taxable amount will be the portion of the carrying amount expected to
be recovered through use. The tax consequences of recovering this amount
through the receipt of operating income (that is, through use) are determined
by considering any deductions available during the period of recovery. In a simple
situation, this might mean just deducting the expected tax depreciation
allowances (if any) from the amount expected to be recovered through use, to
determine the resulting temporary difference. |
|
|
|
Where
an asset is expected to be recovered through use without any disposal, it
might also be necessary to consider any capital gains tax consequences of
abandoning the asset and any resulting temporary differences. |
|
|
|
Where
an asset is expected to be held and used for a period before disposal, it
might be necessary to consider the income tax consequences of the disposal;
these could affect tax depreciation allowances relating to the carrying
amount that is expected to be recovered through use (for example, claw backs
of, or additional, tax depreciation allowances based on the disposal
proceeds, if applicable). |
|
|
■ |
Determine
the tax consequences of recovery through sale and the temporary differences
that will arise. |
|
The
future taxable amount will be the portion of the carrying amount expected to
be recovered through disposal. This will be the residual value or adjusted
residual value (see the second bullet point above). The tax consequences will
be the taxable gain arising on such disposal. |
|
|
■ |
Determine
which of the temporary differences arising from recovery through use and
through sale should be recognised. |
|
The
temporary differences arising from the analysis in the above two steps should
be considered separately (rather than determining a net temporary difference)
if the tax liability (or asset) arising from use and the tax asset (or
liability) arising from sale could not be offset. Such offset might not be
possible if the amounts are taxed in a different manner (for example, if
income tax losses cannot be fully offset against capital gains) or if they
are taxed at a different time (for example, a tax loss arising on the
reversal of a deductible temporary difference may not be offsettable against
taxable income arising from the earlier reversal of a taxable temporary
difference). |
13.172.5 The impact of the expected manner of
recovery and use of residual values is illustrated below: |
Example – Impact of expected
manner of recovery and residual values |
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An
entity acquired a property during a business combination before transition to
IFRS. The total fair value on acquisition of the property was C3.5m (that is,
'cost' to the entity); this was split between land of C1m and buildings of
C2.5m. |
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The
property was revalued on transition to IFRS. A revaluation uplift of C2m was
recognised; and the revalued amount of C5.5m is used as deemed cost. C800,000
of this revaluation uplift related to the land element, and C1.2m to the
building element. |
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There
are no tax deductions for use, but the total cost (plus an adjustment for
inflation) is deductible on sale. The tax rate is 30% throughout. |
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Deferred
tax on the land is calculated on a sale basis (see further para 13.213). But
the expected manner of recovery for the buildings will have a significant
impact on deferred tax. |
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Expected manner of recovery based on
use |
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If
the use basis alone is appropriate for the buildings: |
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13.173.1 Where a temporary difference arises
on initial recognition of an asset (other than on a business combination), and
the transaction does not affect accounting profit or taxable profit at the
time of the transaction, any deferred tax asset or liability in respect of
that temporary difference is not permitted to be recognised (see para 13.162
onwards). [IAS 12 paras 15, 24]. |
Example – Dual manner of
recovery and initial recognition exception |
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Using
the example in paragraph 13.172.5, but assuming that the property is
separately acquired. On revaluation, the property's residual value was
revisited; this resulted in changes to the carrying amounts of the land and
both elements of the buildings (that is, sale and use). |
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13.173.2 Inflation adjustments for tax
purposes can have a significant impact on the deferred tax calculation where
there is a dual manner of recovery expectation. Inflation adjustments are
generally an allowance relating to tax on capital gains (as opposed to income
tax); so any adjustments to the tax base relating to inflation on the
buildings are relevant only to the sale element of the buildings. Inflation
adjustments are not allocated to the element of the buildings that will be
used in the ongoing business. Instead, inflation adjustments on the
buildings' total cost are included in the calculation of deferred tax on the
sale element of the property. |
13.173.3 Because inflation adjustments are
effectively a revaluation of the tax base and arise after initial
recognition, they are not subject to the initial recognition exception. The
adjustments will increase the asset's tax base and thus reduce the taxable
temporary difference relating to the sale element of the buildings. |
13.173.3.1 The accounting implications of
revaluations for tax purposes are addressed further in paragraph 13.217
onwards. |
13.173.4 Where the use element of a
building is revalued downwards below its allocated original cost, this is
treated similarly to depreciation of the building (see para 13.212 onwards).
Where the initial recognition exception applies, an entity does not recognise
later changes in the unrecognised deferred tax liability as the asset is
depreciated or devalued. [IAS 12 para 22(c)]. The downward revaluation
is a reversal of the originating temporary difference arising on the asset's
initial recognition; so it is not recognised in the deferred tax calculation. |
13.173.5 Where the sale element of a building is revalued
downwards below its allocated original cost, this increases the deductible
temporary difference arising on the asset's initial recognition. It is not a
reversal of the originating temporary difference on initial recognition. The
downward revaluation is a new temporary difference and is recognised in the
deferred tax calculation. Any resulting deferred tax asset is recognised only
if it can be offset against a deferred tax liability on the related land, or
if the IAS 12 recognition criteria are met in some other way. |
13.174 The manner in which management
expects to recover an asset's carrying amount or settle a liability's carrying
amount might change. The change in the manner of recovery or settlement could
affect the deferred tax balances already recognised for that asset or
liability. The deferred tax balances should be remeasured using the tax rates
and tax bases that are consistent with the revised expected manner of
recovery. Any adjustments resulting from the remeasurement should be
recognised in profit or loss or if they relate to items previously recognised
outside profit or loss, they should be recognised in other comprehensive
income or directly in equity, as appropriate. [IAS 12 para 60(c)]. See the
example below and scenario 2 in paragraph 13.211. |
Example – Change in intention on
expected manner of recovery |
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An
entity acquired a piece of plant in a business combination on 1 January 20X6
at cost of C800,000. The plant is fully deductible in use at a rate of 25%
per annum. Accounting depreciation is charged at 10% per annum and the
residual value is nil. |
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If
the plant is sold, any chargeable gain will be taxable at 40%. The chargeable
gain will be the excess of proceeds over the original cost, adjusted for
inflation, less any deductions already claimed. |
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The
rate for income and capital gains tax is 40%. |
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Management
intended initially to recover the asset in full through use. At the end of
its life, the asset would be scrapped and there would be no tax consequences.
So deferred tax is calculated on a use basis as at 31 December 20X6. |
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At
the end of 20X7, the intention changes and the plant is expected to be sold.
deferred tax is calculated on a sale basis as at 31 December 20X7. |
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13.175 Measurement can be more complicated
when distributed and undistributed income are taxed at different rates. In
some jurisdictions, corporate taxes are payable at a higher or lower rate if
part or all of the net profit or retained earnings are distributed as
dividends. For example, undistributed profits might be taxed at 45% and
distributed profits at 30%. In such situations, deferred tax assets and
liabilities should be measured using the tax rates on undistributed profits
(45% in the example; that is, with no anticipation of future dividend). [IAS
12 para 52A]. |
13.175.1 IAS 10 prohibits accrual of a
dividend that is proposed or declared after the end of the reporting period
but before the financial statements are authorised for issue. Any tax
consequences of paying a dividend are recognised when the dividend is
subsequently declared and recognised as a liability. [IAS 12 para 52B].
Referring to the example above, assume that tax is recoverable if the entity
pays a dividend in the subsequent accounting period. In that case, the entity
recognises the refundable part of income taxes (45% – 30% = 15%) as a current
tax asset and a reduction of current tax expense when it recognises the
dividend. It continues to recognise deferred tax assets and liabilities using
the undistributed rate. |
13.175.2 In the example above, assume that the
tax rate for distributed profits had been higher than that for undistributed
profits, say 40% and 30% respectively. A current tax liability and increase
of current tax expense would be recognised based on the incremental tax rate
of 10% when the dividend was recognised. |
Example – Tax consequences of a
dividend |
A
dividend of C400 was declared in February 20X4, payable on 31 March 20X4.
Under IAS 10, no liability was recognised for the dividend at 31 December
20X3. The profit before tax was C2,000. The tax rate is 30% for undistributed
profits and 40% for distributed profits. Should the tax rate applicable to
distributed profits be applied for the portion of net profit corresponding to
dividends declared after the balance sheet date? |
No,
the tax rate applicable to undistributed profit should be applied; because
the tax rate for distributed profit is used only where the obligation to pay
dividends has been recognised. So the current income tax expense is C600
(C2,000 × 30%). |
During
20X4 a liability of C400 will be recognised for dividends payable. An
additional tax liability of C40 (C400 × 10%) is also recognised as a current
tax liability and an increase of the current income tax expense for 20X4. |
13.176 The incremental tax effect of the
dividend payment (that is, the additional tax @ 10%) is not recognised in
equity but in profit or loss, even though the dividend payment is charged to equity.
The tax consequences of dividends in such situations are more directly linked
to past transactions or events than to distributions to owners. [IAS 12 para
52B]. The past transactions and events in this instance are those that gave
rise to profits that were initially taxed at 30% and that were recognised in
profit or loss. |
13.177 In some jurisdictions, an entity
pays tax only when part or all of its net profits or retained earnings are
paid out as dividends. The tax consequences of such dividends are also
included as part of the tax charge in profit or loss for the same reasons.
The tax payable primarily relates to items recognised in profit or loss and
is not different from income taxes generally, even though it arises from
paying a dividend. But an exception is made when the amounts payable are in
effect a withholding tax for the benefit of the shareholders. The recipients
of the dividends would typically be entitled to a tax credit at least equal
to the tax paid by the entity. In this case, the subjects of taxation are the
shareholders and not the entity. So the tax is charged directly to equity as
part of the dividends, as explained further in paragraph 13.52. [IAS 12 paras
52B, 58, 65A]. Finally, the entity should disclose the tax that would result
if retained earnings were paid out as dividends (see para 13.304). [IAS 12
para 81(i)]. |
13.178 In its consolidated financial
statements, a parent that has a subsidiary operating in a dual-rate tax
jurisdiction, and which does not expect to re-invest the earnings
permanently, should measure the deferred taxes on temporary differences
relating to the investment in the subsidiary (that is, the outside basis
difference) at the rate that would apply to distributed profits. This is on
the basis that the undistributed earnings are expected to be recovered
through their distribution up the group and, under paragraph 51 of IAS 12,
the deferred tax should be measured in accordance with the expected manner of
recovery. |
13.179 Discounting of deferred tax assets
and liabilities is prohibited. [IAS 12 para 53]. Although the balance sheet
liability method can lead to the accumulation of large deferred tax assets
and liabilities over a prolonged period, discounting is not permitted. This
is because it is impracticable or complex to schedule the timing of reversal
of each temporary difference. [IAS 12 para 54]. |
13.180 But deferred taxes are discounted to
some extent, at least implicitly. Temporary differences are calculated by
reference to the carrying amount of an asset or liability. Where that
carrying amount is already calculated on a discounted basis, as in the case
of retirement benefit obligations (see IAS 19), the deferred tax asset or
liability is implicitly discounted. In such situations, temporary differences
are calculated using the (discounted) carrying amount of assets and
liabilities; the implicit effect of discounting should not be reversed. [IAS
12 para 55]. |
|
13.186
The tax status of an entity can change because of, say, public listing of its
equity instruments, restructuring of its equity or a change in tax
jurisdictions of its shareholders; the change could affect current tax assets
and liabilities as well as deferred tax assets and liabilities. The entity
could be taxed at a different rate in the future or it might lose or gain
various tax incentives that affect the tax bases of its assets and
liabilities. SIC 25 deals with the resulting change in accounting treatment. |
13.187
The current and deferred tax consequences of a change in tax status should be
dealt with in profit or loss; unless they relate to transactions and events
that result (in the same or a different period) in amounts recognised in
other comprehensive income, or in a direct charge or credit to the recognised
amount of equity. Tax consequences relating to amounts recognised in other
comprehensive income are recognised in other comprehensive income. Tax
consequences relating to direct changes in equity are charged or credited
directly to equity. [SIC 25 para 4]. |
13.188
An entity should identify the transactions and events that gave rise to
current and deferred tax balances. Where transactions and events are
recognised outside profit or loss (for example, asset revaluations),
additional current and deferred tax consequences should also be recognised
outside profit or loss. So the cumulative amount of tax recognised outside
profit or loss would be the same amount that would have been recognised if
the new tax status had applied previously. [SIC 25 para 8]. |
Example –
Change in tax status of an entity |
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On 31 August 20X2, entity A changed its status from one type of entity to
another. It became subject to a higher income tax rate (30%) than 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
also increased from 30% to 40%. 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.
|
13.189
The deferred tax effects of items recognised outside profit or loss might
themselves have been determined pro rata (as discussed in para 13.288.5); in
that case, a change in tax status also affects those transactions and events.
So the tax effects of the change in tax status should also be allocated in a
similar pro rata basis as adopted previously, unless the allocation can be
made on a more appropriate basis. |
13.190
The tax consequences of a change in tax status could affect deferred tax
balances that arose from a previous acquisition. Where the change in tax
status arose in the period after acquisition, the tax effects of the change
should be dealt with in profit or loss and not as an adjustment against
goodwill. But where an entity's tax status is changed because of its
acquisition, the tax effects of the business combination should be measured
in the acquirer's consolidated financial statements using the revised tax
laws and rates; also affecting goodwill. The accounting treatment in the
acquired entity's separate financial statements would be as discussed above. |
13.191
Tax relief for capital expenditure on plant and machinery is given in some
jurisdictions by way of capital allowances; these are a form of standardised
tax depreciation. Capital allowances are deducted from accounting profit to
arrive at taxable profit; the amount of depreciation charged in the financial
statements is disallowed in the tax computation. Depreciation for tax and
accounting purposes is the same over the asset's life, but differs from year
to year; this gives rise to temporary differences under IAS 12, because
of differences between the asset's carrying amount and tax base. The capital
allowances often depreciate the asset at a faster rate for tax purposes than
the rate of depreciation charged in the financial statements; this results in
carrying amounts in excess of tax base. The temporary differences created are
referred to as 'accelerated capital allowances'. The following example shows
the origination and reversal of a temporary difference on an asset qualifying
for capital allowances. |
Example –
Origination and reversal of temporary differences |
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An entity buys a machine in 20X1 for
C100,000. The asset is expected to be recovered fully through use over five
years. Depreciation is charged on a straight line basis for accounting
purposes and is C20,000 per annum. The rate of capital allowances is 25% per
annum on a reducing balance basis. The machine will be scrapped at the end of
its useful life; and the entity will use any unclaimed capital allowances
against future trading income. |
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The temporary difference will arise as follows:
|
13.191.1
A change in legislation can change the rates at which capital allowances are
granted; this could affect the tax base of the asset on which deferred tax is
measured. If an entity has taken into account the phasing of the reversal of
temporary differences when recognising deferred tax, it will need to take into
account changes in the timing of capital allowances. This change is accounted
for in the period when the change in rates was substantively enacted (see
further para 13.165). |
13.192
On a use basis, an asset's tax base represents the amount that will be
deductible for tax purposes against taxable income earned from its use in
future periods. For non-current assets (such as property, plant and
equipment), accounting depreciation is often recognised at a slower rate than
tax depreciation is claimed. As the asset is used, accelerated tax allowances
result in the asset's tax base being lower than its carrying amount. This
gives rise to a taxable temporary difference on which a deferred tax
liability is recognised. After all tax allowances have been claimed, the
deferred tax liability unwinds as the asset continues to be used and
depreciated for accounting purposes. |
13.193
In a number of jurisdictions, legislation has been amended so that tax
allowances can no longer be claimed for existing and new assets (that is, to
reduce the tax depreciation rate to zero). The removal of future tax
depreciation on an existing asset significantly reduces its tax base when
deferred tax is measured on a use basis, because future deductions are no
longer available. So the deferred tax liability for the existing asset
increases; and there is often a tax expense in the income statement in the
accounting period when substantive enactment occurs (see para 13.69). |
13.194 The accounting treatment of
government grants and their treatment for tax purposes can give rise to
temporary differences. Under IAS 20, government grants relating to assets are
presented in the balance sheet in one of two ways: by recognising the grant
as deferred income, or by deducting the grant in arriving at the asset's
carrying amount. Grants given as a contribution towards an asset's cost of
acquisition might be non-taxable; but some are in effect taxed by reducing
the cost of fixed assets for capital allowance purposes. Other grants (such
as revenue-based grants) are usually taxable on a cash received basis. |
13.195
If
the grant relating to an asset is not taxable, it has a tax base of nil and
gives rise to a deductible temporary difference on initial recognition. This
applies in two situations: first, where the grant is deducted from the
asset's carrying amount; in this case, a deductible temporary difference
arises, because the carrying amount is less than the asset's tax base which is
cost; and, secondly, where the grant is set up as deferred income; in this
case, the difference between the deferred income and its tax base of nil is a
deductible temporary difference. But a deferred tax asset cannot be
recognised because of the initial recognition exception noted in paragraph
13.162 and explained in paragraph 13.163.1. It would be irrational to
recognise the tax benefit associated with this temporary difference on
initial recognition when the income from the grant itself is recognised over
a number of periods. |
13.195.1 For grants related to assets, there
might be a temporary difference relating to the asset as well as the
deductible temporary difference relating to the grant. Where the grant is
deducted from the asset's cost, any taxable temporary difference relating to
the asset (for example, where tax deductions exceed accounting depreciation)
needs to be calculated on the difference between the following two amounts:
the asset's net book value excluding the grant (that is, gross cost less
accumulated depreciation calculated on the gross cost) and its tax written
down value also excluding the grant (that is, gross cost less tax allowances
claimed). |
13.196 Where a grant relating to an asset
is taxable, the nature of the deferred tax adjustment depends on how the
grant is treated for tax and accounting purposes. If the grant is deducted
from the cost of fixed assets for financial reporting and tax purposes, the
deferred tax calculation is relatively straightforward where capital
allowances for tax purposes are calculated on a reduced cost. If the grant is
treated as a deferred credit for financial reporting purposes, but deducted
against the asset's cost for capital allowance purposes, the deferred tax calculation
consists of two components: a deferred tax asset arises on the unamortised
grant; and this is netted off against the deferred tax liability arising on
the accelerated capital allowances. In practice, the balance on the deferred
income account reduces the asset's book value for the purpose of calculating
the temporary difference. |
Example – Capital allowances
restricted by amount of grant |
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An
entity buys a fixed asset for C120,000. The asset qualifies for a grant of
C20,000; the grant is treated in the financial statements as a deferred
credit. The asset has a useful economic life of five years. The entity claims
capital allowances (25% reducing balance), but these are restricted by the
amount of the grant. The temporary differences for deferred tax purposes are
calculated as follows: |
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|
13.197 Non-taxable revenue-based grants
have no deferred tax consequences, the amortised credit to the income
statement does not enter into the determination of taxable profits. If a
revenue-based grant is taxable, a temporary difference will arise between its
carrying amount and its tax base. Where a revenue-based grant is taxed on
receipt but amortised over a period for financial reporting purposes, it
gives rise to a deductible temporary difference; this is the difference
between the carrying amount of the unamortised balance and a nil tax base. A
deferred tax asset is recognised on the deductible temporary difference if it
is probable that the entity will earn sufficient taxable profit in later
accounting periods (as the deferred credit unwinds through amortisation) so
that it will benefit from the reduction in tax payments. A grant that was
taxed on receipt might become repayable, and the repayment qualifies for tax
relief in the year when the repayment is made; any deferred tax asset
previously carried forward should be immediately written off as part of the
tax charge. |
13.198 Many entities enter into lease and
hire purchase contracts giving them the right to use or purchase assets. In
many jurisdictions, a lease contract does not provide for legal title to the
leased asset to pass to the lessee. A hire purchase contract has similar
features to a lease, except that the hirer can acquire legal title by
exercising an option to purchase the asset on fulfilment of specified
conditions (often the payment of a number of instalments). |
13.199 Assets acquired under leases and
hire purchase contracts give rise to temporary differences between the
carrying amount and tax base. Where the asset is bought under a hire purchase
agreement, the hirer normally accounts for the fixed asset's acquisition and
can claim the capital allowances and therefore no particular deferred tax
problems arise. Similarly, no deferred tax problems normally arise in accounting
for an operating lease. The amount that is charged to rentals by the lessee
in its income statement is likely to be the same as the amount charged in
arriving at the taxable profit. An exception to this is where accrued rentals
give rise to short-term temporary differences. |
Finance leases – Lessees |
|
13.200
When
a lessee enters into a finance lease, an asset and a liability are recognised
in its balance sheet. On inception of the lease, this accounting has no
immediate tax impact in most territories. Both the tax base of the asset and
the tax base of the liability are nil, as generally tax deductions are
received when the lease payments are made. IAS 12 does not specifically address
the tax effects of finance leases and there are two principal approaches to
the deferred tax accounting. The choice of approach is a matter of accounting
policy, to be applied on a consistent basis. |
13.200.1 One approach considers the lease as a
single transaction in which the asset and liability are integrally linked, so
there is no net temporary difference at inception. Subsequently, as the
settlement of the liability and the amortisation of the leased asset diverge,
there will be a net temporary difference on which deferred tax is recognised.
A deferred tax asset would be subject to IAS 12 recognition criteria. |
13.200.2 The second approach, which was
developed by the Interpretations Committee in April 2005, considers the asset
and the liability separately. The temporary difference on each item (the
difference between the carrying amount and a tax base of nil) does not give
rise to deferred tax since the initial recognition exception applies. |
13.200.3 Additionally some take the view that
the initial recognition exception does not apply under the second approach.
Paragraphs 15 and 24 of IAS 12 refer to 'the initial recognition of an asset or liability'; in this case, an asset and a liability are recognised at the
same time, with equal and opposite temporary differences. This approach
results in a similar net deferred tax amount recognised in the balance sheet
to that recognised under the first approach but disclosures are different as
both the deferred tax asset and deferred tax liability should be presented in
the notes at their gross amounts. |
13.200.4 The Interpretations Committee noted
that there is diversity in practice in applying the requirements of IAS 12 to
assets and liabilities arising from finance leases and agreed in June 2005
not to develop any guidance because the issue fell directly within the scope
of the Board's short-term convergence project on income taxes. However, this
project was suspended and there have been no further developments. |
13.200.5 Subsequent changes to the finance
lease asset and liability will need to be considered whenever the initial
recognition exception applies. Management will need to analyse the movements
in the temporary differences to see if they are due to subsequent changes in
the amount that gave rise to the temporary differences on initial recognition
or whether they are new temporary differences on which deferred tax is
recognised (see para 13.164 onwards). |
13.200.6 The accounting implications of the
two main approaches for determining deferred tax on finance lease in the
lessee's financial statements are shown in the following example. |
|
Finance leases – Lessors |
13.201 When a lessor enters into a finance lease, the
leased asset is derecognised and the amount due from the lessee under the
finance lease is recognised in its balance sheet as a receivable at an amount
equal to the lessor's net investment in the lease, with any gain or loss
recognised in profit or loss. In many jurisdictions, tax deductions
continue to be given for the leased asset with the lease payments taxed upon
receipt. |
13.201.1 The derecognition of the leased asset
and the recognition of the finance lease receivable should be considered as a
single transaction in which the finance lease receivable and the leased asset
are linked. At inception the tax base of the leased asset might be equal to
or different from the carrying amount of the lease receivable. Deferred tax
is recognised to the extent there is a temporary difference. Subsequently,
the temporary difference will change or arise and the corresponding deferred
tax should be recognised. |
13.201.2 An alternative in which the lessor
considers each item separately and applies the initial recognition exception
to the initial temporary difference arising on the lease receivable is not
acceptable. The substance of this transaction is the exchange of one
asset (the fixed asset) for consideration (lease receivable) with any
difference recognised in profit or loss and so the initial recognition
exception would not apply. |
13.201.3 The accounting implications of the
approach for determining deferred tax on a finance lease in the lessor's
financial statements are shown in the following example. |
|
13.202 Decommissioning costs arise in a
number of industries, such as the electricity and nuclear industries;
abandonment costs in the mining and extractive industries; and environmental
clean-up costs in a number of industries. IAS 37 requires management to
recognise a provision at the outset for the obligation to decommission an
asset and to capitalise a corresponding decommissioning asset in addition to
the underlying asset. The decommissioning asset is depreciated over the life
of the underlying asset. The accounting for decommissioning obligations (also
referred to as 'asset retirement obligations') and the related asset is
discussed in chapter 21. In many jurisdictions, this will have deferred tax
implications. |
13.202.1 Similar to finance lessees, the
initial recognition of the asset and the obligation has no immediate tax
impact in most territories. Both the tax base of the asset and the tax base
of the liability are nil, because in many jurisdictions the tax deduction for
the decommissioning cost is only available when an entity incurs the
expenditure. We consider that there are two principal approaches for the
deferred tax accounting. The choice of approach is a matter of accounting
policy, to be applied on a consistent basis. Under both approaches, the
deferred tax accounting applies to discounted carrying amounts for assets and
liabilities; so, on initial recognition, the tax deductions are based on the
discounted amounts, rather than the gross amounts payable in the future. IAS
12 focuses on the future tax consequences of recovering an asset or settling
a liability at its carrying amount, which is the discounted amount (see paras
13.113 and 13.121). |
13.202.2 One approach considers that the
decommissioning assets and liabilities are integrally linked and should be
viewed on a net basis. No deferred tax arises at inception, but a temporary
difference arises subsequently as the asset carrying amount decreases due to
its depreciation and the liability carrying amount increases due to the
unwinding of the discount. Deferred tax would be recognized on this temporary
difference. Any deferred tax asset would be recognised subject to IAS 12
recognition criteria. |
13.202.3 The alternative approach allocates
the future tax deductions to the liability. The asset's tax base is nil
because there are no associated tax deductions; so there is a temporary
difference equal to the asset's carrying amount on initial recognition. The
liability's tax base (that is, carrying amount less future deductions) is
also nil; so there is a temporary difference equal to the liability's
carrying amount on initial recognition. For decommissioning obligations (and
related assets) arising outside a business combination and which do not
affect accounting profit or taxable profit on initial recognition, these
temporary differences will be covered by the initial recognition exception
(see para 13.162); so no deferred tax arises on initial recognition. |
13.202.4 For later changes to decommissioning
assets and liabilities, management will need to determine how to account for
them under the relevant approach. The two approaches will not necessarily
give the same results, due to the intricacies of the initial recognition
exception. In particular, where the initial recognition exception applies,
management will need to analyse the movements in the temporary difference;
this is to see if they are due to reversals of the amount that gave rise to
the temporary difference or whether they are new temporary differences on
which deferred tax is recognised (see para 13.164 onwards). |
13.202.5 The accounting implications of the
two approaches for determining deferred tax on decommissioning assets and
liabilities are shown in the following example. |
Example – Deferred tax on
decommissioning asset and obligation |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
An entity will incur
decommissioning costs of C1m relating to its plant in 3 years' time. The
plant was not acquired as part of a business combination. The applicable
discount rate is 8% and the tax rate is 30%.
|
13.202.6 Similar to approach one, the above
alternative assumes the application of the initial recognition exception. There
is an additional view that the initial recognition exception does not apply
under approach 2. This is based on the fact that paragraphs 15 and 24 of IAS
12 refer to 'the initial recognition of an asset or liability'; in this case, an asset and a liability are recognised at the
same time, with equal and opposite temporary differences. Under this view, a
deferred tax liability would be recognised in respect of the taxable
temporary difference on the decommissioning asset; and (subject to IAS 12's
recognition criteria) a deferred tax asset would be recognised in respect of
the deductible temporary difference on the decommissioning liability.
Subsequent changes to the decommissioning asset and liability would also have
a deferred tax impact, because the initial recognition exception has not been
applied. Given that different approaches are acceptable, an entity should
make clear its accounting policy for deferred tax on decommissioning
obligations if this is material. This approach results in a similar net deferred
tax amount recognised in the balance sheet than under approach 1 but
disclosures are different since under this approach the deferred tax asset
and deferred tax liability should be presented in the notes at their gross
amounts. |
13.202.7 In some situations, tax deductions
are available on some (but not all) of the decommissioning expenditure.
Management needs to understand the basis for the tax deductions in order to
determine the deferred tax implications. If the tax deduction relates to (or
is a proxy for) specific types of expenditure, it might be necessary to treat
this expenditure as a separate component of the decommissioning asset and
liability for the purpose of allocating the deductions. There might be no
relationship to specific expenditure, but tax deductions are given instead as
a percentage of total expenditure; in this case, the tax base is determined
using that percentage figure. |
13.203 Accounting for pension costs and
other post-retirement benefits gives rise to a temporary difference for
deferred tax purposes. Tax relief on employers' pension contributions is
often given in the period when they are paid, rather than when the costs are
recognised in the financial statements, with the possible exception of some
large contributions, where tax relief might be spread over a period. In an
unfunded plan, and in the case of provisions for unfunded benefits (such as
post-retirement healthcare), the tax relief is often given when the pensions
or other benefits are paid. In the financial statements, on the other hand,
pension costs and other post-retirement benefits are recognised under IAS 19
as service is provided by the employee. |
13.203.1 A deductible temporary difference
arises between the carrying amount of the net defined benefit liability and
its tax base; the tax base is usually nil, unless tax relief on contributions
paid is received in a period subsequent to payment. In most cases, this
deductible temporary difference will reverse, but it might take a long time.
This is particularly relevant for defined benefit pension plans, unfunded
pensions and post-retirement benefit plans. A deferred tax asset is
recognised under IAS 12 for these temporary differences if it is recoverable. |
13.203.2 A deferred tax asset should be
recognised to the extent that it is probable that taxable profit will be
available against which the deductible temporary difference can be utilised.
[IAS 12 para 24]. The question arises whether deferred tax liabilities resulting
from other temporary differences can be taken into account in determining the
recoverability of the deferred tax asset relating to pensions. Future
reversals of existing taxable temporary differences are dealt with in
paragraph 13.134 onwards. A deferred tax asset for a pension obligation
cannot be recognised simply because there are sufficient taxable temporary
differences at the balance sheet date; the timing of reversal of the taxable
temporary differences also needs to be taken into account. |
13.203.3
Management
might need to schedule the reversal of temporary differences to justify
recognising the deferred tax asset. In many jurisdictions, the entity has to
have plans in place to eliminate the pension deficit – simply making the
normal contributions will not eliminate the deficit. Recognising a tax asset
in respect of the pension obligations should take into account the expected
timing of regular and one-off contributions necessary to eliminate the
deficit. |
13.203.4 If the entity has incurred losses in
the past and also in the current period, this could impact the recognition of
tax assets. For example, if the entity continues to make losses in the next
few years but the amount of the reversal of the existing taxable temporary
differences in those years is not enough to create taxable profits (with the
effect that any pension contributions made in those years simply add to the
tax loss), the deferred tax asset might not be recoverable. For an assessment
of the likelihood that taxable profits will be available when there has been
a history of trading losses, see paragraph 13.144 onwards. |
13.203.5 Where a net defined benefit asset
arises (for example, in respect of a surplus in the pension plan), a taxable
temporary difference will arise and a deferred tax liability will be
recognised. |
13.203.5.1 Guidance on how entities should
assess the recoverability of a defined benefit pension surplus is given in
IFRIC 14 (see further chapter 11). If a pension surplus refund is subject to
a tax other than income tax, an entity measures the amount of the refund net
of the tax. [IFRIC 14 para 13]. But if a surplus refund is subject to income
tax, the deferred tax liability relating to the pension surplus is determined
under IAS 12 and recognised separately from the pension asset. |
13.203.5.1.1 IAS 1 requires information to be
disclosed about key sources of estimation uncertainty; IFRIC 14 states that
such information might include restrictions on the current realisability of
the surplus; it might also include the basis used to determine the amount of
the economic benefit available. The manner of recovery could also impact
deferred tax accounting in jurisdictions where refunds of surplus are subject
to income tax at a different rate from the normal corporate income tax rate. |
13.203.5.2 The right to a refund or the right
to a reduction of future contributions needs to exist in order to recognise a
pension asset; but IAS 12 requires the entity to consider its expected manner
of recovery in determining the relevant tax rate and tax base for calculating
the deferred tax liability relating to the pension asset. So the entity could
have a right to a refund from
the plan (and immediately pass the IFRIC 14 test), but it might expect to realise the economic benefits
of the surplus through reductions in future contributions. For instance, this
might be the case where a lower tax rate applies to reduced contributions
than to a refund. |
13.203.5.3 Where the entity expects to recover
the surplus through reduced contributions, it will need to confirm that it
has sufficient capacity to reduce future contributions over the scheme's
remaining life. In some cases, the entity might expect to recover the pension
asset in part through reduced contributions and in part through a refund; the
appropriate tax rates and tax bases should be used to determine the deferred
tax liability for each part of the expected recovery. |
13.203.6 IAS 19 requires actuarial gains and
losses to be recognised as they arise, outside profit or loss. Pension cost
accounting might give rise to current tax (tax relief on contributions) and
deferred tax (on the temporary difference between the net defined benefit
asset or liability and its tax base). There is no direct relationship between
the components of pension cost reported in the performance statements and the
contributions and benefits paid in a period; so current and deferred tax need
to be allocated between the performance statements. |
13.203.7 Current and deferred tax should be
recognised outside profit or loss if the tax relates to items that are
recognised outside profit or loss. [IAS 12 para 61A]. It can sometimes be
difficult to determine the amount of current and deferred tax that relates to
items recognised outside profit or loss. In this case, current and deferred
tax should be allocated on a reasonable pro
rata basis, unless another method of allocation is more
appropriate in the circumstances. [IAS 12 para 63]. |
13.203.8 IAS 12 does not specify a method of
allocating current and deferred tax relating to post-retirement benefits. It
is acceptable for tax relief on pension contributions to be allocated so that
the contributions cover profit and loss items first and actuarial losses
second (unless some other allocation is more appropriate). If contributions
exceed those items, tax relief relating to the excess is credited in profit
or loss (unless it is more appropriate to allocate it to other comprehensive
income). Where a special contribution is made to fund a deficit arising from
an identifiable cause (such as an actuarial loss), an alternative method of
allocation might be appropriate; in that case, the tax relief should be
allocated to other comprehensive income. But, if there is no clear link
between the special contribution and the items recognised in the performance
statements, the first method shown above should be used. |
13.203.9 The allocation of current and
deferred tax is illustrated in the following simplified examples, which show
the movements in the pension balance during the year. A tax rate of 30% is
assumed. |
Example 1 – Defined benefit asset
with an actuarial loss |
|
|
|
Change in defined |
Current tax |
Deferred |
|
|
C |
C |
C |
Brought
forward |
120 |
|
(36) |
|
|||
Contributions |
70 |
(21) |
|
|
|||
Income
statement – net pension cost |
(60) |
18 |
– |
Other
comprehensive income – actuarial loss |
(20) |
3 |
3 |
|
|||
|
(80) |
21 |
3 |
|
|||
Carried
forward |
110 |
– |
(33) |
|
|||
|
|||
Current
tax relief of C21 arises on contributions paid of C70. This is allocated
first to cover pension cost of C60 reported in the income statement
(resulting in a credit of C18 in the tax charge). The balance of the
contributions paid of C10 is allocated to the actuarial loss; hence, current
tax of C3 is credited in other comprehensive income. Deferred tax of C3 is
attributable to the balance of the actuarial loss of C10; this is credited in
other comprehensive income. |
Example 2 – Defined benefit liability
with an actuarial loss |
|||
|
|
|
|
|
Change in defined |
Current tax |
Deferred |
|
C |
C |
C |
Brought
forward |
(200) |
|
60 |
|
|||
Contributions
paid |
80 |
(24) |
|
|
|||
Income
statement – net pension cost |
(70) |
21 |
– |
Other
comprehensive income – actuarial loss |
(20) |
3 |
3 |
|
|||
|
(90) |
24 |
3 |
|
|||
Carried
forward |
(210) |
– |
63 |
|
|||
|
|||
Current
tax relief of C24 arises on contributions paid of C80. This is allocated
first to cover pension cost of C70 reported in the income statement
(resulting in a credit of C21 in the tax charge). The balance of the
contributions paid of C10 is allocated to the actuarial loss; hence, current
tax of C3 is credited in other comprehensive income. Deferred tax of C3 is
attributable to the balance of the actuarial loss of C10; this is credited in
other comprehensive income. |
Example 3 – Defined benefit liability
with an actuarial gain |
|||
|
|||
If,
in the above example, there was an actuarial gain rather than an actuarial
loss, the whole of the current tax relief of C24 would be credited in the
income statement. None of the current tax can be allocated to other
comprehensive income because there is no debit in other comprehensive income.
Thus, the initial C21 (30% of C70) is allocated to the income statement, nil
is allocated to other comprehensive income, and the excess of C3 is allocated
to the income statement. Deferred tax attributable to the actuarial gain
would be charged in other comprehensive income, as shown below. |
|||
|
|
|
|
|
Change in defined benefit liability |
Current tax relief (30%) |
Deferred tax asset (30%) |
|
C |
C |
C |
Brought
forward |
(200) |
|
60 |
|
|||
Contributions |
80 |
(24) |
|
|
|||
Income
statement – net pension cost |
(70) |
24 |
(3) |
Other
comprehensive income – actuarial gain |
20 |
– |
(6) |
|
|||
|
(50) |
24 |
(9) |
|
|||
Carried
forward |
(170) |
– |
51 |
|
13.203.10 The allocation is more complicated
if a large contribution is made in the period (for example, to reduce an existing
pension deficit). Assume that, in example 2 above, an additional contribution
of C100 was paid and tax deductions were received in the period. |
Example – Receipt of tax relief on
additional contribution |
|||
|
|
|
|
|
Change in defined benefit liability |
Current tax relief (30%) |
Deferred tax asset (30%) |
|
C |
C |
C |
Brought
forward |
(200) |
|
60 |
|
|||
'Normal'
contributions paid |
80 |
(24) |
|
Additional
contributions paid |
100 |
(30) |
|
|
|||
Income
statement – net pension cost |
(70) |
21 |
– |
Other
comprehensive income: |
|
|
|
Current
year actuarial loss |
(20) |
3 |
3 |
Relating
to previous actuarial losses |
– |
30 |
(30) |
|
|||
|
(90) |
54 |
(27) |
|
|||
Carried
forward |
(110) |
– |
33 |
|
|||
|
|||
If
tax deductions on the normal contribution of C80 and the additional
contribution of C100 are all received in the period (that is, no spreading of
deductions), the current tax relief of C24 on the 'normal' contributions is
allocated as follows: first, against the pension cost in the income
statement; and the balance is allocated against the actuarial loss. |
|||
|
|||
Further
current tax deductions of C30 are received on the additional contribution. So
there is an excess deduction to be considered. Under the allocation hierarchy
in paragraph 13.203.7, this excess would go to the income statement, unless
another method of allocation is more appropriate. The treatment of the
deferred tax in relation to the additional contribution will depend on the
reason for making that contribution. In this case, it is likely that the
additional contribution is funding past actuarial losses. So it is necessary
to determine where the underlying items – giving rise to the deficit that is
being funded – were originally recognised; this is done by backwards-tracing
the items in the performance statement. Thus the tax movement is allocated to
other comprehensive income, as illustrated above. |
|||
|
|||
But
if the additional contribution was made to fund current year actuarial losses
as well as previous actuarial losses, C3 would be allocated to other
comprehensive income (to cover the C10 of actuarial loss made in the current
year not yet tax affected). There is an excess deduction of C27 after
allocating to the net pension cost in the income statement and any actuarial
losses in other comprehensive income. Again, this should be allocated to other
comprehensive income if the contribution was made to fund the accumulated
actuarial losses. Notably, this has the same outcome as the allocation method
illustrated in the table above. An element of judgement will be needed when
considering why the additional contribution was made. |
|||
|
|||
It
will be necessary to backwards-trace further if the deductions received in
the year exceed the current and prior year actuarial losses that had not been
allocated current tax deductions. If it can be established (using
backwards-tracing) that the tax deductions relate to prior year actuarial
losses, the excess tax deductions will be recognised in other comprehensive
income; and there will be a corresponding reversal of deferred tax (as shown
above). |
|||
|
|||
Just
because a pension liability recognised on transition to IFRS was charged to
equity, current tax deductions or subsequent changes in any related deferred
tax asset will not necessarily also be recognised in equity (see further para
13.288.7). |
13.203.11 If tax deductions are spread across
more than one accounting period, this will impact on the deferred tax
calculation because the deduction received in the current year will be lower.
Assume that, in the example above, the tax relief for the additional
contribution of C100 is spread over three periods; that is, only one-third of
the relief on the additional contribution is received in the current period. |
Example – Spreading of tax relief on
additional contribution |
|||
|
|
|
|
|
Change in defined benefit liability |
Current tax relief (30%) |
Deferred tax asset (30%) |
|
C |
C |
C |
Brought
forward |
(200) |
|
60 |
|
|||
'Normal'
contributions paid |
80 |
(24) |
|
Additional
contributions paid |
100 |
(10) |
|
|
|||
Income
statement – net pension cost |
(70) |
21 |
– |
Other
comprehensive income: |
|
|
|
Current
year actuarial loss |
(20) |
3 |
3 |
Relating
to previous actuarial losses |
– |
10 |
(10) |
|
|||
|
(90) |
34 |
(7) |
|
|||
Carried
forward |
(110) |
– |
53 |
|
|||
|
|||
Note
that the deferred tax balance at the period end is not 30% of the pension
balance. |
|||
|
|||
Assuming
that a deferred tax asset has been recognised in relation to the pension
liability at the beginning of the period, part of this deferred tax asset
reverses as a result of the tax deductions received in the period. But, if
the contributions paid do not receive tax relief in the period, a corresponding
portion of the deferred tax asset on the opening pension liability will
continue to be carried forward (assuming the recognition criteria are met);
and this portion will reverse in the future when the tax deductions are
received. |
|||
|
|||
The
deferred tax asset can be summarised as: |
|||
|
|||
|
C |
||
On
pension liability at year end (110 × 30%) |
33 |
||
Outstanding
deductions on contributions made (100 × 30% × 2/3) |
20 |
||
|
|
||
Total
deferred tax asset |
53 |
||
|
|
||
|
|||
In
terms of the pension liability's tax base, the tax base of a liability is its
carrying amount less any amount that will be deductible for tax in future
periods (see para 13.122). So the deductible temporary difference will be
equal to the future deductible amounts. If, in arriving at the pension
liability of C110, contributions of C100 had been paid in the period on which
tax relief is spread over 3 years (with tax relief on C33 received in the
current year), the tax base will be the carrying amount of the liability
(C110) less future deductible amounts (C110 + C67 = C177) = a tax base of –
C67. In other words, the carrying amount in the balance sheet is a liability;
but the tax base is an asset (of C67), representing the deductions receivable
in the future for payments made and payments to be made. This gives a
deductible temporary difference of C110 – (– C67) = C177 (that is, equal to
the future deductible amounts). |
|||
|
|||
A
deferred tax asset of C177 × 30% = C53 should be recognised to the extent
that it is probable that the deferred tax asset will be recovered. |
13.204 IFRS 2 requires entities to
recognise the cost of equity-settled share-based awards to employees on the
basis of the fair value of the award at the date of grant, spread over the
vesting period (see further chapter 12). But any deduction available for tax purposes
in the case of equity-settled transactions often does not correspond to the
amount charged to profit or loss under IFRS 2. |
13.205 A deductible temporary difference
arises between the tax base of the remuneration expense recognised in profit or
loss (that is, the amount permitted by the tax authorities as a deduction in
future periods) and its carrying amount of nil on the balance sheet (the
credit is against retained earnings). This gives rise to a deferred tax
asset. The calculation of the deferred tax asset is complicated by the fact
that the future tax deduction will be based on the share price at the date of
exercise; and the price is not known until that date. So the amount of the
tax deduction to be obtained in the future (that is, the tax base) should be
estimated on the basis of the information available at the end of the period.
Thus, the measurement of the deductible temporary difference should be based
on the entity's share price at the balance sheet date. [IAS 12 para 68B]. |
13.205.1 Management will estimate the future
tax deductions available based on the share options' intrinsic value at the
balance sheet date. The estimate of the tax deduction should be based on the
number of options expected to be exercised (as opposed to the number of
options outstanding at the balance sheet date); this will give the best
estimate of the amount of the future tax deduction. |
13.206 The amount of the future tax
deduction (calculated as set out above) is unlikely to be the same as the remuneration
expense recognised in profit or loss and credited to equity. If the amount of
the estimated future tax deduction exceeds the cumulative amount of the
remuneration expense, this indicates that the tax deduction relates to an
equity item as well as the remuneration expense. In that situation, the
excess deferred tax should be recognised in equity under the principle that
the tax should follow the item. This also applies to any excess current tax
that arises in the year of exercise. [IAS 12 para 68C]. (See further para
13.288.2.) |
13.206.1 The accounting for excess deferred
tax on an equity-settled share-based award is illustrated in the following
example. |
Example –
Excess deferred tax on an
equity-settled share-based award |
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On
1 January 20X3, 100,000 options are issued with a fair value of C360,000. The
vesting period is 3 years and all options are expected to be exercised. All
of the share options are exercised in year 4. The tax rate is 30%. The
intrinsic value of the share options (that is, market value of the underlying
shares less exercise price) at the end of years 1, 2 and 3 and at the date of
exercise in year 4 is C330,000, C300,000, C380,000 and C400,000,
respectively. |
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The
total staff cost recognised in each of the first 3 years is C120,000. At the
end of the first year, the estimated corresponding tax benefit available in
the future is C33,000 (30% × ⅓ × C330,000); this is calculated
using the intrinsic value at the balance sheet date. The gross amount giving
rise to the tax benefit is C110,000, which is less than the cumulative
remuneration expense of C120,000 recognised to date; so the entire amount of
the estimated future tax benefit of C33,000 is recognised in the income
statement. |
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At
the end of year 2, the cumulative amount of the estimated tax benefit
available in the future is C60,000 (30% × ⅔ × C300,000). The gross amount giving
rise to the tax benefit of C200,000 is less than the cumulative remuneration
expense of C240,000 recognised to date; so the entire amount is recognised
through the income statement. The amount recognised in year 2's income
statement is C27,000 (C60,000 − C33,000). |
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At the end of year 3, the
cumulative amount of the estimated tax benefit available in the future is
C114,000 (30% × C380,000). The amount giving rise to the benefit of C380,000
exceeds the cumulative remuneration expense of C360,000 recognised to date;
so the excess expected future tax benefit of C6,000 (30% × C20,000) is
recognised in equity. The cumulative position at the end of year 3 is shown
below.
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13.206.4 The deferred tax in respect of an
equity-settled share-based payment award should be calculated for each
separate award (or tranche of an award where some options have been exercised
and deferred tax is being reversed) and not for all awards in total. Each
separate award has its own tax base (that is, the tax deductions that will be
received on exercise of the options). This tax base is compared to the
carrying amount of each separate award to calculate the temporary difference;
and deferred tax should be recognised, where appropriate. The movement on the
deferred tax for each grant is allocated between profit or loss and equity
based on the cumulative share-based payment charge recognised in profit or
loss (as outlined in para 13.206). An appropriate method (for example,
weighted average or FIFO) should be used on a consistent basis to identify
options that have been exercised or settled. |
13.206.5 When the tax is allocated between
profit or loss and equity, each award should be considered separately. The
allocation should not be done on a total basis, because this could mask
underlying movements in relation to specific awards. |
Example – Allocation of deferred tax
movements on separate awards |
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An
entity has two share-based payment awards. Tax deductions will be received
based on the market value of the shares at the date of exercise. The
cumulative share-based payment charge under IFRS 2 and the expected tax
deductions (measured using the share price at the balance sheet date) for
each scheme are given below. |
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It
is assumed that the recognition criteria for deferred tax assets are met and
the tax rate is 30%. |
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Award 1 |
Award 2 |
Total |
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C'000 |
C'000 |
C'000 |
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Cumulative
charge (income statement) |
100 |
100 |
200 |
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Expected
tax deduction |
160 |
80 |
240 |
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Deferred
tax asset (30% of expected tax deduction) |
48 |
24 |
72 |
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Allocation performed on a grant by
grant basis |
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For Award 1, C100 of the tax
deduction relates to the charge recognised in the income statement. The
remaining C60 of tax deduction is an equity item.
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13.206.6 The allocation between profit or
loss and equity is also relevant when a deferred tax asset in respect of a
share-based payment is reduced because the share price has fallen. When the
deferred tax asset has a corresponding portion of tax credit that was
previously recorded in equity (under para 68C of IAS 12), the reduction of
the deferred tax asset needs to be analysed to determine how much of the
reduction should be recognised in equity. The reversal of deferred tax assets
and liabilities should be recognised in the statement in which the initial
item was recognised (see para 13.288). So, if the share-based payment's tax
base reduces, the deferred tax balance needs to be analysed to determine the
extent of reversal (if any) from equity. |
Example – Allocation of deferred tax
when share price has fallen |
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An
equity-settled share-based payment award for employees vests after 4 years of
service. An award is made for 2,000 shares. The fair value of the award at
the date of grant is C6 (per share). |
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The entity expects all the shares
in the scheme to vest. So, under IFRS 2, the accounting expense is 2,000
shares × C6 = C12,000 × ¼ = C3,000 per annum for 4 years. At the end of year
2, the cumulative IFRS 2 charge is C6,000. The share price at the end of year
2 is C10, but it drops to C7 by the end of year 3. The position at the end of
years 2 and 3 is summarised below.
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The movement in deferred tax in
year 3 is analysed as follows:
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There
is a deferred tax credit of C900,000 in the income statement reflecting the
deferred tax on the share-based payment charge of C3,000,000 in the period. |
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Where the share-based payment's
tax base reduces, but does not fall below the cumulative accounting charge
under IFRS 2, the excess tax deduction is reduced; so it is recognised in
equity. The deferred tax charge of C750,000 in equity comprises:
If the share-based payment's tax
base falls below the cumulative accounting charge, the full amount that was
previously recognised in equity will be fully reversed; the movement in the
income statement will comprise a tax credit in respect of the share-based
payment charge and a charge in respect of any reduction in the tax base below
the cumulative accounting charge. |
13.206.7 In jurisdictions where a tax
deduction is given when the share options are exercised, there might be no
tax deduction where share options lapse after the vesting date and are not
exercised. But the share-based payment charge in the income statement for
options that lapse after vesting is not reversed. [IFRS 2 para 23]. So, where
share options have lapsed after vesting and no tax deduction is
available, the total current tax credit in the income statement will be less
than the share-based payment charge tax-effected at the standard rate of tax.
This reflects the fact that part of the share-based payment charge has not
received a tax deduction because the related share options lapsed after
vesting. |
Example – Share options lapse after
vesting |
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This
example uses the facts in the example in paragraph 13.206.2, but assumes that
some share options lapse after vesting. |
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On
1 January 20X3, 100,000 options are issued with a fair value of C360,000. The
vesting period is 3 years and all options are initially expected to be
exercised. The tax rate is 30%. The intrinsic value of the 100,000 share
options (that is, market value of the underlying shares less exercise price)
at the date of exercise in year 4 is C400,000. (At the end of years 1, 2 and
3 it is C330,000, C300,000 and C380,000 respectively.) |
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During years 1, 2 and 3, the
expected tax benefit is recognised as explained in the example in paragraph
13.206.2. The cumulative position at the end of year 3 is shown below.
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In
year 4, 85,000 of the share options are exercised and 15,000 lapse without
being exercised. The actual current tax deduction obtained is C102,000 (30% ×
C400,000 total intrinsic value at the date of exercise × 85/100). |
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The
accounting charge in the income statement relating to the 85,000 options that
are exercised is C306,000 (360,000 × 85/100); so the tax effect relating to
this charge is C91,800 (306,000 × 30%). |
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The
deferred tax asset of C114,000 at the end of year 3 is reversed through the
income statement and equity. The double entry is as follows: |
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The overall position is shown
below:
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In
the original example, when all the options were exercised, the overall tax
position in year 4 was as follows: nil in the income statement (comprising a
current tax credit of C108,000 offset by a deferred tax charge of C108,000);
and a net tax credit of C6,000 to equity because of the increase in share
price since the end of year 3 (comprising a current tax credit of C12,000
offset by a deferred tax charge of C6,000). |
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Where only 85,000 options are
exercised and the remaining options lapse, the overall tax position in year 4
is:
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13.206.8 In some jurisdictions, a tax
deduction in respect of a share-based payment award is received upfront or
part way through the vesting period. The receipt of the tax deduction
crystallises the amount; so re-measurement based on share price would not
apply after this point, but there are implications for the deferred tax
accounting. IAS 12 does not specifically address the situation where the tax
deduction is received before the related accounting expense; but similar
logic to that in IAS 12 applies. [IFRS 2 paras BC312 to BC314]. The receipt
of an upfront tax deduction in respect of share-based payments gives rise to
a deferred tax liability. [IFRS 2 para BC314]. |
Example – Tax deduction received
upfront |
An
equity-settled share-based payment award for employees vests after 3 years of
service. An award is made for 1,000 shares. The fair value of the award at
the date of grant is C120 (per share). |
The
entity expects all the shares in the scheme to vest. So the accounting
expense under IFRS 2 is 1,000 shares × 120 = C120,000 × ⅓ = C40,000 per annum for 3 years. |
Under
the tax rules of the entity's jurisdiction, the entity receives a tax deduction
upfront (at 30%) for the total number of options based on an amount (C140)
that exceeds the fair value of the award at the date of grant. So the amount
deductible for tax purposes is C140,000 (1,000 × 140). |
A
deferred tax liability of C42,000 (140,000 × 30%) is recognised on the tax
deduction received upfront; this is unwound over the 3-year vesting period. |
A
deferred tax credit of C12,000 (40,000 × 30%) is recognised in the income
statement each year, in line with the IFRS 2 charge; so a total of C36,000
tax credit is recognised in the income statement. |
The
excess tax deduction of C6,000 (42,000 – 36,000) is recognised in equity. In
our view, this amount is also unwound over the 3-year vesting period (that
is, a tax credit of C2,000 per annum is recognised in equity); this is
consistent with the unwinding of the deferred tax credit recognised in the
income statement. |
13.206.9 In group situations, some parent
entities may recharge their subsidiaries where those subsidiary entities'
employees participate in the parent entity's share option schemes. The
accounting for share-based payments in a group situation is dealt with in
chapter 12. Tax accounting issues arise in the group if the subsidiary
receives a tax deduction on the recharge and not when the employee exercises
the options. If the tax relief on the recharge is clearly linked to the
share-based payment (that is, it is based on an amount derived from the share-based
payment, such as the option's intrinsic value or fair value, and there is no
other tax relief for the share-based payment), our view is that the tax
relief in the consolidated financial statements is treated in accordance with
paragraphs 68A to 68C of IAS 12. So, where the tax deductible amount is no
greater than the share-based payment expense, the tax relief is reflected in
the consolidated income statement. Any excess of the tax relief over the
amount of the tax effect of the IFRS 2 charge is reflected in equity. If the
recharge is not clearly linked to the share-based payment, the tax deduction
on the recharge should be credited to the consolidated income statement (like
tax deductions on management recharges in general). |
13.206.10 Whether or not a deferred tax asset
is recognised in the consolidated financial statements for the expected tax
deductions on recharges depends on the arrangement between the parent and the
subsidiary. If the recharge is made at the parent's discretion, a deferred tax
asset is not recognised; this is because a tax deduction will not arise
unless there is a recharge. Where a parent agrees to make a recharge when
options are exercised, a deferred tax asset should be recognised (subject to
meeting IAS 12's criteria) over the period of service in relation to any
expected tax deductions that are considered recoverable. The expected tax
deduction for the recharge can be regarded as a tax deduction in respect of
the share-based payment charge to the extent that it is recharged. |
13.207 Cash-settled share-based payment
transactions (such as share appreciation rights issued to employees) give
rise to a liability and not a credit to equity. The fair value of the
liability is re-measured at each reporting date until the liability is
settled. A deductible temporary difference might arise if the liability's
carrying amount exceeds the liability's tax base (that is, the carrying
amount less any amounts that will be deductible for tax purposes in the
future); this would result in a deferred tax asset (subject to IAS 12's
recognition criteria). The tax effects of such transactions are always
recognised in the income statement. |
13.208 Many entities revalue their
non-monetary assets such as land and buildings. In some jurisdictions, the
revaluation or other restatement (increase or decrease) of an asset to fair
value affects taxable profit (loss) for the current period. The tax base of
the asset is adjusted and no temporary difference arises. The resulting
current tax that arises on the revaluation is recognised. In other
jurisdictions, the revaluation or restatement of an asset does not affect
taxable profit in the current period; as a result, the asset's tax base is
not adjusted. The increase or decrease does not enter into the determination
of taxable profit for the current period; but the future recovery of the
carrying amount will result in a taxable flow of economic benefits to the
entity, and the amount that is deductible for tax purposes will differ from
the amount of those economic benefits. The difference between the carrying
amount of a revalued asset and its tax base is a temporary difference; and it
gives rise to a deferred tax liability or asset. The resulting deferred tax
expense or income arising from the revaluation is recognised in other
comprehensive income (see para 13.288.1). This is true even if: |
■ |
The
entity does not intend to dispose of the asset. In such cases, the asset's
revalued carrying amount will be recovered through use; and this will
generate taxable income which exceeds the depreciation that will be allowable
for tax purposes in future periods. |
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Tax
on capital gains is deferred where the proceeds of the asset's disposal are
invested in similar assets. In such cases, the tax will become payable on
sale or use of the similar assets. See further paragraph 13.216 onwards. |
[IAS
12 para 20]. |
13.209 The precise nature of the liability
that arises on an asset's revaluation depends on the asset's taxation status.
In some jurisdictions, assets that do not attract tax depreciation (such as
land) give rise to chargeable gains or losses for tax purposes if they are
sold above or below their tax indexed cost (that is, original cost uplifted
by an indexation allowance, where applicable). For accounting purposes, such
assets are sometimes revalued but rarely depreciated. Depreciable assets, on
the other hand, might or might not be revalued. If such an asset is revalued
in excess of cost and sold at the revalued amount, a further tax liability –
in addition to any liability arising on the capital gain – might arise if the
asset was eligible for capital allowances. This further liability (which
arises by way of a balancing charge in some jurisdictions) is designed to
claw back any tax depreciation previously claimed in respect of the asset. |
13.210 The measurement of the liability also
depends on the manner in which the entity expects to recover the carrying
amount of an asset that has been revalued in the financial statements –
whether through use, sale, or use and sale (that is, 'dual manner of
recovery'). The following paragraphs consider the deferred tax consequences
of revaluing assets and the different ways in which the entity expects to
recover the revalued carrying amounts. For guidance relating to the expected
manner of recovery for investment properties measured at fair value, refer to
paragraph 13.219.4 onwards. |
13.210.1 An approach for applying this 'dual
manner of recovery' is set out in paragraph 13.172.3. Use of this approach
for properties can be summarised as follows: |
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Ascertain
the expected manner of recovery of the asset's carrying amount. |
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Split
the asset's carrying amount between amounts to be recovered through use and
through sale. |
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Determine
the expected period of recovery through use and the expected date of sale or
abandonment. |
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Determine
the tax consequences of recovery through use and the temporary differences
that will arise. |
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Determine
the tax consequences of recovery through sale and the temporary differences
that will arise. |
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Determine
which of the temporary differences arising from recovery through use and
through sale should be recognised. |
13.211 Where a depreciable asset that
qualifies for tax is revalued upwards, the revaluation gives rise to a
further originating temporary difference; this is in addition to the
temporary difference that arises from accelerated tax depreciation. Because
the revaluation represents a new originating temporary difference, deferred
tax should be provided in a way that reflects how the entity expects to
recover the asset's revalued carrying amount – whether through use, sale, or
use and sale. Various scenarios arise. |
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Example – Upward revaluation of
depreciable assets |
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An
entity acquired a building in a business combination at a cost of C1,000,000
on 1 January 20X1. The useful life of the building is 20 years and it will be
depreciated to a residual value of C150,000. The building is eligible for
allowances of 50% initial allowance and 4% writing down allowance (WDA) each
year (up to a total of C500,000) until disposal. On disposal, the proceeds
are liable to capital gains tax, subject to a deduction where that cost
exceeds capital allowances previously claimed. The tax rate for capital gains
and income is 30%. In each of the four years until revaluation, the deferred
tax provided is calculated as shown below. Note that the example deals only
with the deferred tax on the buildings – a dual manner of recovery
expectation is applied, and the residual value is attributed to the carrying
amount of the sale element on initial recognition (see further para
13.172.3). There are no changes to the estimated residual value in years 1 to
4. The land element is not a depreciable asset (see further para 13.213). |
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In
the tables: NBV = net book value; TB = tax base; TD = temporary difference;
DTL = deferred tax liability; DTA = deferred tax asset. |
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13.212 Where a depreciable asset is
revalued downwards, the tax consequence of the impairment loss is similar to
depreciation and represents a reversal of an originating temporary
difference. This reversal could give rise to a deferred tax asset or a
reduction in the deferred tax liability; the treatment will depend on the
asset's tax base just before the downward revaluation was recognised.
Similarly, where a depreciable asset that was revalued upwards is
subsequently revalued downwards, the downward revaluation will first reverse
the previous upward revaluation; and any excess reversal is recognised in
profit or loss. |
Example – Downward revaluation
of depreciable assets |
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Facts
are generally the same as in scenario 3 in paragraph 13.211; but at 31 December
20X6, two years after revaluation and immediately before sale, the asset
is revalued downwards to C600,000. The entity expects to recover the full
carrying amount of the building through sale. |
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There
is no use element as at 31 December 20X6 because the expected manner of
recovery is solely through sale. The impact of the devaluation on the sale
element is shown below. |
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13.213
Where a non-depreciable asset (such as land having an infinite life) is
revalued upwards above the tax deductible amount on sale (including any
inflation allowance), the revaluation gives rise to an originating temporary
difference on which deferred tax should be provided. The asset is not
depreciated, so no part of the asset's carrying amount is expected to be
recovered (that is, consumed) through use. It follows that the carrying
amount of a non-depreciable asset can only be recovered through sale [SIC 21
para 5; IAS 12 (amended) para 51B]. |
13.214
The following examples illustrate the tax consequences of revaluing a
non-depreciable asset under IAS 16. |
Example
1 – Upward revaluation of non-depreciable asset |
On transition to
IFRS, entity B elected to re-measure its land and buildings at fair value at
the date of transition, as permitted by IFRS 1. This fair value was
subsequently used as deemed cost for the purpose of historical cost
accounting. Entity B does not have a policy of annual revaluations. |
One of entity B's
assets is a piece of land. The tax base of the land is its original cost when
acquired by entity B, increased each year in line with the Retail Price
Index. |
There is a
temporary difference between the revalued accounting base and the tax base of
the land. The temporary difference will reduce over time as the tax base is
increased by changes in the Retail Price Index. Management expects to hold
the land for the foreseeable future; and it expects that the land's tax base
will exceed the accounting base before the land is disposed of. |
In this situation,
management should recognise deferred tax in respect of the land based on the
difference between the accounting base and the tax base at the balance sheet
date. Management should not anticipate future changes in the land's tax base
arising from changes in the Retail Price Index. |
Example
2 – Indexation of tax base on revalued non-depreciable asset |
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An
entity acquired a plot of land for C1,000,000 on 1 January 20X1 when the tax
indexed cost was also C1,000,000. On disposal, the proceeds in excess of
indexed cost are subject to capital gains tax @ 30%, which is also the rate
of tax on income other than capital gains. The price index for calculating
indexation allowances increases by 2% in 20X1 and 2.5% in 20X2. But the tax
rules state that indexation allowance cannot create or increase a loss. The
deferred tax asset recognised in each of those years (if sufficient taxable
profits are available) is calculated as follows.
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Example
3 – Sale of revalued non-depreciable asset |
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Following on from
example 2, suppose the land is sold during 20X6 for C2,000,000. There is
additional indexation allowance of C23,135 up to the time of sale, so the
indexed cost is C1,100,000. Assume the tax effect of the indexation
allowance in the period of sale is recognised in other comprehensive income. The
entity pays tax at 30% on the taxable profit as follows: |
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Taxable profit |
Accounting profit |
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C |
C |
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Sales proceeds |
2,000,000 |
2,000,000 |
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Tax base/carrying
amount before sale |
1,100,000 |
1,500,000 |
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Taxable/accounting
profit |
900,000 |
500,000 |
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Tax @ 30% |
270,000 |
150,000 |
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The journal entries
for the current tax and for the release of the deferred tax liability of
C126,940 (see example 2) are as follows: |
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13.215
Where a non-depreciable asset (that has not been previously revalued) is
revalued downwards, an originating temporary difference arises if a capital
loss will arise for tax purposes. But, if capital losses can only be offset
against chargeable capital gains, a deferred tax asset is not normally
recognised unless deferred tax has been provided (in the same or an earlier
accounting period) for chargeable gains on upward revaluations of other
assets. Where a downward revaluation of a non-depreciable asset simply
reverses a previous upward revaluation of the same asset, the tax effect
recorded should reverse the tax effect that was previously recorded for the
upward revaluation. |
13.216 In
some jurisdictions, the tax arising on a taxable gain – when certain assets
used for trading purposes (such as properties) are disposed of – might not
need to be paid immediately if the sale proceeds are reinvested (within
specified time limits) in other qualifying assets. One type of relief
('rollover relief') reduces the 'base cost' of the replacement asset by the
taxable gain 'rolled over. A higher taxable gain will arise on disposal of
the replacement asset (and higher tax might become payable) than if the
original gain had not been rolled over. It might be possible to claim
rollover relief on the gain when the replacement asset is sold, so that tax
on that gain again does not need to be paid. This situation can theoretically
continue indefinitely and will depend on the specific tax rules. |
13.216.1
Another type of
relief ('holdover relief') delays payment of tax on the original gain where
reinvestment of the proceeds satisfies certain conditions. The taxable gain
on disposal of the old asset is not deducted from the new asset's cost;
instead, the current tax on the gain is delayed (that is, 'held over') and is
payable at a future date, depending on the specific tax rules. |
13.216.2
Where rollover
relief is claimed, the standard might require a deferred tax liability to be
recognised on the new asset (often similar in amount to the current tax that
did not need to be paid on the old asset). The new asset's tax base has been
reduced; so tax might become payable when the new asset is sold or used. |
13.216.3
The new asset's
reduced tax base is likely to result in a temporary difference when compared
with its carrying amount in the financial statements. A temporary difference
that results from rollover relief is not covered by the initial recognition
exception (see further para 13.162 onwards). It does not arise from the
asset's initial recognition, but instead arises as a result of relief given
on an asset that was previously disposed of. |
13.216.4
The following
example considers the deferred tax position on initial recognition of an
asset with a tax base reduced by rollover relief – including the interaction
with the dual manner of recovery (see further para 13.172.2 onwards) and the
initial recognition exception. |
Example
– Rollover relief |
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An entity disposes
of a building which (without rollover relief) would result in a taxable gain
of C400,000. The entity invests in a new building at a cost of C2,500,000. It
claims rollover relief so that no taxable gain or loss arises on disposal of
the old building. Instead, the taxable gain on the old building reduces the
acquisition cost of the new building that will be allowable for tax purposes
when it is sold. So the new building's tax base (on a sale basis) is as
follows: |
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As noted in
paragraph 13.216.3, to the extent that the temporary difference results from
rollover relief, it is not covered by the initial recognition exception. So
the amount of the temporary difference covered by the initial recognition
exception excludes the amount attributable to rollover relief. It is
calculated as the carrying amount less the tax base resulting from original
cost (that is, C2.5m). |
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Management should,
therefore, recognise a deferred tax liability of C120,000 on the taxable
temporary difference resulting from rollover relief of C400,000. But the
resulting taxable temporary difference might enable otherwise unrecognised
deferred tax assets on the same (for example, related land) or other assets
to be recognised if the criteria in IAS 12 are met. |
13.216.5
Where holdover
relief is claimed, current tax remains payable in the future (as noted in
para 13.216.1). If the entity discounts current taxes (see para 13.73), the
carrying amount of the tax payable could be materially reduced if the
deferral period is significant. |
13.217 An
asset can sometimes be revalued for tax purposes; and that revaluation might
or might not be reflected for accounting purposes. Where an asset revaluation
for tax purposes relates to an accounting revaluation of an earlier period
(or to one that is expected to be carried out in a future period), the tax
effects of the asset revaluation and the adjustment of the tax base are
recognised in other comprehensive income in the periods in which they occur.
[IAS 12 para 65]. This is consistent with the general principle that tax
follows the item. |
13.217.1
Where an asset
revaluation for tax purposes does not relate to an accounting revaluation of
an earlier period (or to one that is expected to be carried out in a future
period), the tax effects of adjusting the tax base are recognised in profit
or loss. [IAS 12 para 65]. |
13.217.2
If an asset is
carried at a revaluation ('deemed cost') under the transitional rules of
IFRS 1, but the entity has no ongoing accounting policy of revaluation,
the effect of changes in the tax base are recognised in profit or loss. This
is discussed further in paragraph 13.219 onwards. |
13.217.3
The impact of changes in the tax revaluation is only recognised in other
comprehensive income if a relationship is established between the accounting
revaluation and the tax revaluation. That relationship does not have to be
one of perfect correlation. When a general basis of indexation for tax
purposes applies to all entities, the reporting entity needs to establish the
relationship. It might be helpful to consider how valuations of the relevant
class of assets have correlated with the tax index in the past, as well as
any indicators that suggest changes in that correlation in the future. Also,
where significant amounts are involved, the entity should have regard to the
significant judgements disclosure requirements under IAS 1 (see para
13.277.2). [IAS 1 para 122]. |
13.217.4
If an entity's accounting policy is to revalue an asset (so that a
revaluation surplus is taken to reserves in the same or a previous period) –
and a relationship between the accounting revaluation and the tax revaluation
has been established – then if the tax base is revalued we consider that (to
the extent that the tax revaluation is no greater than the cumulative
accounting revaluation) the tax revaluation arguably relates to the earlier
accounting revaluation; as a result, the effect of the adjusted tax base is
recognised in other comprehensive income. But where the tax revaluation
exceeds the cumulative accounting revaluation, it is a matter of judgement as
to whether the tax revaluation relates to an accounting revaluation expected
in the future. If it is judged to be so, the effect of the adjusted tax base
is recognised in other comprehensive income; otherwise, it is recognised in
profit or loss. |
13.217.5
If it is clear that
the tax basis revaluation does not relate to the accounting revaluation, the
effect of the tax revaluation is taken to profit or loss. This might arise if
the basis for the asset's tax revaluation bears no relationship to asset
price development in the market. For example the tax basis is general
inflation but the class of assets has had a reducing fair value in the past –
as has been the case for technology products. The tax revaluation might be
expected to be upwards, but the accounting revaluation would not be. |
13.218
The following paragraphs consider the accounting treatment of changes in
deferred tax as a result of tax revaluations. |
13.218.1
An entity's accounting policy might be to carry an asset at depreciated cost.
If the tax base is revalued for tax purposes, the effect of the tax base's
revaluation is recognised in profit or loss because it does not relate to a
prior accounting revaluation and none is anticipated in future periods. |
Example
– Asset carried at cost |
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Entity A acquires
an asset which has an initial tax base equal to its cost. |
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The asset's tax
base is increased each year by an amount based on asset price inflation. |
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Entity A accounts
for the asset using a policy of cost (that is, with no accounting
revaluation) under IAS 16. |
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If a tax
revaluation is available in this situation (that is, the tax revaluation can
create or increase a loss), then the impact of the increase in the tax base
as a result of the tax revaluation is recognised in profit or loss. It does
not relate to an accounting revaluation that has been recognised in other
comprehensive income. |
13.218.2
Where an entity's accounting policy is to revalue an asset and there is a
related tax revaluation, the effect of adjusting the tax base is recognised
in other comprehensive income. |
Example
– Asset carried at revaluation |
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Entity A acquires
an asset which has an initial tax base equal to its cost. |
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The asset's tax
base is increased each year by an amount based on asset price inflation. |
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Entity A accounts
for the asset using a policy of revaluation under IAS 16. |
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To the extent that
the increase in the tax base as a result of the tax revaluation is no greater
than the cumulative accounting revaluation surplus recognised in other
comprehensive income, the tax revaluation arguably relates to an earlier
accounting revaluation; as a result, the effect of the adjusted tax base is
recognised in other comprehensive income. |
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Where the tax
revaluation exceeds the cumulative accounting revaluation, the comments in
paragraph 13.217.4 apply to the excess amount. |
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The tax revaluation
arising in the period of the asset's disposal is allocated between the income
statement and other comprehensive income; see further example 2 in paragraph
13.214. |
13.218.3
The situation is more complicated when an acquired asset's tax base has been
reduced by rolled-over gains and the tax revaluation is given on the reduced
tax base. In summary, the rolled-over gain reduces the new asset's tax base;
see further paragraph 13.216 onwards. |
Example
1 – Tax base reduced by rolled-over gains, asset carried at cost |
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Entity A acquires
an asset and the initial tax base is reduced by rolled-over gains. |
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The asset's reduced
tax base is increased each year by an amount based on asset price inflation. |
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Entity A accounts
for the asset using a policy of cost (that is, with no accounting
revaluation) under IAS 16. |
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If the tax base of
an asset carried at cost has been reduced by rolled-over gains (so that it is
lower than the accounting cost) and the tax revaluation is given on the
reduced tax base, the increase in the tax base as a result of the tax
revaluation is recognised in profit or loss; this is because it does not
relate to an accounting revaluation that has been recognised in other
comprehensive income. |
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The tax revaluation
reduces the deferred tax arising on the rolled-over gain. But the impact of
the change in tax is not 'backwards traced' for accounting purposes to the
previously rolled-over gain (this is because it is not related to the
rollover, even though it is reversing its effect). |
Example
2 – Tax base reduced by rolled-over gains, asset carried at revaluation |
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Entity A acquires
an asset and the initial tax base is reduced by rolled-over gains. |
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The asset's reduced
tax base is increased each year by an amount based on asset price inflation. |
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Entity A accounts
for the asset using a policy of revaluation under IAS 16. |
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The accounting is
similar to the example in paragraph 13.218.2 (for revalued assets), except
that the tax revaluation will be lower; this is because it is given on a
lower tax base. As in paragraph 13.218.2, to the extent that the increase in
the tax base as a result of the tax revaluation is no greater than the
cumulative accounting revaluation surplus recognised in other comprehensive
income, the tax revaluation arguably relates to an earlier accounting
revaluation; as a result, the effect of the adjusted tax base is recognised
in other comprehensive income. |
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In other words, the
accounting in this scenario is similar to that in paragraph 13.218.2; but it
will take longer for the tax revaluation to reach the accounting revaluation
gain because it is given on a lower tax base. |
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We do not consider
that the impact of the tax revaluation up to the accounting cost of the asset
(that is, to the extent of the rolled-over gain) should first be taken to the
income statement. This would suggest that the tax revaluation relates to the
reinstatement of the cost (that is, it somehow replaces the impact of the
rollover election). We do not believe that this is the case. The rollover
reduces the amount of tax revaluation that is available, but otherwise the
scenario is similar to the example in paragraph 13.218.2 for revalued assets;
and so similar accounting should apply. |
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The above
accounting will apply unless the tax revaluation exceeds the accounting
revaluation gain. |
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To the extent that
the increase in the tax base as a result of the tax revaluation exceeds the
cumulative accounting revaluation, it is a matter of judgement as to whether
the tax revaluation relates to an accounting revaluation expected in the
future or whether it is reinstating the tax base back to initial cost and
reducing the deferred tax arising on the rolled-over gain; in which case,
this element is similar to example 1 above and would be recognised in profit
or loss. |
13.218.4
Where an asset is
acquired in a business combination and the asset's tax base is lower than its
fair value at the acquisition date, the accounting in the parent's
consolidated financial statements will be the same whether the acquired
entity had revalued the property before acquisition by the group or whether
the property was revalued on acquisition. In both cases, under IFRS 3, the
asset's fair value at the acquisition date is the deemed cost from the
acquiring group's perspective; and any deferred tax liability arising as a
result of the lower tax base at the acquisition date will form part of the
goodwill calculation. |
Example
1 – Asset carried at a policy of cost (that is, based on fair value at
acquisition date) |
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Entity A acquires
an asset in a business combination. |
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The asset's tax
base is lower than its fair value at the acquisition date. The asset's
initial tax base is increased each year by an amount based on asset price
inflation. The tax base at acquisition date reflects the tax revaluation to
date. |
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Entity A accounts
for the asset using a policy of cost (that is, based on the asset's fair
value at the acquisition date, with no subsequent accounting revaluation)
under IAS 16. |
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If the asset's tax
base is lower than its fair value at the acquisition date, the deferred tax
liability forms part of the goodwill calculation in the consolidated
financial statements. Any subsequent increase in the tax base as a result of
tax revaluation is recognised in profit or loss, because it does not relate
to an accounting revaluation that has been recognised in other comprehensive
income. |
Example
2 – Asset acquired in business combination subsequently carried at a policy
of revaluation |
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Entity A acquires
an asset in a business combination. |
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The asset's tax
base is lower than its fair value at the acquisition date. The asset's
initial tax base is increased each year by an amount based on asset price
inflation; and the tax base at the acquisition date reflects the tax
revaluation to date. |
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Entity A accounts
for the asset using a policy of revaluation under IAS 16. |
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There are several
acceptable accounting treatments (described below) for determining how the
impact of the tax revaluation is allocated to the performance statements. The
accounting treatment selected should be applied on a consistent basis. |
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(a) |
The tax revaluation
is first applied to any shortfall between the asset's 'cost' and tax base at
the acquisition date. This might or might not result from a rollover election
and/or higher fair value than original cost to the acquired entity. Either
way, from the acquirer's perspective, the asset has a lower tax base. This
method reflects the natural order in which the revaluation arises (that is,
the fair value revaluation at acquisition arises before any post-acquisition
revaluation; and so the tax revaluation is first allocated against the fair
value adjustment). |
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To the extent that
the increase in the tax base as a result of tax revaluation builds the tax
base up to the fair value at the acquisition date, the accounting treatment
is similar to that in example 1 above. The increase in the tax base is
recognised in profit or loss, because this element does not relate to an accounting
revaluation that has been recognised in other comprehensive income. |
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Then to the extent
that any further increase in the tax base as a result of tax revaluation is
no greater than the cumulative post-acquisition accounting revaluation
surplus recognised in other comprehensive income, the tax revaluation
arguably relates to an earlier accounting revaluation; and so the effect of
this adjustment to the tax base is recognised in other comprehensive income. |
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Note: if the tax
indexation exceeds the accounting revaluation, the comments in paragraph
13.217.4 apply. |
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(b) |
The tax revaluation
is first considered to relate to any post-acquisition revaluation gain; and
so the impact is recognised in other comprehensive income (subject to the
comments in para 13.217.4). This is consistent with the general principle in
example 2 of paragraph 13.218.3 for revalued properties, where the tax
revaluation is first considered to relate to the accounting revaluation. |
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To the extent that
the increase in the tax base as a result of the tax revaluation is no greater
than the cumulative accounting revaluation surplus recognised in other
comprehensive income, arguably relates to the accounting revaluation that has
been recognised in other comprehensive income; and so the effect of the
adjusted tax base is recognised in other comprehensive income. This is
consistent with example 2 in paragraph 13.218.3. |
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To the extent that
the increase in the tax base as a result of the tax revaluation exceeds the
cumulative accounting revaluation recognised in other comprehensive income,
it would be considered to relate to the element of revaluation arising on
acquisition (that is, the fair value adjustment); in that case, the increase
in the tax base as a result of indexation would be recognised in profit or
loss. |
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To the extent that
the tax revaluation exceeds the cumulative accounting revaluation (recognised
in other comprehensive income and arising on acquisition), it is a matter of
judgement as to whether the tax revaluation relates to an accounting
revaluation expected in the future. If it does, the effect of the adjusted
tax base would be recognised in other comprehensive income; otherwise, it
would be recognised in profit or loss. |
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(c) |
The tax revaluation
would be allocated pro rata. |
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The tax revaluation
would be allocated pro
rata to the revaluation arising on acquisition (that is, change
in tax recognised in profit or loss) and the post-acquisition accounting
revaluation (that is, change in tax recognised in other comprehensive
income). |
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13.219
The accounting
treatments described above apply regardless of whether a deferred tax
liability was recognised on transition to IFRS or later. But the fact that a
deferred tax liability recognised on transition to IFRS was charged to equity
(as part of the transition adjustment) does not mean that changes in the
liability will also be recognised in equity. Instead, management should use
the entity's current accounting policies to determine where the items that
gave rise to the original deferred tax would have been recognised if IFRS had
applied in the earlier periods. |
13.219.1
Where it is not
possible to assess where the items that gave rise to the original deferred
tax would have been recognised if IFRS had applied in the earlier periods,
the changes in the deferred tax should, by default, be recognised in profit
or loss. |
13.219.2
An entity might
recognise an asset at a revalued amount ('deemed cost') on transition to
IFRS, in lieu of cost, but does not otherwise treat the asset as revalued.
Where the entity does not have an accounting policy of revaluing its assets,
there is no revaluation surplus shown in the financial statements. In our
view, changes in the related deferred tax liability arising as a result of
tax revaluation are not regarded as relating to an accounting revaluation
recognised in other comprehensive income; and so the impact of the tax
revaluation should be recognised in profit or loss. |
13.219.3
Similarly, an
entity might have recognised deferred tax relating to a business combination
on transition to IFRS and taken it (under IFRS 1) to retained earnings. Where
the entity does not have an accounting policy of revaluing its assets, this
was a one-off entry in lieu of adjusting goodwill (which IFRS 1 only permits
in limited circumstances). A later tax revaluation does not relate to an
accounting revaluation that has been recognised in other comprehensive
income; and so (consistent with example 1 in para 13.218.4) the increase in
the tax base as a result of tax revaluation would be recognised in profit or
loss. |
13.219.4
Investment
properties are held to earn rentals or for capital appreciation or both.
Under IAS 40, an entity can choose to measure the investment property at cost
or at fair value. |
13.219.5
In 2010 the IASB amended IAS 12 for investment properties. The amendments
introduced a presumption that an investment property measured at fair value
is recovered entirely through sale. This presumption is rebutted if the
investment property is depreciable and is held within a business model whose
objective is to consume substantially all of the investment property's
economic benefits over time rather than through sale. The presumption cannot
be rebutted for an investment property (or portion of an investment property)
that would be considered non-depreciable if IAS 16 were applied (such as
freehold land). |
13.219.6 In
some jurisdictions, an investment property does not qualify for tax
depreciation (whatever measurement basis is used); and so no part of the
property's cost is deductible against taxable rental income. Instead, the
cost of the property (uplifted by an allowance for inflation, where
applicable) is allowed as a deduction against sales proceeds for the purpose
of computing any chargeable gain arising on sale. |
13.219.7
Even in jurisdictions where an investment property qualifies for tax
depreciation, there is a presumption that an investment property carried at
fair value will be recovered entirely through sale. This presumption is
rebutted if the investment property would be considered depreciable if IAS 16
were applied and it is held within a business model whose objective is to
consume substantially all of the investment property's economic benefits over
time rather than through sale. |
13.219.8 Therefore,
deferred tax for investment properties carried at fair value should generally
be provided using the tax base and rate that are consistent with recovery
entirely through sale, and using capital gains tax rules – or other rules
regarding the tax consequences of sale (such as rules designed to claw back
any tax depreciation previously claimed in respect of the asset). If the
presumption is rebutted, deferred tax should be measured reflecting the tax
consequences of the expected manner of recovery. [IAS 12, para 51C]. The
guidance at paragraph 13.170 (on how to apply the expected manner of recovery
approach to assets and liabilities) can also be applied to investment
properties carried at fair value. |
13.219.9 The
presumption also applies where investment property is acquired in a business
combination and the acquirer uses fair value to measure the investment
property later. |
13.220 Where an investment property is
carried at cost, it would be depreciated in the normal way over its useful
economic life for accounting purposes; the rebuttable presumption that the
asset will be recovered through sale does not apply. The asset's expected
manner of recovery might be through a combination of use and sale; in that
case, the asset's carrying amount is split between the use and sale elements,
and these carrying amounts are compared to the respective tax bases. Where
the only tax deduction available for the property is on sale, the tax base of
the building's use element carried at cost would be nil on initial
recognition and in all future periods. |
13.221 This can be illustrated by the
following example. |
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13.225 A property might be transferred from
investment property carried at fair value to property, plant and equipment
following commencement of owner-occupation; or it might be transferred from
property, plant and equipment to investment property that will be carried at
fair value following end of owner-occupation. This reclassification could
have consequences for the deferred tax balances recognised. |
Example 1 – Transfer from investment
property held at fair value to property, plant and equipment |
An
entity acquired an investment property on 1 January 20X7. The building
element of the property is valued at C50m . Management initially expects to use
the building for 10 years to generate rental income, with no residual value.
The initial expectation is that the building will be sold at the end of year
10 to recover its tax base. The presumption that it will be recovered through
sale is not rebutted. |
For
tax purposes, the asset's cost is not deductible against rental income; but
any sales proceeds are taxable after deducting cost. The tax rate is 30% for
taxable income and 40% for chargeable capital gains. |
On
initial recognition, no temporary differences arose. During years 1 to 5,
changes in the building's fair value were credited to profit or loss. The
entity also recognised deferred tax on the changes in fair value in profit or
loss. |
Five
years after acquisition, the property was transferred from investment
property to property, plant and equipment following a change in use. At the
date of transfer, the building's fair value and the corresponding deferred
tax liability were C60m and C4m (40% of C10m) respectively; and the building
was estimated to have a remaining life of 20 years with a nil residual value. |
Where
an investment property carried at fair value is transferred to property,
plant and equipment, the property's fair value at the date of transfer
becomes its deemed cost for subsequent accounting under IAS 16. [IAS 40 para
60]. So no adjustment is made to the carrying amount at the date of transfer.
Howeve,r the building will now be expected to be recovered through use and
sale. A taxable temporary difference of C60m will arise in relation to the
use element (carrying value of C60m less tax deductions through use of nil),
of which C50m would have been originally covered by the initial recognition
exception if the property had always been classified as property, plant and
equipment. A deductible temporary difference of C50m will remain on the sale
element (tax deductions through sale of C50m less expected residual value of
nil), but this would also have been covered by the initial recognition
exception. So a deferred tax liability of C3m (30% of C10m) should be
recognised due to the difference in the tax rates between capital and income.
This reduction of C1m in the deferred tax balance is recognised through the
revaluation reserve. |
At
the end of the year, the building's use element would have a depreciated
carrying amount of C57m; this would give rise to a taxable temporary
difference at that date of C57m. Of this amount, C47.5m arose on initial
recognition (being the original temporary difference on initial recognition
of C50m less a year's depreciation charge of C2.5m). The remaining C9.5m
arose after initial recognition; so deferred tax should be provided on this
amount. This results from the C10m uplift in the building's valuation (that
occurred after initial recognition) less a year's depreciation charge against
this (of C0.5m). So the deferred tax balance at the end of the year would be
C2.85m (30% of C9.5m). This reduction of C0.15m in the deferred tax balance
(from C3m to C2.85m) is recognised through the income statement. The deferred
tax liability will continue to reverse at the rate of C0.15m per annum until
it has been reversed in full over the building's remaining useful life. |
Assuming
no change in residual value or tax base for the building's sale element,
there would be no impact on the deferred tax calculation for the sale
element. |
Example 2 – Transfer from property,
plant and equipment to investment property held at fair value |
A
building was purchased on 1 January 20X7 for C50m, with a useful life of 25
years and an estimated residual value of nil. The building was used in the
business; so it was classified as property, plant and equipment. For tax
purposes, the asset's cost is not deductible in use, but any sales proceeds
are taxable after deducting the cost. The tax rate is 30% for taxable income
and 40% for chargeable capital gains. |
On
initial recognition, a carrying amount of nil was attributable to the
building's sale element; this created a deductible temporary difference. A
taxable temporary difference existed in relation to the building's use
element; but no deferred tax was recognised because these differences were
covered by the initial recognition exception. |
Five
years after acquisition, the property was transferred from property, plant
and equipment to investment property following a change in use. At the date
of transfer, the property's depreciated cost was C40m (C50m less five years'
annual depreciation of C2m). The property's fair value at the date of
transfer amounted to C60m. The presumption that the property will be
recovered through sale will apply after the transfer. |
Where
an entity transfers an owner-occupied property to investment property that
will be carried at fair value, the difference between the fair value and the
property's depreciated cost is treated in the same way as a revaluation under
IAS 16. [IAS 40 para 61]. In other words, the difference of C20m (C60m less
C40m) is credited to the revaluation reserve and recognised in other
comprehensive income. The entity also recognises deferred tax on the
revaluation surplus charged to the revaluation reserve in other comprehensive
income.The deferred tax could be calculated by reference to the C10m
difference between the revised carrying value and the tax base through sale;
or some take the view that the deferred tax could be calculated by reference
to the full uplift of C20m at the date of transfer (because C10m of the C50m
of cost on initial recognition has already reversed through the depreciation
charge). |
13.225.1 The amendments to IAS 12 made by
'Deferred tax: Recovery of underlying assets', issued in December 2010,
incorporate the guidance in SIC 21, which has been withdrawn for entities
applying the amendments. |
13.225.2 Paragraph 107 of IAS 38 states that
"an intangible asset with an indefinite
useful life shall not be amortised". This might be the case with,
for example, trademarks or brands (see further chapter 15). Non-amortisation
of an asset is arguably an indication that the asset is not recovered through
use; so the measurement of deferred tax presumes that the asset's carrying
amount will be recovered through sale; and the tax base determination follows
that presumption. |
13.225.3 The carrying amount of a
non-depreciable asset (such as land having an unlimited life) will only be
recovered through sale. [IAS 12 para 51B]. The asset is not depreciated and
no part of its carrying amount is expected to be recovered (or consumed)
through use. The question arises whether the same conclusion should be
applied to intangible assets with indefinite useful lives. |
13.225.4 There are some distinctions to be drawn
between land and intangible assets with indefinite lives. The fact that an
asset has an indefinite life does not mean that the future economic benefits
arising from the asset will not eventually be consumed; it is simply that the
timing of that consumption is uncertain. Indeed, the requirement to test
intangible assets with indefinite lives for impairment at least annually is
an acknowledgement that recovery through use might occur. The intangible
asset can be used to generate income on an ongoing basis in the business; so
recovery through sale should not be presumed where that is not currently
expected. |
13.225.5 Consistent with the factors above,
we consider that management should use judgement based on individual facts
and circumstances to determine the expected manner of recovery of intangible
assets with indefinite lives and whether paragraph 51B of IAS 12 should be
applied. |
13.225.6 In some circumstances, the tax base
of an intangible asset with an indefinite life can be determined solely on a
sale basis. If revenues generated by intangible assets with indefinite lives
are not (and are not expected to be in the future) a recovery of the asset's
carrying amount, recovery through sale might be acceptable. But the following
factors should be considered: |
■ |
Recovery
through sale may not be presumed for intangible assets that have been the
subject of an impairment write-down – such a write-down is evidence of
recovery through use. |
■ |
If
the asset's carrying amount is subject to impairment in the future, the
expected manner of recovery could change to recovery through use; this will
have an impact on deferred taxes recognised in current earnings, in addition
to the impact of the impairment. |
■ |
Management
might need to disclose the presumption of recovery through sale to comply
with paragraph 122 of IAS 1, which requires disclosure of judgements made by
management that have significant effects on amounts recognised. |
13.226 Significant deferred tax balances
could arise on financial instruments. An entity should consider the expected
manner of recovery for each instrument and the associated tax implications to
measure and report the deferred tax. Instruments might be recovered through
use, through sale or through a combination of both (that is, a dual manner of
recovery). Generally, financial assets that are held for trading purposes
will be recovered through sale, whereas financial assets that are intended to
be held to maturity will be recovered through use. However, the measurement
and reporting of deferred tax related to available-for-sale financial assets
will often be based on an assumed recovery through sale, but might warrant a
dual manner of recovery in some circumstances. |
13.226.1 All entities (including
non-financial entities) are required or permitted under IAS 39 to measure
certain financial assets and liabilities at fair value; and changes in fair
values are reported through profit or loss or in other comprehensive income. |
13.227 Where financial assets are carried
at fair value with adjustments through profit or loss, tax laws might
recognise the gains and losses arising from changes in fair value as they
accrue; this means that such gains and losses would be subject to current tax
when they are recognised and no deferred tax would arise. In other
circumstances, the gains and losses might be taxed only when they are realised
at a later date. In that case, a temporary difference arises between the
asset's fair value and its tax base; so a deferred tax liability or asset
(subject to meeting the recognition test) should be recognised through profit
or loss. |
13.227.1 Where a financial asset is
classified as 'available-for-sale' and changes in fair value are recognised
in other comprehensive income, the tax effects of such gains and losses
should also be recognised in other comprehensive income. In some tax
jurisdictions, such gains and losses are taxed in the same period in which
they arise; in other tax jurisdictions, they are taxable when the financial
asset is sold. In either situation, the related current or deferred tax
effects should also be recognised in other comprehensive income. |
13.227.2 When an available-for-sale financial
asset is derecognised on sale or is impaired, the cumulative gain or loss
previously recognised in other comprehensive income is reclassified to profit
or loss. [IAS 39 paras 55(b), 67]. A question arises whether the tax on the
gain recognised in other comprehensive income should be reclassified to
profit or loss. Although IAS 12 is silent on this, we believe that the tax
effects of gains and losses recognised in other comprehensive income should
be reclassified to profit or loss in the same period as the gains or losses
to which they relate. This is a sensible treatment, because reclassifying any
cumulative gains or losses to profit or loss ensures that tax on the gain
recognised in profit or loss is the same as the tax paid on that gain. |
Example – Deferred tax on fair
value gains |
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An
entity acquired an equity security for C10,000; the security is classified on
initial recognition as 'available-for-sale'. At the year end, the security's
fair value increases to C12,000. The tax rate is 30%. |
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The
change in fair value of C2,000 is recognised in other comprehensive income
under IAS 39. Ignoring indexation, the tax arising on this gain at the
balance sheet date is 30% of (C12,000 – C10,000) = C600. A current or
deferred tax liability of C600 will be recognised at the balance sheet date
(with a corresponding debit recognised in other comprehensive income),
depending on whether the tax on the gain is payable in the current period or
deferred until the investment is sold. |
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The
security is sold in the following year at its market value of C11,500. A loss
arises for accounting purposes between sales proceeds of C11,500 less
carrying amount of C12,000 = C500. Also (under IAS 39) the gain of C2,000
(before tax) previously recognised in other comprehensive income is
reclassified to profit or loss; this means that the gain reported in profit
or loss is C1,500, which is sales proceeds less original cost. |
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Ignoring
any inflation adjustments for tax purposes, the current tax that arises on
sale will depend on whether tax was paid or deferred on the earlier gain. |
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Scenario 1 – Gains or losses are
taxed in the period in which they arise |
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A
taxable loss of C500 arises between sales proceeds of C11,500 and carrying
amount for tax purposes of C12,000; this gives rise to a current tax credit
of C150 (C500 @ 30%), assuming this is recoverable. The taxable loss of C500
differs from the accounting gain of C1,500; this is because tax on the gain
of C2,000 arising in a prior period was paid as current tax. There would have
been no deferred tax arising in the previous period; but the current tax of
C600 would have been recognised in other comprehensive income. |
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Where tax on the gain that was
previously recognised in other comprehensive income was paid when the gain
arose, the reclassification of the tax paid in the current period is regarded
as an adjustment of the current tax of prior periods:
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13.227.3 An equity investment might be
recovered through receipt of dividends or through disposal or a combination
of both. Where the tax implications differ, the expected manner of recovery
needs to be considered. |
Example – Expected manner of recovery
of available-for-sale investment |
An
entity holds an available-for-sale investment − that is, shares in a listed
entity. The tax base of the shares is C400,000, which was the amount
initially paid for the shares. The fair value of the shares at the year end
is C1,000,000. |
At
the balance sheet date, the entity expects to receive dividends of C500,000
over five years and then sell the shares. The shares are currently trading
ex-dividend and the future distributions are not expected to impair the
carrying amount of the investment when paid. |
Dividends
are non-taxable. Based on 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? |
An
entity should recognise deferred tax based on the expected manner of recovery
of an asset or liability at the balance sheet date. [IAS 12 para 51]. |
The
entity expects to derive the dividends from the investee's future earnings
rather than from its existing resources at the balance sheet date. The entity
does not expect the investment's carrying amount at the balance sheet date to
be recovered through future dividends. |
Therefore
the entity expects to recover the investment through sale. The carrying
amount of C1,000,000 has a corresponding tax base of C400,000 on sale. There
is a taxable temporary difference of C600,000 at the balance sheet date. Tax
is payable at the capital gains rate of 10%. |
The
entity should recognise a deferred tax liability of C60,000 relating to the
shares. |
But,
if the entity expects that the future dividends will result in a recovery of
the investment's carrying amount, applying the dual manner of recovery might
be appropriate. |
13.227.4 An entity might use a derivative
instrument (for example, a foreign currency forward contract) to hedge its
foreign exchange risk exposure on cash flows in connection with a future
purchase of an item of property, plant and equipment. The derivative is
carried at fair value; and, if it qualifies as a cash flow hedge under IAS
39, gains and losses are initially recognised in other comprehensive income.
The entity has an accounting policy choice as to the amount at which to
record the hedged asset when it is purchased (see further chapter 6). The
entity could record the asset at cost and then reclassify the gain or loss from
other comprehensive income to profit or loss gradually as the asset is
depreciated. [IAS 39 para 98(a)]. Or the gain or loss on the derivative could
be reclassified immediately out of other comprehensive income and added to
(or deducted from) the asset's initial cost. [IAS 39 para 98(b)]. If the
latter policy is adopted and the asset's cost is adjusted, a temporary
difference will arise on the asset's initial recognition. The following
example considers the deferred tax implications of this temporary difference
and the recognition of tax relating to the derivative in the performance
statements. |
Example – Cash flow hedge of
property, plant and equipment |
An
entity purchases an item of property, plant and equipment (PPE) in a foreign
currency. Before the purchase, it enters into a foreign currency forward
contract that meets the criteria for hedge accounting in IAS 39 and is a
fully effective cash flow hedge. Under the tax rules of the jurisdiction
where the entity is based, the gain or loss on the forward contract is taxed
when the forward contract matures (that is, when the asset is purchased). The
entity intends to recover the asset entirely through use; the tax authority
grants capital allowances over the asset's useful economic life based on its
equivalent purchase price in the entity's functional currency on the date of
purchase. |
The
entity's accounting policy for cash flow hedges of this type is to reclassify
the gain or loss on the derivative immediately out of other comprehensive
income and add it to (or deduct it from) the asset's initial cost. [IAS 39
para 98(b)]. This adjustment to the PPE's cost means that its carrying amount
differs from its tax base; so a temporary difference arises on recognising
the PPE. |
(a)
Does the initial recognition exception apply to the temporary difference
arising from an asset's cost adjustment for a cash flow hedge? |
In
our view, the initial recognition exception does not apply; and so deferred
tax should be recognised. Any tax on settling the forward contract is
inherently linked to the PPE's purchase. This is because the forward contract
was a designated hedge for this purchase, and the initial temporary
difference on the PPE arises as a result of the hedge accounting. As such,
the PPE's purchase cannot be looked at in isolation. So the purchase of the
PPE has an impact on accounting profit (that is, the current tax on the
derivative) that is inherently linked to the purchase. The criteria for the
initial recognition exception in IAS 12 (see para 13.162) are not met. |
(b)
When should the tax effect of the gain or loss on the forward contract be
recognised in profit or loss? |
Any
deferred tax previously recorded in other comprehensive income should be
reclassified out of other comprehensive income and into profit or loss in
line with the underlying accounting. This can be achieved by recognising the
current tax on the forward contract in profit or loss and unwinding the
existing deferred tax asset or liability against other comprehensive income.
The net effect to the income tax charge will be nil in this case, because a
new deferred tax asset or liability is recognised on initial recognition of
the asset (as a result of the temporary difference referred to in (a) above). |
13.228 Financial instruments carried at
amortised cost can also give rise to deferred tax consequences. |
Example – Deferred tax and
financial assets carried at amortised cost |
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An
entity acquires a 5% bond with a nominal value of C100,000 at a discount of
20% to the nominal value; the bond is repayable in five years' time at a
premium of 20% to the nominal value. The costs of acquisition are C5,000, and
interest is received annually in arrears. The entity expects to hold the bond
to maturity. The costs of acquisition are taxed as part of the cost of the
bond; interest is taxed when received; and any profit on redemption (proceeds
less cost) is taxed on redemption. |
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The total return on the bond over
five years is C60,000 (C145,000 – C85,000). This amount should be amortised
over the period to maturity using the effective interest method. The
effective interest rate is 12.323% that exactly discounts the future cash
inflows over the five-year period to the net proceeds received.
|
13.229 Compound financial instruments (such
as convertible notes) might contain liability and equity components: the
liability component represents a borrowing with an obligation to repay; and
the equity component represents an embedded option to convert the liability
into the entity's equity. Under IAS 32, the issuer is required to present the
liability and equity components separately on its balance sheet. First, the
carrying amount of the liability component is determined by measuring the
fair value of a similar liability that does not have an associated equity
component. Secondly, this amount is deducted from the fair value of the
instrument as a whole; and the residual amount is assigned to the equity
component. |
13.230
In
some jurisdictions, the tax base of a compound financial instrument that is a
simple convertible note (comprising a loan and an equity component) will
often be its face value. The tax base is not split. When such an instrument
is split for accounting purposes, the carrying amount of the liability
component will initially be less than the face value of the instrument as a whole
and less than the tax base and a taxable temporary difference arises. Even
though the tax base of the liability is different from its carrying amount on
initial recognition, the initial recognition exception does not apply. The
taxable temporary difference arises from the initial recognition of the
equity component separately from the liability component. So a deferred tax
liability should be recognised on the taxable temporary difference. [IAS 12
para 23]. |
13.231 The equity component of the compound
instrument is recognised in equity; so the deferred tax liability is also
charged directly to equity (as a reduction in the carrying amount of the
equity component). But the discount associated with the liability component
of the compound instrument unwinds through profit or loss; so the reduction
in the associated deferred tax liability in the balance sheet (resulting from
the reversal of the temporary difference) is also recognised through profit
or loss. This is consistent with the principle that tax follows the item.
[IAS 12 para 23]. The following example (based on example 4 of appendix B to
IAS 12) illustrates the accounting for the tax effects of a compound
financial instrument where the tax base is not split. |
Example – Deferred tax on
convertible loan where the tax base is not split |
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An
entity issues a non-interest-bearing convertible loan for proceeds with a
fair value of C1,000 (which is also the loan's face value) on 31 December
20X4; the loan is repayable at par on 1 January 20X8. Under IAS 32, the
entity classifies the instrument's liability component as a liability and the
equity component as equity. The entity assigns an initial carrying amount of
C751 to the liability component and C249 to the equity component. The entity
later recognises imputed discount as an interest expense at an annual rate of
10% on the liability component's carrying amount at the beginning of each
year. The tax authorities do not allow the entity to claim any deduction for
the imputed discount on the liability component of the convertible loan. The
tax rate is 40%. |
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The
temporary differences associated with the liability component (and the
resulting deferred tax liability and deferred tax expense and income) are as
follows: |
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13.232 The deferred tax balances need to
reflect the tax consequences arising from the manner in which the entity
expects to recover or settle the carrying amount of its assets and
liabilities. If there are various settlement options with different tax
consequences, the entity needs to assess (at each reporting date) the most
likely option that the investors or the issuer will take. For example,
management might expect that a convertible instrument will be redeemed or
converted early (for instance, in the next accounting period), and the
deferred tax liability previously provided does not fully reflect the tax
consequences that would follow from conversion or redemption; in that case,
the deferred tax liability should be adjusted accordingly. Any adjustment
should be made through equity or through profit or loss depending on the tax
consequences that would follow from early conversion or redemption. For
example, if no tax is payable on early conversion, any outstanding deferred
tax liability should be derecognised by crediting equity; this is consistent
with the principle that tax follows the item. On conversion, the liability component
is transferred directly to equity and no gain or loss arises. It is also
consistent with the treatment that the reversal of the deferred tax liability
does not arise from the unwinding of the discount. Because the option to
convert generally lies with the instrument's holders, the deferred tax
balance should only be adjusted for the tax effects of the conversion if
there is sufficient evidence that it is probable that the instrument's
holders will convert. On the other hand, if early redemption of the
convertible instrument would have further tax consequences, any adjustment to
the deferred tax liability previously provided should be made through profit
or loss. |
13.232.2 There are financial instruments that
have some characteristics of debt but nevertheless are equity instruments for
accounting purposes. Examples include a perpetual bond that carries a coupon
that the issuer can defer indefinitely, or annuity commitments that are
payable in the event a dividend distribution is made. Such payments are
accounted for as charges to equity, and are often deductible for tax
purposes. . |
13.232.3 The income tax consequences of
distributions to holders of an equity instrument shall be accounted for in
accordance with IAS 12. [IAS 32.35A]. Under IAS 12, income tax that relates
to items recognised in equity should be recognised in equity [IAS
12.61A]. However, the tax consequences of dividends to shareholders
should generally be recognised in profit or loss [IAS 12.52A and IAS 12.52B]
because they are linked to past transactions or events (that is, prior
earnings) rather than to distributions to owners. |
13.232.4 As noted above, sometimes payments to
holders of equity instruments other than dividends are reflected as
distributions of equity. Where such payments also give rise to income
tax deductions, it is not always clear whether such tax consequences should
be recognised within equity or profit or loss. As various equity
instruments have different features and tax law varies by country, the nature
of the payment must be assessed in each circumstance to determine whether the
tax impact should be reflected within equity or profit or loss. Indicators
that might provide evidence that the payment is not a dividend to
shareholders include: |
|
|
|
■ |
The
related payments can be made regardless of available profit in the year or
prior year earnings; |
■ |
Holders
of the related equity instruments are not also required to be shareholders; |
■ |
The
related payments result in a reduction to the carrying amount of the equity
instrument. |
13.233 This section deals with the deferred
tax implications of investments in subsidiaries, branches, associates and
joint ventures in separate financial statements. When a parent entity or
investor acquires such an investment it is accounted for in the separate
financial statements of the parent or investor at cost (which is the amount
paid for the shares or the business) or under IAS 39. A temporary difference
might arise between the investment's carrying amount in the separate
financial statements and its tax base (which is often cost or indexed cost). |
13.233.1 Where an investment is carried at
cost, any increase in the investment's value is not recognised. The
investee's post-acquisition profits are not recognised in the parent or
investor's separate financial statements; so these are not reflected in the
investment's carrying amount in determining the temporary difference. |
13.233.2 An entity should recognise a
deferred tax liability for all taxable temporary differences associated with
investments in subsidiaries, branches and associates, and interests in joint
ventures, except to the extent that both of the following conditions are
satisfied: |
■ |
the
parent, investor or venturer 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. |
[IAS
12 para 39]. |
13.233.3 An entity should recognise a
deferred tax asset for all deductible temporary differences arising from
investments in subsidiaries, branches and associates, and interests in joint
ventures, to the extent that it is probable that: |
■ |
the
temporary difference will reverse in the foreseeable future; and |
■ |
taxable
profit will be available against which the temporary difference can be
utilised. |
[IAS
12 para 44]. |
13.233.4 For guidance on the way in which the
above exemptions (for temporary differences relating to investments in
subsidiaries, branches, associates, and interests in joint ventures) interact
with the initial recognition exceptions in paragraphs 15 and 24 of IAS 12,
see paragraph 13.233.10. |
13.233.5 The carrying amounts for such
investments can be recovered through distributions or disposal or both.
Management needs to determine the deferred tax implications based on the
manner in which it expects to recover the investment. |
13.233.6 The application of the above
exceptions from recognising deferred tax in separate financial statements is
addressed in the section dealing with deferred tax implications of
investments in subsidiaries, associates and joint ventures in consolidated
financial statements, from paragraph 13.253 onwards. |
13.233.7 A reporting entity that operates a
branch recognises the branch's assets and liabilities in its own financial
statements. Where temporary differences arise in relation to those assets and
liabilities, deferred tax assets and liabilities are also recognised on those
temporary differences in the reporting entity's financial statements under
IAS 12. In some jurisdictions, there might be tax consequences where the
branch distributes profits or is sold. This is similar to the position for
subsidiaries in consolidated financial statements. A temporary difference
might arise between the total carrying amount of the reporting entity's net
assets in the branch and the tax base of the reporting entity's investment in
the branch. Where the reporting entity has determined that the retained
profits in the branch will not be distributable in the foreseeable future,
and that the branch will not be sold, it does not recognise a deferred tax
liability in relation to its investment in the branch. [IAS 12 para 40]. See
paragraph 13.274 for foreign branches. |
13.233.8 Around the world, there are a number
of entities that do not pay tax but whose profits are taxable in the hands of
the investors. Examples of such entities are partnerships, UK limited
liability partnerships (LLPs) and US limited liability companies (LLCs). This
type of tax structure can give rise to accounting issues in the investor's
separate financial statements. |
13.233.9 For instance, where an entity
invests in a tax-transparent entity ('the investee'), it will initially
record its investment at cost in its separate financial statements. But,
because the investee is tax transparent, its initial tax base will not necessarily
be its cost, but the sum of the tax bases of the underlying assets and
liabilities within the investee. As such, there might be an initial taxable
temporary difference. A question arises as to whether this is covered by the
initial recognition exception (see para 13.162) or whether deferred tax
should be provided on initial recognition. |
13.233.10 In our view, the initial recognition
exception applies, because recognition of the investment in the
tax-transparent entity represents the initial recognition of an asset in a
transaction that is not a business combination (in the investor's separate
financial statements) and which does not affect accounting profit or taxable
profit at the time of the transaction. [IAS 12 para 15(b)]. We consider that
the reference made in paragraph 15 of IAS 12 to the exemption in paragraph 39
of IAS 12 (see para 13.233.2) – for which different conditions have to be met
in order for the exemption to be taken – applies to temporary differences in
respect of investments in subsidiaries, branches, associates and joint
ventures arising after initial recognition. |
13.233.11 Similar logic would apply for the
interaction of the exemptions in paragraphs 24 and 44 of IAS 12 if there was
an initial deductible temporary difference arising on the investment of the
tax-transparent entity. |
13.233.12 For the accounting in consolidated
financial statements for tax relating to an investment in a tax-transparent
entity, see paragraph 13.269 onwards. |
13.234 The treatment of tax in consolidated
financial statements involves the same considerations that apply to
individual financial statements (that is, deferred tax should be provided on
temporary differences that arise between the carrying amounts of assets and
liabilities reported in the consolidated balance sheet and their tax bases).
The tax base is determined in one of two ways: by reference to a consolidated
tax return in jurisdictions that require such a return; or by reference to
the tax returns of each individual entity in the group in other
jurisdictions. [IAS 12 para 11]. |
13.234.1 In a group, the tax positions of the
individual group members are unlikely to be similar. Some group members might
be profitable but others might make a loss; this will lead to different tax
considerations. Some group members might operate in the same tax
jurisdiction, but others might operate in different tax jurisdictions.
Consolidated financial statements are prepared as if the parent entity and
its subsidiaries were a single entity; so it follows that the group's tax
position needs to be viewed as a whole. A group's total tax liability is
determined by adding together the tax liability assessed under local tax laws
and borne by individual group members. |
13.235 Under IAS 27 and IFRS 10 (effective
for accounting periods beginning on or after 1 January 2013), a group should
follow uniform accounting policies in preparing consolidated financial
statements. Adjustments might be required at the consolidation level where an
overseas subsidiary has not followed group accounting policies (for example,
because of local requirements) in preparing its own financial statements.
These adjustments could result in additional temporary differences in the
consolidated financial statements for which deferred tax should be
recognised. |
13.236 Adjustments are also required to
eliminate various intra-group transactions so the group can be treated as a
single economic entity. Such adjustments affect the carrying amount of assets
and liabilities reported in the consolidated balance sheet; so they give rise
to additional temporary differences that defer or accelerate tax (from the
perspective of treating the group as a single entity). Such tax effects are
recognised as part of the group's deferred tax (see further para 13.252). |
13.237 The types of events and transactions
that normally give rise to deferred tax adjustments at the group level are as
follows: |
■ |
Business
combinations that are accounted for as acquisitions such as: |
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■ |
Fair
value adjustments. |
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■ |
Tax
deductible goodwill. |
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■ |
Any
additional assets and liabilities that are recognised at the date of
acquisition. |
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■ |
Deferred
tax assets and liabilities that were not recognised by the acquiree as a
result of initial recognition exception. |
|
■ |
Deferred
tax asset in respect of unrecognised tax losses or deductible temporary
differences of the acquiree. |
|
■ |
Deferred
tax asset in respect of unrecognised tax losses or deductible temporary
differences of the acquirer. |
|
■ |
Reverse
acquisitions. |
|
■ |
Intra-group
transactions eliminated on consolidation. |
|
■ |
Investments
in subsidiaries, associates and joint ventures. |
|
■ |
Foreign
currency translation. |
13.238
In a business combination, the identifiable assets and liabilities of the
acquired business are recognised in the consolidated financial statements at
their fair values at the date of acquisition (with limited exceptions). These
fair values of the individual assets and liabilities are often different from
the book values appearing in the acquired entity's own financial statements.
The tax bases of the assets and liabilities often remain the same; although
they sometimes change as a result of the acquisition. So temporary
differences arise on consolidation where the tax bases of the related assets
and liabilities are not affected by the business combination or are affected
differently. For example, a taxable temporary difference arises as a result
of the acquisition when the carrying amount of a non-monetary asset (such as
a building of the acquired entity) is increased to fair value at the date of
acquisition but its tax base remains at cost to the previous owner. The
deferred tax liability arising from this taxable temporary difference is
recognised in the consolidated financial statements to reflect the future tax
consequences of recovering the building's recognised fair value. The
resulting deferred tax liability affects goodwill. [IAS 12 para 19]. |
Example –
Deferred tax effects of fair value adjustments |
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On
1 January 20X5, entity H acquired all the share capital of entity S for
C1,500,000. The book values and the fair values of the identifiable assets
and liabilities of entity S at the date of acquisition are set out below,
together with their tax bases in entity S's tax jurisdictions. Any goodwill
arising on the acquisition is not deductible for tax purposes. The tax rates
in entity H's and entity S's tax jurisdictions are 30% and 40% respectively.
|
|
13.240
Goodwill arising in a business combination is sometimes deductible for tax
purposes through amortisation over a number of years rather than against
proceeds from sale of the acquired business. The goodwill is carried on the
balance sheet without amortisation; so management needs to determine the
appropriate tax base of the goodwill that reflects the manner in which it is
expected to be recovered. If goodwill impairment is not expected in the
foreseeable future, there might not appear to be an expectation of imminent
recovery through use; and so it might be expected that the goodwill will be
recovered solely through sale. The cost of the goodwill is not deductible
against sales proceeds; so, if this analysis is appropriate, its tax base is
nil and a taxable temporary difference exists between the carrying amount and
the tax base. But no deferred tax should be recognised on initial recognition
or later – see the exception outlined in paragraph 13.158. But the expected
manner of recovery should be considered more closely. When a business is
acquired, impairment of the goodwill might not be expected imminently; but it
would also be unusual for a sale to be expected imminently. So it might be
expected that the asset will be sold a long way in the future; in that case,
recovery through use over a long period (that is, before the asset is sold)
might be the expected manner of recovery. Management needs to exercise
judgement to determine the expected outcome; and this might be a key
judgement that should be disclosed (see para 13.307.2). |
13.241
Goodwill is not amortised for accounting purposes; but goodwill arising in a
business combination is an asset that can be consumed. The goodwill's
carrying amount needs to be tested for impairment annually and whenever there
is an indication that it might be impaired. Any impairment loss is recognised
immediately in profit or loss. Where an entity expects to recover the
goodwill's carrying amount at least partially through use (that is, not
solely through sale), temporary differences might arise using the tax base
that is consistent with recovery through use. Taxable temporary differences
arising at the time of the business combination would not be recognised (see
the exception outlined in para 13.158). If goodwill is amortised for tax
purposes but no impairment is recognised for accounting purposes, any
temporary differences arising between the (amortised) tax base and the
carrying amount will have arisen after the goodwill's initial recognition; so
they should be recognised. |
13.242
Referring to the example in paragraph 13.238, assume that goodwill of
C490,000 is deductible for tax purposes at the rate of 20% per annum (but
there is no tax deduction on sale). The goodwill has a tax base in use of
C490,000 on initial recognition, and no temporary difference arises where it
is expected to be recovered wholly through use. At the end of the year,
following a claim for tax deduction in that year of C98,000 (20% of
C490,000), the tax base of the goodwill will reduce to C392,000. The carrying
amount remains unchanged at C490,000 without any impairment; so a taxable
temporary difference of C98,000 arises (carrying amount of C490,000 less tax
base of C392,000). This taxable temporary difference arises during the year
and not on initial recognition; so a deferred tax liability is recognised.
[IAS 12 para 21B]. The tax deduction that should be recognised on
consolidation is C39,200 (40% of C98,000) because the goodwill's carrying
amount is recovered against S's taxable profits. By the end of year 5, the
deferred tax liability would increase to C196,000, as the cost of the
goodwill would have been fully amortised for tax purposes. The temporary
difference at that date would be C490,000 (carrying amount of C490,000 less
tax base of Cnil). This temporary difference and the corresponding deferred
tax liability will remain until a reversal occurs, either on the goodwill's
impairment or when the subsidiary is sold. |
13.243
In some jurisdictions, the goodwill's cost is deductible (for tax purposes)
only against proceeds from sale of the acquired business. Where the acquiring
entity expects to recover the goodwill's carrying amount through use, a
temporary difference arises in use. The goodwill's carrying amount exceeds
its tax base of nil. But no deferred tax is provided on a taxable temporary
difference arising on initial recognition of goodwill (see para 13.158). On
the other hand, if (a number of years after acquiring the business) the
entity changes its intended method of recovering the goodwill from use to
sale, the tax base of the goodwill reverts to its original cost on initial
recognition. A deferred tax asset might arise if (after initial recognition)
the goodwill has been impaired so that its carrying amount is less than its
tax base applicable on sale. |
13.243.1
An acquired entity might have tax-deductible goodwill from its own prior
acquisitions. For accounting purposes, the existing goodwill is included in
the goodwill arising on the new acquisition. But, in some jurisdictions, the
tax base in the original goodwill remains available to the acquired entity
and will be deductible over the remaining tax life. A question arises as to
how the temporary difference (if any) related to the tax-deductible goodwill
is determined. We believe that management needs to establish whether some of
the goodwill arising in the new acquisition relates to the tax-deductible
goodwill from the prior acquisition. If it does, an appropriate proportion of
the new goodwill should be allocated to that entity for the purpose of
determining the temporary difference. This approach is consistent with the
requirement in IAS 36 to allocate goodwill to groups of cash-generating units
for impairment testing purposes. The allocation should be made in a manner
consistent with the guidance in IAS 36 (that is, allocated to cash-generating
units that are expected to benefit from the synergies of the combination).
This approach is also consistent with the requirement in IAS 21 to allocate
goodwill to the different functional currencies in the acquired entity. The
deductible or taxable temporary difference is based on this allocation. |
13.244 Additional
assets and liabilities might be recognised that were not recognised in the
acquiree's financial statements before the acquisition. Examples of such
assets and liabilities include some intangible assets (see para 13.245)
and contingent tax liabilities (see para 13.246). |
Intangible
assets |
|
13.245
An acquirer recognises an all
identifiable intangible assets of the acquire at the acquisition date as
assets separately from goodwill, regardless of whether they were recognised
by the acquiree before the business combination. See further chapter 25 |
13.245.1
Where such additional assets are recognised, the deferred tax effects should
also be recognised. The initial recognition exception for deferred tax that
applies to goodwill is not extended to such intangible assets arising on a
business combination. This is because, unlike goodwill, such intangible
assets are not residuals. Also, a reason for not recognising deferred tax on
goodwill is to avoid having to gross-up both sides of the balance sheet
because goodwill and the related deferred tax are mutually dependent (see
para 13.159); such dependency does not exist for other intangible assets. |
Example –
Deferred tax on intangible assets |
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The facts are the same as in the
example in paragraph 13.238, except that an intangible asset not previously
recognised by the acquiree was identified on acquisition and measured at its
fair value of C130,000. The intangible asset will be amortised over its
useful life of 10 years, but the amortisation will not be deductible for tax
purposes. |
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13.245.2
Even if the intangible asset acquired on the business combination has an
indefinite useful life (and is not amortised for accounting purposes and is
also not deductible for tax purposes), a deferred tax liability should be
recognised based on management's expectation of the asset's manner of
recovery, for the reasons stated in the previous paragraph. So, in this
situation, the goodwill arising on acquisition would be calculated in the
same way as indicated above. The only difference is that the deferred tax
liability of C52,000 would remain on the balance sheet, but would be released
through profit or loss on sale or impairment. See further paragraph
13.225.1. |
|
Contingent
tax liabilities – IFRS 3 |
13.246.2
Contingent liabilities are separately recognised in a business combination
where fair value can be measured reliably. [IFRS 3 para 23]. Contingent
liabilities recognised in acquisition accounting are measured subsequently at
the higher of the amount recognised in accordance with IAS 37 and the amount
initially recognised less any amortisation recognised under IAS 18. [IFRS 3
para 56]. This differs from IAS 37's requirements, where a provision is
recognised only when the outflow of economic resources is probable. |
13.246.3
The exceptions to IFRS 3's basic recognition and measurement principles are
listed in its introduction. The list of exceptions includes assets and
liabilities falling within IAS 12's scope. But the detailed guidance
specifies only that deferred tax assets and liabilities in a business
combination should be accounted for under IAS 12; and it is silent about
current tax assets and liabilities and tax contingencies. |
13.246.4
We believe that there are two acceptable approaches to recognising contingent
tax liabilities in a business combination. IFRS 3 refers to IAS 37 only in
the context of contingent liabilities; and income taxes are listed in the
introduction to IFRS 3 as an exception to the recognition and measurement
principles. So it can be argued that IFRS 3 does not apply to tax
contingencies. Contingent tax liabilities might be recognised when the
outflow is probable under IAS 12 (see para 13.74 onwards). Alternatively it
could be argued that IFRS 3 applies to all contingent liabilities and that
the exception applies only to deferred taxes; so it is also acceptable to
recognise and measure contingent tax liabilities at fair value under IFRS 3. |
13.247
In some circumstances, the deferred tax effects of temporary differences
arising on acquisition might not have been recognised by the acquiree because
those differences fell within the initial recognition exception (see para
13.162). The deferred tax effects of such temporary differences should be
recognised on consolidation, even though they were not recognised by the
acquired entity itself. This is because (from the group's perspective) any
additional deferred tax balances are recognised as a result of the business
combination and not from an initial recognition of the asset or liability. |
Example –
Impact of initial recognition exception taken by the acquiree |
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The facts are the
same as in the example in paragraph 13.238, except that entity S purchased a
specialised factory in an enterprise zone where such factories are eligible
for tax allowances at 150% of their purchase cost. The factory cost C150,000;
and that amount was also its fair value at the date of acquisition. The tax
base of the property on initial recognition was C225,000, but no deferred tax
asset was recognised on the excess tax allowances of C75,000 because of the
initial recognition exception.
|
|
13.249.3
An acquirer accounts under IAS 12 for the potential tax effects of an
acquiree's temporary differences and carry-forwards that exist at the
acquisition date or arise as a result of the acquisition. [IFRS 3 para 25]. A
deferred tax asset is recognised for the carry-forward of unused tax losses
and unused tax credits to the extent that it is probable that future taxable
profit will be available against which the unused tax losses and credits can
be utilised (see para 13.144 onwards). [IAS 12 para 34]. |
13.249.4
In some circumstances, the acquiree might not have recognised a deferred tax
asset in respect of its past tax losses, because it was uncertain whether
future taxable profits would be available. But, as a result of its
acquisition, the acquirer might determine that it is probable that other
entities within the group will have sufficient taxable profits in the future
to realise the tax benefits through transfer of those losses as permitted by
the tax laws. So a deferred tax asset attributable to the unrelieved losses
should be recognised as a fair value adjustment. The acquired entity's
deferred tax assets are recognised in purchase accounting (even if they had
not been recognised before the acquisition), provided they meet IAS 12's
recognition criteria in the context of the enlarged group. |
13.249.5
If the potential benefits of the acquiree's unused tax losses or other
deferred tax assets do not satisfy the criteria for separate recognition when
a business combination is initially accounted for but are subsequently
realised, an entity recognises these deferred tax assets as follows: |
■ |
Acquired deferred tax benefits
recognised within the measurement period (resulting from new information
about facts and circumstances that existed at the acquisition date) are
applied to reduce the carrying amount of any goodwill related to that
acquisition. If the carrying amount of that goodwill is zero, any remaining
deferred tax benefits are recognised in profit or loss. |
■ |
All other acquired deferred tax
benefits realised are recognised in profit or loss (or outside profit or
loss, if required by IAS 12). |
[IAS 12 para 68]. |
13.249.6
An example of the above is included in Table 13.1. |
13.249.7
Deferred tax benefits acquired in a business combination might not be
recognised at the acquisition date but are recognised later; in that case, a
description of the event or change in circumstances that caused the deferred
tax benefits to be recognised needs to be disclosed. [IAS 12 para 81(k)]. See
paragraph 13.292.2. |
13.250
As a result of a business combination, an acquirer might consider it probable
that it will recover its own
unused tax losses against the future taxable profit of the acquiree. In that
situation, the standard does not permit a deferred tax asset to be recognised
in the fair value exercise or any consequential effect on goodwill arising on
the business combination. [IAS 12 para 67]. This is because those losses are
not the acquiree's losses; so they would not have met the criteria for
separate recognition as an identifiable asset in paragraph 10 of IFRS 3.
Instead, the deferred tax asset should be recognised in the separate and
consolidated financial statements of the acquirer; and there should be a
corresponding credit to the tax charge in profit or loss. |
13.250.1
Paragraph 67 of IAS 12 refers to any change in the probability of realising a
pre-acquisition deferred tax asset of the acquirer as a result of a business
combination. An acquirer might consider it probable that it will recover its
own deferred tax asset that was not recognised before the business
combination. For example, the acquirer might be able to utilise the benefit
of its unused tax losses against the acquiree's future taxable profit. Or the
business combination might no longer be probable that the deferred tax asset
will be recovered from future taxable profit. In such cases, the acquirer
recognises a change in the deferred tax asset in the period of the business
combination, but does not include it in the accounting for the business
combination. In other words, the acquirer does not take it into account in
measuring the goodwill or bargain purchase gain recognised in the business
combination. [IAS 12 para 67]. |
13.250.2
If a business combination changes the amount recognised by the acquirer for
its pre-acquisition deferred tax asset, the amount of that change is required
to be disclosed. [IAS 12 para 81(j)]. See paragraph 13.292.2. |
13.251
In some business combinations, the acquirer (for accounting purposes) is the
entity whose equity interests have been acquired; and the legal parent entity
is treated as the acquired entity. These combinations are commonly referred
to as 'reverse acquisitions'. [IFRS 3 para B19]. Accounting for reverse
acquisitions is dealt with in chapter 25. |
13.251.1
For deferred tax accounting, where a temporary difference arises on the
initial recognition of an asset or liability in a business combination, the
initial recognition exception referred to in paragraph 13.162 does not apply.
What does this mean in the case of a reverse acquisition? |
13.251.2
Under reverse acquisition accounting, the legal acquired entity is treated
(for the purposes of the consolidated financial statements) as the acquirer;
and the legal parent is treated as the acquired entity. So it is the legal
parent's assets and liabilities that are fair valued under IFRS 3. In a business
combination, the acquired entity's assets and liabilities do not qualify for
the initial recognition exception, but the acquirer is unaffected. This is
the case, even if the acquirer for accounting purposes is not the legal
acquirer. In other words, the entity that is the legal acquired subsidiary
(but which, for accounting purposes, is the acquirer) continues to qualify
for the initial recognition exception because its net assets are recorded in
the consolidated financial statements at existing book values. The entity
that is the new legal parent (but which, for accounting purposes, is the
acquired entity) does not qualify for the initial recognition exception; so
deferred tax is recognised in the consolidated financial statements on any
temporary differences on its assets and liabilities. |
13.251.3
A similar situation arises where a new parent entity is added to an existing
group; this is achieved by setting up a new shell entity (newco) that issues
equity shares to the existing shareholders in exchange for shares in the
existing group. Such a transaction is accounted for as a 'reorganisation'.
Where a reorganisation has occurred, the new entity's consolidated financial
statements are prepared using the book values from the previous holding entity's
consolidated financial statements. Any previous use of the initial
recognition exception by the previous holding entity would be carried forward
into the new consolidated financial statements. Accounting for a new entity
added to a group is dealt with in chapter 25. |
13.252
Consolidation adjustments can have tax consequences. Where such adjustments
give rise to temporary differences, deferred tax should be provided under IAS
12. A typical consolidation adjustment is where unrealised profits and losses
are eliminated on an intra-group transfer of inventories. Such an adjustment
gives rise to a temporary difference that will reverse when the inventory is
sold outside the group. |
Example –
Deferred tax effects of intra-group transactions |
A subsidiary sells goods costing
C60,000 to its parent entity for C70,000; and these goods are still held in
inventory at the year end. A consolidation adjustment is required in the
financial statements to eliminate the unrealised profit of C10,000 from
consolidated income statement and from group inventory. The sale of inventory
between the two companies is a taxable event that changes the inventory's tax
basis. The difference between the carrying amount of the inventory of C60,000
in the consolidated financial statements and the appropriate tax base of
C70,000 (from the parent's perspective) gives rise to a deductible temporary
difference. |
If the parent and the subsidiary were
resident in the same tax jurisdiction and paid income tax at 30%, a deferred
tax asset of C3,000 (C10,000 @ 30%) would be recognised in the consolidated
financial statements. The resulting credit to income would offset the tax
charge on the profit made by the subsidiary. The deferred tax asset would be
recovered when the parent sells the inventory to a party outside the group. |
But if the parent and subsidiary were
resident in different tax jurisdictions and paid income tax at 40% and 30%
respectively, a deferred tax asset of C4,000 (C10,000 @ 40%) would be
recognised in the consolidated financial statements. The new tax basis of the
inventory (C70,000) is deductible on the buyer's tax return when the cost of
the inventory (that is, C60,000 after elimination of intra-entity profit) is
recovered. Since tax is expected to be paid at 40% when the inventory is sold
by the intermediate buyer, it follows (from the expected manner of recovery
rule discussed in para 13.170) that the resulting deferred tax asset arising
on the deductible temporary difference should be measured at that rate. In
the consolidated financial statements, the resulting tax credit of C4,000
would exceed the tax charge of C3,000; and the excess of C1,000 (representing
the excess tax benefit attributable to the transferred inventory) would
reduce the consolidated tax expense (income) of the period, even though the
pre-tax effects of the transaction had been eliminated in full. |
13.253
This section deals with the deferred tax implications in consolidated
financial statements of investments in subsidiaries, branches, associates and
joint ventures. (The deferred tax implications of such investments in the
separate financial statements of the parent or investor are dealt with in
para 13.233 onwards.) In the consolidated financial statements of the parent
or investor, the investment is recorded by consolidating the subsidiary's net
assets (line-by-line) or by using the equity method for interests in
associates or joint ventures. |
13.254
A temporary difference might arise between the investment's carrying amount
in the consolidated financial statements and its tax base (which is often
cost or indexed cost). This temporary difference is sometimes referred to as
'outside basis' difference. It is additional to the temporary differences relating
to the investee's underlying assets and liabilities (sometimes referred to as
'inside basis' difference). The temporary difference relating to the
investment might arise in a number of situations. The most common situation
is where undistributed profits in the investee increase the parent's
investment in the investee to above its tax cost. Other situations include a
reduction in the investment's carrying amount to below tax cost due to
impairment; and changes in the investment's carrying amount as a result of
changes in foreign exchange rates where the investing entity and its
investees are based in different countries. [IAS 12 para 38]. The carrying
amounts for such investments or interests can be recovered through
distributions or disposal. Management needs to determine the deferred tax
implications based on the manner in which it expects to recover the
investment. |
13.255
Accordingly, an entity should recognise a deferred tax liability for all
taxable temporary differences associated with investments in subsidiaries,
branches and associates, and interests in joint ventures, except to the
extent that both of the following conditions are satisfied: |
■ |
the parent, investor or venturer 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. |
[IAS 12 para 39]. |
13.255.1
Deferred tax assets arising on investments in subsidiaries, branches and
associates, and interests in joint ventures, are addressed in paragraph
13.268 onwards. |
13.256 In a
parent/subsidiary relationship, the parent controls the subsidiary's
financial and operating policies (including its dividend policy). So the
parent can control the timing of the reversal of the temporary differences
arising from that investment (including the temporary differences arising
from undistributed profits and from any foreign exchange translation
differences). Therefore, where the parent entity (and thus the economic
entity – the group) has determined that the subsidiary's profits and reserves
will not be distributed in the foreseeable future and that the subsidiary
will not be disposed of, it does not recognise a deferred tax liability that
arises from the investment in the subsidiary in its separate and consolidated
financial statements. [IAS 12 para 40]. |
13.257 Where no deferred
tax is provided, the total amount of taxable temporary difference should
still be disclosed (see further para 13.303). But the group continues to
recognise (subject to adjustments arising on consolidation) the deferred tax
assets and liabilities that are recognised in the subsidiary's own financial
statements and those that arise from fair value adjustments on acquisition of
that subsidiary. |
13.258 The parent's
management needs to be able to provide sufficient evidence that the
undistributed earnings will continue to be reinvested for the foreseeable
future as part of the parent's continuing investment in that subsidiary. This
evidence might include documentary resolutions by the parent's management,
formal communication to minority shareholders and specific plans for
reinvesting the funds. Such plans should take into consideration some or all
of the following factors: (a) the financial requirements of the parent and
the subsidiary; (b) long-term and short-term operational and fiscal
objectives; (c) remittance restrictions imposed by governments, financing
agreements or others; and (d) tax consequences of any remittances. |
13.259 In practice, most
parent entities would not recognise a deferred tax liability in respect of a
subsidiary's undistributed profits; exceptions are where profits will be
distributed in the foreseeable future, or the subsidiary will be disposed of.
It is often difficult to determine the amount of further taxes that would be
payable on remittance, as it will depend on the following factors: the tax
laws and rates in the countries where the parent and subsidiary are located;
the terms of the tax treaties (if any) between the two countries; and/or the
time when the profits were earned and the level of the parent entity's local
taxable profits at the time of remittance. Difficulties might also arise if
the reporting entity has complex structures. For example, a reporting entity
with many layers of intermediate holding companies might have several
alternative routes for recovering an investment; and each route could have
different tax consequences. In such cases, management should judge the manner
in which the investment is expected to be recovered; and it should calculate
any deferred tax on that basis. |
13.260 An example
illustrating the above principles is given in example 3 of appendix B to the
standard; and it is reproduced here with appropriate adjustments and
amendments. |
Example – Deferred tax on
investment in subsidiary |
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|
On
1 January 20X5, entity A acquired 100% of the shares of entity B at a cost of
C600,000. At the acquisition date, the tax base (in entity A's tax
jurisdiction) of A's investment in entity B is C600,000. Reductions in the
carrying amount of goodwill are not deductible for tax purposes; and the
goodwill would also not be deductible if entity B disposed of its underlying
business. The tax rate in entity A's tax jurisdiction is 30%; and the tax
rate in entity B's tax jurisdiction is 40%. |
||
|
|
|
Goodwill arising on consolidation is
calculated as follows: |
C'000 |
C'000 |
Fair
values of entity B's identifiable assets and
liabilities (excluding deferred tax) at 1 January 20X5 |
|
504 |
Less:
Tax base of assets acquired and liabilities assumed |
|
(369) |
|
|
|
Temporary
difference arising on acquisition |
|
135 |
|
|
|
Deferred
tax liability arising on acquisition of entity B
(C135,000 @ 40%) |
|
54 |
|
|
|
Purchase
consideration |
|
600 |
Fair
values of entity B's identifiable assets and
liabilities (excluding deferred tax) |
504 |
|
Deferred
tax liability calculated as above |
(54) |
450 |
|
|
|
Goodwill
arising on acquisition |
|
150 |
|
|
|
No
deduction is available in entity B's tax
jurisdiction for the cost of the goodwill. So the tax base of the goodwill in
entity B's jurisdiction is nil. But, under IAS
12, entity A does not recognise any deferred tax liability for the taxable
temporary difference associated with the goodwill in entity
B's tax jurisdiction (see para 13.159). |
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|
|
|
During
the year ended 31 December 20X5, entity B made a profit of C150,000 and
declared a dividend of C80,000. The dividend was appropriately authorised;
and it was recognised as a liability by entity B at 31 December 20X5. The net
assets of entity B at 31 December 20X5 are as follows: |
||
|
|
|
Net
assets at 1 January 20X5 (incorporating the above fair value adjustments) |
|
450 |
Retained
profits (net profit of C150,000 less dividends payable of C80,000) |
|
70 |
|
|
|
Net
assets at 31 December 20X5 |
|
520 |
|
|
|
Entity A's separate financial
statements |
|
|
Investment
in entity B |
|
600 |
Tax
base |
|
600 |
|
|
|
Temporary
difference |
|
Nil |
|
|
|
Entity A recognises a
liability for any withholding tax or other taxes that it will incur on the
accrued dividend receivable of C80,000. |
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|
|
|
Entity A's consolidated financial
statements |
|
|
At
31 December 20X5, the carrying amount of entity
A's underlying investment in entity B (excluding
accrued dividend) is as follows: |
||
|
|
|
Net
assets of entity B |
|
520 |
Goodwill |
|
150 |
|
|
|
Carrying
amount |
|
670 |
|
|
|
Temporary
difference associated with entity A's investment
in entity B is |
|
|
Carrying
amount as above |
|
670 |
Tax
base |
|
600 |
|
|
|
Temporary
difference = cumulative retained profits since acquisition |
|
70 |
|
|
|
If
entity A has determined that it will not sell the investment in the foreseeable
future and that entity B will not distribute its retained profits in the
foreseeable future, no deferred tax liability is recognised in relation to
entity A's investment in entity B. But entity A discloses the amount of the
temporary difference of C70,000 that is not expected to reverse in the
foreseeable future. |
||
|
||
On
the other hand, if entity A expects to sell the investment in entity B (or
that entity B will distribute its retained profits in the foreseeable
future), it recognises a deferred tax liability to the extent that the
temporary difference is expected to reverse. The tax rate should reflect the
manner in which entity A expects to recover the carrying amount of its
investment (that is, through dividends or by selling or liquidating the
investment). If entity B is dissolved and retained profits are remitted, the
realisation of its assets and the remittance of the proceeds could result in
capital gains taxes and/or withholding taxes in entity B's tax jurisdictions
and capital gains taxes in entity A's tax jurisdictions |
||
13.261 A parent's
management might decide to recover the carrying amount of its investment in a
subsidiary through future distributions. For example, suppose that a parent
entity has not previously recognised a deferred tax liability on a
subsidiary's undistributed profits amounting to C1,000,000. The subsidiary
currently expects to generate earnings of at least C200,000 a year for the
foreseeable future. So the parent's management decides to realise earnings
(through future dividend payments from the subsidiary) of C200,000 a year.
The fact that the subsidiary intends to distribute earnings would initially
call into question the 'reinvestment for the foreseeable future' assertion.
But, if management can establish that the distributions will be no more than future earnings, the 'reinvestment for
the foreseeable future' assertion might still be sustainable. |
13.262 So, if the parent
can provide sufficient corroborating evidence (as discussed in para 13.258)
regarding the need to reinvest for the foreseeable future the undistributed
profits that have been brought forward – and if it is reasonable to expect
the subsidiary to generate annual earnings of at least C200,000 – there is no
need to recognise a deferred tax liability relating to the undistributed
earnings that have been brought forward. On the other hand, if management
intends to distribute C200,000 a year (regardless of the subsidiary's
earnings), circumstances will have changed regarding the 'reinvestment for
the foreseeable future' assertion; so a deferred tax liability will need to
be recognised immediately (at the applicable tax rate) and there should be a
corresponding tax charge in profit or loss. |
13.263 A reporting entity
that operates a branch will recognise the branch's assets and liabilities and
related deferred tax in its own financial statements. In some jurisdictions,
tax consequences might arise when the branch distributes profits or is sold.
A temporary difference might arise between the carrying amount of the
reporting entity's net assets in the branch and the tax base of the reporting
entity's investment in the branch (as for subsidiaries). Where the reporting
entity has determined that the retained profits in the branch will not be
distributable in the foreseeable future, and that the branch will not be
sold, it does not recognise a deferred tax liability in relation to its investment
in the branch. [IAS 12 para 40]. See further paragraph 13.274. |
13.264 In the investor's
consolidated financial statements, an associate is accounted for using the
equity method of accounting. The carrying amount of the investment is
initially cost, adjusted for the post-acquisition change in the investor's
share of the associate's net assets. Where the investment is expected to be
recovered through sale, the tax base is often the amount paid for the shares
in the associate. So a temporary difference arises between the investment's
carrying amount and its tax base (for the reasons set out in para 13.254). |
13.265 An investor has
significant influence over the associate: it has the power to participate in
the associate's financial and operating policy decisions; but it does not
have control over those policies. So the investor cannot control the
associate's dividend payments. Unless there is an agreement that the
associate's profits will not be distributed in the foreseeable future, an
investor recognises a deferred tax liability in relation to taxable temporary
differences arising from the associate's undistributed profits. [IAS 12 para
42]. In practice, such an agreement is unlikely to exist; so a deferred tax
liability would be recognised for most associates in respect of
post-acquisition earnings. But (for reasons stated in para 13.259) it might
not be possible to determine the tax that will be payable when the investment
cost is recovered – whether through distribution of the retained profits or
through disposal. In that case, the standard suggests that the entity should
recognise the minimum amount that can be determined. [IAS 12 para 42]. |
Example – Deferred tax on
investment in associate |
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On
1 January 20X5, entity A acquired 40% of the shares of a foreign entity B at
a cost of FC1m (FC = foreign currency). At the acquisition date, the tax base
(in entity A's jurisdiction) of entity A's investment in entity B is
C500,000. |
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|
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During
the year ended 31 December 20X5, entity B made a profit of FC240,000. The
exchange rate at 1 January 20X5 was C1:FC2; and at 31 December 20X5 it was
C1:FC1.6. The tax rate in entity A's jurisdiction is 30%. |
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|
|
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Entity B's net assets |
FC'000 |
C'000 |
||||||||||||||||||||||||||||||
Book
value = Fair values of entity B's identifiable assets and liabilities at 1
Jan 20X5 |
1,200 |
|
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Profit
for the year |
240 |
|
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|
|
|
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Net
assets at 31 December 20X5 |
1,440 |
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|
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Calculation of goodwill on
acquisition |
|
|
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Purchase
consideration |
1,000 |
|
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Share
of entity B's net assets at acquisition (40% of FC1,200,000) |
(480) |
|
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|
|
|
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Goodwill
arising on acquisition |
520 |
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|
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Equity carrying amount of investment
in entity B at 31 December 20X5 |
|
|
||||||||||||||||||||||||||||||
Share
of entity B's net assets at 31 December 20X5 (40% of FC1,440,000 @ 1.6) |
|
360 |
||||||||||||||||||||||||||||||
Goodwill
arising on acquisition (FC520,000 @ 1.6) |
|
325 |
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|
|
|
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Equity
interest at 31 December 20X5 |
|
685 |
||||||||||||||||||||||||||||||
Tax
base = cost of shares |
|
500 |
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|
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Temporary
difference |
|
185 |
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Temporary difference comprises |
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|
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Share
of retained profits (40% of FC240,000 @ 1.6*) |
|
60 |
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Share
of exchange difference on opening net assets – 40% of (FC1,200,000 × (1/1.6 –
1/2)) |
|
60 |
||||||||||||||||||||||||||||||
Exchange
difference on goodwill – FC520,000 × (1/1.6 – 1/2) |
|
65 |
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|
185 |
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*
Under IAS 21, a weighted average exchange rate is used for translating the
share of profit (see chapter 7). For simplicity in this example it is assumed
that the weighted average exchange rate is the same as the closing rate. |
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Entity
A would recognise a deferred tax liability in its consolidated financial
statements as follows: |
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13.266 The IASB issued
IFRS 11 to replace IAS 31; and the new standard is effective for annual
periods beginning on or after 1 January 2013. Under the new standard, joint
arrangements could be joint operations or joint ventures. In the case of
joint operations, the joint operator recognises in its balance sheet the
assets that it holds and the liabilities that it has incurred in respect of
the joint operation, including its share of assets held jointly and
liabilities incurred jointly. The related tax bases would also be included in
the joint operator's tax balance sheet. So any temporary differences arising
between the carrying amounts and the tax bases of the assets and liabilities
should be recognised; and deferred taxes should be provided in the normal
way. |
13.267 In the case of
joint ventures, the investor accounts for its investment using the equity
method. Temporary differences would arise between the carrying amount of the
investor's interest (that is, the investor's capital contributions plus its
share of undistributed profit) and the tax base of the investment. The terms
of the contractual arrangement between the venturers on the retention of any
profit in the joint venture will determine whether any deferred tax should be
provided on the temporary difference (that is, similar to the treatment for
associates – see para 13.264 onwards). Where the venturer can control the
timing of the distribution of its share of the profits, and it is probable
that the profits will not be distributed in the foreseeable future, a
deferred tax liability is not recognised. [IAS 12 para 43]. But the amount of
any taxable temporary difference should be disclosed. |
13.268 An entity should
recognise a deferred tax asset for all deductible temporary differences
arising from investments in subsidiaries, branches and associates, and
interests in joint ventures, to the extent that it is probable that: |
■ |
the
temporary difference will reverse in the foreseeable future; and |
■ |
taxable
profit will be available against which the temporary difference can be
utilised. |
[IAS
12 para 44]. |
13.268.1 A deferred tax
asset might arise in the reporting entity's separate or consolidated
financial statements in relation to its investment in a subsidiary, associate
or joint venture. For example, the carrying amount of the investment might
have been written down to its recoverable amount as a result of impairment,
but the tax base remains unaffected. A deferred tax asset that arises should
be recognised only if the reporting entity expects that the temporary
difference will reverse in the foreseeable future and also expects that
taxable profit will be available against which the temporary difference can
be utilised. For instance, the temporary difference could be reversed if the
investment is sold or if a tax deduction is received for an impairment charge
that was previously disallowed. The entity should consider the guidance (set
out at para 13.128 onwards) to determine whether the deferred tax asset
should be recognised. It should be noted that this deferred tax asset is
separate from those that might arise in the financial statements of the
subsidiary, associate or joint venture. |
13.269 A number of
entities around the world do not pay tax (see para 13.233.8); but their
profits are taxable in the hands of the investors. Examples of such
entities are partnerships, UK limited liability partnerships (LLPs) and US
limited liability companies (LLCs). As well as giving rise to accounting
issues in the investor's separate financial statements (see para 13.233.8
onwards), this tax structure can give rise to accounting issues in the
investor's consolidated financial statements. |
13.269.1 One accounting
issue relates to the presentation of tax in profit or loss where an
investment in a tax-transparent entity is accounted for in consolidated
financial statements under the equity method. Consider an investor that has a
number of subsidiaries and an investment in an associate. The associate is a
limited liability partnership, which is not itself subject to tax; but its
investors are taxed on their share of the profits. When the associate is
included in the investor's consolidated financial statements, a question
arises on the tax impact (current and deferred) of the associate's profits:
should they be included within the associate's equity-accounted profits and
net assets; or should they be reported within the group's tax charge and as
part of the group's current and deferred tax liability? |
13.269.2 Our view is that
the tax (current and deferred) is reported as part of the group's tax charge;
and the corresponding liability is added to the group's current and deferred
tax liability. This view is supported by the example in IAS 1, which has a
footnote explaining that the equity-accounted profit of an associate is "… the share of associates' profit attributable to
owners of the associates, ie it is after tax and non-controlling interests in
the associates". We consider that the tax (current and deferred)
should be reported as part of the group's tax (and not as part of the
associate's equity-accounted profit and net assets) because the tax does not
arise in the associate but is levied instead on the investor. |
13.269.3 Another deferred
tax accounting issue arises on acquisition of a tax-transparent associate. If
a taxable temporary difference arises, management needs to consider how to
account for that temporary difference. We consider that there are two
acceptable accounting treatments. |
13.269.4 The acquisition of
the associate does not give rise to an initial accounting or taxable profit;
so it does not logically follow that a deferred tax charge should be recorded
in profit or loss. We consider that the initial recognition exception in
paragraph 15(b) of IAS 12 applies because the acquisition of an associate is
not a business combination (see further para 13.162). So no deferred tax is
generally recognised on initial acquisition of a tax-transparent associate. |
13.269.5 The alternative
acceptable view is that the deferred tax liability arising on acquisition of
the associate (for example, on previously unrecognised intangibles or
goodwill) is recognised. Any deferred tax liabilities arising on this
acquisition are recognised as deferred tax liabilities of the group (as
explained in para 13.269.2) – that is, outside the associate's
equity-accounted amounts. The question then arises of how to account for the
debit relating to this deferred tax liability. We consider that the debit is
taken to the associate's equity-accounted share of net assets. This follows
from applying business combination principles and adjusting deferred tax
against goodwill. But, because goodwill on acquisition of an associate is
combined with all the other assets and liabilities for presentation in the
consolidated financial statements, it is this single line item that should be
debited to allow recognition of deferred tax. IAS 28 requires that an
associate is initially recorded at cost. Under the IASB's Framework, cost is
the amount of cash or cash equivalents paid or the fair value of other
consideration given. It can be argued that the assumption of the tax
liability by the investor is part of the consideration for the acquisition,
and so increases its cost. |
13.269.6 The accounting
treatment set out in paragraph 13.269.5 adds the debit to the carrying amount
of the equity-accounted investment; so the accounting carrying amount is
changed. Any consequential effect on the temporary difference would need to
be considered. This accounting treatment could result in an iterative process
to arrive at the carrying amount of the equity-accounted investment and the
deferred tax liability. |
13.270 Gains or losses
arising on the translation of an entity's own overseas assets (including
investments in subsidiaries and associated companies) and liabilities can
give rise to temporary differences; this depends on whether or not the gains
or losses have a tax effect. Also, the translation of foreign entities'
financial statements can sometimes give rise to temporary differences on
which deferred tax might need to be recognised. |
13.271 An entity's
foreign currency monetary assets and liabilities are translated at the end of
each reporting period; and the resulting gain or loss is recognised in profit
or loss. Such gains or losses might be taxable (or tax deductible) in the
period in which they are realised. So the tax base of the asset or liability
is not changed as a result of the change in exchange rate. The difference
between the translated carrying amount and its tax base (that is, original
carrying amount) might give rise to a taxable or deductible temporary
difference. |
Example – Foreign currency and
deferred tax |
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|
|||||||||||||||||||||||||||||
Entity
A sold goods to overseas customers for FC250,000 on 1 November 20X3. At 31
December 20X3, the receivable was still outstanding. Revenue is recognised on
an accrual basis for both accounting and tax purposes. Exchange differences
are not assessable for tax purposes in entity A's country until they are
realised. |
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|
|
||||||||||||||||||||||||||||
1
November 20X3 |
C1:FC1.60 |
||||||||||||||||||||||||||||
31
December 20X3 |
C1:FC1.65 |
||||||||||||||||||||||||||||
|
|
||||||||||||||||||||||||||||
Management should calculate the tax
base of the receivable balance at 31 December 20X3 as follows:
|
13.271.1 The related
deferred tax is recognised in profit or loss (see scenario B, example 2 in
para 13.119). But, where the exchange differences are recognised outside
profit or loss (for example, foreign currency borrowings hedging a net
investment in the consolidated financial statements or qualifying as a
hedging instrument in a cash flow hedge), the deferred tax is also recognised
outside profit or loss. |
13.272 Where an entity
holds a non-monetary asset in a foreign country, the asset's carrying amount
(in the absence of any impairment) is its historical purchase price
translated at the exchange rate at the date of purchase. To the extent that
the asset's realisation (through use or sale) gives rise to tax consequences
in the foreign country, the asset's tax base changes as the exchange rate
changes; but the carrying amount remains the same. A deferred tax asset
(subject to meeting the recognition test) or a deferred tax liability should
be recognised on the temporary difference that arises (see also para 13.274). |
13.273 Exchange
differences arise when the results and financial position of a foreign
operation are translated into a presentational currency (for inclusion in the
reporting entity's financial statements) by consolidation, or the equity
method. Such exchange differences arise because the income statement items
are translated at the average rate; and balance sheet assets and liabilities
are translated at the closing rate. Exchange differences also arise when the
opening net assets are translated at a different closing rate to the previous
closing rate. All such exchange differences are recognised in a separate
component of equity in the consolidated financial statements; and they are
shown in other comprehensive income. From a deferred tax perspective, such
exchange differences should not give rise to any temporary differences
associated with the foreign operation's assets and liabilities. This is
because the carrying amounts of the assets and liabilities and their
respective tax bases will be measured in the foreign entity's functional
currency at the balance sheet date; so any temporary differences arising
would have been recognised by the foreign entity as part of its deferred tax
balances in its own financial statements. These deferred tax balances
(translated at the year-end exchange rate) will simply flow through on
consolidation; and no further adjustment is necessary. |
13.273.1 Although temporary
differences do not arise from translation of the financial statements of a
foreign operation, they might arise on consolidation; this occurs as a result
of the difference between the translated amount of the reporting entity's net
investment in the foreign operation (effectively the group's share of net
assets) and the tax base of the investment itself in the reporting entity.
See paragraph 13.256 onwards and an example in paragraph 13.265 illustrating
the tax effect of exchange differences. |
13.274
Where the activities of a reporting entity's foreign branch are carried out
as an extension of the reporting entity (rather than being carried out with
any significant degree of autonomy), the foreign branch's functional currency
is the same as that of the reporting entity. But changes in exchange rates
give rise to temporary differences if the foreign branch's taxable profit or
tax loss (and hence the tax base of its non-monetary assets and liabilities)
is determined in the foreign currency. This is because the carrying amounts
of the foreign branch's non-monetary assets and liabilities (which are
translated into the reporting entity's currency at the historical rate)
differ from their tax bases (which are translated at exchange rates
prevailing at the reporting date). A deferred tax asset (subject to the
recognition test) or a deferred liability should be recognised on such
temporary differences. The resulting deferred tax is credited or charged to
profit or loss. [IAS 12 para 41]. Note that these deferred tax balances
relate to the foreign branch; and they are in addition to those that can
arise from the reporting entity's investment in the foreign branch (discussed
above). |
Example –
Deferred tax and foreign branch |
|||
|
|||
An entity operates a foreign branch
that has the same functional currency as the entity. At 1 January 20X5, the
foreign branch acquires a property for FC540,000 (FC = foreign currency) when
the exchange rate is C1:FC12. The asset has an expected useful life of 5
years and zero residual value. For tax purposes, the asset is written off
over 3 years. The exchange rate at 31 December 20X5 is C1:FC9. The tax rates
in the entity's country and the foreign country are 30% and 25% respectively. |
|||
|
|||
At 31 December 20X5, a temporary
difference arises in respect of the property as follows: |
|||
|
Foreign branch |
Exchange rate |
Entity |
|
FC |
C1 = FC |
C |
Net
book value of property |
|
|
|
Cost |
540,000 |
12 |
45,000 |
Depreciation charge for the year |
(108,000) |
|
(9,000) |
|
|
||
Net book value |
432,000 |
|
36,000 |
|
|
||
Tax
base of property |
|
|
|
Cost |
540,000 |
|
|
Tax depreciation claimed |
(180,000) |
|
|
|
|
|
|
|
360,000 |
9 |
40,000
* |
|
|
||
Temporary difference |
72,000 |
|
(4,000) |
|
|
||
Deferred tax @ 25%** |
18,000 |
|
(1,000) |
|
|
||
* The tax base is measured at the
year-end rate because this rate gives the best measure of the reporting
currency amount that will be deductible in future periods. |
|||
|
|||
** The tax rate is 25% (that is, the
rate applicable to the foreign country) because the entity will be taxed on
the asset's recovery in that jurisdiction. |
|||
|
|||
A taxable temporary difference arises
in the foreign entity; but a deductible temporary difference arises in the
reporting entity. This is because (following the change in exchange rate from
FC12 to FC9) the foreign currency revenue required to recover the asset's
reporting currency carrying amount is C36,000 @ 9 = FC324,000; but the tax
base of the asset remains at FC360,000. This difference of FC36,000 @ 9 =
C4,000 gives rise to a deductible temporary difference; a deferred tax asset
@ 25% (that is, C1,000) should be recognised in the entity's financial
statements for this temporary difference. |
|||
|
|||
If the tax base had not been
translated at the year-end rate, it would have been recorded at C30,000
(C45,000 less tax depreciation of C15,000) at the year end. This would have
given rise to a temporary difference of C6,000 (C36,000 – C30,000); the
entity would have provided deferred tax liability of C1,500 (25% of C6,000)
on this temporary difference. But translating the tax base at year-end rate
resulted in a deferred tax asset of C1,000. The difference of C2,500 is
attributable to the tax effect of currency translation on the tax base, that
is 25% of (C40,000 – C30,000) = C2,500. |
13.274.1
The following extract from the financial statements of Tenaris explains the
tax effect of currency translation on the tax base: |
13.275
The governments or tax authorities of
some jurisdictions offer investment incentives by way of temporary reductions
of tax (known as 'tax holidays'). Tax holidays result in tax reductions
regardless of an entity's level of taxable profit. A lower tax rate or nil
tax rate is normally applied to the taxable profits arising within the tax
holiday period. Where deferred tax arises on temporary differences that
reverse within the tax holiday period, it is measured at the tax rates that
are expected to apply during the tax holiday period (that is, the lower tax
rate or nil tax rate). Where deferred tax arises on temporary differences
that reverse after the tax holiday period, it is measured at the enacted or
substantively enacted tax rates that are expected to apply after the tax
holiday period. |
13.275.1
The example below considers the deferred tax implications when the start of a
tax holiday is delayed until the period when an entity has taxable profits
(after using any carried-forward losses). |
Example
– Tax holidays |
||||
|
||||
A jurisdiction grants a tax holiday
to specified entities. The tax holiday provides a 0% tax rate for the first
two years of the holiday and a tax rate of 20% for the following three years.
The normal tax rate is 40%. |
||||
|
||||
The tax holiday does not commence
until the year in which an entity generates taxable profits (after use of
carried-forward losses). The entity does not expect to generate taxable
profits (after use of carried-forward losses) for three years. |
||||
|
||||
An entity's forecast taxable profit
is as follows: |
||||
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
|
C'000 |
C'000 |
C'000 |
C'000 |
Taxable (losses)/profit in the year |
(300) |
100 |
200 |
250 |
Use of carried-forward losses |
−
|
(100) |
(200) |
− |
|
|
|||
Taxable (losses)/profit after use of
carried-forward losses |
(300) |
0 |
0 |
250 |
|
|
|||
|
|
|||
In this scenario, the tax holiday
begins in year 4. |
||||
|
||||
(a) At the end of year 1, assuming
the recoverability criteria in IAS 12 are met, should a deferred tax asset in
respect of the taxable losses be recognised? |
||||
|
||||
The entity is receiving a benefit,
because the existence of the unused losses effectively delays the start of
the tax holiday period. Without these unused losses (and assuming no taxable
profit in year 1), the entity would begin paying taxes in year 4 instead of
year 6. So a deferred tax asset of C120,000 (C300,000 × 40%) should be
recognised. |
||||
|
||||
(b) If the entity does not expect the
tax holiday to begin until year 4 (and so it will not pay tax until year 6),
should it recognise deferred tax liabilities for any taxable temporary
differences on assets or liabilities that will reverse in years 2 to 5? |
||||
|
||||
IAS 12 provides the following
exceptions to recognising deferred tax liabilities: for the initial
recognition of goodwill; for the initial recognition of assets or liabilities
that do not affect accounting or taxable profit; and for some specified
investment in subsidiaries. IAS 12 does not provide an exception to
recognising deferred tax liabilities based on an expectation of future
taxable losses. |
||||
|
||||
So, deferred tax liabilities should
be recognised and measured at the rate that will be in effect when the
temporary differences reverse. For the temporary differences reversing before
the start of the tax holiday (years 2 and 3), the appropriate rate is the
normal tax rate (40%). For the temporary differences reversing during the
first two years of the tax holiday (years 4 and 5), the appropriate rate is
0%. |
||||
|
||||
Note that deferred tax on temporary
differences reversing in the remaining three years of the tax holiday is
measured at 20%. |
13.275.1.1
A temporary difference might arise on
the initial acquisition of an asset or liability during the tax holiday
period; and it might appear to be subject to the initial recognition
exception. For example, an entity might receive an upfront fee during a tax
holiday period; and it would record deferred revenue. The jurisdiction might
assess tax on revenue when cash is received; because the tax holiday period
provides for a nil tax rate, it might seem that the initial acquisition of
the deferred revenue liability does not impact accounting or taxable profit.
But the initial recognition exception does not apply because the upfront fee
does impact taxable income, even though a nil tax rate is applied as a result
of the tax holiday (as opposed to being exempt from tax). |
13.275.2
The governments or tax authorities of some jurisdictions offer investment
incentives by way of credits to be applied in determining tax liabilities. In
general, tax credits are tax benefits received other than tax deductions
that normally arise (at standard rates) from deductible expenditures. Tax
credit schemes vary significantly across jurisdictions and can be complex in
practice, so each scheme's characteristics warrant careful consideration to
determine the appropriate accounting. For example, some tax credits schemes
are structured as in substance government grants that are available
regardless of the level of an entity's taxable profits, while others offer
tax credits that are only recoverable if the entity has sufficient taxable
profits against which the credit can be applied. |
|
Tax credit schemes are comprised of
(i) investment tax credits and (ii) other tax credits. There is no definition
in IFRS of either investment tax credits or other tax credits. While the
treatment of unused tax credits is addressed by IAS 12, the standard does not
deal with accounting for investment tax credits. [IAS 12 para 4]. Investment
tax credits are also outside IAS 20's scope. [IAS 20 para 2]. |
|
13.275.3
Therefore, the following questions
arise: |
|
|
■ |
What differentiates investment tax
credits from other tax credits? |
■ |
What is the accounting for investment
tax credits and other tax credits? |
|
13.275.4
Other tax credits are within IAS 12's scope. A deferred tax asset is
recognised for unused tax credits to the extent that it is probable that
future taxable profit will be available against which the unused tax credit
can be utilised (see further para 13.144 onwards). [IAS 12 para 34]. The
credit entry for the deferred tax asset (and any subsequent adjustment to the
asset) will be to the tax line in the income statement in the period the tax
credit arises. Where receipt of a tax credit is subject to the entity
complying with specific substantive conditions in future periods, the credit
is recognised only when the conditions are met. |
|
13.275.5
Investment tax credits are generally tax benefits received for investment in
specific qualifying assets (other than tax deductions that are available as
part of the asset's tax base in use or on disposal). We believe that this
definition should be interpreted narrowly, although in some circumstances, it
might also be applied to credits for investments in qualifying but non-capitalised
research and development expenditure. When there are substantive additional
requirements to be met that are not directly related to the investment, the
benefit should not be treated as an investment tax credit, but rather, as an
'other tax credit'. Examples of such requirements would include maintaining a
certain number of employees or reaching a certain level of export revenues. |
|
13.275.6
Management needs to use judgement in assessing the substance of each tax
credit scheme. Conditions may be attached to a scheme that are perfunctory
and do not determine whether the tax benefit will be received; in which case
it may still be appropriate to classify the tax benefit as an investment tax
credit. For example, if the only additional criterion for receiving a tax
credit is to maintain at least 200 employees, but the entity needs at least
2,000 employees to operate the qualifying equipment purchased under the
scheme, the additional criterion would be perfunctory and the tax benefit
classified as an investment tax credit. |
|
13.275.7
There are three alternative accounting models to account for investment tax
credits, which analogise to either IAS 12 or IAS 20. The most appropriate
model to apply will depend on the nature of the credit and the specific
circumstances of the entity, including previous policy choices. |
|
Tax
credit (or flow though) model |
|
13.275.8
This treatment is based on the
assumption that investment tax credits are often not substantially different
from other tax credits. So it is acceptable to have the same accounting
treatment for investment tax credits as previously described for other tax
credits (see para 13.144). This model would apply equally to tax credits
available as a result of qualifying but non-capitalised research and
development expenditure. |
|
Government
grant (or deferral) model |
|
13.275.9
This treatment is based on
characterising the investment tax credit as being similar to a government grant
and recognises the tax benefit in pre-tax profit or loss over the related
asset's useful life. The credit results in a reduction to the current tax
liability or the recognition of a deferred tax asset (where unused), and
under IAS 20 the benefit (that is, the credit entry) is either: |
|
|
■ |
recognised separately from the
related asset as deferred income; in which case the deferred income is
amortised over the related asset's life in the income statement as 'other
income'; or |
■ |
recognised as a reduction of the
related asset's carrying amount; in which case, the benefit arises through a
lower depreciation charge. |
|
|
A new temporary difference between
the book and tax base of the asset may arise where a non-taxable grant
results in adjustment to the asset's carrying value but not its tax base.
Alternatively, where such a grant is recognised as deferred income, the
difference between the deferred income balance and its tax base of nil will
also be a temporary difference. Whichever method of presentation is adopted,
the resulting deferred tax asset that arises on the initial recognition of
the asset or deferred income is not recognised. [IAS 12 para 33]. |
|
|
|
In the limited circumstances where
this approach is adopted for tax credits on qualifying expenditure that does
not result in a capitalised asset, the tax credit entry is generally
recognised in pre-tax profit or loss when the related expenditure is
incurred. |
|
|
13.275.10
If an entity is considering adopting
this accounting model, it should consider potential consequences for
subsequent accounting. For instance, where a deferred tax asset resulting
from an investment tax credit cannot be recovered because of unexpected tax
losses, should the deferred income (or adjustment to asset carrying amount)
be reversed? One view separates the future measurement of the deferred tax
asset from the deferred income (or carrying amount of the asset). The
recovery of the deferred tax asset depends on future profits and is not
linked to the circumstances that gave rise to the grant. Government grants
are not adjusted if the granted assets are impaired. An alternative view is
that writing off the deferred tax asset is a repayment of government grant,
so the deferred income (or adjustment to the carrying amount of the asset)
should be reversed. We consider that either approach is acceptable; and the
choice of approach is a matter of accounting policy to be applied
consistently. However, recognising the complexities that may result from this
approach, including the impact of any subsequent reversal of any deferred tax
asset, many entities may find it preferable to account for such credits as
other tax credits rather than as investment tax credits, unless measurement
of the credit is reasonably straightforward, and there is a high expectation
of its recovery (for example, where recovery of the tax credit is not
dependent on the level of an entity's future taxable profits). |
|
Change
of tax base (or IRE) model |
|
13.275.11
Where a related asset is recorded on
the balance sheet, in some circumstances it might be acceptable to view the
investment tax credit as an increase of the related asset's tax base. Where
the asset was not acquired in a business combination (and the related asset's
initial recognition does not affect accounting or taxable profit), the
deductible temporary difference that arises will qualify for the initial
recognition exception in paragraph 15 of IAS 12 (see para 13.162 onwards).
Therefore, no deferred tax asset is recognised at the time the tax credit
arises, but recognition occurs as a reduction of current tax as the credit is
realised. |
13.276
Tax effects (regardless of how they have been calculated) should be shown in
the financial statements separately from the items or transactions to which
they relate. The standard contains a considerable number of disclosure
requirements in respect of taxation. Most of the disclosure requirements
apply to the financial statements of individual companies as well as to
consolidated financial statements. The paragraphs that follow deal with
the disclosure requirements of current and deferred tax. |
13.277
There
is no specific requirement in IAS 12 to disclose accounting policies in
respect of current and deferred tax. However IAS 1 requires disclosure of
significant accounting policies that are relevant to an understanding of the
entity's financial statements. [IAS 1 para 117]. In respect of deferred tax,
the policy note should state the measurement basis on which deferred tax has
been recognised. |
13.277.1 Examples of accounting policies on
current and deferred tax under IAS 12 are given in Tables 13.3 and 13.4
below. |
13.277.2 IAS 1 also requires disclosure in
the financial statements of judgements (apart from those involving
estimations – see para 13.307.1) that management has made in the process of
applying the accounting policies and that have the most significant effect on
the amounts recognised in those financial statements. [IAS 1 para 122]. This
is discussed in detail in chapter 4. |
13.277.3 An example of disclosure of critical
judgements in respect of tax is given in Table 13.5 below. |
13.278
Liabilities and assets for current tax should be presented separately on the
face of the balance sheet. [IAS 1 para 54(n)]. Similarly, deferred tax
liabilities and deferred tax assets should be presented separately on the
face of the balance sheet. [IAS 1 para 54(o)]. Where an entity presents
current and non-current assets (and current and non-current liabilities) as separate
classifications on the face of the balance sheet, it should not classify
deferred tax assets (liabilities) as current assets (liabilities). [IAS 1
para 56]. In other words, deferred tax assets and liabilities are always
presented as non-current. |
13.279
The amount of an asset or liability that is expected to be recovered or
settled more than 12 months after the balance sheet date should be disclosed
in the following situation: where an entity has a line item that combines (a)
amounts expected to be recovered or settled no more than 12 months after the
balance sheet date and (b) amounts expected to be recovered or settled more
than 12 months after the balance sheet date. [IAS 1 para 61]. This situation
might apply to deferred tax assets and liabilities because they are always
presented as non-current (see para 13.278); even though they could contain an
element expected to be recovered or settled no more than 12 months from the
balance sheet date. |
13.280
To meet the IAS 1 requirement, an entity should first calculate the amount
that becomes due no more than 12 months after the balance sheet date (that
is, the 'current' component of the total asset or liability balance). That
amount is then deducted from the total balance to give the 'non-current'
component. It might be difficult to estimate the current component in
practice, because management might need to make subjective judgements on the
probable timing of the reversal of taxable and deductible temporary
differences and on the probable timing of the reversal of tax losses. Indeed,
it is sometimes impossible to obtain a reliable split without making
arbitrary assumptions. Nevertheless, it appears that such a split is required
to comply with paragraph 61 of IAS 1, even though the entire deferred tax
asset or liability balance is presented as non-current in the balance sheet. |
13.281
Although current tax assets and liabilities are separately measured and
recognised, they should be offset for presentation purposes if, and only if,
the entity: |
■ |
has a legally enforceable right to
set off the recognised amounts; and |
■ |
intends either to settle on a net
basis, or to realise the asset and settle the liability simultaneously. |
[IAS 12 para 71]. |
13.282
The above offset criteria are similar to those established for financial
instruments in paragraph 42 of IAS 32. The 'legal right of offset' criterion
is met only where income taxes are levied by the same tax authority that
accepts or requires settlement on a net basis. [IAS 12 para 72]. |
13.283
In consolidated financial statements, current tax assets of one group member
could be offset against a current tax liability of another member if there is
a legally enforceable right to offset the recognised amounts; and the
entities intend to make settlement on a net basis or to recover the asset and
settle the liability simultaneously. [IAS 12 para 73]. Simultaneous
settlement means that the cash flows are equivalent to a single net amount;
this is because the realisation of the current tax asset and the settlement
of the current tax liability occur at the same moment. |
13.284
Similar conditions apply to offsetting deferred tax assets and liabilities.
An entity should offset deferred tax assets and deferred tax liabilities for
presentation purposes if, and only if: |
■ |
the entity has a legally enforceable
right to set off current tax assets against current tax liabilities; and |
|
■ |
the deferred tax assets and the
deferred tax liabilities relate to income taxes levied by the same taxation
authority on either: |
|
■ |
the same taxable entity; or |
|
■ |
different taxable entities which
intend either to settle current tax liabilities and assets on a net basis, or
to realise the assets and settle the liabilities simultaneously, in each
future period in which significant amounts of deferred tax liabilities or
assets are expected to be settled or recovered. |
|
[IAS 12 para 74]. |
13.285
Simultaneous realisation of the asset and settlement of the liability (in the
final point above) is particularly relevant to deferred taxes. Without this
requirement, offset of specific deferred tax balances could take place only
if the temporary differences giving rise to a deferred tax asset reverse
before (or at the same time as) those giving rise to a deferred tax
liability. If those giving rise to the liability reverse first, there will be
a requirement to pay tax before any entitlement to recover tax. The IASB felt
that the need to schedule the timings of the reversals of individual
temporary differences (to measure the extent to which the balances should be
offset for presentation purposes) would be impractical and unnecessarily
costly. [IAS 12 para 75]. |
13.285.1
In rare circumstances, an entity might have a legally enforceable right of
offset (and an intention to settle net) for some periods but not for others.
Detailed scheduling would be required to establish reliably whether the
deferred tax liability of one taxable entity will result in increased tax
payments in the same period in which a deferred tax asset of another taxable
entity will result in decreased payments by that second taxable entity. [IAS
12 para 76]. |
13.285.2
The requirement in paragraph 13.284 effectively prohibits offset of deferred
tax assets and liabilities relating to different tax jurisdictions in
consolidated financial statements. It also means that a net group tax
liability cannot be presented by offsetting group tax assets on the grounds
of a group tax planning opportunity, unless the opportunity relates to taxes
levied by the same tax authority on different group members and the entities
are treated as a group for tax purposes. |
13.285.3
An entity might have a large number of different temporary differences
(giving rise to deferred tax assets and liabilities) that arise during a
period. Although these deferred tax assets and liabilities are measured
separately, the ability to offset assets against liabilities depends on (a)
the nature of the balances (for example, tax rules might not permit deferred
tax assets for capital losses to be offset against deferred tax liabilities
for trading item tax allowances, such as accelerated capital allowances) and (b)
who they are due to or from. |
13.286
IAS 12 requires the tax expense (or income) related to profit or loss from
ordinary activities to be presented in the statement of comprehensive income.
If an entity presents the profit or loss components in a separate income
statement (as described in para 81 of IAS 1), it presents the tax expense (or
income) related to profit or loss from ordinary activities in that separate
statement. [IAS 12 paras 77, 77A]. |
13.286.1
The treatment of tax in the performance statements is considered further in
the following sections. |
13.287
Deferred tax is recognised as income or expense and included in profit or
loss for the period, except to the extent that the tax arises from: |
■ |
A transaction or event that is
recognised (in the same period or a different period) outside profit or loss,
either in other comprehensive income or directly in equity (see para 13.288). |
■ |
A business combination (see para
13.238 onwards). |
[IAS 12 para 58]. |
13.287.1
IAS 12 distinguishes between tax on items recognised in other comprehensive
income and tax on items recognised directly in equity; and it requires that
the two amounts are presented accordingly and separately disclosed. |
13.288
Under the principle that tax follows the item, deferred tax relating to items
that are recognised (in the same or a different period) in other
comprehensive income is recognised in other comprehensive income. Similarly,
deferred tax relating to items that are recognised (in the same or a
different period) directly in equity is recognised directly in equity. [IAS
12 para 61A]. |
13.288.1 Some
examples of items on which deferred tax is recognised in other comprehensive
income (including some noted in para 62 of IAS 12) are given below: |
■ |
A change in the carrying amount
following revaluation of property, plant and equipment (see para 13.208). |
■ |
The recognition of valuation
movements on available-for-sale investments (see para 13.226). |
■ |
The translation of the financial
statements of foreign operations (see para 13.273). |
13.288.2 Some
examples of items on which deferred tax is recognised directly in equity
(including some noted in para 62A of IAS 12) are given below: |
■ |
An adjustment to opening retained
earnings where a change in accounting policy is applied retrospectively or an
error has been corrected. |
■ |
The initial classification of a
compound financial instrument where the tax base is not split between the two
components (see para 13.229). |
■ |
The amount of the tax deduction
(estimated or known) that exceeds the cumulative amount of the expense in an
equity-settled share-based payment award (see para 13.206). |
13.288.3 The
most common type of deferred tax that is recognised in other comprehensive
income is on the revaluation of an asset (such as property, plant and
equipment). But the deferred tax liability is always released through profit
or loss because the revalued asset's carrying amount is recovered through use
by way of a depreciation charge. An entity can sometimes make a transfer
directly between reserves (from the revaluation reserve to retained earnings)
of an amount equal to the difference between depreciation based on the
revalued amount and depreciation based on cost. In this case, the transfer
should be made net of deferred tax. [IAS 12 para 64]. This issue is addressed
in scenario 1 of the example in paragraph 13.211. |
13.288.4 IAS
12 does not specify the reserve in which tax charged (or credited) to other
comprehensive income or directly to equity should be recognised. But the tax
should be recognised in the same reserve as the underlying item (unless such
treatment is prohibited by another standard or by the legal requirements
relating to that reserve). This is consistent with the general principle in
IAS 12 that an entity accounts for the tax consequences of transactions and
other events in the same way that it accounts for the transactions and other
events themselves. This is supported by paragraph 64 of IAS 12, which
requires transfers from revaluation reserve to be made net of tax (see para
13.288.3); this indicates that the tax has been included in that reserve in
the first instance. |
13.288.5 It
can be difficult to determine the amount of deferred tax that relates to
items that are recognised outside profit or loss, either in other
comprehensive income or directly in equity. For example, this might be the
case where: |
■ |
There are graduated rates of income
tax and it is not possible to determine the rate at which a specific
component of taxable profit (tax loss) has been taxed. |
■ |
A change in the tax rate or other tax
rules affects a deferred tax asset or liability relating (in whole or in
part) to an item that was previously recognised outside profit or loss. |
■ |
An entity determines that a deferred
tax asset should be recognised (or should no longer be recognised in full)
and the deferred tax asset relates (in whole or in part) to an item that was
previously recognised outside profit or loss. |
|
|
In such situations, the attributable
tax is calculated on a reasonable pro rata basis, or another basis that is
more appropriate in the circumstances. [IAS 12 para 63]. |
Example –
Apportionment of deferred tax credit |
|
An entity was unable to recognise a
deferred tax asset of C5m (of which C1m relates to items charged to other
comprehensive income) because it was not probable that sufficient taxable
profits would be available against which the deductible temporary difference
could be utilised. After a few years, circumstances have changed and the
entity expects to recover at least C3m of the unrecognised deferred tax
asset. Unless the entity cannot analyse the particular categories of
deductible temporary differences (which will be rare in practice), some form
of apportionment is needed. For example, the entity could allocate part of
the C3m (for instance, 1/5 × 3 = C0.6m) to other comprehensive income and the
balance of C2.4m to profit or loss. |
|
13.288.7
The carrying amount of deferred tax assets and liabilities can change without
a change in the temporary difference. Such changes might arise as a result
of: |
■ |
A change in tax rates or laws. |
■ |
A re-assessment of the recoverability
of deferred tax assets (see para 13.155). |
■ |
A change in the expected manner of
recovery of an asset (see para 13.174). |
|
|
The resulting change in deferred tax
should be recognised in profit or loss except to the extent that it relates
to items previously recognised outside profit or loss (see further para
13.288). [IAS 12 para 60]. This is sometimes referred to as 'backwards-tracing'. |
Example 1 –
Backwards-tracing of property revaluations |
|
An entity has a policy of revaluing
property under paragraph 31 of IAS 16. As a result of revaluation gains, a
taxable temporary difference has arisen between the properties' carrying
amount and their tax base; this has led to recognition of a deferred tax
liability at the period end. |
|
The revaluation gains were recognised
in other comprehensive income under IAS 16; and the related deferred tax
liability was also recognised in other comprehensive income (following the
principles of paragraph 60 of IAS 12, as noted above). |
|
The corporation tax rate has changed
from 40% to 35% with an effective date of 31 May 20X8. This change has been
substantively enacted at the balance sheet date and will impact the reversal
of the temporary difference from 31 May 20X8 onwards; so the deferred tax
liability will be reduced. |
|
Any adjustment to deferred tax
resulting from the tax rate change should be traced back to the original
transaction recognised in other comprehensive income. As such, the impact of
any adjustment to this deferred tax liability would be recognised in other
comprehensive income. (This differs from the accounting for reversals of the
deferred tax liability resulting from depreciation charged; in that case, the
reversal is recognised in profit or loss – see para 13.211.) |
Example 2 –
Backwards-tracing of defined benefit liabilities |
|
An entity has a defined benefit
pension scheme that is in deficit at the period end. A deferred tax asset has
been recognised for the deductible temporary difference in relation to the
pension deficit. |
|
The corporation tax rate has changed
from 40% to 35% with an effective date of 31 May 20X8. This change has been
substantively enacted at the balance sheet date and will impact the reversal
of the temporary difference from 31 May 20X8 onwards; so the deferred tax
asset will be reduced. |
|
Having identified the transactions
that gave rise to the temporary difference, management will need to trace the
impact of the tax rate change to the same place. In this case, the pension
deficit might have arisen as a result of service costs or other income
statement charges, or actuarial losses recognised in other comprehensive
income, or both. |
|
Depending on how the pension deficit
arose (and thus how the deferred tax asset was originally booked), the
reduction in the deferred tax asset will be recognised in profit or loss, in
other comprehensive income, or it will be split between the two. |
|
The backwards-tracing for the tax
rate change should be consistent with the approach used for allocating tax
deductions (see para 13.203.8). The deferred tax asset (which is impacted by
the tax rate change) represents the tax on amounts against which tax
deductions have not yet been allocated. Where amounts in the performance
statements are covered by deductions received on contributions, no deferred
tax arises. The deferred tax arises on any excess amounts in the performance
statements; and the backwards-tracing should be carried out on that basis. |
|
If the deferred tax relates to a
pension liability recognised on transition to IFRS, management needs to
determine where the pension items on which the original deferred tax arose
would have been recognised if IFRS had been applied in the prior periods (as
explained in para 13.288.8). If this is not possible, the deferred tax would
generally be recognised in profit or loss. |
13.288.8 In
some cases, a deferred tax asset or liability might have been recognised on
the initial adoption of IFRS. In our view, the fact that deferred tax was
charged to equity (as part of the transition adjustment) does not mean that
subsequent changes in the deferred tax asset or liability will also be
recognised in equity. Instead, management needs to determine (using the
entity's current accounting policies) where the items on which the original
deferred tax arose would have been recognised if IFRS had applied in the
earlier periods. If it is not possible to assess where those items would have
been recognised, the deferred tax changes would generally be recognised in
profit or loss (under para 58 of IAS 12). |
13.288.9
Where deferred tax arose on the initial adoption of IFRS, the implications of
any transitional rules in IFRS 1 for the underlying items will need to be
considered; this is for the purpose of backwards-tracing when accounting for
deferred tax changes. For instance, if an asset is recognised at 'deemed
cost' on the initial adoption of IFRS (with related deferred tax on the
transition adjustment), any changes in that deferred tax should be recognised
in profit or loss (see para 13.219 onwards). Similarly, where an item or an
adjustment is deemed to be nil (for accounting purposes) under the
transitional rules in IFRS 1, any subsequent changes in related deferred tax
should not be backwards-traced to other comprehensive income or retained
earnings, but should instead be recognised in profit or loss. For example, if
an entity applies the exemption in para D13 of IFRS 1, cumulative translation
differences for all foreign operations are deemed to be nil at the date of
transition to IFRS. |
13.288.10
A different situation arises where an exemption in IFRS 1 applies for
disclosure purposes only; for example, some defined benefit scheme
disclosures can be made prospectively from the date of transition to IFRS.
[IFRS 1 para D11]. In this case, our view is that backwards-tracing to other
comprehensive income should be applied for changes in deferred tax, unless it
is not possible to assess where the items on which the original deferred tax
arose would have been recognised (see the example in para 13.288.7); this is
because the exemption does not apply to the underlying accounting. |
13.289
IAS 21 is silent on where exchange gains and losses should be shown in the
income statement. IAS 12 makes it clear that exchange differences on foreign
deferred tax assets and liabilities can be included as part of the deferred
tax expense (income) if that presentation is considered to be the most useful
to financial statement users. [IAS 12 para 78]. A more usual presentation
would be to include the exchange differences on deferred taxes as part of the
foreign exchange gains and losses that are credited or charged in arriving at
profit before tax. |
13.290
A considerable amount of information about current and deferred tax is
disclosed in the notes. In this section, the disclosure requirements are
grouped under appropriate headings for ease of reference; and examples from
published financial statements are included where relevant. |
13.291
The major components of the tax expense (income) should be identified and
disclosed separately. [IAS 12 para 79]. Such components might include: |
■ |
In respect of current tax: |
|
■ |
The current tax expense (income). |
|
■ |
Any adjustments recognised in the
period for current tax of prior periods. |
|
■ |
The amount of the benefit arising
from a previously unrecognised tax loss, tax credit or temporary difference
of a prior period that is used to reduce current tax expense. |
|
■ |
The amount of tax expense (income)
relating to changes in accounting policies and errors that are included in
profit or loss (under IAS 8) because they cannot be accounted for
retrospectively. |
|
■ |
In respect of deferred tax: |
|
■ |
The amount of deferred tax expense
(income) relating to the origination and reversal of temporary differences. |
|
■ |
The amount of deferred tax expense
(income) relating to changes in tax rates or the imposition of new taxes. |
|
■ |
The amount of the benefit arising
from a previously unrecognised tax loss, tax credit or temporary difference
of a prior period that is used to reduce deferred tax expense. |
|
■ |
Deferred tax expense arising from the
write-down (or reversal of a previous write-down) of a deferred tax asset
that has been reviewed at the balance sheet date. |
|
■ |
The amount of tax expense (income)
relating to changes in accounting policies and errors that are included in
profit or loss (under IAS 8) because they cannot be accounted for
retrospectively. |
|
[IAS 12 para 80]. |
13.292
The total current and deferred tax relating to items that are charged or
credited directly to equity should be disclosed. [IAS 12 para 81(a)]. An
example that shows the amount of tax charged directly to equity is provided
in Table 13.5.1. |
13.292.1
The amount of income tax relating to each component of other comprehensive
income (including reclassification adjustments) should be disclosed in the
statement of comprehensive income or in the notes. [IAS 12 para 81(ab)].
Components of other comprehensive income can be presented on the face of the
statement of comprehensive income net of related tax effects; or they can be
presented before related tax effects. If an entity presents items of other
comprehensive income before related tax effects (with the total tax shown
separately), it should allocate the tax between the items that might be
reclassified later to profit or loss and those that will not be
reclassified.[IAS 1 paras 90, 91]. This is considered further in chapter 4. |
13.292.2 The
following disclosures should be made in the case of business combinations: |
■ |
If a business combination (in which the
entity is the acquirer) causes a change in the amount recognised for its
pre-acquisition deferred tax asset (see para 13.250.1), the amount of that
change. |
■ |
If the deferred tax benefits acquired
in a business combination are not recognised at the acquisition date but are
recognised after the acquisition date (see para 13.249.5), a description of
the event or change in circumstances that caused the deferred tax benefits to
be recognised. |
[IAS 12 para 81(j), (k)]. |
13.293
The standard does not require the current tax charge (credit) reported in
profit or loss to be analysed further between domestic and foreign tax.
Entities with significant amounts of foreign tax might find it useful to give
an extra analysis in the tax note as shown below: |
|
C'000 |
C'000 |
Domestic tax |
|
|
Current tax on income for the period |
X |
|
|
|
|
|
X |
|
Double tax relief |
X |
|
|
|
|
|
|
X |
Foreign tax |
|
|
Current tax on income for the period |
X |
|
|
|
|
|
|
X |
|
|
|
Current tax expense |
|
X |
Deferred tax expense |
|
X |
|
|
|
Tax on profit on ordinary activities |
|
X |
|
|
|
|
||
A non-mandatory format (including
some of the disclosure requirements stated in para 13.291) is given in
example 2 of appendix B to IAS 12. |
13.294
The originating and reversing temporary differences are disclosed as a single
figure within the deferred tax expense in profit or loss; this figure should
be further analysed by each type of temporary difference and each type of
unused tax losses and tax credits (if this is not apparent from the changes
in the amounts recognised in the balance sheet). [IAS 12 para 81(g)(ii)].
These temporary differences are likely to include the tax effects of accelerated
capital allowances, fair value gains, material provisions, utilisation of
unrelieved tax losses and other temporary differences. In practice, the above
disclosure will form part of the balance sheet movements of principal types
of deferred tax assets and liabilities. So it will be clear from the changes
in balance sheet amounts; and it will not usually need to be disclosed as a
separate note to the tax expense or income in profit or loss. |
13.294.1
An example of an entity disclosing each type of temporary difference and tax
losses is given in Table 13.7 (in para 13.301.1). |
13.295
The amount of tax attributable to discontinued operations should be
disclosed; and it should be analysed between the tax expense relating to: |
■ |
The gain or loss on discontinuance. |
■ |
The profit or loss from the ordinary
activities of the discontinued operation for the period, together with the
corresponding amounts for each prior period presented. |
[IAS 12 para 81(h)]. |
13.295.1
The presentation of tax on discontinued operations is
dealt with in chapter 26. |
13.296
The standard requires an explanation of the relationship between tax expense
and accounting profit. This relationship can be affected by factors
including: significant tax-free income and significant disallowables; tax
losses utilised; different tax rates in the locations of foreign-based
operations; adjustments related to prior years; unrecognised deferred tax;
and tax rate changes. An explanation of these matters enables financial
statement users to understand whether the relationship between tax expense
and accounting profit is unusual; and it helps the users to understand the
significant factors that could affect that relationship in the future. The
explanation should be in either or both of the following numerical forms: |
■ |
A reconciliation between tax expense
(income) and the product of accounting profit multiplied by the applicable
tax rate(s); the basis for computing the applicable tax rate(s) should also
be disclosed. |
■ |
A reconciliation between the average
effective tax rate (tax expense divided by the accounting profit) and the
applicable tax rate; the basis for computing the applicable tax rate should
also be disclosed. |
[IAS 12 paras 81(c), 84]. |
13.297
IAS 12 requires the total tax charge
(current and deferred), rather than the current
tax charge, to be reconciled to the theoretical tax on accounting profit. |
13.298
The starting point for preparing the numerical reconciliation (whether in
absolute or in percentage terms) is to determine an applicable tax rate. In
the context of a single economic entity (that is, the group), it is important
to use an applicable tax rate that provides the most meaningful information
to financial statement users. The most relevant rate is often the rate
applicable in the reporting entity's country. This rate should be used even
if some of the group's operations are conducted in other countries. In that
situation, the impact of different tax rates applied to profits earned in
other countries would appear as a reconciling item. The basis for computing
the applicable tax rate should be disclosed (as well as an explanation of
changes in the applicable tax rate(s) compared to the previous accounting
period). [IAS 12 para 81(d)]. This is because sometimes it may not be
possible to determine a meaningful single applicable tax rate (particularly
for multi-national groups). |
13.299
Another method is to aggregate separate reconciliations prepared using the
applicable tax rate in each individual jurisdiction; and then provide a
reconciliation from the aggregation to a single applicable tax rate (that is,
the reporting entity's rate). Such information would normally be requested as
part of the group reporting packs; and it would greatly simplify the process for
presenting the tax reconciliation in the consolidated financial statements. |
|
13.299.1
An example of reconciliation using monetary amounts is shown in Table 13.2
(see para 13.274.1); an example using tax rates is shown in Table 13.6: |
13.300
Where a group operates mainly outside its local territory, a third method is
to use an average tax rate (weighted in proportion to accounting profits
earned in each geographical territory) as the applicable tax rate. This
method is not included in the standard, but it could be used – provided the
basis for computing the applicable tax rate is disclosed (under IAS 12, para
81(c)). |
Example –
Determination of 'applicable rate' for a group with significant overseas
subsidiaries |
|
|
|
|
|
||||
|
|
|
|
|
Country |
Profit |
Tax rate |
Weighted average |
|
UK |
100 |
30% |
100/2030
× 30% = |
1.48 |
US |
600 |
40% |
600/2030
× 40% = |
11.82 |
France |
500 |
35% |
500/2030
× 35% = |
8.62 |
Germany |
450 |
38% |
450/2030
× 38% = |
8.42 |
Australia |
380 |
33% |
380/2030
× 33% = |
6.18 |
|
|
|||
Total |
2,030 |
Average
rate = |
36.52 |
|
|
|
|||
The average rate of 36.52% should be
used in the tax reconciliation. The basis for calculating the rate should
also be disclosed (as stated in para 13.296). |
13.300.1 Use
of a weighted average tax rate method might be appropriate where all the
group entities have made a profit. But this method might not provide a
meaningful tax rate where some entities within a group have profits and
others have losses. For example, the entity might calculate the weighted
average tax rate based on absolute values (that is, making all values
positive); in that case, the tax rate obtained might appear meaningful, but
there will be a reconciling item in the tax reconciliation. On the other hand,
the weighted average rate might be calculated based on actual values; even
though the theoretical tax expense will be the correct amount, the weighted
average tax rate might not be meaningful because it might be higher than any
individual rate. So it might not be appropriate to use the weighted average
tax rate method in this situation. |
13.301
Deferred tax assets and liabilities (of the current and previous periods)
should be analysed by each type of temporary difference and each type of
unused tax losses and tax credits. [IAS 12 para 81(g)(i)]. The significant
types of temporary difference that generally need to be disclosed separately
include: accelerated capital allowances; revaluation of assets; other
short-term taxable temporary differences that affect accounting or taxable
profit; provisions; and tax losses carried forward. A format for disclosure
is given in example 2 of appendix B to IAS 12. The amount of deferred tax
income or expense recognised in profit or loss should be similarly analysed
(if this is not apparent from the balance sheet movement of each component –
see para 13.294). [IAS 12 para 81(g)(ii)]. |
13.301.1
An example of an entity disclosing each type of temporary difference and tax
losses is given in Table 13.7. (Note that comparatives have not been
reproduced.) |
13.301.2
The standard requires an analysis of each type of temporary difference. Where
a temporary difference comprises the net amount of deferred tax assets and
liabilities that have met the criteria for offset (see para 13.284), we
believe that the disclosure applies to the net position for that temporary
difference. |
|
Example – Analysis
of each type of temporary difference |
||||
|
||||
At its year end, entity A has
property, plant and equipment (PPE) with carrying amounts, tax bases and
temporary differences outlined below. The differences arise because the
assets are deductible for tax purposes in a way that differs from the
depreciation recognised for accounting purposes. |
||||
|
|
|
|
|
Class
of PPE |
Carrying amount |
Tax base |
Temporary difference |
DT asset/(liability) @ 30% |
|
C'000 |
C'000 |
C'000 |
C'000 |
Property |
100 |
75 |
25 |
(7.5) |
Cars |
50 |
65 |
(15) |
4.5 |
Office equipment |
20 |
10 |
10 |
(3.0) |
|
|
|||
Total |
170 |
150 |
20 |
(6.0) |
|
|
|||
At an effective tax rate of 30%, the
property and office equipment give rise to a deferred tax liability of
C10,500; and the cars give rise to a deferred tax asset of C4,500. Entity A
can use the deferred tax asset to offset the deferred tax liabilities; so the
entity discloses the net deferred tax liability position of C6,000 on the
face of the balance sheet. |
||||
|
||||
Deferred tax assets and liabilities
should be analysed by each type of temporary difference. [IAS 21 para 81(g)]. |
||||
|
||||
In respect of the above amounts, we
do not believe that IAS 12 requires a gross presentation, because the
deferred tax noted in the table above relates to the same type of temporary
difference (that is, differences between depreciation for tax and accounting
purposes). |
||||
|
||||
Entity A has the right to offset the
deferred tax asset and liability (and thus presents the net position in the
balance sheet). The amount of the net position relating to the difference
between the carrying amount and tax base of PPE is C6,000; that amount should
be disclosed as a component of the total deferred tax liability recognised. |
13.302
Disclosures are also required in respect of unrecognised temporary
differences, such as: |
■ |
The amount (and expiry date, if any)
of deductible temporary differences, unused tax losses and unused tax credits
for which no deferred tax has been provided. [IAS 12 para 81(e)]. Although
not required by the standard, it might be helpful to explain the
circumstances in which the deferred tax asset would be recovered. |
■ |
The total amount of temporary
differences associated with investments in subsidiaries, branches and
associates and interests in joint ventures for which deferred tax liabilities
have not been recognised. [IAS 12 para 81(f)]. |
13.303
For investments in subsidiaries, branches, associates and interests in joint
ventures, disclosure is required of the total amount of temporary differences
(rather than the deferred tax assets and liabilities associated with such
temporary differences). But the standard encourages disclosure of the
deferred tax amounts. This is because it might sometimes be difficult
(particularly for foreign investments) to quantify the future tax payable in
view of a number of factors (for example, the tax laws and tax rates in
force, the intended timing of future remittances, and the terms of any tax
treaty that might exist between the two countries). [IAS 12 para 87]. |
13.303.1
For an example of an entity disclosing unrecognised temporary differences on
subsidiaries and joint ventures, see Table 13.8. The example also shows the
amount of the potential deferred tax (see para 13.303). For an example of
disclosure of tax losses and deductible temporary differences for which no
deferred tax has been recognised, see Table 13.8.1. That example also shows
unrecognised temporary differences on subsidiaries, associates and joint
ventures. |
13.304
An entity generally recognises any tax consequences of the payment of a
dividend at the time when the dividend is recognised as a liability in the
financial statements (see para 13.175 onwards). But the amount of income tax
arising on dividends that were proposed or declared before the financial
statements were authorised for issue (but are not recognised as a liability
in the financial statements) should be disclosed. [IAS 12 para 81(i)]. |
13.305
Where tax rates vary between distributed and undistributed profits, the
nature of the potential tax consequences (that would result from the payment
of dividends to shareholders) should also be disclosed. In making this
disclosure, an entity should also disclose: |
■ |
The important features of the tax
systems and the factors that will affect the amount of the potential income
tax consequences of dividends. [IAS 12 para 87A]. |
■ |
The amount of the potential tax
consequences arising from the payment of dividends to shareholders (where it
is practical to determine such amounts). [IAS 12 para 82A]. For example, in a
consolidated group, a parent and some of its subsidiaries might have paid
income taxes at a higher rate on undistributed profits; but they are aware of
the amount of the tax refund that would arise if future dividends are paid at
the lower rate. In that situation, the refundable amount should be disclosed.
[IAS 12 para 87B]. |
■ |
Whether there are any potential tax
consequences that it is not practical to determine. [IAS 12 para 82A]. This
could arise where the entity operates a large number of foreign subsidiaries
and it would not be practicable to compute the tax consequences arising from
the payment of dividends to shareholders. In that situation, an entity simply
discloses that fact (as stated above). In the parent's separate financial
statements (if any), the disclosure of the potential tax consequences should
relate to the parent's retained earnings. [IAS 12 para 87B]. |
13.306
Where an entity has incurred a loss in the current or a preceding period and
the recovery of the deferred tax asset depends on future taxable profits in
excess of those arising from the reversals of existing taxable temporary
differences, the amount of the deferred tax asset and the nature of the
evidence supporting its recognition should be disclosed. [IAS 12 para 82].
See further paragraph 13.146. |
13.307
Recognition of the deferred tax asset should be supported by evidence showing
why future profits are likely be available against which the deferred tax
assets can be recovered (see further para 13.133 onwards). The evidence might
also include tax-planning strategies (see para 13.136 onwards). Any
statements made to explain how the asset would be recovered should be
balanced, realistic and consistent with the other disclosures made in the
financial statements (particularly in the management commentary). References
to any profit forecasts etc should be avoided as far as possible. |
13.307.1
"An entity shall disclose information
about the assumptions it makes about the future, and other major sources of
estimation uncertainty at the end of the reporting period, that have a
significant risk of resulting in a material adjustment to the carrying
amounts of assets and liabilities within the next financial year. In respect
of those assets and liabilities, the notes shall include details of: (a)
their nature, and (b) their carrying amount as at the end of the reporting
period." [IAS 1 para 125]. |
13.307.2
The disclosures required in respect of estimation uncertainty are different
from those required for key judgements in applying accounting policies (see
further para 13.277.2). The estimation uncertainty disclosures deal with
situations where the entity has incomplete or imperfect information (often
relating to the future). |
13.307.3
Areas that could require disclosure in respect of estimation uncertainty are: |
■ |
Status of negotiations with tax
authorities. |
■ |
Assessing the probabilities that
sufficient future taxable profits will be available to enable deferred tax
assets resulting from deductible temporary differences and tax losses to be
recognised. |
■ |
Other assumptions about the
recoverability of deferred tax assets (see also para 13.306). |
13.307.4
Examples of disclosure in respect of estimation uncertainty on tax are given
in Tables 13.9 and 13.10. |
13.307.5
Disclosure of estimation uncertainty is dealt with in chapter 4. |
13.308.1
An example of an entity disclosing contingent liabilities for taxation is
given in Table 13.11. |
13.309 IAS 12 requires the use of tax rates a
nd laws that have been substantively
enacted by the balance sheet date (rather than by the date when the financial
statements are authorised for issue); this means that information received
after the year end about changes in tax rates and laws is not an adjusting
post balance sheet event. But changes in tax rates or laws enacted or
announced after the balance sheet date that have a significant effect on
current and deferred tax assets and liabilities should be disclosed under IAS
10. [IAS 10 para 22(h); IAS 12 para 88].
|
13.310
Cash flows from taxes on income should be separately disclosed and classified
as cash flows from operating activities (unless they can be specifically
identified with financing and investing activities). [IAS 7 para 35]. These
issues are considered further in chapter 30. ©2013 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.
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