IAS 12 INCOME TAXES. Made by Renáta Makula 28 September 2017

Size: px

Start display at page:

Download "IAS 12 INCOME TAXES. Made by Renáta Makula 28 September 2017"

Piers Leonard
6 years ago
Views:

1 IAS 12 INCOME TAXES Made by Renáta Makula 28 September 2017

2 Contents Importance of in Hungary Examples IAS 12 standard

4 in Hungary Accounting harmonisation A process which results higher comparability of accounting practices Globalisation of international capital market Company relationships International accounting trend uniform accounting language

5 in Hungary Advantages of harmonization Easier entrance into the international capital markets for companies from different countries. The process of consolidated report preparing will be simplier and more accurate. The financial reports will be more clear for investors, creditors and for other users. Provide clearer and internationally comparable information.

6 in Hungary International Financial Reporting Standards () What is? Language of international financial reporting main aim is providing useful information to extarnal and internal users Included IAS (International Accounting Standards) (International Financial Reporting Standards), which replace IAS SIC (International Issues Committee) IFRIC (International Financial Reporting Issues Committee), which replace SIC Based on common law Business view significant differences between HAS (Hungarian Accounting System) and Deferred taxes

7 in Hungary

8 in Hungary Milestones of regulation in Hungary /2002 (EK) IAS decree Consolidated financial statements can be/must be prepared in accordance with standards (1 January 2005) Compulsory for companies listed on stock exchange Option for groups are not listed on stock exchange (in this case the consolidated FS replace the HAS statements) /2015 Government decree Standalone primary financial statements can be/must be prepared under (2016/2017) Compulsory for companies listed on stock exchange and financial institutions Option for companies are obliged to audit

9 IAS 12 Income taxes standard

10 in Hungary IAS 12 Income taxes standard was issued in 1996 by International Accounting Standards Borad is effective for accounting periods beggining on or after 1 January 1998 The objective of this standard is to prescibe the accounting treatment for income taxes. How to account the tax consequences of transactions are recognised in an entity s financial statements. According to IAS 12.1 és IAS 12.2 this standard must be applied for all domestic and foreign income taxes which based on taxable profit. Current and future taxes are also recognised in financial statements which harmonising with requirements Deferred tax assets / liabilities must be presented depend on nature

11 in Hungary Definitions Deferedd tax assets are the amount of income taxes recoverable in future periods respect of deductible temporary differences the carryforward of unused tax losses (deductive loss) Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of temporary differences. Tax expense (tax income) is the accumulated amount of current tax and deferred tax.

12 in Hungary Statement of financial position at the end of 31 December 2016 Note Standard ASSETS Fixed assets Property, plant and equipment IAS 16, 17 Intangible assets IAS 38 Goodwill 3 Deferred tax asset IAS 12 Other investments 7 Total fixed assets Current assets Inventories, net IAS 2 Trade receivables, net 7 Other receivables and other current assets 7 Advance payment on capital project Income tax receivables IAS 12 Trapped cash IAS 7 Cash and cash equivalents IAS 7 Total current assets TOTAL ASSETS

13 LIABILITIES AND SHAREHOLDER'S EQUITY Equity attributable to equity holders of the parent Share capital IAS 1 Share premium IAS 1 Hedging reserve IAS 1 Retained earnings IAS 1 Cumulated translation adjustment Total equity attributable to equity holders of the parent Non-controlling interest Total equity Long term liabilities Long term debt 7 Deferred tax IAS 12 Obligations under finance lease 7 Provision IAS 37 Total non-current liabilities Current liabilities Trade accounts payable 7 Other liabilities and accruals 7 Accrued interest on debt Short term borrowings 7 Short term portion of long term debts 7 Taxation IAS 12 Financial liabilities 7 Provision IAS 37 Total current liabilities

14 Consolidated Income Statement for the year ended 31 December 2016 Net sales Direct cost of sales Gross profit Distribution cost General and administrative costs Other operating costs Operating income Financial and operational restructuring costs Interest income Interest costs Loss from associated parties Gain / loss on derivatives Foreign exchange gain Pre-tax profit Aggregated amount of current and deferred tax Income tax Profit for the period Of which: Attributable to the parent Non-controlling interest

15 in Hungary Concept of deferred taxes Accounting profit Is a profit or loss for a period before deducting tax expense Taxable profit Is a profit or loss for a period determined in accordance with rules established by tax authorities Regulated by accounting law Determined by tax regulations The starting point of current income tax calculation is the accounting profit.

16 in Hungary Income tax calculation The accounting profit must be modified to fulfill the requirements of tax regulation and to calculate the assets and liabilities tax base. Tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. For example, 1. You have 100 EUR interest receivable and interest revenue. Is taxed on a cash basis, thats why the tax base of interest receivable is 0 and the accounting base is 100 EUR. 2. When you receive the cash and eliminate the interest receivable from your books, you will need to include full amount of cash received into your tax return. The receivable s tax base will be also 100 EUR. Temporary difference beetween tax base and accounting base Two type of tax base modifications can be occured: a) temporary differences DEFERRED TAX RECOGNITION b) final differences

17 in Hungary Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position (BS) and its tax base. Arising from timing differences, for example provisons, amortisation, deductive loss The related adjusment will be affected more than one period Temporary differences will be recovered Future tax consequense Deferred tax must be recognised Final differences are arising from such differeneces than penalty, recognized expenses - in accounting profit - are not connected to the business activity. It will be accured just in one period It will not be recovered There is no future tax consequense

18 in Hungary Current vs deferred taxes Income tax Current tax Deferred tax Substance - Payable to the tax - Accountig measure authorities Basis - Taxable profit (loss) - Temporay differences Timing - Current period - Future period Deferred tax asset aim is to present the future tax benefits Deferred tax liability aim is to present the future tax payables

19 in Hungary Calculation of deferred taxes Deferred tax assets and deferred tax liabilities can be calculated using the following formulae: Temporary difference = Carrying amount - Tax base Deferred tax asset or liability = Temporary difference x Tax rate The following formula can be used in the calculation of deferred taxes arising from unused tax losses or unused tax credits: Deferred tax asset = Unused tax loss or unused tax credits x Tax rate

20 in Hungary Calculation of deferred taxes In case of assets Deferred tax assets Carrying amount < Tax base Deferred tax liability Carrying amount > Tax base In case of liabilities Deferred tax assets Carrying amount > Tax base Deferred tax liability Carrying amount < Tax base

21 in Hungary Calculation of deferred taxes In case of assets Deferred tax assets Deferred tax liability Carrying amount < Tax base Carrying amount > Tax base Example: At the end of 2016 the machinary carrying amount is EUR 100,000 and it s tax base is EUR 70, 000. It is a temporary difference because the carrying amount and tax base will be also zero, just not at the same time. Topic Carrying amount Tax base Temporary difference Tax rate % DTA(+) / DTL (-) PPE 100,000 EUR 70,000 EUR 30,000 EUR 9% -2,700 EUR (C) Deferred tax liability / (D)Deferred tax expense 2,700 EUR

22 in Hungary Calculation of deferred taxes In case of liabilities Deferred tax assets Deferred tax liability Carrying amount > Tax base Carrying amount < Tax base Example: At the end of 2016 provision was created amounted to EUR 2,500. Under tax regulation the amount of created provison must be eliminated, added back. It is non deductibale for tax purposes at the time of creation. It will be deductible in tax calculation when the provison will be removed from FS. Topic Carrying amount Tax base Temporary difference Tax rate % DTA(+) / DTL (-) Provision created Provision released 2,500 EUR 0 2,500 EUR 9% +225 EUR 0 2,500 EUR 2,500 EUR 9% EUR (D) Deferred tax assets / (C)Deferred tax revenue (C) Deferred tax assets / (D)Deferred tax revenue 225 EUR 225 EUR

23 in Hungary Recognition and measurement of deferred taxes The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary differences. A deferred tax asset is recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised. [IAS 12.24] Deductive loss related deferred tax asset tax regulation impairment loss! In 2017 the ITC rate uniformly is 9% In the year of 2016 the rate was 9% under 500 million HUF and 19% was above Impairment loss of tax assets (C) Deferred tax assets /(D)Deferred tax expense

24 in Hungary The carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. [IAS 12.37] Deferred tax assets and liabilities are 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/laws that have been enacted or substantively enacted by the end of the reporting period. [IAS 12.47] The measurement reflects the entity's expectations, at the end of the reporting period, as to the manner in which the carrying amount of its assets and liabilities will be recovered or settled. [IAS 12.51]

25 in Hungary Temporary differences can be occured at next levels: 1. Difference between accounting profit and taxable profit (tax base related modifications). For example: amortization, provision, impairment loss of trade receivables, deductive loss 2. modifications IAS 23 Borrowing cost (general purpose loan related cost activation) IAS 16 PPE (activated maintance cost) IAS 17 Leasing IAS 19 Employee benefits (provisons) IAS 37 Provisions (discounting long term provisons) 3. Consolidation related modifications, elimination of internal transactions intercompany PPE sold intercompany inventory sold

26 in Hungary Deferred tax effect of financial statements Elements of FS Financial position Total comprehensive income Deferred tax recognition, effect Deferred tax asset should be presented within fixed assets, deferred tax liability should bepresented as long term liability. (IAS 1.70) Deferred tax asset/liability must be presented in separate line (IAS 1.68) Discounting is not permitted which is declared in explicit way by standard. (IAS 12.35) Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events are recognised in the same way as the items giving rise to those tax consequences. Accordingly, current and 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: [IAS 12.58] transactions or events that are recognised outside of profit or loss (other comprehensive income) - in which case the related tax amount is also recognised outside of profit or loss [IAS 12.61A] Cash flow There is no cash flow effect. It is a theoretical tax.

27 in Hungary Thank you for your attention!

IAS 12 INCOME TAXES. Overview

IAS 12 INCOME TAXES. Overview IAS 12 INCOME TAXES Overview IAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of accounting for income taxes which recognises both the current tax consequences of transactions