Deferred Taxation February 2011

Transcription

1 s Tax Academy Finding your way around Deferred Taxation February 2011

2 Synopsis The amount of tax payable in any particular period does not necessarily bear a direct relationship to the amount of profit or loss shown on the income statement. This is due to the fact that the tax laws provide for the computation of taxable income for a period based on rules different from the generally accepted accounting principles followed while preparing the financial statements. In order to properly account for the tax effects of all transactions occurring within a period, a deferred tax provision is necessary. In this session we will examine the technical issue of deferred tax computation and accounting with particular focus on IFRS tax reporting requirements, practical issues and impending changes. Deferred Taxation February 2011 Slide 2

3 Learning outcome At the end of this course, participants will be able to: Understand deferred taxation from both accounting and tax perspectives and the relationship between the two Prepare deferred tax computation, presentation and key disclosure requirements Identify practical issues and challenges regarding deferred tax accounting Deferred Taxation February 2011 Slide 3

4 Contents Introduction & definition of deferred tax terminologies Accounting for deferred tax Fair value adjustments and non-depreciable assets Initial recognition exceptions Applicable tax rates and manner of recovery Analysis and classification of deferred tax Presentation & disclosure requirements Differences between SAS and IFRS/IAS Group deferred tax consolidation Practical issues and expected changes Conclusion / Discussions / Workshop 1 hour 30 minutes

5 Introduction & definition of deferred tax terminologies 5

6 Introduction The amount of tax payable in any particular period does not necessarily bear a direct relationship to the amount of profit or loss shown on the income statement. This is because the tax laws provide for the computation of taxable income for a period based on rules different from the generally accepted accounting principles followed while preparing the income statement. In order to properly account for the tax effects of all transactions occurring within a period, a deferred tax provision is necessary so as to comply with matching concept. The relevant accounting standards on the subject are SAS 19 and IAS 12 both titled Income Taxes. Deferred Taxation February 2011 Slide 6

7 Introduction Deferred taxation inspired by matching concept Date Description Amount (N'm) Revaluation surplus Capital gains Tax per account Comments 2005 cost Revalued to No tax due 2011 Sold for CGT payable Date Description Amount (N'm) Acct surplus Capital gains Tax per account Comments 2005 cost Revalued to Def tax charge 2011 Sold for CGT covered by DT Deferred Taxation February 2011 Slide 7

8 Definitions What is Deferred Tax? SAS 19 Deferred tax is the tax (liability or asset) attributable to timing differences. IAS 12 Deferred tax is the tax consequences of the future recovery/settlement of the carrying amount of assets/liabilities in a company s balance sheet if it is probable that recovery or settlement of that carrying amount will make future tax payments larger/smaller than they would be if such recovery or settlement were to have no tax consequences. In simple terms Deferred tax is the future tax effects of differences between items in the financial statements and their equivalent values for tax purposes. Deferred Taxation February 2011 Slide 8

9 Definitions Accounting profit is the net profit or loss for a period before deducting tax expense. Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable). Tax expense (tax income) is the aggregate amount included in the determination of net profit or loss for the period in respect of current tax and deferred tax. Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. Deferred Taxation February 2011 Slide 9

10 Definitions Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences may be either: (a) taxable temporary differences, which 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; or (b) deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. Deferred Taxation February 2011 Slide 10

11 Definitions If carrying amount > Tax Base If carrying amount < Tax Base For assets Taxable temporary difference = Deferred tax liability (DTL) Deductible temporary difference = Deferred tax asset (DTA) For liabilities Deductible temporary difference = Deferred tax asset (DTA) Taxable temporary difference = Deferred tax liability (DTL) (a) Example of taxable difference Higher NBV for fixed assets compared to TWDV as a result of accelerated capital allowance. (b) Example of deductible difference - Provisions disallowed for tax purposes until payment is made e.g. gratuity provision. Deferred Taxation February 2011 Slide 11

12 Definitions IAS 12 - Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. SAS 19 - Timing Differences are differences between the accounting income and taxable income which arise because the periods in which some items of revenue and expense are included in accounting income differ from the periods in which they are included in taxable income. Such differences originate in one period and are expected to reverse in one or more subsequent periods. While all timing differences are temporary differences, not all temporary differences are timing differences. SAS 19 - Permanent differences are differences between taxable and accounting items, for a period, that are not expected to reverse in subsequent periods. Deferred Taxation February 2011 Slide 12

13 Definitions Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of: (a) (b) (c) deductible temporary differences; the carry forward of unused tax losses; and the carry forward of unused tax credits. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Deferred Taxation February 2011 Slide 13

14 Definitions Tax base of an asset The tax base of an asset is the amount that will be deductible for tax purposes in future periods. Example A machine cost 100. For tax purposes, capital allowance of 30 has already been granted in the current and prior periods and the remaining cost will be deductible in future periods, either as annual allowances or through a balancing allowance on disposal. What is the tax base of the machine? The tax base of the machine is 70. Deferred Taxation February 2011 Slide 14

15 Definitions Tax base of income receivable In the case of income receivable, the tax base is the amount of the related income already taxed. Examples: 1. Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a cash basis. What is the tax base of the interest receivable? The tax base of the interest receivable is nil. 2. Trade receivables have a carrying amount of 100. The related revenue has already been included in taxable profit. What is the tax base of the trade receivable? The tax base of the trade receivables is 100. Deferred Taxation February 2011 Slide 15

16 Definitions Tax base of a non taxable asset If the economic benefits relating to an asset will not be taxable, the tax base of the asset is equal to its carrying amount. Example Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not taxable. What is the tax base? The tax base of the dividends receivable is 100.* *Under this analysis, there is no taxable temporary difference. An alternative analysis is that dividends receivable have a tax base of nil and that a tax rate of nil is applied to the resulting temporary difference of 100. Under both analyses, there is no deferred tax liability. Deferred Taxation February 2011 Slide 16

17 Definitions Tax base of liabilities and provisions The tax base of a liability or provision is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. Examples 1. Current liabilities include accrued expenses with a carrying amount of 100. The related expense will be deducted for tax purposes in future on a cash basis. The tax base of the accrued expenses is nil. 2. Provision for retirement benefit has a carrying amount of 100. Retirement benefit is only allowable for tax purposes when paid. The tax base of the retirement benefit provision is nil. Deferred Taxation February 2011 Slide 17

18 Definitions Tax base of unearned revenue In the case of revenue received in advance, the tax base of the resulting liability is its carrying amount, less the amount of the revenue already taxed. Example Current liabilities include interest revenue received in advance, with a carrying amount of 100. The related interest revenue was taxed on a cash basis. The tax base of the interest received in advance is nil. Deferred Taxation February 2011 Slide 18

19 Definitions Tax base of a non deductible liability If the expense relating to a liability will not be tax deductible, the tax base of the liability is equal to its carrying amount. Example Current liabilities include accrued fines and penalties with a carrying amount of 100. Fines and penalties are not deductible for tax purposes. The tax base of the accrued fines and penalties is 100.* *Under this analysis, there is no taxable temporary difference. An alternative analysis is that the liability has a tax base of nil and that a tax rate of nil is applied to the resulting temporary difference of 100. Under both analyses, there is no deferred tax liability. Deferred Taxation February 2011 Slide 19

20 Accounting for deferred tax 20

21 Accounting for deferred tax Why provide for deferred tax? Deferred tax accounting seeks to equalise the tax expense determined by the tax laws which often bear no direct relationship with revenue earned. The objective is to recognise the appropriate tax expense/income relating to the items recognised in the financial statement. Most deferred tax liabilities and deferred tax assets arise where income or expense is included in accounting profit in one period, but is included in taxable profit in a different period. e.g. Costs of intangible assets capitalised and are being amortised in the income statement, but deductible in full for tax purposes when incurred. Deferred Taxation February 2011 Slide 21

22 Accounting for deferred tax Illustration Why provide for deferred tax? Cost of Equipment (N'000) 1,200 Depreciation rate (Straight Line) 20% Company income tax rate 30% Annual profit before depreciation (N 000) 800 Capital Allowance: - Initial Allowance 50% - Annual Allowance 25% Deferred Taxation February 2011 Slide 22

23 Accounting for deferred tax Illustration Why provide for deferred tax? Accounting Total N'000 N'000 N'000 N'000 N'000 N'000 Profit before depr & tax ,000 Depreciation [a] (240) (240) (240) (240) (240) (1,200) Profit before tax ,800 30% [b] (168) (168) (168) (168) (168) (840) Profit after tax ,960 Based on Tax Laws Total N'000 N'000 N'000 N'000 N'000 N'000 Profit before depr & tax ,000 Capital allowance [c] (750) (150) (150) (150) - (1,200) Profit before tax ,800 30% [d] (15) (195) (195) (195) (240) (840) Profit after tax ,960 Timing difference [a-c] (510) Deferred Taxation February 2011 Slide 23 Def [d-b] (153)

24 Accounting for deferred tax Illustration Why provide for deferred tax? - (50) (100) (150) (200) Tax charge without Def Tax Tax Charge with Def Tax (250) (300) 2006 N N N N N 000 Total N 000 Current tax charge only (15) (195) (195) (195) (240) (840) Deferred tax (153) Tax charge including def tax 168) (168) (168) (168) (168) (840) Deferred Taxation February 2011 Slide 24

25 Accounting for deferred tax When do you provide for deferred tax? Generally, you should provide for deferred tax if the accounting treatment of an item defers from the tax treatment; and The difference will result in a higher or lower amount of income tax payable in the future. Otherwise no deferred tax is required. The above general rule is however subject to initial recognition exception (to be considered later). Accounting treatment Tax treatment Temporary difference Deferred tax required Deferred Taxation February 2011 Slide 25

26 Accounting for deferred tax Recognition An enterprise should account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognised in the income statement, any related tax effects are also recognised in the income statement. For transactions and other events recognised directly in equity, any related tax effects are also recognised directly in equity. Deferred Taxation February 2011 Slide 26

27 Accounting for deferred tax Recognition (cont.) IAS 12 (revised) requires that deferred tax assets be recognised when it is probable that taxable profits will be available against which the deferred tax asset can be utilised. Where an enterprise has a history of tax losses, the enterprise recognises a deferred tax asset only: - to the extent that the enterprise has sufficient taxable temporary differences; or - there is convincing other evidence that sufficient taxable profit will be available. Deferred Taxation February 2011 Slide 27

28 Accounting for deferred tax Basis of provision In providing for deferred taxes, there are three major bases. These are: nil provision basis; partial provision basis; and full provision basis. The only basis allowed by SAS & IFRA is the full provision basis. Deferred Taxation February 2011 Slide 28

29 Accounting for deferred tax Methods of computation Deferral Method Under this method, deferred taxes are determined on the basis of the prevailing tax rates when the timing differences originate. No adjustments are made later to recognise subsequent changes in tax rates. Reversals of the tax effects of timing differences are accounted for using the tax rates current at the time the differences arose. This method is not permitted by SAS and IFRS. Deferred Taxation February 2011 Slide 29

30 Accounting for deferred tax Methods of computation Liability method Under this method, the amount of deferred tax is computed using the tax rate expected to be in force during the period in which the timing differences reverse. Usually, the current tax rate is used as a reasonable estimate of the future tax rates, unless changes in tax rates are known in advance. As a result, the deferred tax provision represents the best estimate of the amount which would be payable or recoverable when the relevant timing differences reverse. This is the method required by SAS & IFRS. Deferred Taxation February 2011 Slide 30

31 Accounting for deferred tax Summary of requirements Deferred taxes should be computed using the liability method Only the temporary differences that are expected to reverse during the period allowed by the tax law should be considered in computing deferred taxes for treatment either as an asset or as a charge to the deferred tax account. Full provision should be made for deferred taxes (i.e. full basis). Deferred Taxation February 2011 Slide 31

32 Accounting for deferred tax Examples of items requiring deferred tax recognition Accelerated capital allowance [DTL] Unutilised capital allowance [DTA] Unutilised tax losses [DTA] Unrealised exchange gain [DTL] Unrealised exchange loss [DTA] General provision for bad and doubtful debts [DTA] Provision for stock obsolescence [DTA] Retirement benefit provision [DTA] *DTA = Deferred tax asset; DTL = Deferred tax liability Deferred Taxation February 2011 Slide 32

33 Accounting for deferred tax Examples of items requiring deferred tax recognition Revaluation surplus on fixed assets [DTL] Impairment of assets [DTA] Revaluation deficit on investment (diminution in value) [DTA] Immaterial addition to fixed assets expensed [DTA] Profit on disposal [DTL] Loss on disposal [DTA] *DTA = Deferred tax asset; DTL = Deferred tax liability Deferred Taxation February 2011 Slide 33

34 Accounting for deferred tax How to calculate deferred tax: the 9-step approach 1 Determine carrying value 2 Compute current income tax 3 Determine tax base 4 Calculate temporary differences 5 Identify exceptions 6 Review deductibility of differences e.g. tax losses 7 Apply relevant tax rates 8 Recognise deferred tax 9 Presentation & disclosure Deferred Taxation February 2011 Slide 34

35 Fair value adjustment and nondepreciable assets 35

36 Fair value adjustment and non-depreciable assets Revaluations of property, plant and equipment increase the carrying amount of an asset without affecting the tax base. They therefore create additional temporary differences. The tax effect relating to the increase in the carrying value of a revalued asset should be determined and charged or credited directly to equity. IAS 12/SIC 21 - the revaluation of an asset does not always affect taxable profit (or loss) in the period of the revaluation and the tax base of the asset may not be adjusted as a result of the revaluation. If the future recovery of the carrying amount will be taxable, any difference between the carrying amount of the revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset. Deferred Taxation February 2011 Slide 36

37 Fair value adjustment and non-depreciable assets Non-depreciable assets SIC 21 The deferred tax liability or asset that arises from the revaluation of a non-depreciable asset should be measured based on the tax consequences that would follow from recovery of the carrying amount of that asset through sale, regardless of the basis of measuring the carrying amount of that asset. Accordingly, if the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset that differs from the tax rate applicable to the taxable amount derived from using an asset, the former rate is applied in measuring the deferred tax liability or asset related to a non-depreciable asset. Deferred Taxation February 2011 Slide 37

38 Initial recognition exceptions 38

39 Initial recognition exceptions Initial recognition refers to the first time an item is recorded in the financial statements. Deferred tax is not required for temporary differences arising from: the initial recognition of goodwill; or goodwill for which amortisation is not deductible for tax purposes; or the initial recognition of an asset/liability which at the time of the transaction does not affect accounting or taxable profit (except in a business combination.), for example, cost of non depreciable land. Deferred Taxation February 2011 Slide 39

40 Applicable tax rate and manner of recovery 40

41 Applicable tax rate and manner of recovery Measurement and applicable tax rate Deferred tax assets and liabilities should be measured using 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. Exercise: The income tax rate in Country A for 2010 is 30%. At 31 October 2010, the parliament of Country A approved a tax cut which will result in an income tax rate of 25%. The new tax rate will be effective for years beginning 1 January When the company prepares its financial statements for the year ended 31 December 2010, which tax rate should be used for deferred tax? Answer: 25% Deferred Taxation February 2011 Slide 41

42 Applicable tax rate and manner of recovery Manner of recovery The measurement of deferred tax liabilities and deferred tax assets should reflect the tax consequences that would follow from the manner in which the entity expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. Example A An asset has a carrying amount of 100 and a tax base of 60. A tax rate of 20% would apply if the asset is sold while income tax rate is 30% will apply to recovery through use. The temporary difference is 40. Hence, the entity recognises a deferred tax liability of 8 20%) if it expects to sell the asset without further use and a deferred tax liability of 12 30%) if it expects to retain the asset and recover its carrying amount through use. Deferred Taxation February 2011 Slide 42

43 Applicable tax rate and manner of recovery Manner of recovery Example B An asset with a cost of 100 and a carrying amount of 80 is revalued to 150. No equivalent adjustment is made for tax purposes. Cumulative capital allowance is 30 and the tax rate is 30%. If the asset is sold for more than cost, the cumulative capital allowance of 30 will be taxed as balancing charge while sale proceeds in excess of cost will be taxable as CGT at 10% The tax base of the asset is 70, taxable temporary difference is 80. If the entity expects to recover the carrying amount by using the asset then there is a deferred tax liability of 24 (80 at 30%). If the entity expects to recover the carrying amount by selling the asset immediately for proceeds of 150, the deferred tax liability will be as follows: Deferred Taxation February 2011 Slide 43

44 Applicable tax rate and manner of recovery Manner of recovery Example B (cont.) Temporary Difference Tax rate Deferred Tax Cumulative capital allowance taxable as balancing charge Excess of proceed over original cost taxable as capital gain 30 30% % 5 Total Deferred Taxation February 2011 Slide 44

45 Analysis and classification of deferred tax 45

46 Analysis and classification of deferred tax SAS 19 requires deferred tax to be classified under long term and current portions (for deferred tax liability) or fixed and current assets (for deferred tax assets). IAS 12 (revised) requires that an entity which makes the current/noncurrent distinction should not classify deferred tax assets and liabilities as current assets and liabilities. NOTE: IAS 12 prohibits the discounting of deferred tax assets and liabilities but SAS 19 is silent on this. Deferred Taxation February 2011 Slide 46

47 Analysis and classification of deferred tax Offsetting An enterprise should offset deferred tax assets and deferred tax liabilities if, and only if: the enterprise 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. Deferred Taxation February 2011 Slide 47

48 Presentation & disclosure 48

49 Presentation & Disclosure Presentation Tax assets and tax liabilities should be presented separately from other assets and liabilities in the balance sheet. Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities. There are two major methods of presenting tax effects of timing differences in the financial statements: - net-of-tax method - separate line item method Deferred Taxation February 2011 Slide 49

50 Presentation & Disclosure Disclosure requirements In respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits, an entity should disclose: the amount of the deferred tax assets and liabilities recognised in the balance sheet for each period presented; the amount of the deferred tax income or expense recognised in the income statement, if this is not apparent from the changes in the amounts recognised in the balance sheet. Deferred Taxation February 2011 Slide 50

51 Presentation & Disclosure Example of deferred tax analysis note Deferred Tax Analysis N'million N'million Accrued interest (19) - Assets on lease Depreciation Derivatives 3,862 3,216 Fair value adjustments of financial instruments (18) 128 Impairment charges on loans and advances (1,330) (823) Post-employment benefits (408) (428) Share-based payments (96) (82) Other differences (309) 209 Deferred tax closing balance 2,292 2,773 Deferred taxation liability 3,128 3,201 Deferred taxation asset (836) (428) Deferred Taxation February 2011 Slide 51

52 Presentation & Disclosure An entity should disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when: the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred tax asset relates. Deferred Taxation February 2011 Slide 52

53 Presentation & Disclosure Below is an example of disclosure where deferred tax asset is not recognised in the accounts: Deferred tax asset has not been recognised in the financial statements, as, in the view of the directors, there is uncertainty as to the timing of inflows of future taxable profits against which the tax asset may be offset. Deferred Taxation February 2011 Slide 53

54 Presentation & Disclosure An enterprise should disclose an explanation of the relationship between tax expense (or income) and accounting profit in either or both of the following forms: a numerical reconciliation between tax expense and the product of accounting profit multiplied by the applicable tax rate, or a numerical reconciliation between the average effective tax rate and the applicable tax rate. Note: The average effective tax rate is the tax expense (or income) divided by the accounting profit before tax. Deferred Taxation February 2011 Slide 54

55 Presentation & Disclosure Example of deferred tax reconciliation Deferred tax reconciliation N'million N'million Deferred tax balance at beginning of the year 2,117 2,919 Change in company tax rate - (100) Temporary differences for the year: 175 (46) Accrued interest (19) (17) Assets on lease 132 (134) Capital gains tax 8 - Depreciation Derivatives 1, Fair value adjustments of financial instruments (142) (175) Impairment charges on loans and advances (535) (214) Post-employment benefits (32) (40) Share-based payments (17) (60) Other differences (510) (296) Deferred tax balance at end of the year 2,292 2,773 Deferred Taxation February 2011 Slide 55

56 Presentation & Disclosure Effective to statutory tax rate reconciliation N'million Rate Profit before tax 5, % Tax charge / Effective tax rate: 1,400 28% Company income tax % Education tax 190 4% NITDA Levy (IT Tax) 50 1% Deferred tax 310 6% Reconciliation: Effect of change in tax rates - 0% Education tax (190) -4% NITDA Levy (IT Tax) (50) -1% Tax effect of permanent differences 317 6% Penalty and interest 210 4% Disallowed donation 130 3% Subscription disallowed 78 2% Investment allowance (56) -1% Non taxable income (45) -1% Expected tax charge / statutory tax rate 1,477 30% Deferred Taxation February 2011 Slide 56

57 Differences between SAS and IFRS/IAS 57

58 Differences between SAS and IFRS/IAS Computation of deferred taxes IFRS Balance sheet liability method which focuses on temporary differences. The standard prohibits the use of the income statement liability method. SAS Income statement liability method which focuses on timing differences. However the standard does not prohibit the use of the balance sheet method. Deferred Taxation February 2011 Slide 58

59 Differences between SAS and IFRS/IAS Extra-Ordinary Items IFRS Extra ordinary items are not permitted by IFRS. However deferred tax must be accounted for in line with the treatment of the temporary difference. SAS Deferred taxes relating to extraordinary items should be shown as part of the tax on extraordinary items. Deferred Taxation February 2011 Slide 59

60 Differences between SAS and IFRS/IAS Recognition of deferred tax asset IFRS A deferred tax asset is recognised if it is probable (more likely than not) that sufficient taxable profit will be available against which the temporary difference can be utilised. SAS Only timing differences that are expected to reverse during the period allowed by the tax law are considered in computing deferred tax assets. Deferred Taxation February 2011 Slide 60

61 Differences between SAS and IFRS/IAS Disclosures IFRS An entity must reconcile its effective to statutory tax and analyse the components of deferred tax assets/liabilities. Disclose amount of deferred tax assets recognised & the evidence supporting recognition and amount & expiry of temporary differences for which no deferred tax assets are recognised. SAS Reconciliation of effective to statutory rate not required. Not required but deferred tax assets are recognised to the extent of their recoverability. Deferred Taxation February 2011 Slide 61

62 Differences between SAS and IFRS/IAS Undistributed profits in subsidiaries, JVs & associates IFRS Deferred tax is recognised except when the parent/investor is able to control the distribution of profit and it is probable that the temporary difference will not reverse in the foreseeable future. SAS No specific requirements regarding deferred tax treatment of undistributed profits of subsidiaries, joint ventures and associates. Deferred Taxation February 2011 Slide 62

63 Differences between SAS and IFRS/IAS Tax rates IFRS Tax rates and tax laws that have been enacted or substantively enacted. SAS Current tax rate is used as a reasonable estimate of the future tax rates, unless changes in tax rates are known in advance. Deferred Taxation February 2011 Slide 63

64 Differences between SAS and IFRS/IAS Presentation Current vs Non Current IFRS SAS Deferred tax assets and liabilities are classified as noncurrent on the balance sheet, with supplemental note disclosure for: (1) the components of the temporary differences, and (2) amounts expected to be recovered within 12 months and more than 12 months of the balance sheet date. Deferred tax balance should be presented in the balance sheet separately in the case of liability, between long term and current liabilities and in case of assets between fixed and current assets. Deferred Taxation February 2011 Slide 64

65 Group deferred tax consolidation 65

66 Group deferred tax consolidation Similar principles as applicable to stand-alone entities with slight modifications for group peculiarities. Golden rule is to compare the group carrying values with the tax base of the consolidated entities. Deferred tax should not be provided on investments in subsidiaries, joint ventures and associates where the group controls the timing of the reversal of temporary differences and it is probable that these differences will not reverse in the foreseeable future. Group temporary differences may be affected by: - Elimination of inter-company items - Fair value adjustments e.g. on acquisition of a subsidiary - Unification of accounting policies. Deferred Taxation February 2011 Slide 66

67 Group deferred tax consolidation B&B Bank Group based in Dubai has a subsidiary bank in Nigeria, BBN Plc. BBN owns substantial landed property which are being carried at historical cost for local reporting purposes. However, the group decided to revalue the assets of BBN for consolidation purposes. There are no capital gain and income taxes in the UAE but if BBN disposes of the asset, any capital gains will be liable to tax at 10% in Nigeria. The income tax rate in Nigeria is 30%. Questions: Should any deferred tax be recognised in respect of the above? If so by which entity(ies)? You may use the information below for your analysis assuming the property will be sold in the near future: N million Land Building Total Cost NBV Fair value Capital allowance Nil Deferred Taxation February 2011 Slide 67

68 Group deferred tax consolidation N million Land Building Total Cost NBV Fair value Capital allowance Nil Solution: Deferred Tax Computation - B&B Group N'million Carrying Value Tax base Temp Diff Tax rate Def Tax Land % 30 Building Balancing charge portion (cost - TWDV) % 66 Capital gain portion (Fair value - cost) % 10 Total def tax liability 106 Deferred Taxation February 2011 Slide 68

69 Practical issues and expected changes 69

70 Practical issues These include: Commencement of business Cessation of business Pioneer and post pioneer deferred tax accounting Change of accounting date Group consolidation (especially where there is different accounting treatments, different reporting dates etc) Local GAAP to IFRS conversion and transition adjustment Deferred Taxation February 2011 Slide 70

71 Practical issues ABC Bank Plc has a significant investment in shares. Based on the capital gains tax legislation, capital gains on the sale of shares are not taxable and capital losses are not deductible. In line with ABC s understanding of the law, past gains have always been excluded from taxation. However, in the past couple of years the stock market has almost collapsed forcing ABC to recognise impairment provisions for the diminution of value of its investment in shares. ABC is however optimistic that the shares will recover in the near future. Questions: 1) Is the impairment provision deductible for tax purposes? 2) Should deferred tax be recognised for the impairment provision? Why or why not? Deferred Taxation February 2011 Slide 71

72 Expected changes No change to prohibition of discounting Removal of initial recognition exemption Recognition of deferred tax assets in full, less, a valuation allowance. Presentation of deferred tax assets and liabilities as current or noncurrent based on the classification of the asset or liability to which the temporary difference relates. Deferred Taxation February 2011 Slide 72

73 Conclusion 73

74 Conclusion Deferred tax is fun! Principal GAAP is IAS 12, substantially a rule based standard. SAS 19 is the local GAAP equivalent but not as robust as IAS 12. Golden rule is Deferred tax = (carrying amount - tax base) x applicable tax rate. Exceptions apply in certain cases such as goodwill and initial recognition. Major challenges are around practical application and dealing with unusual situations such as commencement rules. To find your way around deferred tax easily, you must study IAS 12 and build on your learning in today s session. Deferred Taxation February 2011 Slide 74

75 Questions / Discussions / Workshop 75

76 In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists. Eric Hoffer, U.S. philosopher. Thankyou... This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Nigeria, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers. All rights reserved. In this document, and PricewaterhouseCoopers refer to PricewaterhouseCoopers Nigeria which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

77 Profile Paper Presenter Taiwo Oyedele Tax Partner, Contact information Phone: +234 (1) Ext Qualifications Fellow of the Association of Certified Chartered Accountants (FCCA). Fellow of the Institute of Chartered Accountants of Nigeria (FCA). Fellow of the Chartered Institute of Taxation of Nigeria (FCTI). Certified Information Systems Auditor (CISA). Professional Experience Taiwo is a Partner in the Tax and Corporate Advisory Unit of. He has many years of tax, accounting and consulting experience across different sectors. He has provided tax services covering areas such as mergers and acquisitions, tax strategies, international tax planning, group structuring, business combination and tax function effectiveness. Taiwo has substantial experience about the Nigerian economy and the tax environment. He is widely acknowledged and respected by tax professionals and administrators as a thought leader on topical tax issues. He is regularly involved in tax debates, reforms and tax policy discussions. Taiwo writes articles on technical issues in national newspapers and professional journals. He is a regular paper presenter at conferences (local and international), the CITN seminars, ICAN MCPE and ACCA continuous professional development programme. He is the current Dean of the Direct Taxation Faculty of CITN and a member of the Taxation and Fiscal Policy Management Faculty Board of ICAN. Taiwo is a contributor to the annual Doing Business report of the World Bank and Paying Taxes publication. In his role on these projects, Taiwo examines the various areas requiring reforms in tax practice and administration, tax legislation and tax policy in Nigeria compared to over 180 other countries around the globe.