IAS 12 Income Tax
Calculation Book Value (Carrying Value) Iess Income Tax Value (Tax Base) = Temporary Difference Temporary Difference X Applicable Tax Rate = Deferred Tax Asset/ Liability
Background Issued in 1998 but replacing the previous version The revision introduced an approach referred to as the balance sheet liability approach method whilst its predecessor used the income statement liability method Main difference: Income Statement Liability Method focused on timing differences Balance Sheet Liability Method on temporary differences Standard amended several times since then - latest amendment in 2009 relating to IFRS 9
Scope Income taxes include all taxes which are based on taxable profits Domestic & Foreign Excludes government grants and investment credits from its scope However includes any resultant temporary differences arising therefrom
Key Definitions 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) Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax
Key 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: o Deductible temporary differences o The carry-forward of unused tax differences o The carry-forward of unused tax credits
Key Definitions Temporary differences are differences between the Carrying Amount of an asset or liability in the Statement of Financial Position and its tax base o 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 o deductible temporary differences 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
Tax base- Asset The tax base of an asset is the amount attributed to that asset for tax purposes For an asset = the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset Note: If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount
Time to think What is the tax base in these scenarios? A machine cost 100. For tax purposes, depreciation of 30 has already 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, any gain on disposal of the machine will be taxable and any loss on disposal will be deductible for tax purposes. Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a cash basis.
Time to think Trade receivables have a carrying amount of 100. The related revenue has already been included in taxable profit Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not taxable A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax consequences
Tax base- Liability The tax base of a liability is the amount attributed to that liability for tax purposes 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. Note: In the case of revenue which 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
Time to think Current liabilities include accrued expenses with a carrying amount of 100. The related expense will be deducted for tax purposes on a cash basis Current liabilities include interest revenue received in advance, with a carrying amount of 100. The related interest revenue was taxed on a cash basis Current liabilities include accrued expenses with a carrying amount of 100. The related expense has already been deducted for tax purposes
Time to think Current liabilities include accrued fines and penalties with a carrying amount of 100. Fines and penalties are not deductible for tax purposes A loan payable has a carrying amount of 100. The repayment of the loan will have no tax consequences
Tax base- No Asset or Liability!! Some items have a tax base but are not recognised as assets and liabilities in the SFP, e.g. research costs are expensed in determining accounting profit but may not be permitted as a deduction in determining taxable profit until a later period. The difference between the Tax Base of the research costs, being the amount deductible for tax in future periods, and the Carrying Amount of nil is a deductible temporary difference that results in a deferred tax asset
Tax base & Consolidated AFS In consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed, otherwise the tax base is determined by reference to the tax returns of each entity in the group
Recognition- Current tax Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognised as an asset The benefit relating to a tax loss that can be carried back to recover current tax of a previous period shall be recognised as an asset
Recognition- Taxable Temporary Diffs A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: o the initial recognition of goodwill, or o the initial recognition of an asset or liability in a transaction which: i. is not a business combination, and ii. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss) General rule of thumb: IAS 12(R) requires the recognition of all deferred tax liabilities with a some exceptions
Time to think An asset which cost 150 has a carrying amount of 100. Cumulative depreciation for tax purposes is 90 and the tax rate is 25%. What deferred tax liability should be recognised? Tax base is 150-90= 60 (what will be deductible against taxable income when the asset is recovered in future periods) Carrying amount is 100 Temporary taxable difference is 100-60= 40 Deferred tax liability will be 40 x 25%= 10 Journals Dr. Deferred tax expense (I/S) 10 Cr. Deferred tax liability (SFP) 10
Taxable Temporary Differences All timing differences are temporary differences but not all temporary differences are timing differences! Examples of timing differences interest revenue is included in accounting profit on a time proportion basis but may, in some jurisdictions, be included in taxable profit when cash is collected depreciation used in determining taxable profit (tax loss) may differ from that used in determining accounting profit. The temporary difference is the difference between the carrying amount of the asset and its tax base development costs may be capitalised and amortised over future periods in determining accounting profit but deducted in determining taxable profit in the period in which they are incurred.
Taxable Temporary Differences Business combinations recognition of assets and liabilities acquired at fair where no such adjustment is made for tax purposes-recognised o The resultant recognition of deferred tax will impact the computation of goodwill Revaluation of Property Plant & Equipment and Investment Property where no such adjustment is made for tax purposes-recognised o Irrespective of whether the entity intends to dispose of the asset or not a temporary taxable difference arises either from future economic benefits relating to the use of the asset or from proceeds on its disposal (or both)
Taxable Temporary Differences Transactions where the tax base of an asset or liability on initial recognition differs from its initial carrying amount, for example when an entity benefits from non-taxable government grants related to assets-not recognised Where the carrying amount of investments in subsidiaries, branches and associates or interests in joint ventures become different from the tax base-depends! Compound financial instruments split between a liability and equity portion-recognise but in different places, profit and loss and directly in equity respectively
Recognition- Deductible Temporary Differences A deferred tax asset shall 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 that: o is not a business combination; and o at the time of the transaction, affects neither accounting profit nor taxable profit General rule of thumb: IAS 12(R) requires the recognition of all deferred tax assets with a some exceptions.
Time to think An entity recognises a liability of 100 for accrued product warranty costs. For tax purposes, the product warranty costs will not be deductible until the entity pays claims. The tax rate is 25%. What deferred tax asset should be recognised? Tax base is 100-100= 0 (carrying amount less amounts deductible in the future against taxable profits) Carrying amount is 100 Temporary deductible difference is 100-0= 100 Deferred tax asset will be 100 x 25%= 25 Journals (only recognised to the extent probable!) Dr. Deferred tax asset (SFP) 25 Cr. Deferred tax income (I/S) 25
Deductible Temporary Differences Retirement benefit costs recognised for accounting purposes may only be deductible for tax purposes on payment of contributions - recognised Revaluation of Property Plant & Equipment and Investment Property where no such adjustment is made for tax purposes - recognised Where the carrying amount of investments in subsidiaries, branches and associates or interests in joint ventures become different from the tax base - depends!
Deductible Temporary Differences It is probable that taxable profit will be available against which a deductible temporary difference can be utilised when there are sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity which are expected to reverse: o in the same period as the expected reversal of the deductible temporary difference
Deductible Temporary Differences When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that: o it is probable that the entity will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference, or o tax planning opportunities are available to the entity that will create taxable profit in appropriate periods
Unused Tax losses & deferred tax assets A deferred tax asset shall be recognised for the carryforward 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 unused tax credits can be utilised o Where this is a history of recent tax losses there needs to be convincing evidence that future taxable profits will be achieved o Take into account possible expiry of tax losses o Consider the causes of losses and likelihood of repetition o Consider the impact of tax planning Reassess annually an unrecognised deferred tax asset arising from unused tax losses
Measurement Deferred tax will be measured at the tax rates that are expected to apply to the period when the asset is realised or liability is settled, based on tax rates that have been enacted at reporting date Often difficult and subjective to apply as measurement of deferred tax liabilities and assets depends on whether an entity expects to recover the asset by using it; or by selling it
Non-depreciable assets carried at revaluation in terms of IAS 16 If a deferred tax liability or asset arises from a non-depreciable asset measured using the revaluation model in IAS 16, the measurement of the deferred tax liability or asset reflects the tax consequences of recovering the CA of the asset through sale, regardless of the basis of measuring the CA of that asset
Non-depreciable assets carried at revaluation in terms of IAS 40 If a deferred tax liability or asset arises from investment property that is measured using the fair value model in IAS 40, It is presumed that the CA of the investment property will be recovered through sale
Non-depreciable assets carried at revaluation in terms of IAS 40 Therefore, Measurement of the deferred tax liability or asset should reflect the tax consequences of recovering the CA of the investment property through sale
Non-depreciable assets carried at revaluation in terms of IAS 40 This presumption is rebutted if the investment property is depreciable; and It is the intention to consume substantially all of the economic benefits of the investment property over time, rather than through sale
If the presumption is rebutted Then we are back where we started: the measurement of deferred tax liabilities and assets should reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of those assets and liabilities that give rise to temporary differences
Measurement Deferred tax assets/ liabilities should not be discounted Deferred tax assets for tax losses or unused tax credits should only be recognised to the extent that its probable that future taxable profits will be available against which to utilise it. Deferred tax must be classified as non-current
Time to think An asset has a carrying amount of 100 and a tax base of 60. A tax rate of 20% would apply if the asset were sold and a tax rate of 30% would apply to other income. What deferred tax asset/liability should be recognised?
Time to think An asset with a cost of 100 and a carrying amount of 80 is revalued to 150. Cumulative depreciation for tax purposes is 30 and the tax rate is 30%. If the asset is sold for more than cost, the cumulative tax depreciation of 30 will be included in taxable income but sale proceeds in excess of cost will not be taxable. What deferred tax asset/liability should be recognised?
Presentation & Disclosure Offset of current tax asset and current tax liability permitted if an entity: o has a legally enforceable right to set off the recognised amounts; and o intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously o In its consolidated AFS has a current tax asset of one legal entity and a current tax liability of another legal entity in the group can be legally setoff to make or receive a single net payment and the entities intend to do so
Presentation & Disclosure Offset deferred tax assets and deferred tax liabilities if, and only if: o the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and o the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either; i. the same taxable entity; or ii. different taxable entities which intend either to settle current tax liabilities and assets on a net basis in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered Detailed disclosures required including; o o Tax reconciliation (numerical or tax rate) Unrecognised deferred tax assets