IAS 12 (revised 2000) Income Taxes Implementing IAS
Overview Current taxes Deferred taxes: temporary differences calculation of deferred taxes consolidation and deferred taxes presentation and disclosures IAS 12 2
Current Tax Assets and Liabilities Current tax for current and prior periods should be recognised as a liability. If the amounts already paid exceed the amounts due, the excess should be recognised as an asset Tax loss carry back benefits that can be used to recover current tax of a previous period should be recognised as an asset IAS 12 3
Calculation of Current Tax Expense 20X8 20X9 Financial Tax Financial Tax Statements Return Statements Return Income before income taxes 100,000 100,000 100,000 100,000 Profit on contract in progress (40,000) 40,000 Net income financial 100,000 100,000 statements ====== ====== Net income tax return 60,000 140,000 ====== ====== Tax expense (50%) 30,000 70,000 ====== ====== IAS 12 4
Comparative Income Statements? Presentation of Income Tax Expense Without Provision for Deferred Taxes 20X8 20X9 Financial statement income before income taxes 100,000 100,000 Income tax expense (30,000) (70,000) Net income 70,000 30,000 ======= ======= Tax as % of income before taxes 30% ======= 70% ======= IAS 12 5
Comparative Income Statements Presentation of Income Tax Expense With Provision for Deferred Taxes 20X8 20X9 Financial statement income before income taxes 100,000 100,000 Income taxes: Current (30,000) (70,000) Deferred (20,000) 20,000 Total tax expense (50,000) (50,000) Net income 50,000 50,000 ======= ======= Tax as % of income before taxes 50% ======= 50% ======= IAS 12 6
Journal Entries IAS Balance Sheet DR CR DR CR 20X8 Current tax expense 30,000 Deferred tax expense 20,000 Current tax payable 30,000 Deferred tax liability 20,000 Income Statement 20X9 Current tax expense 70,000 Deferred tax expense 20,000 Current tax payable 70,000 Deferred tax liability 20,000 IAS 12 7
Illustration Without Deferred Taxes Machinery costs $ 5,000,000 Useful life IAS books = 10 years Useful life tax books = 5 years A B C D E F G Year Profit before depreciation and tax Tax depreciation Taxable income Tax 25% Book depreciation Pretax income (AE) Tax ratio (D/F x 100%) 1 5,000,000 4,000,000 4, 22.2 % 2 7, 6, 1,625,000 7,000,000 23.2 % 3 8,400,000 7,400,000 1,850,000 7,900,000 23.4 % 4 6,450,000 5,450,000 1,362,500 5,950,000 22.9 % 5 8,000,000 7,000,000 1,750,000 7, 23.3 % 6 10,325,000 10,325,000 2,581,250 9,825,000 26.3 % 7 6,000,000 6,000,000 1, 5, 27.3 % 8 1 1 2,750,000 10, 26.2 % 9 2,250,000 2,250,000 562,500 1,750,000 32.1 % 10 7,300,000 7,300,000 1,825,000 6,800,000 26.8 % IAS 12 8
Illustration With Deferred Taxes Year IAS net book value Tax net book value Cum. temporary difference Cum. deferred taxes Deferred tax charge (credit) Current tax charge (as before) Total tax charge New tax ratio 1 4, 4,000,000 125,000 125,000 1,125,000 25 % 2 4,000,000 3,000,000 250,000 125,000 1,625,000 1,750,000 25 % 3 3, 2,000,000 1, 375,000 125,000 1,850,000 1,975,000 25 % 4 3,000,000 2,000,000 125,000 1,362,500 1,487,500 25 % 5 2, 2, 625,000 125,000 1,750,000 1,875,000 25 % 6 2,000,000 2,000,000 (125,000) 2,581,250 2,456,250 25 % 7 1, 1, 375,000 (125,000) 1, 1,375,000 25 % 8 250,000 (125,000) 2,750,000 2,625,000 25 % 9 125,000 (125,000) 562,500 437,500 25 % 10 (125,000) 1,825,000 1,700,000 25 % IAS 12 9
Deferred Taxes Temporary differences The 4step approach Treatment of deferred tax assets Tax losses Consolidation and deferred taxes Presentation and disclosures IAS 12 10
Definitions Temporary differences: differences between the carrying amount of an asset or liability in the balance sheet and its tax base Taxable temporary differences: will result in taxable amounts in determining taxable profit of future periods when the carrying amount of the asset or liability is recovered or settled Deductible temporary differences: will result in amounts that are deductible in determining taxable profit of future periods when the carrying amount of the asset or liability is recovered or settled IAS 12 11
Temporary Differences Deferred taxes are recognised for all temporary differences unless they arise from: Goodwill/negative goodwill Initial recognition of an asset or liability in a transaction which: is not a business combination and at the time of the transaction, affects neither accounting profit not taxable profit (loss) IAS 12 12
Calculation of Deferred Tax 4 steps Step 1: determine differences between tax and IAS balance sheets Step 2: determine which of them are future taxable, which are future deductible, differences Step 3: multiply them by the expected tax rate SIC21 Income Taxes Recovery of Revalued NonDepreciable Assets Step 4: consider if it is probable that taxable profit will be available against which the deductible temporary difference (including unused tax losses) can be utilised and only then show an asset IAS 12 13
Different tax rates apply Undistributed earnings 50% Distributed earnings 40% Deferred tax? at what rate Provide at 50% When distribution recognised: credit 10% to current tax IAS 12 14
Step 4 Probable Taxable Profit? Sources of future taxable income: offset against deferred tax liabilities reversals of taxable temporary differences future taxable profits carryback income (if available) taxplanning strategies IAS 12 15
IAS 12 the Key Points Comprehensive application required using the balance sheet liability method Partial provisioning not acceptable No discounting permitted Deferred tax assets on deductible temporary differences and tax loss carry forwards recognised only...when it is probable that taxable profits will be available... for utilisation IAS 12 16
Consolidation and Deferred Tax Consolidation adjustments and elimination of intercompany profits Deferred tax on undistributed profits of subsidiaries, associates, joint ventures No deferred tax on (non tax deductible) goodwill, as recognition of a deferred tax liability would increase the carrying amount of goodwill IAS 12 17
Presentation 1. SIC25 Income Taxes Changes in the Tax Status of an Enterprise or its Shareholders 2. Deferred taxes to be shown separately from current taxes, both to be shown on the face of the balance sheet 3. Deferred tax assets and liabilities not to be shown as current 4. Offset of deferred tax assets and liabilities only if: legally enforceable right of tax offset they relate to taxes levied by the same tax authority on the same entity or entities which intend to net IAS 12 18
Disclosures (1) The components of tax expense Explanation of changes in tax rates compared to the previous year The amount of any current and deferred tax on items recognised directly in equity (i.e. revaluation of land) IAS 12 19
Disclosures (2) For each type of temporary difference, unused tax losses and unused tax credits: the amount of deferred tax assets and liabilities in the balance sheet the amount of deferred tax income or expense in the income statement Amount and expiry date of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised Reconciliation of effective to statutory tax rate Temporary differences for undistributed profits of subsidiaries etc. that are not provided for IAS 12 20
IAS 12 Deferred Taxes: the Main Rules Temporary (not timing) differences Deferred taxes to be set up on (almost) all temporary differences The 4step approach to calculating deferred taxes Tax loss carryforwards are also assets Deferred tax assets to be set up only if it is probable that taxable profit will be available against which the deductible temporary difference can be utilised IAS 12 21