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© 2011 IFRS Foundation

1The IFRS for SMEs

Topic 3.2Section 29 Income Tax


2

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The accounting requirements applicable to small and medium‑sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July 2009.

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3Section 29 – Introduction

• Section 29 is based on the IASB’s March 2009 Exposure Draft, Income Tax.– Same ‘temporary difference’ approach as

in IAS 12– Simpler explanation– Fewer exceptions


4Section 29 – Scope and definitions

• Income tax defined– Income tax: All domestic and foreign tax

based on taxable profit– Taxable profit = taxable income minus

deductible amounts (a net amount)– Tax based on revenue ≠ income tax

– Sales tax, VAT, tax on capital, and social security tax ≠ income tax

– Income tax = tax rate x taxable profit


5Section 29 – Other definitions

• Current tax: Amount of income tax payable/refundable based on taxable profit/loss for the current period or past periods

• Deferred tax: Tax payable/recoverable in the future period as a result of past transactions


6Section 29 – Other definitions

• Tax basis: Measurement of asset, liability, or equity under the tax law

• Temporary difference: Difference in carrying amount of asset, liability, or other item in the financial statements and its tax basis – if entity expects the item will affect future taxable profit


7Section 29 – Steps in accounting for income tax

1. Recognise current tax2. Identify which assets and liabilities would

affect taxable profit if recovered or settled for their carrying amounts

3. Determine tax basis of items in (2) plus other items that have a tax basis although not recognised (eg borrowing cost or R&D that is capitalised for tax purposes)

4. Compute temporary differences, unused tax losses, unused tax credits


8Section 29 – Steps in accounting for income tax

5. Recognise deferred tax assets or liabilities arising from temporary differences

6. Measure deferred tax assets and liabilities– Use substantively enacted tax rates– Consider possible outcomes of a review by

tax authorities7. Valuation allowance against deferred tax

assets (probable recovery)8. Allocate current and deferred tax to related

components of P&L, OCI, equity


9Section 29 – Recognition of current tax

• Current Tax– Liability for any tax payable on current or

prior taxable profit– Asset if overpayment is recoverable– Measure using tax law enacted or

substantively enacted at reporting date– Current period expense or income, but if

current tax relates to an item of OCI, that tax is presented as part of OCI



• Example: Calculate Current Tax– Accounting profit 150,000, tax rate 15%– 20,000 royalty income is tax exempt– 5,000 meals expense is not deductible– Bad debt expense 2,500 included 500

estimate not deductible until write-off– Tax depreciation (accelerated) is 43,000,

book depreciation is 35,000.What is current tax expense?

continued...



• Example: Calculate Current Tax (cont’d)Taxable profit:

Accounting profit 150,000Less nontaxable royalty (20,000)Plus nondeductible meals 5,000Plus nondeductible bad debts 500Less add’l tax depreciation (8,000)Taxable Profit 127,500

Current tax = 15% x 127,500 = 19,125


12Section 29 – Recognition of deferred tax

• Deferred tax– Based on difference between amounts in

balance sheet and tax basis of those items– If recovery of asset/liability will not affect

taxable profit, no deferred tax– Tax basis = amount that would be

deductible if asset were sold (or liability were settled) at end of reporting period



• Deferred tax– Measure using enacted (or substantively

enacted) tax rates– But use the rate based on expected income

at the time of reversal of the temporary difference to calculate the expected effective tax rate



• Example: Calculate Deferred Tax– Accounting profit 150,000, tax rate 15%– 20,000 royalty income is tax exempt– 5,000 meals expense is not deductible– Bad debt expense 2,500 included 500

estimate not deductible until write-off– Tax depreciation (accelerated) is 43,000,

book depreciation is 35,000.What is deferred tax expense?

continued...



• Example: Calculate Deferred Tax (cont’d)Deferred tax asset – nondeductible bad debt:

500 x 15% = 75Deferred tax liability – accelerated deprec:

8,000 x 15% = 1,200Same jurisdiction, right of offset

Deferred tax expense = 1,200 – 75 = 1,125Deferred tax liability = 1,125Total tax expense 19,125 + 1,125 = 20,250


16Section 29 – Recognition of deferred tax• Example: Journal entry (reflects the last two

examples)

Income tax expense 20,250 Taxes currently payable 19,125 Deferred tax liability 1,125



• Example: Graduated tax rates– Temporary difference arises 7,500 in 20X1,

expected to reverse in 20X3– Tax rate 15% on first 500,000 of profit, 25% on

excess over 500,000– Taxable profit 20X1 = 400,000– Expected taxable profit 20X3 = 600,000– Effective tax rate 20X3 = (500,000 x 15%) +

(100,000 x 25%) = 100,000/600,000 = 16.67%– Deferred tax liability 20X1 = 16.67% x 7,500 =

1,250


18Section 29 – Temporary differences

• Temporary differences– Can arise on initial recognition of an asset

or liability– Can arise after initial recognition because

income/expense is recognised in P&L in one period and in taxable profit in a different period

– Can arise when tax basis of asset or liability changes but changes will never affect the carrying amount



• Recognise (a few exceptions – next slide):– Deferred tax liability for all temporary

differences that will increase taxable profit in the future

– Deferred tax asset for all temporary differences that will reduce taxable profit in the future

– Deferred tax asset for tax loss and tax credit carryforwards



• Exceptions to recognition:– No deferred tax for temporary differences

associated with unremitted earnings of foreign sub, associate, JV

– No deferred tax for temporary difference associated with initial recognition of goodwill



• Example: 25% owned associate, equity method used for books, ordinary tax rate 30%, capital gains tax rate 0%– Cost 10,000– Equity method income year 1 = 1,000– Temporary difference = 1,000– Deferred tax liability = 0% x 1,000 = 0– Taxable dividend received = 200– Current tax expense = 30% x 200 = 60– End of year 1 carrying amount = 10,800



• Changes in deferred tax liabilities / assets:– Recognised in P&L (or in OCI if it relates to

an item of OCI)• Example using data in slide 14: Tax rate

now increases to 20%, deferred tax asset and liability not yet reversed.– Deferred tax liability is 1,125– Def tax liab should be 20% x 7,500 = 1,500– Tax expense charged to P&L = 375


23Section 29 – Measurement of deferred tax

• Use tax rate that has been enacted or substantively enacted

• If different rates apply to different types of income, use rate the entity expects to pay

• Valuation allowance against tax assets:– Net carrying amount = probable recovery– Review carrying amount each period



• Example: Valuation allowance– 31/12/X1 temporary differences of 120 available

to reduce future taxable profit– Cannot be carried back– Of the 120, based on forecasts of future profits,

only 30 has > 50% likelihood to be utilised– Tax rate 20%

Journal entry at 31/12/X1 Debit CreditDeferred tax asset [120 x 20%] 24 Valuation allowance [(120 - 30) x 20%] 18 Income tax benefit – deferred tax (P&L) 6



• Do not discount current or deferred taxes• Uncertainty in measuring both deferred tax

assets and liabilities: – Use probability-weighted average amount

of all possible outcomes, assuming tax authorities know all facts

• If different tax rates apply to undistributed and distributed income, accrue at undistributed rate initially– Adjust through P&L when distributed


26Section 29 – Presentation

• Classification: – All deferred tax assets and liabilities as

non-current• Offsetting:

– Do not offset current tax assets and liabilities or deferred tax assets and liabilities unless entity has legal right to offset and it intends either to settle net or simultaneously


27Section 29 – Disclosure

• Disclose major components of tax expense: – Current tax expense (income)– Adjustments to current tax of prior periods– Deferred tax expense (income) relating to:

– New or reversing temporary differences– Changes in tax rates or new taxes

– Effects of changes in uncertainty– Changes in valuation allowance– Tax expense relating to changes in

accounting policies or errors



• Other disclosures: – Current and deferred tax relating to items of

OCI– Explanation of significant differences in

amounts in P&L and amounts reported to tax authorities

– Changes in tax rates

continued next slide...



• Other disclosures (continued): – For each type of temporary difference and

unused tax loss and tax credit:– Amount of deferred tax and valuation

allowance at end of period– Analysis of changes in deferred tax and

valuation allowance during period– Expiry date of temporary differences and

unused tax losses and tax credits– Explanation if payment of undistributed

earnings will have a tax impact

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