ifrs and taxation in nigeria - official websiteoverview of income tax (ias 12) •deferred tax...

IFRS AND TAXATION IN

NIGERIA

Presented by:

Oladimeji Adeboyejo BSc, ACCADipIFR, AAT, ACCM, ACTI, ACA.

5/16/2013 1CITN, LAGOS DISTRICT SOCIETY

Objective The primary objective of this presentation

is to update ourselves on the new

development on IFRS in Nigeria.

How IFRS will impact tax administration

and practise in Nigeria.

CITN, LAGOS DISTRICT SOCIETY 25/16/2013

Outline

Introduction•What is IFRS•The need for IFRS

Nigeria Road map• Fist time adopter

•Role Financial Reporting Council

IFRS and Nigeria GAAP•New terminologies

Overview of Income Tax (IAS 12)•Deferred Tax•Other Specific Issue

Nigeria FIRS and The IFRS

Conclusion3CITN, LAGOS DISTRICT SOCIETY5/16/2013

IAS

SASSAS

4CITN, LAGOS DISTRICT SOCIETY5/16/2013

Background of developments in International

Financial Reporting Standards

• The International Accounting Standards Committee(IASC), now called IFRS Foundation, formed in 1973,was the first international standards-setting body. Itwas reorganized in 2001 and became anindependent international standard setter, theInternational Accounting Standards Board (IASB).Since then, the use of international standards hasprogressed rapidly. As of 2009, the European Unionand over 100 other countries either require or permitthe use of International Financial ReportingStandards (IFRSs) issued by the IASB or a localvariant of them.

• International Financial Reporting Standards were firstadopted in 2005 in many countries around the world.


Background of developments in International

Financial Reporting Standards• More than 12,000 companies in approximately 120 nations have

adopted IFRS, including listed companies in the European

Union. Australia, New Zealand and Israel have essentially

adopted IFRS as their national standards. Brazil started using

IFRS in 2010. Canada adopted IFRS, in full, on Jan. 1, 2011.

Mexico required adoption of IFRS for all listed entities starting in

2012. Japan is working to achieve convergence of IFRS and

began permitting certain qualifying domestic companies to apply

IFRS for fiscal years beginning April 1, 2010. A decision regarding

the mandatory use of IFRS in Japan is to be made around 2012

and Nigeria is also adopting starting from 2012.

• In fact, The majority of G20 members now require the use of

IFRSs. The ‘big four’ yet to require adoption of IFRSs for all listed

companies are China, India, Japan and the United States.CITN, LAGOS DISTRICT SOCIETY 65/16/2013

The need for IFRS• The world is now a global village

• Need to attract international investors and to enable easymonitoring of overseas investments - Attraction of Foreign DirectInvestment (FDI)

• Assurance of easier access to external capital for local anddomestic companies

• Increasing demand for public accountability and transparency byall stakeholders

• Facilitates industry perception of improved transparency andcomparability for investors and rating agencies

• Global comparability of financial statements


2012

Public Listed Entities and Significant Public Interest Entities

2013

Other Public interest Entities

2014

Small and Medium-sized Entities

Roadmap to IFRS conversion in Nigeria



(Cont’d)Phase 1: Publicly listed Entities and Significant Public Interest Entities

– These entities are to prepare their financial statements using

applicable IFRS by January 1, 2012.

– Significant public interest entities are:

• government business entities,

• all entities that have their equities or debt instruments listed

and traded in a public market (a domestic or foreign Stock

Exchange),

• other organisations, though unquoted, that are required by

law to file returns with more than two regulatory authorities

e.g CAC, FIRS, NCC etc. Examples of entities that meet

these criteria include financial and other credit institutions,

insurance companies and Telecoms companies.



(Cont’d)Phase 2: Other Public Interest Entities

• All other public interest entities are expected to mandatorily

adopt IFRS, for statutory purposes, by January 1, 2013.

• Other public interest entities are:

– Entities other than listed entities (unquoted, private

companies), which are of significant public interest because

of their :

• nature of business,

• size, or number of employees

• their corporate status which require wide range of

stakeholders.

• Example of entities meeting these criteria are large not for

profit entities such as charities and pension funds.CITN, LAGOS DISTRICT SOCIETY 105/16/2013


(Cont’d)Phase 3: Small and Medium-sized Entities (SMEs)

• IFRS for SMEs shall mandatorily be adopted as at January1, 2014.

• Small and Medium-sized Entities (SMEs) refer to entities asdefined by CAMA as small companies

• Entities that do not meet the IFRS for SME’s criteria shallreport using Small and Medium-sized Entities Guidelineson Accounting (SMEGA) Level 3 issued by the UnitedNations Conference on Trade and Development (UNCTAD).These are micro entities that are registered with theCorporate Affairs Commission and raise finance in any formincluding by overdrafts from financial institutions.


General rule in preparing opening IFRS

statement of financial position

IFRS 1 require first time adopter to:

The restatement is booked through retained earnings (or, if appropriate, another category of equity) at the transition date.

Recognise all assets and liabilities required to be recognised by IFRS

De-recognise all assets and liabilities not permitted by IFRS

Re-classifyall items in accordance with IFRS

Re-measureall assets and liabilities in accordance with IFRS

Step 1 Step 2 Step 3 Step 4


IFRS will probably become a near-universal standards

for accounting and business reporting. For the

strategically minded Company ………., conversion to

IFRS presents an opportunity to improve, unify, and

standardize the finance organization, particularly its

people and processes.

13CITN, LAGOS DISTRICT SOCIETY

THE FUTURE

5/16/2013

The role of Financial Reporting Council of Nigeria (FRCN)Subject to the provisions of this Act, the Council shall have the power to:

• enforce and approve enforcement of compliance with accounting, auditing,

corporate governance and financial reporting standards in Nigeria ;

• enter into such contracts as may be necessary or expedient for the purpose of

discharging its functions ;

• borrow such sums of money or raise such loans as it may require for the purpose

of discharging its functions ;

• oversee the delivery by each directorate of their functions, through regular reports

from the directorates’ coordinating directors ;

• oversee the performance of the executive through regular reports from the Chief

Executive Officer ;

• ensure that the Council and its directorates achieve high levels of accountability

and transparency ;

• undertake annual assessment of the risks to the success of the operations of the

Council and oversee the necessary risk mitigation plan ; and

• undertake annual evaluation of its own performance, and that of its committees

and operating bodies, against its objectives, including a review of the schedule of

matters reserved to the Board.CITN, LAGOS DISTRICT SOCIETY 145/16/2013

Conceptual framework for Financial

Reporting ElementsElements ofof FSFS

Assets

Liabilities

Equity

Income

Expenses

RecognitionRecognition ofof elementselements ofof FSFS

It is probable that a future economic benefit will flow to or from anentity, and

when the item has a cost or value that can be measured withreliability

Measurement of the elements of FSMeasurement of the elements of FS

Historical, fair value, Realizable value and present value.


IFRS Vs Nigerian GAAP

• Fair value accounting of financial instruments

• Impairment provisioning for financial assets

• Risk management disclosures

• The scope of consolidation

• Application of the components approach for property, plant and equipment

• Accounting for business combination

• Impairment testing of goodwill

• Significant increased disclosure in general.


IFRS Vs Nigerian GAAP (Cont’d)

Change in Nomenclature

Both by the provisions of the Statement of Accounting Standard (SAS) Number 2 and the Allied Matters Act. 1990. Financial Statements comprise:

• Statement of Accounting Policies

• Balance Sheet

• Profit and Loss Account (Income Statement)

• Notes on the Accounts

• Cash Flow Statement by SAS 18

• Value Added Statements

• Five –year Financial Summary.


IFRS Vs Nigerian GAAP (Cont’d)

By IAS 1, paragraph 10, a complete set of financial statements comprises:

– A statement of financial position at the end of theperiod;

– A statement of profit or loss and other comprehensive income for the period;

– A statement of changes in equity for the period;

– A statement of cash flows for the period

– Explanatory notes including statements of accountingpolicies


IFRS new terminologies• Stocks now Inventories

• Fixed Assets now Non-Current Assets ; Property, plant and equipment

• Net Book Value now Carrying Amount

• Debtors now Receivables

• Sales/Turnover is Revenue

• Creditors now Payables

• Long term liability is now non current liability

• Profit and loss is now statement of profit or loss and other comprehensive income

• Balance sheet is now statement of financial position

• Asset held for sales


Overview of income taxes

20

Income taxes are taxes on income or profits of an entity. They include companies’ income tax, education tax, petroleum profit tax, capital gains tax, IT tax and deferred tax charges.

Tax on taxable profits for the period (current tax) is recognised as:

• An expense in the profit or loss account

• liability in statement of financial position to the extends of unpaid;

a) Current tax period or prior period tax

b) Error on prior period tax

• Asset to the extends ofa) Excess payment on current tax and prior period

taxb) Tax loss that can be carried back to recover

current period taxc) Current tax credit

Deferred tax is necessary to apply the ‘matching principle’ to accounting profit and tax expense

21

Overview of income taxes

DEFERRED TAX

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 statement of profit or loss.

This is because the tax laws provide for the computation of taxable income for a period are based on rules different from the IFRSs followed while preparing the Financial statement. To comply with matching concept, a deferred tax provision is necessary.

22

Income tax

Current tax Deferred tax

Permanent difference

Temporary difference

Liability method

Balance sheet liability method (temporary diff.)

Taxable temporary difference

(deferred liability)

Deductable temporary difference

(deferred asset)

Income liability method (timing

diff. )

Deferral method

Not permitted by the standards


DEFINITION OF TERMS

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) deductible temporary differences;

(b) the carry forward of unused tax losses; and

(c) 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.24

DEFINITION OF TERMS

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.

25

While all timing differences are temporary differences, not all temporary differences are timing differences.

Permanent differences are differences between taxable and accounting items, for a period, that are not expected to reverse in subsequent periods.

26

DEFINITION OF TERMS

TAX BASE

ASSET: The tax base of an asset is the amount that will be deductible for tax purposes in future periods.

INCOME RECEIVABLE: The tax base is the amount of the related income already taxed.

LIABILITY 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.

UNEARNED INCOME: 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.

27

NON TAXABLE ASSET/LIABILITY: If the economic benefits relating to an asset will not be taxable/deductable, the tax base of the asset/liability is equal to its carrying amount.

28

TAX BASE

Examples

A machine cost $1000. For tax purposes, capital allowance of $350 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 …………………….

Interest receivable has a carrying amount of $1000. 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 …………….

29

Examples

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 …………………….

Current liabilities include accrued expenses with a carrying amount of $1000. The related expense will be deducted for tax purposes in future on a cash basis.

The tax base of the accrued expenses is ..............

Provision for retirement benefit has a carrying amount of $1000. Retirement benefit is only allowable for tax purpose when paid.

The tax base of the retirement benefit provision is ...................

30

Examples

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 .............

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 ..........................

31

DEFERRED TAX ASSET OR LIABILITY

The difference between the carrying amount of an asset or liability and its tax base may be taxable or deductible

Assets Liabilities

Carrying Amount

>

Tax Base

Taxable temporary

difference - Deferred tax

liability (DTL)

Deductible temporary


asset (DTA)

Carrying Amount

<

Tax Base

Deductible temporary


asset (DTA)

Taxable temporary


liability (DTL)

32

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. E.g. revaluation

33

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.

34

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.

35

Group deferred tax

• 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. 36

Group deferred tax

Deferred tax liabilities are not recognised on temporary differences when:

• The investor is able to control the reversal of the temporary difference, and

• It is probable that the temporary difference will not reverse in the foreseeable future.

37

Other specific issues

SHARE BASE COMPENSATION: deferred that is permitted to theextent of the amount tax authority would allowed in the future(just like research). If not known, it should be estimated baseon the available information. The deferred tax should berecognise as expense or income except when the amount of taxdeduction exceed the amount of the related cumulativeremuneration expenses. The excess should be recognisedirectly to equity.

COMPOUND FINANCIAL INSTRUMENT: Initial recognition ofdeferred tax is to equity while subsequent recognition is toincome statement.

38

HYPERINFLATION: The non monetary asset are restated interms of the measuring unit available at the end of thereporting period. The deferred tax is reported in profit orloss and the non monetary asset revalued are recognise inother comprehensive income.

INVESTMENT: Tax treatment will take into considerationhow an asset is measured and accounted for in thefinancial statement and how an entity expected to recovervalue from it.

39



BUSINESS COMBINATION: Deferred taxation is recognise except for goodwill. It is however recognise on goodwill to the extent that they do not arise from initial recognition of goodwill.

REVALUATION: A change in carrying amount arising from revaluation of PPE are charged or credited to equity , the same way the related asset is treated.

RE MEASUREMENT OF UNRECOGNIZED DEFERRED ASSET: The entity recognise previously unrecognise deferred tax asset to the extent that is is recoverable . If deferred tax of an acquired subsidiary is realised subsequently, within 12 months of acquisition, it should be credited to goodwill otherwise to profit or loss. 40

NIGERIA FIRS AND THE IFRS

•Where allowable input VAT is included in the cost of inventories, it shall be disallowed for income tax purposes and treated separately as deductible from the output VAT as contained in the VAT Act.

•Any inventory (e.g. returnable packaging materials) reclassified in line with IFRS as non-current asset shall continue to be treated as inventory in line with the existing tax practice. This means input VAT can be claimed as before, capital allowance would not be available.

•Land is not a Qualifying Capital Expenditure under Schedule 2 of CITA, thus Capital Allowance is not claimable on land. (it is an allowable deduction under operating lease)

41

NIGERIA FIRS AND THE IFRS (cont’d)

•Provision/estimate of cost of abandonment, dismantling, removing the item of PPE and site restoration shall not be allowed for capitalization with PPE. The cost shall only be allowable for tax purposes when it has been incurred, or if it is set aside in a funded Sinking Fund.

•Cost and Tax Written Down Value (TWDV) is the basis of capital allowance computation, FIRS shall continue to disregard all revaluation of PPE. Any revaluation surplus shall not be taxable while deficit shall not be an allowable deduction. Professional fees and valuation expenses relating to revaluation of PPE shall not be allowed for tax purposes. These expenses should be separately disclosed. Where such expense is incurred prior to sale, it shall be deductible from chargeable gains under Capital Gains Tax.

•All impairment losses charged to the company's Income Statement shall not be allowed for tax purposes.

42


•Capitalised cost of PPE shall be based on the cost indicated on the invoice. Any imputed interest element charged as finance cost in the Income Statement shall be disallowed.

•For a component to be significant, it must be 20% and above of the total cost of the asset.

•Cost of employee benefits directly attributable to the construction or acquisition of the PPE shall be allowed for inclusion in the cost of the PPE.

•For 1st time adopter, If the retained earnings of a taxpayer that had previously paid tax based on dividend for a particular tax year increases as a result of the adoption of IFRS, and additional dividends are paid after the transition period from the portion of the retained earnings that relates to the tax year, the taxpayer shall be subjected to additional tax based on dividend in line with Section 19 of CITA to the extent that it has not been tax in line with sec. 40 of CITA.


5/16/2013 CITN, LAGOS DISTRICT SOCIETY 44

•Construction of contact: The expected loss recognized as an expense shall be disallowed until the loss is actually incurred and Interest received on advance payment placed in an interest yielding account shall be treated as other income and be subjected to tax at the time it is earned

•LEASE: In compliance with IFRS reclassification of leased asset, there could be a situation whereby an operating lease becomes a finance lease. Where two parties had correctly applied the old principle but are now compelled by the IFRS standard to reclassify operating lease as finance lease, FIRS will rely on the Tax Written Down Value of the asset in granting further capital allowance to the lessee. Investment allowance and Initial allowance shall not be granted to the lessee on reclassification of the asset.

•REVENUE: The turnover to be subjected to tax treatment under loyalty program shall be the payments made for both the consumed and deferred portion of the services. Revenue shall be recognized for tax purposes at the point of realization. VAT will be charged on total invoice value, whether consumed or deferred



•Deferred consideration: where imputed interest is embedded in sales revenue, the entire value on the invoice will be subjected to tax. If interest element is clearly shown and separated on the invoice, VAT should not apply to the interest portion but the interest element shall suffer WHT at the rate of 10%;

•Interest Free Loan: when it relates to individual, it shall be regarded as benefit in kind and tax under the provisions of Personal Income Tax (Amendment) Act 2011; and in the case of corporate taxpayer, it shall be treated in line with the provisions of The Income Tax (Transfer Pricing) Regulations No. 1, 2012 and Section 22 of CITA, Cap C21, LFN 2004.

Borrowing cost: Interest on loan incurred on any Qualifying Capital Expenditure that is under construction shall be capitalised with the cost of construction of the asset while the interest on the loan after the asset is fully constructed shall be expensed. Weighted Average cost of borrowed fund adopted in line with IFRS shall be used to determine the proportion of interest on the general purpose loan that relates to the capital assets for capitalization & capital allowance purposes. Where any part of the borrowed fund is put in an income yielding account, the interest income thereof shall be disclosed. If capitalisationof borrowing cost is suspended at a period when active development is interrupted and charged to Income Statement, it shall be disallowed for tax purpose.



•Amortisation of certain intangible assets such as software, customer list acquired with useful life will be allowed as tax deductible .Where the intangible assets have indefinite life then no tax deduction should be allowed. Cost relating to internally generated intangible assets shall be disallowed for tax purposes except as provided under Second Schedule of CITA.

•Share based payment: Any related expense involved in the issuance of shares under share based payment shall be disallowed for income tax purposes.



•Financial Instruments (FI) classified as Fair Value through Profit or Loss (FVTPL) are trading revenue in nature and therefore liable to companies’ income tax, except they are specifically exempted from tax.

•FI classified as Held to Maturity Investments (HTM) or Available for Sale (AFS) are capital instruments. Consequently , Capital Gains Tax Act will apply to gains or losses derived from such instruments.

•All gains and losses that may arise from fair value measurement shall be disregarded for tax purposes.


ifrs and taxation in nigeria - official websiteoverview of income tax (ias 12) •deferred tax...

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