Wiecek and Young

IFRS PrimerChapter 23

Income Taxes:IAS 12

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Income Taxes

Related standards IAS 12 Current GAAP comparisons IFRS financial statement disclosures Looking ahead End-of-chapter practice

Related Standards

FAS 109 Accounting for income taxes

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Related Standards

IAS 1 Presentation of financial statements IAS 8 Accounting policies, changes in

accounting estimates and errors IAS 37 Provisions, contingent liabilities and

contingent assets IFRS 3 Business combinations

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IAS 12 – Overview

Objective and scope Recognition of current tax liabilities and assets Recognition of deferred tax liabilities and

assets Measurement Recognition of current and deferred tax Presentation Disclosures

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IAS 12 – Objective and Scope

IAS 12 addresses the accounting issues related to tax effects of– Current period transactions and events– Unused tax losses or credits– Tax consequences when carrying amounts and

tax amounts differ

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IAS 12 – Recognition of Current Tax Liabilities and Assets

Current tax = amount of income taxes payable or recoverable on the taxable profit or loss for the period

If current taxes payable > taxes paid, then– Income taxes payable

If current income taxes payable < taxes paid, then– Income taxes recoverable/receivable

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets Underlying assumption of accounting model:

– Assets will be recovered for at least their carrying amount

– Liabilities will be settled for their carrying amount

 If there are tax consequences when the asset is recovered or liability settled, this effect should be reported on the statement of financial position now

 Future tax effect = deferred tax liability or deferred tax asset

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets

Q. Why a tax consequence?

A. Because carrying amount of A & L may differ from their tax amount or tax base = a temporary difference

 

Taxable temporary difference:

Taxable income is increased in future when asset recovered/liability settled

Deductible temporary difference:

Taxable income is decreased in future when asset recovered/liability settled

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets

Example: Installment A/R carrying amount - $40; revenues recognized on sale; taxable when cash received. Tax base = $0

 Why is tax base $0?– When the $40 is received (asset’s carrying

amount is recovered), it is all taxable. No amount ($0) is deductible from the $40 received.

Taxable temporary difference = $40 - $0 = $40

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets

Example: Warranty liability carrying amount - $90; deductible for tax only when warranty expenditures are made. Tax base = $0

 Why is tax base $0?– When the obligation is settled, the full $90 is

deductible in calculating taxable income. Tax base is carrying amount of $90 less amount deductible in future of $90 = $0

Deductible temporary difference = $90 - $0 = $90

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets Future tax consequence (assume tax rate of

40%):– Taxable temporary difference × tax rate* =

deferred tax liability– Installment A/R temporary difference of $40 ×

40% = $16 deferred tax liability

* tax rate – statutory rate when temporary difference is expected to reverse, i.e., enter into calculation of taxable income

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets Future tax consequence (assume tax rate of

40%):– Deductible temporary difference × tax rate* =

deferred tax asset– Warranty liability temporary difference of $90 ×

40% = $36 deferred tax asset

 * tax rate – statutory rate when temporary difference is expected to reverse, i.e., enter into calculation of taxable income

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets

Deferred tax assets– Result from deductible temporary differences and

unused tax losses/credits– Rely on having taxable income in the future in

order to benefit– Recognize deferred tax asset only if probable

that taxable profit will be available

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets

Probable that taxable income will be available in future? Consider:– Existence of taxable temporary differences that will

reverse in future resulting in taxable income– History of profitability– Tax planning opportunities 

If so, recognize deferred tax asset and benefit in same year as tax loss; recognize full tax effect on temporary deductible differences. Reassess each B/S date.

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IAS 12 – Recognition of Deferred Tax Liabilities and Assets

Complexities arise with differences between carrying amounts and tax base of– Goodwill– A & L in a business combination– Investments in subsidiaries, associates, joint

ventures

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IAS 12 – Measurement Current tax liability

– Taxable income × current tax rate = current tax payable

 Current tax asset – if past taxes can be recouped– Taxable loss × tax rate of past year = current tax

receivable/recoverable

Current tax asset – if current year’s taxes overpaid = current tax receivable/recoverable

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IAS 12 – Measurement

Deferred tax assets and liabilities– Measured on an undiscounted basis– Use tax rates for period when asset is expected to be

recovered or liability settled– Use rates based on laws enacted or substantively

enacted at B/S date– Use average rates expected to apply to taxable

profit/loss in period of expected reversal of temporary difference

– Review carrying amount of deferred tax assets at each reporting date

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IAS 12 – Recognition of Current and Deferred Tax Recognize current and deferred taxes in

profit or loss unless– The related income or expense is recognized

elsewhere such as OCI or directly in other equity item

– Tax results from a business combination

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IAS 12 – Presentation

 Classification - deferred taxes are non-current A/L (IAS 1)

Offsetting - both for current and deferred: only if same taxation authority, legal right to offset, intent is to settle net or at same time

Tax expense includes both current and deferred taxes

Report tax expense on profit or loss separately from tax expense in OCI

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IAS 12 – Disclosures

Report separately the major components of tax expense or income– Current tax expense/income– Adjustments for current tax of other periods– Deferred tax expense/income from each type of

temporary difference or change in tax rates or new taxes

– Benefits recognized currently from previously unrecognized tax losses/credits, or other temporary differences

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IAS 12 – Disclosures

 Report (continued)– Tax expense recognized directly in equity and in

each component of OCI– Reconciliation of expected tax rate to effective tax

rate– Tax expense for discontinued op’ns – separately

for operating results and other gain or loss

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IAS 12 – Disclosures

 Related to statement of financial position: Amount of deferred tax asset/liability for each

type of temporary difference Deductible temporary differences and other

balances with unrecognized deferred tax assets

Nature of evidence supporting recognition of uncertain deferred tax assets

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Current GAAP Comparisons  

Pages 29 to 30 of 49

of

http://www.ey.com/Global/assets.nsf/International/IFRS_US_GAAP_vs_IFRS/$file/US_GAAP_vs_IFRS.pdf

 

Pages 94 to 98 of 164

of

http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnOverview(2008).pdf

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IFRS Financial Statement Disclosures

 The Nestlé Group 

http://www.nestle.com/Resource.axd?Id=24E5A5E2-93F8-43A3-956E-0F259448CB90

 Accounting policy for tax Page 16 of 118

Income statement related disclosures Page 31 of 118

Deferred tax assets and liabilities Page 55 of 118

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Looking Ahead

Income taxes – part of short-term convergence project with FASB

Both IASB and FASB have agreed on many changes to eliminate exceptions to general principles in the standards

IASB issued an exposure draft in 2009 and expects to issue final standard in 2010

Exposure draft is for new draft IFRS, not amendments to IAS 12

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Looking Ahead

 Proposed changes likely in exposure draft– Tax base becomes a measurement attribute– Existing non-recognition of deferred tax

assets/liabilities in specific cases to be eliminated– Clarification of substantively enacted tax rate– Change from non-recognition of deferred tax

assets (when not probable of realization) to recognition with an associated valuation allowance account

– Probable will be defined as ‘more likely than not’

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Looking Ahead

 Proposed changes (continued)– Continuation of allocating tax expense/income among

P&L, OCI and equity, but subsequent changes will go through P&L

– Balance sheet classification of deferred taxes to mirror U.S. requirements

– Uncertain tax positions will be addressed – using an expected outcome measure and changes recognized in continuing operations

– Disclosures added; others removed– Reconciliation will be of parent company statutory rate

to effective rate

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End-of-Chapter Practice

23-1 IAS 12 provides much more guidance on the recognition and measurement of the tax effects derived from deductible temporary differences than for the benefits from taxable temporary differences.

Instructions

Write a short paragraph to explain this situation.

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End-of-Chapter Practice 23-2 Listed below are a number of situations that affect the financial statements.

1. Development costs have been capitalized on the statement of financial position and are being amortized to profit or loss over three years, but deducted as an expense for tax purposes as incurred.

2. Revenue is recognized as goods are delivered for financial reporting purposes, but on a cash basis for tax purposes.

3. An entity borrows money and pays a transaction fee on the amount borrowed. The transaction costs are added to the debt and amortized using the effective interest method for financial reporting purposes, although they were deducted when they were paid for tax purposes.

4. Pension expense is charged to profit or loss each period although tax legislation allows entities to deduct only the contributions to the pension trustee to be deducted for tax purposes. Expenses have always exceeded the contributions.

5. Investment property is measured according to the revaluation model for financial reporting purpose, resulting in valuations in excess of original cost. This method is not permitted for tax purposes.

Instructions

For each situation described above, indicate whether the company has a deductible or a taxable temporary difference and whether it will result in the recognition of a deferred tax asset or a tax liability. Explain each briefly.

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End-of-Chapter Practice23-3 A company buys equipment for $1,000, uses it in the manufacturing of goods for resale, and depreciates it on a straight-line basis over its five-year expected useful life. For tax purposes, the equipment is depreciated at 25% a year on a straight-line basis. Tax losses may be carried back against taxable profit of the previous five years. The tax rate for all years is 40%, and in 2004 the company’s taxable profit was $500. In each year from 2005 to 2009, the company reported profits before depreciation expense and taxes of $200.

Instructions

a) For each year from 2005 to 2009, determine the company’s taxable profit or loss and the current tax expense recognized.

b) For each year from 2005 to 2009, determine the amount of any year-end taxable or deductible temporary difference and the related balance of the deferred tax asset or liability account reported on the balance sheet, and the deferred tax expense reported for the year.

c) To the extent possible with the information provided and the results of (a) and (b), prepare a partial statement of comprehensive income for each year from 2005 to 2009.

(adapted from Appendix B of IAS 12)

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End-of-Chapter Practice

23-4 In this chapter, flag icons identify areas where there are GAAP differences between IFRS requirements and national standards.

Instructions

Access the website(s) identified on the inside back cover of this book, and prepare a concise summary of the differences that are flagged throughout the chapter material.

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