IFRS Lectures Income taxes

Authoritative Pronouncements
The module will cover the application of IAS 12 Income Taxes, including:

Current tax (accounting for current tax is straightforward) Deferred tax (more complex and needs special consideration)

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Deferred tax summary

Accounting concept what do we need it all for? Underlying problem Kazakh tax rules differ from IFRS rules. I.e. IFRS profit*20% tax payable

IAS 12 approach balance sheet view Sources for temporary differences carrying amount vs tax base Taxable temporary differences (leading to deferred tax liability) and deductible temporary differences (leading to asset)

Recognition and measurement issues. Movement on the deferred tax balance double entry.

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Deferred tax accounting what for?

Deferred tax accounting is about accounting for items where the tax effect of items is deferred to a later period
Examples: 1. Income or expense is included in accounting profit in one period but included in the taxable income in another period 2. Revaluations of assets where tax authorities do not amend tax base when the asset is revalued (would probably influence tax base anyway later e.g. on sale or disposal) WHERE ITEMS ARE NOT IN TAX ACCOUNTING AT ALL AND WILL NEVER BE CONSIDERED FOR TAX NO DEFERRED TAX OCCURS! These differences are permanent in nature

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Temporary difference and Tax base

The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. taxable temporary differences; or deductible temporary differences.

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Why balance sheet view?

Movements in Balance Sheet lines is the basis for PL lines Examples:

Fixed assets NBV (balance sheet) changes due to depreciation accrued (PL) Movements in provision for doubtful debts (balance sheet) go to PL Revenue received in advance (BS item) is written off to PL when services/goods provided

Balance sheet values for IFRS and tax accounting differs therefore PL differs.

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Deferred tax Temporary differences

Carrying value in FS Tax base Temporary differences

Asset 1

200

160

40

Taxable temporary difference. Deferred tax liability (potential additional tax). Deductible temporary difference. Deferred tax asset (potential tax saving) Deductible temporary difference. Deferred tax asset (potential tax saving) Taxable temporary difference. Deferred tax liability (potential additional tax).

Asset 2

160

200

(40)

Liability 1

(200)

(160)

(40)

Liability 2

(160)

(200)

40

Identified temporary differences should be multiplied by the appropriate tax rate

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Deferred tax Temporary differences

Asset / Carrying amount higher Liability or lower than tax base? Asset Higher Nature of temp. difference Taxable Resulting deferred tax Liability

Asset

Lower

Deductible

Asset

Liability

Higher

Deductible

Asset

Liability

Lower

Taxable

Liability

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Deferred tax Sources for temporary differences

Non-current assets accounting depreciation does not equal tax allowable depreciation

Illustration 1 Fixed asset - Initial value USD 150 k Depreciation method: Straight-line Accounting 5 years Tax 3 years

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Deferred tax Sources for temporary differences Illustration 1

Balance sheet Year 0 1 2 3 4 5 Accounting 150 120 90 60 30 0 Tax 150 100 50 0 0 0 0 20 40 60 30 0 Temporary difference Deferred tax liability=temp. diff * 20% 0 -4 -8 -12 -6 0 Deferred tax charge

0 -4 -4 -4 6 6

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Deferred tax Sources for temporary differences Illustration 1

Years 1-3 (period of tax depreciation)
IFRS PL Depreciation expense Current tax gain Deferred tax expense Total tax expense =tax depreciation*20% = temporary difference*20% =IFRS depreciation*20% -30 -10 4 -6 Tax PL (tax return) -50
paid in cash in -10 years 1-3

Dr deferred tax expense 4 Cr deferred tax liability (4)

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Deferred tax Sources for temporary differences Illustration 1

Years 4-5 (after tax depreciation terminated)
IFRS PL Depreciation expense Current tax gain =tax depreciation*20% = temporary difference*20% =IFRS depreciation*20% -30 0 Tax PL (tax return) 0 0

Deferred tax income

Total tax expense

Dr deferred tax liability 6 Cr deferred tax income (6)

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Deferred tax Examples of temporary differences

Transactions that affect the income statement

Depreciation of an asset Prepaid expenses Retirement benefit costs Deferred income Accrued income or expense

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Deferred tax Examples of temporary differences

Transactions that affect the balance sheet

Depreciation of an asset Loan payable The liability component of a compound financial instrument Revaluation of property, plant and equipment Business combinations

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Recognition and Measurement Criteria

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General Recognition Criteria for Deductible Temporary Differences and Tax Losses

DTA should be recognised to the extent it is probable that taxable profit will be available against which the deductible temporary difference can be utilised Probable is not defined in IAS 12 but is interpreted as more likely than not Reassessment at each reporting date Discounting prohibited

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Temporary Differences
Temporary Differences = Difference between carrying amount and its tax base

Temporary difference gives rise to:

Deferred Tax Asset Probability Test Deferred Tax Liability

Except
Goodwill Initial recognition (DTL) Initial recognition of assets & liabilities

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Recognition of Tax Effects Through the P&L or Equity

Shall be recognised as income or expense, except to the extent that the tax arises from a:

transaction or event which is or was recognised directly in equity; or business combination

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Deferred tax - Measurement

Legislation at the balance sheet date

Deferred tax should be measured by reference to the tax rates and laws, as enacted or substantively enacted by the balance sheet date, that are expected to apply in the periods in which the assets and liabilities to which the deferred tax relates are realised or settled. Where changes in tax rates or tax laws are announced after the balance sheet date, an entity is required to disclose any significant effect of those changes on its current and deferred tax assets and liabilities in accordance with IAS 10

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Deferred tax - Presentation

Tax assets and liabilities should be shown separately Deferred tax assets and liabilities should be offset if, and only if:
(a) the entity has a legally enforceable right to set off current tax assets and liabilities; and (b) the deferred tax assets and liabilities concerned relate to income taxes raised by the same taxation authority on either:
(i) the same taxable entity; or (ii) different taxable entities which intend, in each future period in which significant amounts of deferred tax are expected to be settled or recovered, to settle their current tax assets and liabilities either on a net basis or simultaneously.

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Deferred tax - Disclosure

(a) (b) current tax expense (or income); any adjustments recognised in the period for current tax of prior periods; (c) the amount of deferred tax expense (or income) relating to the origination and reversal of temporary differences; (d) the amount of deferred tax expense (or income) relating to changes in tax legislation; (e) the amount of the benefit arising from a previously temporary difference that is used to reduce current or deferred tax expense; (f) deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset; and (g) the amount of tax expense (or income) relating to those changes in accounting policies and errors which are included in the profit or loss in accordance with IAS 8 because they cannot be accounted for retrospectively
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Deferred tax - Disclosure

(a) (b)

(c) (d) (e)

(f)

tax relating to items in equity; a reconciliation between tax expense (or income) and the product of accounting profit multiplied by the applicable tax rate, or between the average effective tax rate (i.e. tax expense (or income) divided by accounting profit) and the applicable tax rate; an explanation of changes in the applicable tax rate compared to the previous accounting period; the amount of deductible temporary differences, for which no deferred tax asset is recognised in the balance sheet; the aggregate amount of temporary differences associated with investments, for which deferred tax liabilities have not been recognised; For each type of temporary difference, the amount of the deferred tax assets and liabilities recognised in the balance sheet for each period presented;
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IFRS Lectures

Conclusion

Analyse tax consequences of assets and liabilities and calculate their tax bases; Define the measurement and recognition principles associated with taxable and deductible temporary differences;

Determine when recognition exceptions may apply Disclose appropriately

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