C. REPORTING THE FINANCIAL PERFORMANCE OF A RANGE OF ENTITIES - INCOME TAXES Flashcards
Deferred tax (IAS 12)
Deferred tax (IAS 12) is an accounting measure, used to match the tax effects of transactions with their accounting effect. Deferred tax is the tax attributable to temporary differences.
Concepts underlying deferred tax.
Concepts underlying deferred tax.
As a result of a past transaction or event, an entity has an obligation to pay tax or a right to future tax relief. Therefore, the entity has met the Conceptual Framework definition of a liability or asset and so needs to record a deferred tax liability or asset
Accruals concept. To achieve ‘matching’ in the statement of profit or loss and other comprehensive income, the entity should record tax in the accounts in the same period as the item that the tax relates to is recorded. If the tax is paid in a different period to that in which the item is accounted for, a deferred tax adjustment is needed.
Tax base.
Tax base. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
The tax base of an asset is the tax deduction which will be available in future when the asset generates taxable economic benefits, which will flow to the entity when the asset is recovered. Where those economic benefits will not taxable, the tax base of the asset is the same as its carrying amount.
The tax base of liability will be its carrying amount, less the tax deductions which will be available when the liability is settled in future periods. For revenue received in advance, the tax base is carrying amount, less any amount of the revenue that will not be taxable in future periods.
Temporary differences:
Temporary differences: differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. If an item is never taxable or tax deductible, its tax base is deemed to be its carrying amount so there is no temporary difference and no related deferred tax. There are two types of temporary differences:
Taxable temporary differences (eg entity recognized accrued income, but not chargeable for tax till cash is received)
o Tax to pay in the future Deferred tax liability
Deductible temporary differences (eg entity recorded provision, but it does not attracts tax till entity spends cash
o Tax saving in the future Deferred tax asset
Examples of circumstances giving rise to taxable temporary differences:
Examples of circumstances giving rise to taxable temporary differences:
Depreciation. The asset is depreciated over its useful life as per IAS16 and is carried at cost less accumulated depreciation. Depreciation of an asset will be accelerated for tax purposes. As carrying amount will be higher than tax written down valueDTL
Revaluations. PPE is revalued by an entity, but no equivalent adjustment is made for tax purposesDTL
Accrued income/accrued expense. Included in FS when the item is accrued, however taxed on cash receipts/cash paid basis. If it is accrued incomeDLT, If it is an accrued expense, it will result in deferred tax asset, as the entity will get tax relief in the future when expense is actually paid.
Provision and allowances for doubtful debts. A provision is included when IAS 37 criteria is met. A doubtful debt allowance is recognized in accordance with IFRS 9. Expenses related to provision attract tax relief on a cash paid basis. Expenses related to doubtful debts attract tax relief when the debts become irrecoverable and are written offDTA
Sale of goods revenue is included in accounting profit when the goods are delivered, but only included in taxable profit when the cash is received.
Development costs which have been capitalised and will be amortised to profit or loss but were deducted in determining taxable profit in the period in which they were incurred.
Loan. Borrower records a loan at proceeds received less transaction costs. The carrying amount of the loan is subsequently increased by amortisation of the transaction costs against accounting profit. The transaction cost was, however, deducted for tax purposes in the period in which the loan was first recognized.
Current investments or financial instruments are carried at fair value. This exceeds cost, but no equivalent adjustment is made for tax purposes.
Recognition deferred tax
Recognition. Under IAS 12, a deferred tax liability or asset is recognized for all taxable and deductible temporary differences, unless they arise from:
The initial recognition of goodwill; or
The initial recognition of an asset or liability in a transaction which
o Is not a business combination
o At the time of the transaction, affects neither accounting profit not taxable profit.
Deferred tax assets are only recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. Deferred tax is recognized in the same section of the statement of profit or loss and other comprehensive income as the transaction was recognized.
Measurement deferred tax
Measurement. Deferred tax assets and liabilities are measured at the tax rates expected to apply to the period when the asset is realised or liability settled, based on tax rates (and tax laws) that have been enacted (or substantively enacted) by the end of reporting period. If tax rates change, the tax rate expected when the temporary difference will reverse is used. Deferred tax assets and liabilities should not be discounted because the complexities and difficulties involved will affect reliability.
Presentation deferred tax
Presentation. Deferred tax assets and liabilities can only be offset:
The entity has a legally enforceable right to set off the current tax assets against current tax liabilities; and
The deferred tax assets and liabilities relate to income taxes levied by the same taxation authority.
Current tax (IAS 12)
Current tax (IAS 12) is the amount of income taxes actually payable (or recoverable) to the tax authorities in respect of taxable profit (or loss) for a period. Current tax unpaid for current and prior periods is recognized as a liability. Amounts paid in excess of amounts due are shown as an asset. The benefit relating to a tax loss that can be carried back to recover current tax of a previous period is recognized as an asset.
Measurement current tax
Measurement. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the tax authorities.
Recognition current tax
Recognition. Normally current tax is recognized as income or expense and included in the net profit or loss for the period, except in 2 cases:
Tax arising from business combination which is an acquisition is treated differently
Tax arising from a transaction or event recognized in other comprehensive income or which is recognized directly in equity.
Current tax unpaid for current and prior periods is recognized as a liability and amounts paid in excess of amounts due are shown as an asset. The benefit relating to a tax loss that can be carried back to recover current tax of a previous period is recognized as an asset.
Presentation current tax
Presentation. The tax expense (income) related to the profit or loss for the year should be shown in the profit or loss section of the statement of profit or loss and other comprehensive income. In the statement of financial position, tax assets and liabilities should be shown separately from other assets and liabilities.
Current tax assets and liabilities can be offset, but this should happen only when certain conditions apply:
The entity has a legally enforceable right to set off the recognized amounts; and
The entity intends to settle the amount on a net basis, or to realise the asset and settle the liability at the same time.
Temporary difference business combinations
There are some temporary differences which only arise in a business combinations. This is because, on consolidation, adjustments are made to the carrying amounts of assets and liabilities that are not always reflected in the tax base of those assets and liabilities. The tax bases of assets and liabilities in the consolidated financial statements are determined by reference to the applicable tax rules. Usually tax authorities calculate tax on the profits of the individual entities, so the relevant tax bases to use will be those of the individual entities.
Fair value adjustments on consolidation - deferred tax.
Fair value adjustments on consolidation. IFRS 3 requires assets acquired and liabilities assumed on acquisition of a subsidiary to be brought into the consolidated financial statements at the fair value rather than carrying amount. However, this change is not usually reflected in the tax base, and so temporary difference arises. The accounting entries to record the resulting deferred tax are:
Deferred tax liability due to fair value gain: reduces the fair value of the net assets of the subsidiary and therefore increases goodwill:
DEBIT Goodwill X
CREDIT Deferred tax liability X
Deferred tax asset due to fair value loss: increases the fair value of the net assets of the subsidiary and therefore reduces goodwill:
DEBIT Deferred tax asset X
CREDIT Goodwill X
Undistributed profits of subsidiaries, branches, associates and joint ventures (deferred tax).
Undistributed profits of subsidiaries, branches, associates and joint ventures. The carrying amount of an investment in a subsidiary, branch, associate or interests in joint arrangements can be different from the tax base of the investment. This can happen when, for example, the subsidiary has undistributed profits. A subsidiary’s profits are recognized in the consolidated financial statements, but if the profits are not taxable until they are remitted to the parent as dividend income, a temporary difference arises. Under IAS 12, a resulting deferred tax liability is recognized unless:
The parent, investor or venture is able to control the timing of the reversal of the temporary difference (eg by determining dividend policy); and
It is probable that the temporary difference will not reverse in the foreseeable future.
