Chapter 6 Income Taxes

Question 1

Current Tax

Answer 1

1. Current tax is the amount of income taxes payable or recoverable in respect of taxable profit or loss for a period.
2. Current tax unpaid for current and prior periods is recognised as a liability. Amounts paid in excess of amounts due are shown as an asset.

Question 2

Deferred tax

Answer 2

Temporary differences
1. Deferred tax is the tax attributable to temporary differences which are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.

2. Taxable temporary differences generate a deferred tax liability.
3. Deductible temporary differences generate a deferred tax asset.

Question 3

Group financial statements

Answer 3

1. Fair value adjustments on consolidation
   IFRS 3 requires assets and liabilities assumed on acquisition of a subsidiary to be bought in at their fair rather than book value, but tax is based on individual company rather than group account figures.

The deferred tax liability on fair value increases results in higher goodwill while the deferred tax asset on fair value reductions results in lower goodwill.

2. Undistributed profits of subsidiaries, branches, associates and joint ventures.
   Under IAS 12 a deferred tax liability is recognised unless:
   - the parent, investor or venturer is able to control the timing of the reversal of the temporary difference
   - it is probable that the temporary difference will not reverse in the foreseeable future
3. Unrealised profits on intragroup trading.
   In the group financial statements, a reduction for unrealised profit is made where goods transferred have not been sold outside the group. Normally the tax base is the cost to the individual receiving company and a temporary difference arises.

A deferred tax asset is recognised at the receiving company’s tax rate.

Question 4

Other P2 level temporary differences

Answer 4

1. Development costs
   Development costs are capitalised under IAS 38 but are often tax deductible in period incurred.

The temporary difference is the full carrying amount of the development expenditure since the tax base is nil generating a deferred tax liability when multiplied by the tax rate.

2. Impairment losses (and inventory losses)
   If the loss is not tax deductible until later (e.g. Until the asset is sold) a deductible temporary difference arises.

Tax base of the asset does not change so a deferred tax asset arises based on the loss multiplied by the tax rate.

3. Financial assets.
   Gains in financial assets held at fair value are either recognised in profit or loss or in other comprehensive income.

If the gain is not taxable until sale, a taxable temporary difference arises generating a deferred tax liability.

The deferred tax is recognised in the same section of the statement of profit or loss and other comprehensive income as the gain/loss.

4. Unused tax losses and unused tax credits.
   Tax losses and credits may result in a tax saving if they can be carried forward to reduce future tax payments.

A deferred tax asset is recognised for the carry forward of unused tax losses or credits that it is probable future taxable profit will be available against which the unused tax losses and credits can be used.

Question 5

Recognition

Answer 5

Under IAS 12 income taxes, a deferred tax liability is recognised for all taxable and deductible temporary differences, unless they arise from:

1. The initial recognition of goodwill or
2. The initial recognition of an asset or liability in a transaction which
   - is not a business combination
   - at the time of the transaction, affects neither accounting profit not taxable profit

Question 6

Measurement

Answer 6

1. 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 that have been enacted (or substantially enacted) by the end of the reporting period.
2. Deferred tax assets and liabilities cannot be discounted.
3. Deferred tax assets are only recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be used.

Question 7

Presentation

Answer 7

Deferred tax assets and liabilities can only be offset if:

1. The entity has a legally enforceable right to set off current tax assets against current tax liabilities.
2. The deferred tax assets and liabilities relate to income taxes levied by the same tax authority.