Income Taxes - IAS 12 Flashcards
Current tax (IAS 12)
Current tax is the amount actually payable (recoverable) in respect of the taxable profit for a reporting period
How is corporation tax treated in IFRS?
Treated as an expense
DR Taxation expense (P&L)
CR Tax Liability (SOFP)
Why do we need Deferred Tax?
Deferred Tax adopts the matching (accruals) concept to the tax impact of recognised profits.
This means that accounts would need to reflect the tax effects of the current accounting period.
Principles of Deferred tax (IAS 12):
What time of difference is subject to adjustments?
Temporary or timing differences
(Permanent differences between the accounting and tax treatments are not subject to deferred tax).
Method of calculating deferred tax?
- Calculate amount recognised as an asset/liability
- copare to “tax base”
- Step 1 - step 2 = “temporary difference”
- Multiply step 3 by ta rate to calculate deferred tax
5 Is it DTL or DTA?
What is deferred tax liability?
taxable temporary difference gives rise to
increased potential tax expense in the future when the carrying amount of the assets is recovered or liability is settled
What is deferred tax assets
Deductible temporary differences give rise to
decreased potential tax expense in the future when the carrying amount of the asset is recovered or liability is settled.
What may give rise to deferred tax adjustments?
Revaluations on NCA (e.g. PPE)
Capitalised development cost
Consolidation adjustments
Unused tax losses
Measurement of deferred tax:
What is the tax rate used to calculate DT?
And is discounting allowed?
Is netting off allowed in DT?
Enacted or substantively enacted rates the reporting date.
No discounting of deferred tax is prohibited.
Netting off is allowed.
Criticisms of deferred tax:
Using enacted rather than expected rates:
Arguably some information might arise from using expected rates that might better reflect the actual cash paid/saved in the future.
e.g. in my coursework, Taylor Wimpey did not include RPDT in its 2021 accounts as it was not substantively enacted, but the RPDT came into effect 4 months after the reporting date. thus extremely relevant. –> comprises relevance and faithful representation.
Criticisms of deferred tax:
Discounting is prohibited
By not considering for time value of money, information is less value relevant to the users,.
Inconsistent with other standards i.e. IAS 36 impaired assets allow for discounting
therefore limits the usefulness to the users, and comparability of the statement. (Brouwer and Naarding, 2018).
Criticisms of deferred tax:
Netting off DTA and DTL
Although it is arguable that we shouldnt net off in the accounts. DTA and DTL arise from the same phenomena, therefore can be viewed as appropriate.
Criticisms of deferred tax:
Overstated liabilities
Provision of IAS 12 overstates DTL.
As many entities. have a policy of regularly replacing PPE as it wears out, it could be argued that a ‘permanent’ DTL arises.
Criticisms of deferred tax:
Recognition of DTA and DTL
DTA specifically requires the ‘probable’ realisation of the asset
Whereas DTL does not specify any verbal threshold.
One could argue that this is asymmetric prudence
However, studies have found that DTA is more value relevant to the users than DTL, therefore, one could also argue that it is cautious prudence
–> find sources.
Criticisms of deferred tax:
DTL does not meet the definition of Liability
liability is a present obligation of the entity to transfer an economic resource as “a result of past events.”
However, one could argue that the obligation is not a result of a past event. e.g. if profit is not made in the futre, then DTL would never realise into a cash flow.
