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The objective of IAS 12 (1996) is to prescribe the accounting treatment for income
taxes.
In meeting this objective, IAS 12 notes the following:
o
It is inherent in the recognition of an asset or liability that that asset or
liability will be recovered or settled, and this recovery or settlement
may give rise to future tax consequences which should be recognised
at the same time as the asset or liability
o
An entity should account for the tax consequences of transactions and
other events in the same way it accounts for the transactions or other
events themselves.
Key definitions
[IAS 12.5]
Tax base
Temporary
differences
Taxable
temporary
differences
Deductible
temporary
differences
Deferred tax
liabilities
Deferred tax
assets
Current tax
Current tax for the current and prior periods is recognised as a liability to the extent
that it has not yet been settled, and as an asset to the extent that the amounts already
paid exceed the amount due. [IAS 12.12] The benefit of a tax loss which can be
carried back to recover current tax of a prior period is recognised as an asset.
[IAS 12.13]
Current tax assets and liabilities are measured at the amount expected to be paid to
(recovered from) taxation authorities, using the rates/laws that have been enacted or
substantively enacted by the balance sheet date. [IAS 12.46]
Calculation of deferred taxes
Formulae
Deferred tax assets and deferred tax liabilities can be calculated using the following
Temporary difference
Carrying amount
Tax base
Temporary difference
Tax rate
formulae:
Deferred tax
asset
o
o
o
o
a.
b.
c.
Tax
rate
The following formula can be used in the calculation of deferred taxes arising from
unused tax losses or unused tax credits:
Tax bases
The tax base of an item is crucial in determining the amount of any temporary
difference, and effectively represents the amount at which the asset or liability would
be recorded in a tax-based balance sheet. IAS 12 provides the following guidance on
determining tax bases:
Assets. The tax base of an asset is the amount that will be deductible
against taxable economic benefits from recovering the carrying
amount of the asset. Where recovery of an asset will have no tax
consequences, the tax base is equal to the carrying amount. [IAS
12.7]
Revenue received in advance. The tax base of the recognised
liability is its carrying amount, less revenue that will not be taxable in
future periods [IAS 12.8]
Other liabilities. The tax base of a liability is its carrying amount, less
any amount that will be deductible for tax purposes in respect of that
liability in future periods [IAS 12.8]
Unrecognised items. If items have a tax base but are not recognised
in the statement of financial position, the carrying amount is nil [IAS
12.9]
Tax bases not immediately apparent. If the tax base of an item is
not immediately apparent, the tax base should effectively be
determined in such as manner to ensure the future tax consequences
of recovery or settlement of the item is recognised as a deferred tax
amount [IAS 12.10]
Consolidated financial statements. In consolidated financial
statements, the carrying amounts in the consolidated financial
statements are used, and the tax bases determined by reference to
any consolidated tax return (or otherwise from the tax returns of each
entity in the group). [IAS 12.11]
Examples
The determination of the tax base will depend on the applicable tax laws and
the entity's expectations as to recovery and settlement of its assets and
liabilities. The following are some basic examples:
o
Property, plant and equipment. The tax base of property,
plant and equipment that is depreciable for tax purposes that
is used in the entity's operations is the unclaimed tax
depreciation permitted as deduction in future periods
o
Receivables. If receiving payment of the receivable has no
tax consequences, its tax base is equal to its carrying amount
o
Goodwill. If goodwill is not recognised for tax purposes, its
tax base is nil (no deductions are available)
o
Revenue in advance. If the revenue is taxed on receipt but
deferred for accounting purposes, the tax base of the liability
is equal to its carrying amount (as there are no future taxable
amounts). Conversely, if the revenue is recognised for tax
purposes when the goods or services are received, the tax
base will be equal to nil
o
Loans. If there are no tax consequences from repayment of
the loan, the tax base of the loan is equal to its carrying
amount. If the repayment has tax consequences (e.g. taxable
amounts or deductions on repayments of foreign currency
loans recognised for tax purposes at the exchange rate on the
date the loan was drawn down), the tax consequence of
repayment at carrying amount is adjusted against the carrying
amount to determine the tax base (which in the case of the
aforementioned foreign currency loan would result in the tax
base of the loan being determined by reference to the
exchange rate on the draw down date).
Recognition and measurement of deferred taxes
Recognition of deferred tax liabilities
The general principle in IAS 12 is that a deferred tax liability is recognised for all
taxable temporary differences. There are three exceptions to the requirement to
recognise a deferred tax liability, as follows:
o
liabilities arising from initial recognition of goodwill [IAS 12.15(a)]
o
liabilities arising from the initial recognition of an asset/liability other
than in a business combination which, at the time of the transaction,
does not affect either the accounting or the taxable profit
[IAS 12.15(b)]
o
liabilities arising from temporary differences associated with
investments in subsidiaries, branches, and associates, and interests in
joint arrangements, but only to the extent that the entity is able to
control the timing of the reversal of the differences and it is probable
that the reversal will not occur in the foreseeable future. [IAS 12.39]
Example
An entity undertaken a business combination which results in the recognition
of goodwill in accordance with IFRS 3 Business Combinations. The goodwill is
not tax depreciable or otherwise recognised for tax purposes.
As no future tax deductions are available in respect of the goodwill, the tax
attributable to the equity transaction, including regulatory fees, legal costs and
stamp duties. In accordance with the requirements of IAS 32 Financial
Instruments: Presentation, the costs are accounted for as a deduction from
equity.
Assume that the costs incurred are immediately deductible for tax purposes,
reducing the amount of current tax payable for the period. When the tax
benefit of the deductions is recognised, the current tax amount associated
with the costs of the equity transaction is recognised directly in equity,
consistent with the treatment of the costs themselves.
IAS 12 provides the following additional guidance on the recognition of income tax for
the period:
o
Where it is difficult to determine the amount of current and deferred
tax relating to items recognised outside of profit or loss (e.g. where
there are graduated rates or tax), the amount of income tax
recognised outside of profit or loss is determined on a reasonable prorata allocation, or using another more appropriate method [IAS 12.63]
o
In the circumstances where the payment of dividends impacts the tax
rate or results in taxable amounts or refunds, the income tax
consequences of dividends are considered to be more directly linked
to past transactions or events and so are recognised in profit or loss
unless the past transactions or events were recognised outside of
profit or loss [IAS 12.52B]
o
The impact of business combinations on the recognition of precombination deferred tax assets are not included in the determination
of goodwill as part of the business combination, but are separately
recognised [IAS 12.68]
o
The recognition of acquired deferred tax benefits subsequent to a
business combination are treated as 'measurement period'
adjustments (see IFRS 3 Business Combinations) if they qualify for
that treatment, or otherwise are recognised in profit or loss [IAS 12.68]
o
Tax benefits of equity settled share based payment transactions that
exceed the tax effected cumulative remuneration expense are
considered to relate to an equity item and are recognised directly in
equity. [IAS 12.68C]
Presentation
Current tax assets and current tax liabilities can only be offset in the statement of
financial position if the entity has the legal right and the intention to settle on a net
basis. [IAS 12.71]
Deferred tax assets and deferred tax liabilities can only be offset in the statement of
financial position if the entity has the legal right to settle current tax amounts on a net
basis and the deferred tax amounts are levied by the same taxing authority on the
same entity or different entities that intend to realise the asset and settle the liability at
the same time. [IAS 12.74]
The amount of tax expense (or income) related to profit or loss is required to be
presented in the statement(s) of profit or loss and other comprehensive income. [IAS
12.77]
The tax effects of items included in other comprehensive income can either be shown
net for each item, or the items can be shown before tax effects with an aggregate
amount of income tax for groups of items (allocated between items that will and will not
be reclassified to profit or loss in subsequent periods). [IAS 1.91]
Disclosure
IAS 12.80 requires the following disclosures:
o
major components of tax expense (tax income) [IAS 12.79] Examples include:
o
current tax expense (income)
o
any adjustments of taxes of prior periods
o
amount of deferred tax expense (income) relating to the
origination and reversal of temporary differences
o
amount of deferred tax expense (income) relating to changes
in tax rates or the imposition of new taxes
o
amount of the benefit arising from a previously unrecognised
tax loss, tax credit or temporary difference of a prior period
o
write down, or reversal of a previous write down, of a deferred
tax asset
o
amount of tax expense (income) relating to changes in
accounting policies and corrections of errors.
IAS 12.81 requires the following disclosures:
o
aggregate current and deferred tax relating to items recognised directly in equity
o
tax relating to each component of other comprehensive income
o
explanation of the relationship between tax expense (income) and the tax that
would be expected by applying the current tax rate to accounting profit or loss
(this can be presented as a reconciliation of amounts of tax or a reconciliation of
the rate of tax)
o
changes in tax rates
o
amounts and other details of deductible temporary differences, unused tax
losses, and unused tax credits
o
temporary differences associated with investments in subsidiaries, branches and
associates, and interests in joint arrangements
for each type of temporary difference and unused tax loss and credit, the
amount of deferred tax assets or liabilities recognised in the statement of
financial position and the amount of deferred tax income or expense recognised
in profit or loss
o
tax relating to discontinued operations
o
tax consequences of dividends declared after the end of the reporting period
o
information about the impacts of business combinations on an acquirer's
deferred tax assets
o
recognition of deferred tax assets of an acquiree after the acquisition date.
Other required disclosures:
o
details of deferred tax assets [IAS 12.82]
o
o
tax consequences of future dividend payments. [IAS 12.82A]
In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are
required by IAS 1 Presentation of Financial Statements, as follows:
o
Disclosure on the face of the statement of financial position about current tax
assets, current tax liabilities, deferred tax assets, and deferred tax liabilities [IAS
1.54(n) and (o)]
o
Disclosure of tax expense (tax income) in the profit or loss section of the
statement of profit or loss and other comprehensive income (or separate
statement if presented). [IAS 1.82(d)]