Income taxes IAS 12

IAS 12 – Recognition of Current Tax Liabilities and Assetspayable or recoverable on the taxable profit or loss for the period  If current taxes payable > taxes paid, then – Income taxe

Wiecek and Young

IFRS Primer

Chapter 23

Income Taxes:

IAS 12

Income Taxes

 Related standards

 IAS 12

 Current GAAP comparisons

 IFRS financial statement disclosures

 Looking ahead

 End-of-chapter practice

Related Standards

 FAS 109 Accounting for income taxes

3

Related Standards

 IAS 1 Presentation of financial statements

 IAS 8 Accounting policies, changes in

accounting estimates and errors

 IAS 37 Provisions, contingent liabilities and contingent assets

 IFRS 3 Business combinations

4

IAS 12 – Overview

 Objective and scope

 Recognition of current tax liabilities and assets

 Recognition of deferred tax liabilities and assets

IAS 12 – Objective and Scope

 IAS 12 addresses the accounting issues

related to tax effects of

– Current period transactions and events– Unused tax losses or credits

– Tax consequences when carrying amounts and tax amounts differ

6

IAS 12 – Recognition of Current Tax Liabilities and Assets

payable or recoverable on the taxable profit

or loss for the period

 If current taxes payable > taxes paid, then

– Income taxes payable

 If current income taxes payable < taxes paid, then

– Income taxes recoverable/receivable

7

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

 Underlying assumption of accounting model:

– Assets will be recovered for at least their carrying amount

– Liabilities will be settled for their carrying amount

 If there are tax consequences when the

asset is recovered or liability settled, this effect should be reported on the statement of financial position now

 Future tax effect = deferred tax liability or

deferred tax asset

8

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

Q Why a tax consequence?

A Because carrying amount of A & L may differ from

their tax amount or tax base = a temporary

difference

Taxable temporary difference:

Taxable income is increased in future when asset

recovered/liability settled

Deductible temporary difference:

Taxable income is decreased in future when asset

recovered/liability settled

9

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

10

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

 Example: Installment A/R carrying amount -

$40; revenues recognized on sale; taxable when cash received Tax base = $0

 Why is tax base $0?

– When the $40 is received (asset’s carrying amount is recovered), it is all taxable No amount ($0) is deductible from the $40 received

$40

11

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

12

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

 Example: Warranty liability carrying amount -

$90; deductible for tax only when warranty expenditures are made Tax base = $0

 Why is tax base $0?

– When the obligation is settled, the full $90 is deductible in calculating taxable income Tax base is carrying amount of $90 less amount deductible in future of $90 = $0

$90

13

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

 Future tax consequence (assume tax rate of 40%):

– Taxable temporary difference × tax rate* = deferred tax liability

– Installment A/R temporary difference of $40 × 40% = $16 deferred tax liability

 * tax rate – statutory rate when temporary difference is expected to reverse, i.e., enter into calculation of taxable income

14

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

 Future tax consequence (assume tax rate of 40%):

– Deductible temporary difference × tax rate* = deferred tax asset

– Warranty liability temporary difference of $90 × 40% = $36 deferred tax asset

 * tax rate – statutory rate when temporary difference is expected to reverse, i.e., enter into calculation of taxable income

15

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

 Deferred tax assets

– Result from deductible temporary differences and unused tax losses/credits

– Rely on having taxable income in the future in order to benefit

– Recognize deferred tax asset only if probable

that taxable profit will be available

16

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

 Probable that taxable income will be

available in future? Consider:

– Existence of taxable temporary differences that will reverse in future resulting in taxable income– History of profitability

– Tax planning opportunities

 If so, recognize deferred tax asset and

benefit in same year as tax loss; recognize full tax effect on temporary deductible

differences Reassess each B/S date.

17

IAS 12 – Recognition of Deferred Tax Liabilities and Assets

 Complexities arise with differences between carrying amounts and tax base of

– Goodwill– A & L in a business combination– Investments in subsidiaries, associates, joint ventures

18

IAS 12 – Measurement

 Current tax liability

– Taxable income × current tax rate = current tax payable

 Current tax asset – if past taxes can be

recouped

– Taxable loss × tax rate of past year = current tax receivable/recoverable

 Current tax asset – if current year’s taxes

overpaid = current tax receivable/recoverable

19

IAS 12 – Measurement

 Deferred tax assets and liabilities

– Measured on an undiscounted basis– Use tax rates for period when asset is expected

to be recovered or liability settled– Use rates based on laws enacted or substantively enacted at B/S date

– Use average rates expected to apply to taxable profit/loss in period of expected reversal of

temporary difference– Review carrying amount of deferred tax assets at each reporting date

20

IAS 12 – Recognition of Current and Deferred Tax

 Recognize current and deferred taxes in

profit or loss unless

– The related income or expense is recognized elsewhere such as OCI or directly in other equity item

– Tax results from a business combination

21

IAS 12 – Presentation

 Classification - deferred taxes are

non-current A/L (IAS 1)

 Offsetting - both for current and deferred: only if same taxation authority, legal right to offset, intent is to settle net or at same time

 Tax expense includes both current and

deferred taxes

 Report tax expense on profit or loss

separately from tax expense in OCI

22

– Benefits recognized currently from previously unrecognized tax losses/credits, or other

temporary differences

23

IAS 12 – Disclosures

 Related to statement of financial position:

 Amount of deferred tax asset/liability for each type of temporary difference

 Deductible temporary differences and other balances with unrecognized deferred tax

assets

 Nature of evidence supporting recognition of uncertain deferred tax assets

25

Current GAAP Comparisons

26

IFRS Financial Statement

Disclosures

The Nestlé Group

http://www.nestle.com/Resource.axd?Id=24E5A5E2-93F8-43 A3-956E-0F259448CB90

Accounting policy for tax Page 16 of 118 Income statement related disclosures Page 31 of 118 Deferred tax assets and liabilities Page 55 of 118

27

Looking Ahead

 Income taxes – part of short-term

convergence project with FASB

 Both IASB and FASB have agreed on many changes to eliminate exceptions to general principles in the standards

 IASB issued an exposure draft in 2009 and expects to issue final standard in 2010

 Exposure draft is for new draft IFRS, not

amendments to IAS 12

28

Looking Ahead

 Proposed changes likely in exposure draft

– Tax base becomes a measurement attribute– Existing non-recognition of deferred tax

assets/liabilities in specific cases to be eliminated– Clarification of substantively enacted tax rate

– Change from non-recognition of deferred tax assets (when not probable of realization) to recognition with an associated valuation

allowance account– Probable will be defined as ‘more likely than not’

29

Looking Ahead

 Proposed changes (continued)

– Continuation of allocating tax expense/income among P&L, OCI and equity, but subsequent changes will go through P&L

– Balance sheet classification of deferred taxes to mirror U.S requirements

– Uncertain tax positions will be addressed – using

an expected outcome measure and changes recognized in continuing operations

– Disclosures added; others removed– Reconciliation will be of parent company statutory rate to effective rate

30

End-of-Chapter Practice

23-1 IAS 12 provides much more guidance

on the recognition and measurement of the tax effects derived from deductible temporary differences than for the benefits from taxable temporary differences.

Instructions

Write a short paragraph to explain this situation.

31

End-of-Chapter Practice

23-2 Listed below are a number of situations that affect the financial statements.

1 Development costs have been capitalized on the statement of financial position and are being amortized to profit or loss over three years, but deducted as an expense for tax purposes as incurred

2 Revenue is recognized as goods are delivered for financial reporting purposes, but on a cash basis for tax purposes.

3 An entity borrows money and pays a transaction fee on the amount borrowed The transaction costs are added to the debt and amortized using the effective interest method for financial reporting purposes, although they were deducted when they were paid for tax purposes.

4 Pension expense is charged to profit or loss each period although tax legislation allows entities to deduct only the contributions to the pension trustee to be deducted for tax purposes Expenses have always exceeded the contributions.

5 Investment property is measured according to the revaluation model for financial reporting purpose, resulting in valuations in excess of original cost This method is not permitted for tax purposes.

Instructions

For each situation described above, indicate whether the company has a deductible or a taxable temporary difference and whether it will result in the recognition of a deferred tax asset or a tax liability Explain each briefly.

32

End-of-Chapter Practice

23-3 A company buys equipment for $1,000, uses it in the manufacturing of goods for resale,

and depreciates it on a straight-line basis over its five-year expected useful life For tax purposes, the equipment is depreciated at 25% a year on a straight-line basis Tax losses may

be carried back against taxable profit of the previous five years The tax rate for all years is 40%, and in 2004 the company’s taxable profit was $500 In each year from 2005 to 2009, the

company reported profits before depreciation expense and taxes of $200.

Instructions

a) For each year from 2005 to 2009, determine the company’s taxable profit or loss and the

current tax expense recognized.

b) For each year from 2005 to 2009, determine the amount of any year-end taxable or deductible temporary difference and the related balance of the deferred tax asset or liability account

reported on the balance sheet, and the deferred tax expense reported for the year.

c) To the extent possible with the information provided and the results of (a) and (b), prepare a partial statement of comprehensive income for each year from 2005 to 2009.

(adapted from Appendix B of IAS 12)

33

End-of-Chapter Practice

23-4 In this chapter, flag icons identify areas

where there are GAAP differences between IFRS requirements and national standards.

Copyright © 2010 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted

by Access Copyright is unlawful Requests for further

information should be addressed to the Permissions

Department, John Wiley & Sons Inc., 111 River Street, Hoboken,

NJ 07030-5774, (201) 748-6011, fax (201) 748-6008, website http://www.wiley.com/go/permissions The purchaser may make

back-up copies for his or her own use only and not for

distribution or resale The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information

contained herein.