International Accounting Standards

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International Accounting Standards

• IAS 12 Income Taxes

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IAS 12 Income Taxes

• Objective
• To prescribe the accounting treatment for the
  income tax effects of transactions and other
  events recognised in an entitys financial
  statements during a period, both current and
  future.
• Scope

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IAS 12

• Definitions
• Accounting Profit
• Taxable Profit
• Tax expense
• Current tax
• Deferred tax liabilities
• Deferred tax assets
• Temporary differences
• Tax base - examples
• Recognition of Current Tax Liabilities and
  Current Tax Assets

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IAS 12 Income Taxes

• Methods of accounting for deferred tax
• Taxes payable or flow through method
• Deferral method
• Partial liability method
• Comprehensive liability method
• Income Statement approach
• Balance sheet approach

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IAS 12 Income Taxes

• Temporary Differences and Tax Base
• The notions of temporary difference and tax
  base govern the application of the formulae and
  are central to an understanding of the
  requirements of IAS 12.

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IAS 12 Income Taxes

• Temporary Differences
• differences between the carrying amount of an
  asset or a liability in the entitys balance
  sheet and its tax base (tax balance sheet).
• temporary in the sense that it is axiomatic
  under accounting concepts and standards that an
  entity will realise its assets and settle its
  liabilities continually over time at which point
  any previously recognised tax consequences will
  crystallise.

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IAS 12 Income Taxes

• Temporary differences
• taxable temporary differences give rise to
  deferred tax liabilities.
• deductible temporary differences give rise to
  deferred tax assets.

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Taxable Temporary Differences

• Example
• An entity revalues a non-current asset from 1,000
  to 1,200. The tax base of the asset is 1,000. A
  taxable temporary difference of 200 therefore
  exists and would give rise to a deferred tax
  liability.
• As the entity recovers the benefits embodied in
  the asset it will only be able to claim tax
  deductions of 1,000. The temporary difference
  will therefore reverse and the entity will have
  to pay tax on the excess of 200.

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Applying the Model Recognition of Deferred Tax
Assets

• Tax Losses
• a deferred tax asset is recognised for the carry
  forward of unused tax losses to the extent that
  it is probable that future taxable amounts will
  be available to utilise the tax losses.

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Applying the Model Recognition of the Tax
Effect in Equity

• The general rule is that deferred tax is to be
  recognised as income or expense in the income
  statement.
• However, in certain situations the deferred tax
  is recognised in equity
• eg where an asset revaluation was recognised as
  an adjustment to asset revaluation reserve

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IAS 12 Income Taxes

• Measurement of Deferred Tax Assets and
  Liabilities
• based on how the entity expects, at balance sheet
  date, to recover or settle the carrying amounts
  of its assets and liabilities eg an asset could
  normally be recovered through use or sale or
  through use and subsequent date.
• using tax rates (and tax laws) that have been
  enacted or substantially enacted as at the
  reporting date.

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IAS 12 Income Taxes

• Measurement of Deferred Tax Assets and
  Liabilities
• Nominal amounts (ie temporary differences
  multiplied by relevant tax rates)
• Discounting is not permitted

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IAS12 Income Taxes

• Recognition of Current and Deferred Tax
• Income statement
• Items credited or charged directly to equity
• Deferred Tax Arising from a Business Combination

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IAS 12 Income Taxes

• Presentation
• Tax assets and liabilities
• Offset
• Tax Expense
• Disclosure
• Effective Date

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IAS 12 Income Taxes

• Emerging Issues (SIC)
• SIC 21 Recovery of Revalued Non
• Depreciable Assets
• SIC 21.1 base on recovery through sale
• Changes in tax status
  of an entity or its
• shareholders.
  Recognition of effect in
• equity?
• SIC 21.2 - treat consistent with change in tax
  status of transaction.

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IAS 12 Income Taxes

• Emerging Issues (SIC)
• SIC 25 Income taxes - Changes in the
  Tax Status of an Enterprise or its
  Shareholders

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IAS 12 Income Taxes

• Revised 2000
• Operative for financial years beginning on or
  after 1 January 1998.

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Revised IAS 12 vs Superseded Standard

• Superseded Standard had an income statement
  perspective timing differences and permanent
  differences
• Revised Standard has a balance sheet perspective
  temporary differences

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IAS 12 Income Taxes

• Why change?
• International developments
• USA FAS 109
• Disparity between USA, UK, Australia and others
  following superseded IAS 12
• Better able to achieve the objective of capturing
  all tax effects.

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IAS 12 Income Taxes

• Balance Sheet Approach vs Income Statement
  Approach
• By using the income statement as the vehicle for
  the recognition of tax effects, the superseded
  IAS 12 recognised the tax consequences of only
  those transactions or other events that gave rise
  to revenues and expenses.
• The balance sheet approach captures tax effects
  comprehensively, including those arising in
  relation to assets and liabilities but which do
  not relate to revenues and expenses of the period.

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Balance Sheet Approach vs Income Statement
Approach
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Income Statement Approach

• Example
• Doubtful debts expense of 1,000 is a timing
  difference and will only be deductible for tax
  purposes when the debts are bad. The accounting
  entries are
• DR Income tax expense 1,200
• DR Future income tax benefit 300
• CR Current tax payable 1,500

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Balance Sheet Approach

• Example
• Under the balance sheet approach, the accounting
  balance sheet would have a provision for doubtful
  debts of 1,000. In a tax balance sheet, since
  the accounting provision would not yet be
  deductible for tax, there would be a higher tax
  base for debtors. A deductible temporary
  difference would therefore exist. The accounting
  entries are
• DR Current income tax expense 1,500
• CR Current income tax liability 1,500
• DR Deferred tax asset 300
• CR Deferred income tax expense 300
• The net income tax expense under both
  approaches is 1,200.

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Balance Sheet Approach vs Income Statement
Approach

• Balance sheet approach is more comprehensive
• The balance sheet approach will not only
  encompass all timing differences same as the
  income statement approach but will recognise the
  current or future tax consequences of other
  changes in assets and liabilities that occurred
  during the period.
• Example asset revaluations under IAS16,
  Property, Plant Equipment.

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IAS 12 Income Taxes

• The IASB Model
• Underlying principle that the current and
  future income tax consequences of all
  transactions and other events recognised in an
  entitys balance sheet give rise to current and
  deferred tax assets and liabilities.

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IAS 12 Income Taxes

• Basic formulae

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Deductible Temporary Differences

• Example
• an entity recognises an accounting liability of
  1,000. The tax base of the liability is zero. A
  deductible temporary difference of 1,000
  therefore exists and will give rise to a deferred
  tax asset.
• as the entity settles the liability in future
  periods, the payments will be deductible for tax
  purposes. The temporary difference will
  therefore reverse and the entity will recover
  tax relating to the 1,000 deduction.

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IAS 12 Income Taxes

• Tax Base
• the amount that would be attributed by the
  taxation authorities to an asset or liability for
  tax purposes.
• the notion is a simple one, but the determination
  of tax base in any given situation can be
  complex.
• once again, the Standard uses formulae to assist
  in determining the tax base of an asset or
  liability.

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Tax Base

• Example Tax Base of an Asset
• Tax base is calculated as
• An assets carrying amount
• Less Future taxable amounts
• Plus Future deductible amounts

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Tax Base of an Asset - Example

• Land is acquired for a cost of 1,000 and revalued
  2 years later to 1,500. The index for capital
  gains was 100 at the date of acquisition and has
  since moved to 110.
• The tax base of the land is
• Carrying Taxable Deductible Tax
• amount amounts amounts base
• 1,500 - 1,500 1,100 1,100
• When the 1,500 is recovered (from disposal of the
  land) 1,100 would effectively be deducted.

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IAS 12 Income Taxes

• Applying the Model-Recognition of Deferred Tax
  Liabilities
• deferred tax liabilities are to be recognised for
  all taxable temporary differences except in
  certain circumstances relating to
• goodwill
• the initial recognition of assets and liabilities
• investments in subsidiaries, branches, associates
  and joint ventures.

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IAS 12 Income Taxes

• Applying the Model Recognition of Deferred Tax
  Assets
• A deferred tax asset is to be recognised for a
  deductible temporary difference where it is
  probable that future taxable amounts will be
  available to utilise the deductions.
• There are some exceptions, for example, where the
  temporary difference arises from investments in
  subsidiaries, associates, joint ventures, etc and
  it is probable that the temporary differences
  will not reverse in the foreseeable future.

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IAS 12 Income Taxes

• Unused Tax Losses and Unused Tax Credits
• Re-Assessment of Unrecognised Tax Assets
• Investments in Subsidiaries, Branches, Associates
  and Joint Ventures