4. income taxes

8/13/2019 4. Income Taxes

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International Financial Reporting Standards

The views expressed in this presentation are those of the presenter,not necessarily those of the IASB or IFRS Foundation.

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Income taxesJoint World Bank and IFRS Foundation ‘trainthe trainers’ workshop hosted by the ECCB,30 April to 4 May 2012

The views expressed in this presentation are those of thepresenter, not necessarily those of the IASB or IFRS Foundation.



© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org

3Income tax defined

• Income tax: all domestic and foreign taxbased on taxable profit• Taxable profit = a net amount in accordance

with taxation authorities’ rules fordetermining income taxes

• Income tax = tax rate × taxable profitNote : tax based on revenue ≠ income tax – sales tax, VAT, tax on capital, and

social security tax ≠ income tax



• Determining whether a tax is an income tax• hybrid taxes (eg those comprising both

production and profit-based components)must be decomposed and only the profit-based component is subject to IAS 12.

4Judgement




5Current tax defined

• Current tax: amount of income taxpayable/refundable based on taxableprofit/loss for the current period or pastperiods




7Example: current tax

• Tax rate 15%• Profit (accounting) for 20X1 = CU150,000• CU20,000 royalty income is tax exempt• CU5,000 meals expense is not deductible• Bad debt expense CU2,500 included CU500

estimate not deductible until write-off• Tax depreciation (accelerated) is CU43,000,

accounting depreciation is CU35,000.• No provisional tax payments




8Example: current tax continued

Accounting profit 150,000Less nontaxable royalty (20,000)Plus nondeductible meals 5,000Plus nondeductible bad debts 500

Less additional tax depreciation (8,000)Taxable profit 127,500Current tax expense/liability 19,125

Calculation: 15%×

CU127,500 = CU19,125Note: because no provisional tax has beenpaid the liability = current tax expense



• Accounting for uncertain tax positions• Judging when a tax rate becomes

substantively enacted

9

Current tax Judgements and estimates




10Deferred tax defined

• Deferred tax: tax payable/recoverable inthe future period as a result of pasttransactions

• Carrying amount: measurement underIFRSs

• Tax base: measurement under tax law• Temporary difference: difference in

carrying amount of an item in the statementof financial position and its tax base



• Recognise deferred tax asset (liability) for alltemporary difference• initial recognition exemptions• other exemptions• special recognition requirements for deferred

tax assets (next slide)

11Recognition —deferred tax balances



• Deferred tax assets are recognised only if it isprobable that future taxable profit will beavailable to absorb the losses or credits ordeductible differences.

• The existence of unused tax losses mayindicate that future taxable profit is notprobable.

• The tax consequences of transactions andevents are recognised in the same financialstatement as the transaction or event.

12Recognition —deferred tax assets

d f d




13

Recognition —deferred tax assetsExample: tax loss

• Loss for 20X1 (accounting) = tax loss = CU120• Can be carried forward three years then

unutilised portion (if any) expires (and cannotbe carried back)

• Of the CU120 tax loss, based on forecasts offuture taxable profits and other factors (seeIAS12.34 – 36) it is probable that only CU30 will

be utilised• Tax rate 20%

R i i d f d




14

Recognition —deferred tax assets continued Example: tax loss

Journal entry at 31/12/20X1 Debit Credit Asset —deferred tax[calculation: CU120 × 20%]

24

Asset —deferred tax —unrecognised[calculation: CU90 × 20%]

18

Income —profit or loss: income tax(deferred tax)[calculation: CU30 × 20%]

6

R i i d f d



• Determining whether it is probable that theentity will generate sufficient taxable profitto allow for the recognition of a deferredtax asset for:

• deductible temporary differences (forapplication guidance see IAS 12.27 – 31)

• unused tax losses and unused tax credits(for application guidance see IAS 12.34 –36)

15

Recognition —deferred tax assets Judgements and estimates

R iti ti d f d t




16

Recognition exemptions —deferred taxInitial recognition exemptions

• initial recognition of goodwill• initial recognition of an asset or liability in a

transaction which:(i) is not a business combination; and

(ii) at the time of the transaction, affectsneither accounting profit nor taxable profit(tax loss).

R g iti ti d f d t




17

Recognition exemptions —deferred taxExample —initial recognition exemption

• On 1/1/20X1 item of PPE cost = CU1,000

• Estimates in accordance with IAS 16• useful life = five years• residual value = nil

• Tax information• tax rate = 40%• depreciation not deductible• on disposal, any capital gain would not be

taxable and any capital loss would not bedeductible.Calculate deferred tax liability at 31/12/20X1



Recognition exemptions deferred tax



• Recognise a deferred tax liability for all taxabletemporary differences associated withinvestments in subsidiaries, branches andassociates, and interests in joint arrangements,except to the extent that both of the followingconditions are satisfied:

• (a) the parent, investor, joint venturer or jointoperator is able to control the timing of thereversal of the temporary difference; and

• (b) it is probable that the temporary differencewill not reverse in the foreseeable future

19

Recognition exemptions —deferred taxInvestments in subsidiaries



• Deferred tax asset (liability) is measured:• at tax rates expected to apply when the deferred

tax asset (liability) is realised (settled); and

• reflect the tax consequences that would followfrom the manner in which the entity expects torecover (settle) the carrying amount of its assets(liabilities)

• exceptions when revaluation model used fornon-depreciable asset and fair value modelused for investment property

20Measurement —deferred tax



• The tax rate expected to apply in future isgenerally indicated by the tax rate that issubstantively enacted at end of the reportingperiod.

• for graduated tax rates forecast the effective taxrate using substantively enacted tax rates basedon expected income at the time of reversal ofthe temporary difference

• Deferred tax assets and liabilities are notdiscounted

21Measurement —deferred tax continued




22Example 1: deferred tax

• On 1/1/20X1 acquire machine for CU100,000

• Accounting estimates made in accordance withIAS 16 Property, Plant and Equipment

• straight-line depreciation• useful life = 5 years• residual value = nil




23Example 1: deferred tax continued

• Relevant income tax information :• tax depreciation on machine = straight-line

historical cost over 2 years• when entity sells machine, government

recoups past tax depreciation to the extent thatthe selling price exceeds the tax base• substantively enacted tax rates:

• operating profits/losses taxed at 20%• capital gains/losses (eg proceeds from sale

in excess of historical cost) taxed at 10%





Calculate 20X1 deferred tax liability andexpense• Carrying amount = CU80,000• Tax basis = CU50,000 (future tax deductions)• Taxable temporary difference = CU30,000• Deferred tax liability = CU6,000• Deferred tax expense = CU6,000Calculation: 20% × CU30,000 temporary difference =CU6,000 deferred tax liability





Facts the same as Example 1, except at31/12/20X1 intend to sell the machine in 1/20X2• Assume carrying amount still = CU80,000• Tax basis = CU50,000 (future tax deductions)• Taxable temporary difference = CU30,000• Deferred tax liability = CU6,000• Deferred tax expense = CU6,000Calculation: 20% × CU30,000 temporary difference =CU6,000 deferred tax liability





Facts the same as Example 1.On 31/12/20X2 when carrying amount wasCU60,000 machine is revalued to CU120,000Calculate deferred tax liability at 31/12/20X2

• Carrying amount = CU120,000• Tax basis = nil (no future tax deductions)• Taxable temporary difference = CU120,000

• Deferred tax liability = CU24,000 (ie CU120,000 × 20% because expect to recover through use, ieprofit on sale of inventory)





Journal entry for revaluation of machine31/12/X2 Debit Credit

Asset —PPE (machine) 60,000Income —other comprehensive income 48,000

Liability —deferred tax 12,000Reconciliation of deferred tax liability:1/1/20X2 opening balance CU6,00020X2 depreciation CU6,000

31/12/20X2 revaluation CU12,00031/12/20X2 closing balance CU24,000





Facts the same as Example 3. On 30/6/20X3 whencarrying amount = CU105,000 decided to sellmachine = fair value less costs to sell.Calculate deferred tax liability at 30/6/20X3

• Carrying amount = CU105,000• Tax basis = nil (no future tax deductions)• Taxable temporary difference = CU105,000

• Deferred tax liability = CU20,500 (ie CU100,000expected tax recoupment × 20% + CU5,000expected capital profit × 10%)





Reconciliation of deferred tax liability:1/1/20X3 opening balance CU24,00030/6/20X3 6 months depreciation (CU3,000)30/6/20X3 change of intention (CU500)31/12/20X2 closing balance CU20,500





Facts the same as Example 4 except investment property (building). Presume recovery by sale.Calculate deferred tax liability

31/12/20X1 31/12/20X2 30/06/20X3

Carrying amount 80,000 120,000 105,000Tax base 50,000 0 0

Temporary difference 30,000 120,000 105,000

Deferred tax liability 6,000 22,000 20,500

Calculations:

- recoup depreciation 20% × 30,000 20% × 100,000 20% × 100,000- capital gain 10% × 20,000 10% × 5,000





Reconciliation of deferred tax liability:31/12/20X1 31/12/20X2 30/06/20X3

Opening balance 0 6,000 22,000

Fair value change (4,000) 6,000 (1,500)

Tax depreciation 10,000 10,000 0

Closing balance 6,000 22,000 20,500

Calculations:

- fair value change 20% × -20,000 20% × 20,000+10%× 20,000

10% × -15,000

- tax depreciation 20% × 50,000 20% × 50,000





Facts the same as Example 5 except measurement presumption rebutted in 20X1 and 20X2 (not 20X3).Calculate deferred tax liability

31/12/20X1 31/12/20X2 30/06/20X3

Carrying amount 80,000 120,000 105,000

Tax base 50,000 0 0

Temporary difference 30,000 120,000 105,000

Deferred tax liability 6,000 24,000 20,500

Calculations:

- rental income 20% × 30,000 20% × 120,000- recoup depreciation 20% × 100,000

- capital gain 10% × 5,000





Reconciliation of deferred tax liability:31/12/20X1 31/12/20X2 30/06/20X3

Opening balance 0 6,000 24,000

Fair value change (4,000) 8,000 (3,000)

Tax depreciation 10,000 10,000 (500)

Closing balance 6,000 24,000 20,500

Calculations:

- fair value change 20% × -20,000 20% × 40,000 20% × -15,000

- tax depreciation 20% × 50,000 20% × 50,000

- Change intention 10% × -5,000

Example 7: deferred tax




34graduated tax rates

• Temporary difference arises CU7,500 in 20X1,expected to reverse in 20X3

• Tax rate:• 15% on first CU500,000 of profit• 25% on excess over CU500,000• Taxable profit 20X1 = CU400,000• Expected taxable profit 20X3 = CU600,000Calculate deferred tax liability at 31/12/20X1

Example 7: deferred tax continued




35graduated tax rates

• First calculate expected effective tax rate for20X3

• (CU500,000 × 15%) + (CU100,000 × 25%) =CU100,000 expected tax expense for 20X3.

• CU100,000/CU600,000 = 16.67%• Deferred tax liability at 31/12/20X1 = CU1,250

• Calculation: 16.67% expected effective tax rate

for 20X3×

CU7,500 temporary difference =CU1,250

Measurement —deferred tax continued



• Deferred tax assets or liabilities are adjustedwhen a new tax rate is substantively enacted – the adjustment is accounted for as a

revision to an accounting estimate (ie itaffects that period’s profit)

36tax rate change



• At 31/12/20X1 deferred tax liability = CU200• (ie CU1,000 temporary difference × 20% taxrate)

• On 1 January 20X2 tax rate changes to 30%(ie becomes substantively enacted)

• On 1 January 20X2 deferred tax liability =CU300

• (ie CU1,000 temporary difference × 30% taxrate)

37Example: tax rate change

Measurement —deferred tax



• Estimating the tax rates that are expected toapply when temporary differences reverse(eg when tax rates are graduated)

• Judging when a tax rate becomes

substantively enacted

38Judgements and estimates




39Presentation

• Classification: – All deferred tax assets and liabilities as

non-current• Offsetting:

– Do not offset current tax assets andliabilities or deferred tax assets andliabilities unless entity has legal right tooffset and it intends either to settle net orsimultaneously




40Disclosure

• Current tax and deferred tax – see IAS 12.79 – 88

C i h IFRSf SME



• IAS 12 and Section 29 Income Tax of the IFRS forSMEs are significantly different.

41Comparison to the IFRS fo r SMEs

© IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

Q ti t ?




42Questions or comments?

Expressions of individual views bymembers of the IASB and its staffare encouraged.

The views expressed in this

presentation are those of thepresenter.

Official positions of the IASB onaccounting matters are determined

only after extensive due processand deliberation.

4. income taxes

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