page 1 institute of certified public accountants of kenya icpak ias 12 - income taxes by simon...
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Page 1Institute of Certified Public Accountants of Kenya
ICPAK
IAS 12 - Income taxes
by Simon Fisher
31 March 2011
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This slide presentation has been prepared for general guidance only, and does not constitute professional advice. You should not act upon the information contained in these slides without obtaining specific professional advice. Accordingly, to the extent permitted by law, RSM Ashvir (and its employees and agents) accept no liability, and disclaim all responsibility, for the consequences of anyone acting, or refraining from acting, in reliance on the information contained in these slides or for any decision based on it, or for any consequential, special or similar damages even if advised of the possibility of such damages.
Income taxes
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Course objectives
By the end of today you should:
• know the components making up tax expense
• have a good understanding of the basic concepts of IAS 12
• understand the main exemptions within IAS 12
• be able to compute deferred tax on commonly encountered assets and liabilities
• know what disclosures are required under IAS 12
• be able to prepare a ‘tax reconciliation’
• be aware of differences between full IFRS and the IFRS for SMEs.
This course does not cover the computation of taxable profit.
Income taxes
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Tax expense …
… is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax (12.5).
Income taxes
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Agenda/Contents
Section 1: Accounting for current tax
Section 2: Accounting for deferred tax
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Agenda/Contents
Section 1: Accounting for current tax
Section 2: Accounting for deferred tax
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Current tax
Current tax is the amount of income tax payable/recoverable in respect of the taxable profit/loss for the period (12.5).
Current tax for current and prior periods should, to the extent unpaid, be recognised as a liability (12.12).
Accounting for current tax
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Agenda/Contents
Section 1: Accounting for current tax
Section 2: Accounting for deferred tax
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Deferred tax
We will be looking at:• Basic concepts• Measurement
- the rule- the exceptions to the rule
• Recognition• Presentation and disclosure.
Accounting for deferred tax
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Basic concepts
What is deferred tax?
Why do we need it?
How is it calculated?
Accounting for deferred tax
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What is deferred tax accounting …..
Accounting for the tax consequences of the future recovery/settlement of the carrying amount of assets/liabilities in a company’s balance sheet.
IAS 12 (effective from 1998) uses the balance sheet liability method (as opposed to the deferral method) and focuses on ‘temporary differences’ existing at the balance sheet date (not ‘timing differences’)
Accounting for deferred tax
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Basic concepts
What is deferred tax?
Why do we need it?
How is it calculated?
Accounting for deferred tax
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Measurement – the rule
Accounting for deferred tax
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The IAS 12 approach to calculating deferred tax
For every asset and liability in the balance sheet, and for tax losses carried forward:
Carrying amount of asset/liability X
Less: tax base of asset/liability (X)
Temporary difference X
@applicable tax rate X%
Deferred tax asset/liability X
Accounting for deferred tax
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What is a temporary difference?
Temporary difference = [the carrying value of an asset or liability] - [its tax base]:
Carrying amount of asset/liability X
Less: tax base of asset/liability (X)
Temporary difference X
Accounting for deferred tax
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The tax base is …..
…… “the amount attributed to that asset or liability for tax purposes” (12.5)
The tax base of an asset is the amount that will be deductible for tax purposes … when the entity recovers the carrying amount of the asset (12.7).
ie Tax base = future deductible amount
Note: if the future recovery of the asset is not taxable, the tax base is equal to the carrying amount.
Accounting for deferred tax
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Examples 1, 2 and 3
Accounting for deferred tax
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The tax base is …..
…… the amount attributed to that asset or liability for tax purposes
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 (12.8).
Note: in the case of revenue received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.
Accounting for deferred tax
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Examples
Examples 4, 5 & 6
Accounting for deferred tax
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Revaluations …..
Revaluations of property, plant and equipment increase the carrying amount of an asset without affecting the tax base.
They therefore create additional temporary differences on which deferred tax must be recognised (12.20).
Accounting for deferred tax
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Consolidation
Compare the group carrying value with the tax base.
Temporary differences may be affected by:• Elimination of inter-company items • Fair value adjustments – eg on acquisition of a subsidiary• Unification of accounting policies.
Accounting for deferred tax
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Question 1
Accounting for deferred tax
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Temporary differences can be …..
• taxable differences - giving rise to deferred tax liabilities; or
• deductible differences - giving rise to deferred tax assets (12.5)
Accounting for deferred tax
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Measurement –
the exceptions to the rule
Accounting for deferred tax
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Specific Exemption - Initial recognition
The tax effect of all temporary differences arising on initial recognition of an asset or liability which:
• is not a business combination
• at the time of the transaction, affects neither accounting profit nor taxable profit/loss,
should not be recognised (12.15).
Accounting for deferred tax
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Initial recognition of assets and liabilities
Related to abusiness combination?
At the time of the transaction,affects accounting profitor taxable profit (tax loss)?
Don’t recognise DTA/DTL
Recognise DTA/DTL
Yes
No
No
Accounting for deferred tax
Yes
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Initial recognition …..
Question 2
Saloon Car
Accounting for deferred tax
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Saloon car – part 2
Accounting for deferred tax
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Revaluations …..
Revaluations of property, plant and equipment increase the carrying amount of an asset without affecting the tax base.
The resulting change in the temporary difference has not arisen on initial recognition. Therefore the deferred tax must be recognised (12.20).
Accounting for deferred tax
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Specific Exemption - Goodwill
No deferred tax liability shall be recognised in respect of goodwill arising in a business combination for which impairment is not deductible for tax purposes (12.15(b)).
Accounting for deferred tax
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Measurement – Applicable rate
Accounting for deferred tax
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The applicable rate …..
Accounting for deferred tax
Carrying amount of asset/liability X
Tax base of asset/liability (X)
Temporary difference X
@applicable tax rate X%
Deferred tax asset/liability X
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Expected manner
The measurement of deferred tax assets and liabilities should reflect the tax consequences that follow from the manner in which the enterprise expects to recover or settle the respective asset or liability (12.51).
Accounting for deferred tax
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Rate to be applied …..
Deferred tax assets and liabilities should be computed at the rate expected to apply in the period when the asset is realised or the liability settled, based on rates enacted or substantively enacted at the balance sheet date (12.46).
Accounting for deferred tax
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Example of origination and reversal of temporary differences - PPE
A
B
Carrying value = A
Tax base = B
Taxable temporary ___
difference = C
===
C1Provide via profit and loss account at income tax rates
Value
Carrying value
Tax base
Time
Cost
C2C3
Accounting for deferred tax
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Examples
Examples 7 & 8
Accounting for deferred tax
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Measurement - discounting
Deferred tax assets and liabilities should not be discounted (12.53).
Accounting for deferred tax
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Question 3
Accounting for deferred tax
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Recognition
Accounting for deferred tax
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Recognition …..
All deferred tax liabilities should be recognised, except on goodwill and temporary differences subject to the initial recognition exception (12.15).
Deferred tax assets should be recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary difference (including carry forward tax losses) can be utilised (12.24).
Annual reassessment is required (12.37).
Accounting for deferred tax
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Recognition …..
Tax losses
The existence of tax losses is strong evidence that future taxable profit may not be available – there therefore has to be convincing evidence that it will be available (12.35).
Accounting for deferred tax
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Question 4 and 5
Accounting for deferred tax
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Presentation and disclosure
Accounting for deferred tax
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Presentation ….
Deferred tax should be recognised in the profit and loss account except where the transaction giving rise to the asset or liability is recognised directly in equity, or from a business combination (12.58): eg
• prior year adjustments
• revaluation surpluses
• “excess” depreciation.
Accounting for deferred tax
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Offsetting ….
Deferred tax assets and liabilities may be offset only if:• The entity has a legally enforceable right to set off current tax
assets against current tax liabilities• The deferred tax assets and liabilities relate to income taxes
levied by the same tax authority on the same taxable entity (12.74).
Accounting for deferred tax
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Disclosure in the notes to the profit and loss account…..
Definition: Tax expense is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax (12.5).
The components of the tax expense should be disclosed eg
• current tax
• deferred tax movement
• prior period under/over provision
• deferred tax asset not previously recognised (12.79).
Accounting for deferred tax
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Also …..
• Tax relating to discontinued operations (12.81(h)).
Accounting for deferred tax
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And …..
….. a reconciliation of:
• the tax expense, to
• the accounting profit multiplied by the applicable tax rate
The “proof of tax” (12.81(c)).
Accounting for deferred tax
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Proof of tax
Accounting for deferred tax
Tax computationAccounting profit X
Add back: items not tax deductible in period (X)
Sub total X
Deduct: non-taxable income and allowances X
Taxable profit X
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Proof of tax
Accounting for deferred tax
Tax computation
Tax effect
Accounting profit X
Adjustment for permanent differences X
Sub total X
Origination and reversal of temporary differences X
Taxable profit X A?
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Proof of tax
Accounting for deferred tax
Tax computation
Tax effect
Accounting profit X
Adjustment for permanent differences X
Sub total X C?
Origination and reversal of temporary differences X B?
Taxable profit X Current tax
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Proof of tax
Accounting for deferred tax
Tax computation
Tax effect
Accounting profit X D
Adjustment for permanent differences X E
Sub total X Tax expense
Origination and reversal of temporary differences
X Deferredtax mvt
Taxable profit X Current tax
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Proof of tax
Accounting for deferred tax
Tax computation
Tax effect
Accounting profit X D
Adjustment for permanent differences X E
Sub total X Tax expense
Origination and reversal of temporary differences X Deferredtax mvt
Taxable profit X Current tax
Proof of tax
Proof of tax
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Question 6
Accounting for deferred tax
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Example …..
Accounting for deferred tax
Accounting profit 1,200,000
Tax at applicable rate of 30% 360,000Tax effect of:
Expenses not allowed for tax purposes 60,000
Income not subject to tax (80,000)Effect of change of tax rate on deferred tax
liability(20,000)
Prior period over-provision (10,000)
Tax expense 310,000
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And in the notes to the balance sheet …..
• The movement of gross deferred tax assets and liabilities analysed by category of temporary difference (12.81(g))
• The evidence supporting recognition of deferred tax assets if the entity is making losses (12.82)
• The amount of temporary differences and unused tax losses for which no deferred tax asset is recognised (12.81(e)).
Accounting for deferred tax
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Case study
Accounting for deferred tax
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Exposure draft – Income TaxIssued on 31 March 2009 …
• … has been abandoned, but unfortunately was ‘borrowed’ for the IFRS for SMEs
Accounting for deferred tax
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IFRS for SMEs – Income tax
• No initial recognition exemption, other than for goodwill, but• Section 29.3(c): “the tax basis of assets and liabilities is
determined by the consequences of sale of the assets …”• Section 29.24: “an entity shall measure current and deferred
tax … using the probability-weighted average amount of all the possible outcomes, assuming that the tax authorities will review the amounts reported and have full knowledge of all relevant information”
• all deferred tax assets should be recognised and then a valuation allowance is used, if necessary.
Accounting for deferred tax
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IFRS for SMEs – Income tax
Conflict:
Section 29.3(c): “the tax basis of assets and liabilities is determined by the consequences of sale of the assets …”
Section 29.20: “the measurement of deferred tax … shall reflect the consequences that would follow from the manner in which the entity expects … to recover … the carrying amount of the related assets …”
Accounting for deferred tax
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IFRS for SMEs – Income tax
Gobbledegook:
Section 29.32(b): an entity shall disclose “an explanation of the significant differences in amounts presented in the statement of comprehensive income and amounts reported to tax authorities”
Which amounts – Revenue? Expenses?
Surely what was meant was: “an explanation of the significant differences between the effective tax rate and the applicable statutory tax rate”?
Accounting for deferred tax
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Amendment to IAS 12 – Recovery of underlying assets
• Issued 20 December 2010• Effective for accounting periods beginning on or after 1
January 2012• Introduces the presumption that the carrying value of an
investment property carried at fair value is recovered entirely through sale
• The presumption is rebutted if the investment property is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.
Accounting for deferred tax
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Conclusion
IAS 12 is a rule based standard:
• Rule 1: Deferred tax = (carrying amount - tax base) x applicable tax rate.
Accounting for deferred tax
Thank you!Thank you!