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The rate of tax that should be used to determine the deferred tax balance is 29. This is the rate is that expected to apply when the asset is realised. The rate of 30 in 2007, when the
temporary difference originated, is not relevant. The 28 would be used if it had been enacted, but currently it is only under discussion. The best estimate of the rate applying in
2009, based upon laws already enacted or substantively enacted, is the rate for 2008 of 29.
Illustration 6
A machine cost CU50,000. For tax purposes, allowances of CU30,000 have already been deducted in the current and previous periods with the remaining CU20,000 deductible in
future periods. Revenue generated by the entity from using the machine is taxable and any gain or loss made on its disposal will have tax implications. The carrying amount of the
machine for accounting purposes is CU35,000.
The tax rate is currently 30 and is not expected to change in the foreseeable future. The tax base of the machine is CU20,000 CU50,000 less CU30,000.
There is a taxable temporary difference of CU15,000 i.e. accounting carrying amount CU35,000 – tax base CU20,000. This generates a deferred tax liability of CU4,500 i.e.
CU15,000 x 30.
The steps so far for an asset can be summarised in the following diagram.
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6.4 Recognition criteria: further issues
6.4.1 Revaluations
IFRS permit certain assets to be carried at fair value or at a revalued amount. The act of revaluing an asset will not generally result in a taxable event. However, the future
recovery of the asset, either through its continuing use or through disposal, will lead to taxable amounts being generated by the entity. The amount that will be deductible for tax purposes,
based on cost, will differ from that for accounting purposes, based on the revalued amount.
Consequently, the difference between the carrying amount of a revalued asset and its tax base is a temporary difference. An upward revaluation of an asset will therefore give rise to a
deferred tax liability.
Most transactions creating temporary differences relate to transactions recognised in profit or loss, so the related deferred tax is also recognised in profit or loss. However, where the
underlying transaction, such as a revaluation, is recognised in other comprehensive income,
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the deferred tax impact is also recognised in other comprehensive income. [IAS 12.58, 12.61A]
The Standing Interpretations Committee issued SIC 21 Income taxes – recovery of revalued non-depreciable assets which clarifies that deferred tax should be recognised, where
appropriate, even when a non-current asset is not depreciated, for example land. This is because the carrying amount of the asset will ultimately be recovered on disposal rather than
through the charging of depreciation.
Where the market value of an asset is greater than its carrying amount but the entity does not revalue its assets there are no deferred tax implications.
6.4.2 The expected manner of recovery of an asset
The measurement of deferred tax liabilities and assets should reflect the tax consequences of how an entity intends to settle and recover the carrying amount of its liabilities or assets.
For example, different tax rates may apply, depending on whether the entity intends to use an asset to generate future benefits for the entity on an ongoing basis or to sell it. The deferred
tax amount will therefore be calculated using the tax rate relevant to the entity’s expected use. [IAS 12.51]
6.4.3 Annual review
The carrying amount of a deferred tax asset should be reviewed at the end of each reporting period to ensure that it continues to be probable that it will be recovered against future taxable
profits. [IAS 12.56]
If it is no longer probable that sufficient taxable profit will be available to utilise the benefit of the deferred tax asset, then its carrying amount should be written down accordingly. If
sufficient profits later become available, then the amount written down should be reversed. [IAS 12.56]
6.4.4 Discounting
IAS 12 does not permit deferred tax assets and liabilities to be discounted. [IAS 12.53]
6.4.5 Temporary differences and investments
Taxable temporary differences may arise from investments in subsidiaries, branches, associates and joint ventures. Such differences arise as a result of the carrying amount of
investments being different from their tax base. Differences may arise, for example, due to the entities having undistributed profits or through exchange rate differences.
A deferred tax liability arising on such taxable temporary differences should be recognised, except where two conditions are met: the investor is able to control the timing of the reversal
of the temporary differences and it is probable that the amounts will not reverse in the foreseeable future. [IAS 12.39]
Similarly, a deferred tax asset should be recognised in relation to deductible temporary differences in respect of such investments where they will reverse in the foreseeable future
and the entity will be able to utilise the resulting deferred tax asset. [IAS 12.44]
6.5 Future of the standard
The IASB has been working with the US standard setter the Financial Accounting Standards Board FASB on aligning their respective standards on taxation as part of the convergence
project discussed in Chapter 1. The work has been ongoing since 2002 and is not expected to lead to a final standard until 2009.
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Both the international and US standards on taxation are based on the balance sheet liability method discussed above, but both standards have a number of exceptions which mean that
differences arise in the application of the standards. The Boards are not reconsidering the underlying approach of the standards but are instead working to reduce the number of
differences.
7 Change in Tax Status
Where are entity’s tax status changes, for example following a restructuring of its equity, this may impact directly on the entity’s current and deferred tax assets and liabilities. SIC 25
Income taxes - changes in the tax status of an enterprise or its shareholders sets out guidance on how such changes in an entity’s tax status should be treated.
SIC 25 sets out that both the current and deferred tax adjustments required as a result of a change in the tax status of an entity should be included directly in profit or loss for the period.
If, however, the consequences of the change directly impact other comprehensive income then the tax consequences should also be recorded in other comprehensive income.
8 Presentation and Disclosure: Current and Deferred Tax
Current and deferred tax movements should be recognised directly in the profit or loss for the period, except where the tax arises from: [IAS 12.58]
a transaction that is accounted for directly in other comprehensive income such as a revaluation; or
a business combination. The tax expense or income in respect of the profit or loss from the entity’s ordinary activities
should be presented in the statement of comprehensive income. [IAS 12.77] The main components of the tax expense, or income, should be disclosed separately in the
financial statements. The main components of the tax expense or income may include, for example: [IAS 12.79]
current tax expense income; adjustments recognised in the period for current tax of prior periods;
deferred tax expense income relating to temporary differences; an adjustment to the deferred tax expense income relating to changes in tax rates;
and an adjustment made in respect of amounts recognised in prior periods for deferred or
current tax. IAS 12 requires a number of detailed disclosures to be made in relation to both the current
and deferred tax amounts recognised in the financial statements. These disclosures include: [IAS 12.81]
the amount of income tax relating to each component of other comprehensive income;
a reconciliation of the tax expense income to the amount calculated as the accounting profit multiplied by the tax rate. This reconciliation may be presented by
reconciling the average effective tax rate to the actual tax rate for the period;
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an explanation of any changes in the applicable tax rates, compared to the previous accounting period;
the amount of any potential deferred tax asset which has not been recognised because of uncertainties over its recoverability;
an analysis of deferred tax in terms of the type of temporary difference; the aggregate amount where a deferred tax liability for temporary differences in
relation to investments in subsidiaries, associates, branches and investments in joint ventures has not been recognised;
where an entity has discontinued operations presented in accordance with IFRS 5 Non-current assets held for sale and discontinued operations the tax expense relating
to the gain or loss on discontinuance; and the income tax consequences of dividends that were proposed or declared after the
end of the reporting period and not therefore recognised as a liability at the end of the reporting period.
Where an entity has recognised a deferred tax asset at the end of the reporting period, it should disclose the nature of the evidence supporting its future recoverability. [IAS 12.82]
IAS 1 requires that where current and non-current assets and liabilities are separately classified in the statement of financial position, deferred tax assets and liabilities should not
be disclosed as part of current assets and liabilities.
8.1 Offsetting
Where appropriate, deferred tax assets and liabilities should be offset in the statement of financial position.
However, a current tax asset and a current tax liability should only be offset by an entity where it has a legally enforceable right to set off the amounts and it intends to settle them on
a net basis. If the amounts are not settled on a net basis, then they should be settled simultaneously. [IAS 12.71]
Deferred tax assets and liabilities should similarly only be offset where the entity has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred tax
assets and liabilities have arisen on income taxes levied by the same taxation authority. In addition, the amounts should be in relation to the same taxable entity or, where they have
arisen in respect of different taxable entities, there should be the right to settle the amounts on a net basis or simultaneously. [IAS 12.74]
8.2 Other related disclosures
An entity should disclose any tax-related contingent liabilities and contingent assets, in accordance with IAS 37 Provisions, contingent liabilities and contingent assets. Contingent
liabilities and contingent assets may arise from unresolved disputes with the taxation authorities.
Where changes in tax rates or tax laws are enacted or announced after the end of the reporting period, an entity should disclose any significant effect of those changes on its
current and deferred tax assets and liabilities.
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9 Chapter Review
This chapter has been concerned with accounting for income taxes. This includes both current tax and deferred tax. The primary emphasis has been on deferred tax and included
issues of recognition and measurement and the application of these criteria in determining deferred tax balances and charges.
This chapter has covered: the objective and scope of IAS 12;
the nature of deferred tax and why it is necessary; the key principles of recognition and measurement of deferred tax relating to
temporary differences and deferred tax assets and liabilities; and the principal presentation and disclosure requirements of IAS 12.
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10 Self Test Questions
Chapter 15
1. Are the following statements in relation to deferred tax true or false?
1 Deferred tax liabilities are the amounts of income taxes payable in
future periods in respect of taxable temporary differences. 2
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of deductible permanent differences.
Statement 1 Statement 2
A
False False
B False
True
C True
False
D
True True
2. Which TWO of the following are examples of deferred tax assets?
Deferred tax assets are the amount of income taxes recoverable in future periods in respect of
A
the carryforward of unused tax losses
B taxable temporary differences
C
deductible temporary differences
D permanent differences
3. Which TWO of the following must be disclosed separately, according to
IAS12 Income taxes?
A
The tax bases of major items on which deferred tax has been calculated
B The amount of deductible temporary differences for which no deferred
tax asset is recognised
C
Estimates of future tax rates
D The amount of income tax relating to each component of other
comprehensive income
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4. Are the following statements regarding the classification of items under IAS12
Income taxes true or false? 1
Interest expense accrued but included in taxable profit on a cash basis should be classified under deductible temporary differences.
2 Where accumulated depreciation on an asset is greater than
accumulated tax depreciation, the amount should be classified under deductible temporary differences.
Statement 1 Statement 2
A
False False
B False
True
C
True False
D
True True
5. Are the following statements true or false, according to IAS12 Income taxes?
1 Development costs have been capitalised and will be amortised, but
were deducted in determining taxable profit in the period in which they were incurred. This will give rise to a deferred tax asset.
2 The tax base for a machine for tax purposes is greater than the
carrying amount in the financial statements up to the end of the reporting period. This will give rise to a deferred tax asset.
Statement 1 Statement 2
A
False False
B False
True
C True
False
D
True True
6. According to IAS12 Income taxes, are the following statements in relation to
deferred tax liabilities true or false? 1
Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.
2 Deferred tax assets are the amounts of income taxes recoverable in
future periods in respect of deductible temporary differences. Statement 1
Statement 2
A False
False
B False
True
C
True False
D True
True
