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Tax accounting - the process
Tax accounting is a process made up of the following
steps:
| a) |
calculate and recognise
current income tax payable (or receivable); |
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| b) |
determine the tax base of assets and liabilities; |
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| c) |
compare the carrying amount
of assets and liabilities with their tax base
to determine temporary differences; |
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| d) |
identify temporary differences
that are not recognised due to specific exceptions
in IFRS; |
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| e) |
review net deductible temporary
differences and unused tax losses to determine
whether recognition of deferred tax assets is
appropriate; |
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| f) |
calculate deferred tax assets
and liabilities by applying the appropriate
tax rates to the temporary differences identified; |
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| g) |
determine the movement between
opening and closing deferred tax balances; |
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| h) |
determine whether offset of
deferred tax assets and liabilities between
different entities is appropriate in the consolidated
financial statements. Conditions for offset
are specified in Section 73.12; and |
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| i) |
recognise deferred tax assets
and liabilities, with the net change recognised
in income or equity as appropriate. |
Recognition of current income tax expense
The current tax charge (or income) is the amount
payable (or receivable) by an entity as calculated
in its tax return.
The current tax expense is recognised in the income
statement except to the extent that the tax relates
to a transaction that is recognised in equity rather
than the income statement . For example, the tax related to the revaluation of property, plant and equipment
should be recognised in equity [IAS12R.61].
Determine the tax base of assets and liabilities
The tax base of an asset or liability is the amount
attributed to it for tax purposes [IAS12R.5].
a) An asset's tax base is [IAS12R.7] :
| Carrying amount |
-
|
Taxable amount arising
from recovery of the asset |
+
|
Deductible amount
arising from use of the asset |
=
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Tax base |
The above formula can be used as a method of determining
an asset's tax base. The taxable amount arising
from recovery of the asset represents the adjustments
that will be made to accounting profit to arrive
at taxable profit, for example the accounting depreciation
for an item of PPE. Accordingly, the taxable amount
will be capped at the asset's carrying amount.
b) A liability's tax base is [IAS12R.8] :
| Carrying amount |
+
|
Deductible amount arising from
settlement of liability |
-
|
Taxable amount arising from settlement
of liability |
=
|
Tax base |
The above formula can be used as a method of determining
a liability's tax base. The deductible amount arising
from settlement of the liability represents the
adjustments that will be made to accounting profit
to arrive at taxable profit. Accordingly, the deductible
amount will be capped at the liability's carrying
amount.
| c) |
Revenue received
in advance |
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Special rules apply
to liabilities that represent revenue received
in advance
. The tax base is equivalent
to [IAS12R.8]: |
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the liability's carrying
amount if the revenue is taxable in a subsequent
period; |
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nil if the revenue is taxed
in the period received. |
| d) |
Amounts not reflected
in the balance sheet |
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Deductible or taxable
amounts may arise from items that are not recognised
in the balance sheet. For example, research
and development costs may be expensed in the
current period, but deductible for tax purposes
over subsequent periods . The tax base reflects the amount
of the deduction that can be claimed in future
periods [IAS12R.8];]. |
| e) |
Investments within
groups |
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The acquisition of
an investment in a subsidiary, associate, branch
or joint venture will give rise to a tax base
for the investment in the parent entity's financial
statements. The tax base is often cost.
Differences between the tax base and the
carrying amount will arise in the periods
after acquisition due to changes in the carrying
amount. The carrying amount will change, for
example, if the investment is accounted for
using the equity method or if an impairment
charge is recognised .
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| f) |
Expected manner
of recovering or settling assets and liabilities |
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The measurement of
deferred tax liabilities and deferred tax assets
should reflect the tax consequences that would
follow from the way in which management expects
to recover or settle the underlying asset or
liability [IAS12R.51]. This is relevant where
the tax consequence will differ depending on
how management treats the asset or liability
in the future. For example, a different tax
rate may apply depending on whether management
decides to sell or use the asset [IAS12R Example
A-C].
However, the deferred tax liabilities or
deferred tax assets associated with non-depreciable
assets should be measured based on the tax
consequences that would follow from the sale
of that asset [SIC-21.5]. This is because
the asset is not depreciated and therefore
the carrying amount of the non-depreciable
asset reflects the value recoverable from
the sale of the asset.
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Calculate temporary differences
The concept of temporary differences is central
to tax accounting. Temporary differences arise when
the carrying amount of an asset or liability differs
from its tax base [IAS12R.5]. A deductible temporary
difference generally gives rise to a deferred tax
asset and a taxable temporary difference give rise
to a deferred tax liability, although specific exceptions
apply [IAS12R.24]. These exceptions are dealt with
in 73.6.
Taxable temporary differences
Taxable temporary differences arise when: an asset's
carrying amount is greater than its tax base; or
when a liability's carrying amount is less than
its tax base [IAS12R.5(a)]. As the entity recovers
the asset's carrying amount or settles the liability,
the temporary difference reverses and the entity
incurs a taxable amount .
Many taxable temporary differences arise because
the underlying transaction is recognised in different
periods for tax and accounting purposes. For example:
| a) |
interest revenue
is included in pre-tax accounting profit on
a time apportionment basis but taxable on a
cash basis; |
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| b) |
revenue from the sale of goods is included
in pre-tax accounting profit when goods are
delivered but is included in taxable profit
when cash is collected; |
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| c) |
accumulated depreciation differs
from cumulative tax depreciation because depreciation
is accelerated for tax purposes; |
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| d) |
development costs have been
capitalised for accounting purposes and will
be amortised to the income statement but were
deducted in determining taxable profit in the
period in which they were incurred; and |
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| e) |
prepaid expenses for accounting
purposes were deducted on a cash basis in determining
the taxable profit. |
The tax laws the entity's operations are subject
to will determine the temporary differences.
Deductible temporary differences
Deductible temporary differences arise when: an
asset's carrying amount is less than its tax base;
or when a liability's carrying amount is greater
than its tax base [IAS12R.5(b)]. As the entity recovers
the asset's carrying amount or settles the liability,
the temporary difference reverses and the entity
has a deductible amount for tax purposes. Deductible
temporary differences arise in a number of circumstances.
Like taxable temporary differences, some deductible
temporary differences arise from differences in
the timing of recognition of the underlying transaction
for accounting and tax purposes. Common examples
of these are:
| a) |
accumulated depreciation
differs from cumulative tax depreciation as
depreciation is accelerated for accounting purposes; |
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| b) |
employee expenses are recognised when
incurred for accounting purposes and when
paid for tax purposes; |
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| c) |
an impairment loss recognised
for accounting purposes is ignored for tax purposes; |
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| d) |
research costs are expensed
in the period for accounting purposes but deducted
in a later period for tax purposes; and |
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| e) |
the recognition of income is
deferred for accounting purposes but is included
in taxable profit in the current period. |
Temporary differences arising from fair
value adjustments
Taxable and deductible temporary differences arise
where the measurement basis of assets and liabilities
differs from the tax basis [IAS12R.20]. Differences
arising from fair value adjustments, whether on
acquisition or otherwise, are treated the same as
any other taxable and deductible differences. For
example:
| a) |
financial instruments
are carried at fair value, but no equivalent
revaluation is made for tax purposes; |
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| b) |
revaluation of property, plant and equipment
to fair value, but no equivalent adjustment
for tax purposes ; and |
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| c) |
revaluation of assets and liabilities
following an acquisition, without an equivalent
adjustment for tax purposes; and |
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| d) |
goodwill if amortisation is
not deductible for tax purposes. |
Temporary differences arising from consolidation
adjustments
Temporary differences will arise from consolidation
adjustments that result in the carrying amount of
an item in the consolidated financial statements
to differ from its tax base, which is often based
on the non-consolidated position of an entity; examples
include [IAS12R AppendixA.14-17]:
| a) |
unrealised losses
resulting from intra-group transactions are
eliminated on consolidation but not from the
tax base ; |
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| b) |
the retained earnings of controlled entities
are included in consolidated retained earnings,
but taxes are paid on profits when distributed
to the parent ; and |
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| c) |
investments in foreign entities
that are affected by changes in foreign exchange
rates. The carrying amounts of assets and liabilities
are restated for accounting purposes for changes
in exchange rates, but no similar adjustment
is made for tax purposes; |
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| d) |
foreign operations that are
integral to the entity: non-monetary assets
and liabilities are translated using historical
exchange rates but the tax base is translated
using current rates . |
Identify temporary differences that are not recognised
Not all temporary differences are recognised as
deferred tax balances. The exceptions are [IAS12R.15,24]:
| a) |
goodwill; |
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| b) |
initial recognition of certain assets
and liabilities [IAS12R.15]; and |
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| c) |
certain investments. |
Goodwill
IFRS do not permit the recognition of a deferred
tax liability for goodwill when its amortisation
is not deductible [IAS12R.21]. Goodwill is the residual
amount after recognising assets and liabilities
at fair value . The recognition of a deferred tax
liability in respect of goodwill is not permitted,
because it would result in an increase in goodwill.
Initial recognition of certain assets and
liabilities
The second exception relates to a temporary difference
that arises from the initial recognition of an asset
or liability (other than from a business combination)
and affects neither accounting income nor taxable
profit [IAS12R.22] . The basis for
the exception is that the recognition of deferred
tax would overstate the carrying amount of the asset
or liability, or recognition of an expense on initial
recognition.
This exception will apply in limited circumstances,
such as:
| a) |
assets for which
no deductions are available for tax purposes
and will be recovered through use. For example,
some tax authorities do not tax the gain or
loss on disposal of an equity investment; the
tax base of such an investment is therefore
zero; and |
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| b) |
assets which have a tax base that is different
from the cost base at acquisition. For example,
an asset which attracts an investment tax
credit . |
The exception does not apply however to accounting
for a compound financial instrument which is recognised
as both debt and equity [IAS12R.23]. The deferred
tax effect of the temporary difference on the debt
component is recognised as part of the carrying
amount of the equity component .
Certain investments
Entities should recognise deferred tax assets or
deferred tax liabilities associated with investments
in subsidiaries, associates and joint ventures except
in certain situations . The
exceptional situations are:
| a) |
deferred tax liabilities
should not be recognised where the parent or
the investor is able to control the timing of
the reversal of the temporary difference, and
it is probable that the temporary difference
will not reverse in the foreseeable future [IAS12R.39(a)]
; and |
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| b) |
deferred tax assets should not be recognised
if the temporary differences are expected
to continue to exist in the foreseeable future
[IAS12R.39(b)]. |
These conditions may be met where a parent has
control over a subsidiary's dividend policy and
has determined that undistributed profits will not
be distributed in the foreseeable future [IAS12R.40].
Investors should usually recognise deferred tax
liabilities for associates and joint ventures, unless
there is an agreement between the parties that profits
will not be distributed in the foreseeable future
[IAS12R.42,43].
Review deductible temporary differences and unused tax losses
Deferred tax assets arising from deductible temporary
differences must be reviewed to determine to what
extent they should be recognised. The realisation
of deferred tax assets ultimately depends on taxable
profits being available in the future [IAS12R.56].
Taxable profits arise from three sources:
a) Existing taxable temporary differences: taxable
temporary differences exist relating to the same
tax authority and the same taxable entity. These
differences should reverse in the same period as
the expected reversal of the deductible temporary
difference; or in the periods into which a tax loss
arising from a deferred tax asset can be carried
back or forward [IAS12R.28].
b) Future taxable profits: when there are insufficient
taxable temporary differences the entity may recognise
a deferred tax asset where it anticipates sufficient
future taxable profit other than that arising from
the reversal of any existing taxable temporary differences
[IAS12R.29(b)].
c) Tax-planning activities: entities commonly engage
in tax-planning activities [IAS12R.29]. These are
undertaken to manage taxable profit so that existing
tax losses and credits do not expire. Tax-planning
activities usually attempt to move taxable profit
between periods . Tax-planning opportunities
should be considered in determining whether recognition
of a deferred tax asset is appropriate [IAS12R.30].
They should not however be used as a basis for reducing
a deferred tax liability. Whatever tax-planning
opportunities are considered, management must have
the ability to implement them .
Unused tax losses and credits
An entity may recognise a deferred tax asset arising
from unused tax losses or credits when it is probable
that future taxable profit will be available against
which the unused losses and credits may be utilised
[IAS12R.34] . The existence of tax
losses, however, may be evidence that future taxable
profit will not be available [IAS12R.35].
The entity should recognise a deferred tax asset
only to the extent that it has sufficient taxable
temporary differences or where there is persuasive
evidence that sufficient taxable profit will be
available [IAS12R.36(a)-(b)]. Outstanding sales
contracts and a strong earnings history, exclusive
of a loss for example from the sale of an unprofitable
operation, may provide evidence of future taxable
profit . The entity
must also consider the period for which tax authorities
permit such losses and credits to carried forward,
in assessing recoverability.
Determine appropriate tax rates
Deferred tax assets and liabilities should be measured
at the tax rates expected to apply to the period
when the asset is realised or the liability is settled.
The best estimate of the tax rate that will apply
in the future is the tax rates that have been enacted
or substantively enacted at the balance sheet date
[IAS12R.47]. The entity should consider tax rates
to have been substantively enacted when draft legislation
is nearing the end of the approval process. When
different rates of tax apply to different levels
of taxable income, an average rate is used [IAS12R.49]
.
The measurement of a deferred tax asset or liability
should reflect the manner in which the entity expects
to recover the asset's carrying value or settle
the liability [IAS12R.51]. For example, if the entity
expects to sell an investment and the transaction
is subject only to capital gains tax, the entity
should measure the related deferred tax liability
at the tax rate applicable to capital gains .
Profits are taxed at different rates depending
on whether they are distributed to shareholders,
in some jurisdictions. An entity should measure
deferred tax assets and liabilities using the tax
rates applicable to undistributed profits. When
a dividend is subsequently declared and recognised
in the financial statements, the entity should recognise
the dividend's tax consequences.
Deferred tax assets and liabilities should not
be measured on a discounted basis. This basis of
measurement is not appropriate because an entity
is not usually able to accurately predict the timing
of the reversal of each temporary difference [IAS12R.54].
Determine movement in deferred tax balances
The movements in deferred tax assets and liabilities
should be recognised either: as deferred tax expense/credit
in the income statement; or in equity for those
transactions for which the tax effects are recognised
in equity [IAS12R.58(a)] .
Subsequent recognition
At each balance sheet date, an entity should re-assess
unrecognised deferred tax assets to determine whether
new conditions will permit the recovery of the asset
[IAS12R.37]. For example, an acquirer in a business
combination may not have recognised a deferred tax
asset in respect of tax losses. The acquired entity
may however generate sufficient taxable profit to
absorb these losses and permit recognition in the
consolidated financial statements
[IAS12R.67]. Similarly, an acquiree may have an
unrecognised deferred tax asset relating to tax
losses. Subsequent to acquisition, these losses
are recoverable through utilisation of future taxable
profit generated by the acquired group [IAS12R.62].
Subsequent measurement
The carrying amount of deferred tax assets and liabilities
will change in subsequent periods with the recognition
and reversal of temporary differences.
The carrying amount of a deferred tax asset should
be reviewed at each balance sheet date for [IAS12R.56,37,60]:
| a) |
changes in tax rates ; |
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| b) |
changes in the expected manner of recovery
of an asset; |
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| c) |
changes in the assessment of future profits
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Presentation
Change in tax status of an entity or its shareholder
A change in the tax status of an entity or its shareholder
(parent) may have an immediate effect on the entity's
current tax liabilities and assets, and increase
or decrease its deferred tax assets or liabilities.
The tax consequences of a change in tax status should
be included in tax expense unless the underlying
transaction was recognised in equity.
Tax assets and liabilities
Current and deferred tax assets and liabilities
should be presented separately on the face of the
balance sheet [IAS1R.68]. Deferred tax assets and
liabilities should be classified as non-current
[IAS1R.70].
Offset
Current tax assets and liabilities should only be
offset when: an entity has a legal right of offset;
and intends to settle on a net basis or realise
the asset and settle the liability simultaneously
[IAS12R.71]. The legal right arises when the same
tax authority levies the income taxes, and that
authority accepts or requires settlement on a net
basis [IAS12R.72].
Current tax assets in consolidated financial statements
of one group entity may be offset against a current
tax liability of another member if, and only if,
there is a legally enforceable right to offset and
the group intends to settle on a net basis or to
recover the asset and settle the liability simultaneously
[IAS12R.73].
Similar conditions apply to offsetting deferred
tax assets and liabilities. Deferred tax assets
and liabilities in consolidated financial statements
relating to different tax jurisdictions should not
be offset. The group's tax planning opportunities
are not usually grounds for offset unless the opportunity
relates to income taxes levied by the same tax authority
on different group members, and the entities intend
to recover the tax assets and settle the tax liabilities
on a net basis or simultaneously [IAS12R.74].
Tax expense
Tax expense (income) should be presented on the
face of the income statement [IAS12R.77, IAS1R.81]. The principal
components of the tax expense (income) should also
be disclosed. [IAS12R.79,80].
Exchange differences on foreign deferred tax liabilities
or assets
Exchange differences that arise on foreign deferred
tax assets and liabilities, may be included as part
of the deferred tax expense (income). An alternative
and more usual presentation would be to include
the exchange differences on deferred taxes as part
of the foreign exchange gains and losses [IAS12R.78]. Foreign currency-denominated
deferred tax assets and liabilities are translated
at the closing balance sheet rate, being the date
at which they are measured.
Disclosure
Components of tax expense [IAS12R.80]
| a) |
current tax expense (income); |
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| b) |
adjustments recognised in the period for
current tax of prior periods; |
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| c) |
the amount of deferred tax expense (income)
relating to the origination and reversal of
temporary differences; |
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| d) |
the amount of deferred tax expense (income)
relating to changes in tax rates; |
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| e) |
the amount of any previously unrecognised
tax asset that reduces current tax and deferred
tax expense; |
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| f) |
deferred tax expense relating to a write-down
of a deferred tax asset or a reversal of a write-down;
and |
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| g) |
the amount of tax expense (income) relating
to those changes in accounting policies and
errors that are recognised in the income statement
under IAS 8, because they cannot be accounted
for retrospectively. |
Other disclosures [IAS12R.81,82,82A]
| a) |
the aggregate current and deferred
tax relating to items that are recognised in
equity; |
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| b) |
an explanation of the relationship between
tax expense (income) and accounting profit
or loss ; |
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| c) |
an explanation of changes in tax rates
as compared to the previous periods; |
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| d) |
the amount of any deductible temporary
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