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 taxes
Joint World Bank and IFRS Foundation train
the trainers workshop hosted by the ECCB,
30 April to 4 May 2012
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.

IAS 12 specifies the accounting treatment for
income taxes, including how to account for
the current and future tax consequences.
An entity expects to recover the carrying
amount of its assets and to settle its
liabilities.
Recovery or settlement of that carrying
amount affects the amount of future tax
payments a deferred tax liability (or deferred
tax asset) is recognised, with certain limited
exceptions.
2
Introduction
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
3 Income tax defined
Income tax: all domestic and foreign tax
based on taxable profit
Taxable profit = a net amount in accordance
with taxation authorities rules for
determining income taxes
Income tax = tax rate taxable profit
Note: 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.

4
Judgement
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5 Current tax defined
Current tax: amount of income tax
payable/refundable based on taxable
profit/loss for the current period or past
periods
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
6 Accounting for current tax
Measure using tax law enacted or
substantively enacted at reporting date
Current period expense or income
usually presented in profit or loss
if relates to an item of OCI, that tax is also
presented as part of OCI
Liability for any tax payable on current or prior
taxable profit
Asset if overpayment is recoverable
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
7 Example: 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

2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
8 Example: current tax continued
Accounting profit 150,000
Less nontaxable royalty (20,000)
Plus nondeductible meals 5,000
Plus nondeductible bad debts 500
Less additional tax depreciation (8,000)
Taxable profit 127,500
Current tax expense/liability 19,125
Calculation: 15% CU127,500 = CU19,125
Note: because no provisional tax has been
paid the liability = current tax expense


Accounting for uncertain tax positions
Judging when a tax rate becomes
substantively enacted

9
Current tax
Judgements and estimates
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
10 Deferred tax defined
Deferred tax: tax payable/recoverable in
the future period as a result of past
transactions
Carrying amount: measurement under
IFRSs
Tax base: measurement under tax law
Temporary difference: difference in
carrying amount of an item in the statement
of financial position and its tax base
Recognise deferred tax asset (liability) for all
temporary difference
initial recognition exemptions
other exemptions
special recognition requirements for deferred
tax assets (next slide)

11
Recognitiondeferred tax balances
Deferred tax assets are recognised only if it is
probable that future taxable profit will be
available to absorb the losses or credits or
deductible differences.
The existence of unused tax losses may
indicate that future taxable profit is not
probable.
The tax consequences of transactions and
events are recognised in the same financial
statement as the transaction or event.

12
Recognitiondeferred tax assets
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
13
Recognitiondeferred tax assets
Example: tax loss
Loss for 20X1 (accounting) = tax loss = CU120
Can be carried forward three years then
unutilised portion (if any) expires (and cannot
be carried back)
Of the CU120 tax loss, based on forecasts of
future taxable profits and other factors (see
IAS12.3436) it is probable that only CU30 will
be utilised
Tax rate 20%

2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
14
Recognitiondeferred tax assets continued
Example: tax loss
Journal entry at 31/12/20X1 Debit Credit
Assetdeferred tax
[calculation: CU120 20%]
24
Assetdeferred taxunrecognised
[calculation: CU90 20%]
18
Incomeprofit or loss: income tax
(deferred tax)
[calculation: CU30 20%]
6
Determining whether it is probable that the
entity will generate sufficient taxable profit
to allow for the recognition of a deferred
tax asset for:
deductible temporary differences (for
application guidance see IAS 12.2731)
unused tax losses and unused tax credits
(for application guidance see IAS 12.34
36)

15
Recognitiondeferred tax assets
Judgements and estimates
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
16
Recognition exemptionsdeferred tax
Initial 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, affects
neither accounting profit nor taxable profit
(tax loss).


2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
17
Recognition exemptionsdeferred tax
Exampleinitial 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 be
deductible.
Calculate deferred tax liability at 31/12/20X1
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
18
Recognition exemptionsdeferred tax
Exampleinitial recognition exemption
At 1/1/20X1:
Carrying amount = CU800
tax base = CU0 (no future deductions)
temporary difference = CU800
Deferred tax liability = CU0 (because initial
recognition exemption applies)
Recognise a deferred tax liability for all taxable
temporary differences associated with
investments in subsidiaries, branches and
associates, and interests in joint arrangements,
except to the extent that both of the following
conditions are satisfied:
(a) the parent, investor, joint venturer or joint
operator is able to control the timing of the
reversal of the temporary difference; and
(b) it is probable that the temporary difference
will not reverse in the foreseeable future
19
Recognition exemptionsdeferred tax
Investments 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 follow
from the manner in which the entity expects to
recover (settle) the carrying amount of its assets
(liabilities)
exceptions when revaluation model used for
non-depreciable asset and fair value model
used for investment property
20
Measurementdeferred tax
The tax rate expected to apply in future is
generally indicated by the tax rate that is
substantively enacted at end of the reporting
period.
for graduated tax rates forecast the effective tax
rate using substantively enacted tax rates based
on expected income at the time of reversal of
the temporary difference
Deferred tax assets and liabilities are not
discounted

21
Measurementdeferred tax continued
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
22 Example 1: deferred tax
On 1/1/20X1 acquire machine for CU100,000

Accounting estimates made in accordance with
IAS 16 Property, Plant and Equipment
straight-line depreciation
useful life = 5 years
residual value = nil




2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
23 Example 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 that
the 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%



2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
24 Example 1: deferred tax continued
Calculate 20X1 deferred tax liability and
expense
Carrying amount = CU80,000
Tax basis = CU50,000 (future tax deductions)
Taxable temporary difference = CU30,000
Deferred tax liability = CU6,000
Deferred tax expense = CU6,000
Calculation: 20% CU30,000 temporary difference =
CU6,000 deferred tax liability
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
25 Example 2: deferred tax
Facts the same as Example 1, except at
31/12/20X1 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 = CU6,000
Calculation: 20% CU30,000 temporary difference =
CU6,000 deferred tax liability
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
26 Example 3: deferred tax
Facts the same as Example 1.
On 31/12/20X2 when carrying amount was
CU60,000 machine is revalued to CU120,000
Calculate 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, ie
profit on sale of inventory)
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
27 Example 3: deferred tax continued
Journal entry for revaluation of machine
31/12/X2 Debit Credit
AssetPPE (machine) 60,000
Incomeother comprehensive income 48,000
Liabilitydeferred tax 12,000
Reconciliation of deferred tax liability:
1/1/20X2 opening balance CU6,000
20X2 depreciation CU6,000
31/12/20X2 revaluation CU12,000
31/12/20X2 closing balance CU24,000

2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
28 Example 4: deferred tax
Facts the same as Example 3. On 30/6/20X3 when
carrying amount = CU105,000 decided to sell
machine = 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 CU100,000
expected tax recoupment 20% + CU5,000
expected capital profit 10%)
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
29 Example 4: deferred tax continued
Reconciliation of deferred tax liability:
1/1/20X3 opening balance CU24,000
30/6/20X3 6 months depreciation (CU3,000)
30/6/20X3 change of intention (CU500)
31/12/20X2 closing balance CU20,500

2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
30 Example 5: deferred tax
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 80,000 120,000 105,000
Tax 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
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
31 Example 5: deferred tax continued
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
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
32 Example 6: deferred tax
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
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
33 Example 6: deferred tax continued
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
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
34
Example 7: deferred tax
graduated 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 = CU600,000
Calculate deferred tax liability at 31/12/20X1
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
35
Example 7: deferred tax continued
graduated tax rates
First calculate expected effective tax rate for
20X3
(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
Deferred tax assets or liabilities are adjusted
when a new tax rate is substantively enacted
the adjustment is accounted for as a
revision to an accounting estimate (ie it
affects that periods profit)

36
Measurementdeferred tax continued
tax rate change
At 31/12/20X1 deferred tax liability = CU200
(ie CU1,000 temporary difference 20% tax
rate)
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% tax
rate)

37

Example: tax rate change
Estimating the tax rates that are expected to
apply when temporary differences reverse
(eg when tax rates are graduated)
Judging when a tax rate becomes
substantively enacted


38
Measurementdeferred tax
Judgements and estimates
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
39 Presentation
Classification:
All deferred tax assets and liabilities as
non-current
Offsetting:
Do not offset current tax assets and
liabilities or deferred tax assets and
liabilities unless entity has legal right to
offset and it intends either to settle net or
simultaneously
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
40 Disclosure
Current tax and deferred tax
see IAS 12.7988
IAS 12 and Section 29 Income Tax of the IFRS for
SMEs are significantly different.
41
Comparison to the IFRS for SMEs
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2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
42
Questions or comments?
Expressions of individual views by
members of the IASB and its staff
are encouraged.

The views expressed in this
presentation are those of the
presenter.

Official positions of the IASB on
accounting matters are determined
only after extensive due process
and deliberation.
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43

The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at 1
January 2012 with an effective date after 1 January 2012
but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the
publishers do not accept responsibility for loss caused to
any person who acts or refrains from acting in reliance on
the material in this PowerPoint presentation, whether such
loss is caused by negligence or otherwise.
43