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Income Taxes:

IAS 12
Wiecek and Young

IFRS Primer
Chapter 23

Income Taxes
Related
IAS

standards

12
Current GAAP comparisons
IFRS financial statement disclosures
Looking ahead
End-of-chapter practice

Related Standards

FAS

109 Accounting for income taxes

Related Standards
IAS

1 Presentation of financial statements


IAS 8 Accounting policies, changes in
accounting estimates and errors
IAS 37 Provisions, contingent liabilities and
contingent assets
IFRS 3 Business combinations

IAS 12 Overview
Objective

and scope
Recognition of current tax liabilities and assets
Recognition of deferred tax liabilities and assets
Measurement
Recognition of current and deferred tax
Presentation
Disclosures

IAS 12 Objective and Scope


IAS

12 addresses the accounting issues


related to tax effects of

Current period transactions and events


Unused tax losses or credits
Tax consequences when carrying amounts and
tax amounts differ

IAS 12 Recognition of Current


Current tax = amount of income taxes
Tax Liabilities and Assets

payable or recoverable on the taxable profit


or loss for the period
If current taxes payable > taxes paid, then

Income taxes payable

If

current income taxes payable < taxes paid,


then

Income taxes recoverable/receivable

IAS
12

Recognition
of
Deferred
Underlying assumption of accounting model:
Tax
Liabilities and Assets
Assets will be recovered for at least their carrying

amount
Liabilities will be settled for their carrying amount

If there are tax consequences when the asset is


recovered or liability settled, this effect should be
reported on the statement of financial position now
Future tax effect = deferred tax liability or deferred
tax asset

IAS
12

Recognition
of
Deferred
Q. Why a tax consequence?
Tax
Liabilities
andof Assets
A.
Because
carrying amount
A & L may differ from
their tax amount or tax base = a temporary difference
Taxable temporary difference:
Taxable income is increased in future when asset
recovered/liability settled
Deductible temporary difference:
Taxable income is decreased in future when asset
recovered/liability settled

IAS 12 Recognition of Deferred


Tax Liabilities and Assets

10

IAS 12 Recognition of Deferred


Example: Installment A/R carrying amount Tax Liabilities and Assets
$40; revenues recognized on sale; taxable
when cash received. Tax base = $0
Why is tax base $0?

When the $40 is received (assets carrying


amount is recovered), it is all taxable. No amount
($0) is deductible from the $40 received.

Taxable

$40
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temporary difference = $40 - $0 =

IAS 12 Recognition of Deferred


Tax Liabilities and Assets

12

IAS 12 Recognition of Deferred


Example: Warranty liability carrying amount Tax
Liabilities
and
Assets
$90; deductible for tax only when warranty
expenditures are made. Tax base = $0
Why is tax base $0?

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When the obligation is settled, the full $90 is


deductible in calculating taxable income. Tax base is
carrying amount of $90 less amount deductible in
future of $90 = $0

Deductible temporary difference = $90 - $0 =


$90

IAS
12

Recognition
of
Deferred
Future tax consequence (assume tax rate of
Tax
Liabilities
and
Assets
40%):

Taxable temporary difference tax rate* =


deferred tax liability
Installment A/R temporary difference of $40
40% = $16 deferred tax liability

tax rate statutory rate when temporary


difference is expected to reverse, i.e., enter
into calculation of taxable income

14

IAS 12 Recognition of Deferred


Tax
Liabilities
and
Assets

Future tax consequence (assume tax rate of


40%):

15

Deductible temporary difference tax rate* =


deferred tax asset
Warranty liability temporary difference of $90
40% = $36 deferred tax asset

* tax rate statutory rate when temporary


difference is expected to reverse, i.e., enter
into calculation of taxable income

IAS 12 Recognition of Deferred


Tax Liabilities and Assets

Deferred

16

tax assets

Result from deductible temporary differences and


unused tax losses/credits
Rely on having taxable income in the future in
order to benefit
Recognize deferred tax asset only if probable
that taxable profit will be available

IAS 12 Recognition of Deferred


Tax Liabilities and Assets

Probable

that taxable income will be available in


future? Consider:

If

Existence of taxable temporary differences that will


reverse in future resulting in taxable income
History of profitability
Tax planning opportunities

so, recognize deferred tax asset and benefit in


same year as tax loss; recognize full tax effect on
temporary deductible differences. Reassess
each B/S date.

17

IAS 12 Recognition of Deferred


Tax Liabilities and Assets

Complexities

arise with differences between


carrying amounts and tax base of

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Goodwill
A & L in a business combination
Investments in subsidiaries, associates, joint
ventures

IAS 12 Measurement
Current

tax liability

Taxable income current tax rate = current tax payable

Current tax asset if past taxes can be recouped

Taxable loss tax rate of past year = current tax


receivable/recoverable

Current

tax asset if current years taxes


overpaid = current tax receivable/recoverable

19

IAS 12 Measurement
Deferred

20

tax assets and liabilities

Measured on an undiscounted basis


Use tax rates for period when asset is expected to be
recovered or liability settled
Use rates based on laws enacted or substantively
enacted at B/S date
Use average rates expected to apply to taxable
profit/loss in period of expected reversal of temporary
difference
Review carrying amount of deferred tax assets at each
reporting date

IAS 12 Recognition of Current


and
Deferred
Tax

Recognize current and deferred taxes in


profit or loss unless

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The related income or expense is recognized


elsewhere such as OCI or directly in other equity
item
Tax results from a business combination

IAS 12 Presentation
Classification - deferred taxes are non-current
A/L (IAS 1)
Offsetting - both for current and deferred: only
if same taxation authority, legal right to offset,
intent is to settle net or at same time
Tax expense includes both current and
deferred taxes
Report tax expense on profit or loss separately
from tax expense in OCI

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IAS 12 Disclosures
Report

separately the major components of


tax expense or income

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Current tax expense/income


Adjustments for current tax of other periods
Deferred tax expense/income from each type of
temporary difference or change in tax rates or new
taxes
Benefits recognized currently from previously
unrecognized tax losses/credits, or other
temporary differences

IAS 12 Disclosures

Report (continued)

24

Tax expense recognized directly in equity and in


each component of OCI
Reconciliation of expected tax rate to effective tax
rate
Tax expense for discontinued opns separately
for operating results and other gain or loss

IAS 12 Disclosures
Related to statement of financial position:
Amount of deferred tax asset/liability for each
type of temporary difference
Deductible temporary differences and other
balances with unrecognized deferred tax
assets
Nature of evidence supporting recognition of
uncertain deferred tax assets

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Current GAAP Comparisons


Pages 29 to 30 of 49
of
http://www.ey.com/Global/assets.nsf/International/IFR
S_US_GAAP_vs_IFRS/$file/US_GAAP_vs_IFRS.pdf
Pages 94 to 98 of 164
of
http://www.kpmg.co.uk/pubs/IFRScomparedtoU.S.GAAPAnO
verview(2008).pdf

26

IFRS Financial Statement


Disclosures
The Nestl Group
http://www.nestle.com/Resource.axd?Id=24E5A5E2-93F8-43
A3-956E-0F259448CB90
Accounting policy for tax
Income statement related disclosures
Deferred tax assets and liabilities

27

Page 16 of 118
Page 31 of 118
Page 55 of 118

Looking Ahead
Income

taxes part of short-term convergence


project with FASB
Both IASB and FASB have agreed on many
changes to eliminate exceptions to general
principles in the standards
IASB issued an exposure draft in 2009 and
expects to issue final standard in 2010
Exposure draft is for new draft IFRS, not
amendments to IAS 12
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Looking Ahead

Proposed changes likely in exposure draft

29

Tax base becomes a measurement attribute


Existing non-recognition of deferred tax
assets/liabilities in specific cases to be eliminated
Clarification of substantively enacted tax rate
Change from non-recognition of deferred tax
assets (when not probable of realization) to
recognition with an associated valuation
allowance account
Probable will be defined as more likely than not

Looking Ahead

Proposed changes (continued)

30

Continuation of allocating tax expense/income among


P&L, OCI and equity, but subsequent changes will go
through P&L
Balance sheet classification of deferred taxes to mirror
U.S. requirements
Uncertain tax positions will be addressed using an
expected outcome measure and changes recognized in
continuing operations
Disclosures added; others removed
Reconciliation will be of parent company statutory rate to
effective rate

End-of-Chapter Practice
23-1 IAS 12 provides much more guidance
on the recognition and measurement of the
tax effects derived from deductible temporary
differences than for the benefits from taxable
temporary differences.
Instructions
Write a short paragraph to explain this
situation.
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End-of-Chapter Practice
23-2 Listed below are a number of situations that affect the financial statements.
1.
Development costs have been capitalized on the statement of financial position and are
being amortized to profit or loss over three years, but deducted as an expense for tax
purposes as incurred.
2.
Revenue is recognized as goods are delivered for financial reporting purposes, but on a
cash basis for tax purposes.
3.
An entity borrows money and pays a transaction fee on the amount borrowed. The
transaction costs are added to the debt and amortized using the effective interest method for
financial reporting purposes, although they were deducted when they were paid for tax
purposes.
4.
Pension expense is charged to profit or loss each period although tax legislation allows
entities to deduct only the contributions to the pension trustee to be deducted for tax
purposes. Expenses have always exceeded the contributions.
5.
Investment property is measured according to the revaluation model for financial reporting
purpose, resulting in valuations in excess of original cost. This method is not permitted for
tax purposes.
Instructions
For each situation described above, indicate whether the company has a deductible or a
taxable temporary difference and whether it will result in the recognition of a deferred tax
asset or a tax liability. Explain each briefly.

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End-of-Chapter Practice
23-3 A company buys equipment for $1,000, uses it in the manufacturing of goods for resale,
and depreciates it on a straight-line basis over its five-year expected useful life. For tax
purposes, the equipment is depreciated at 25% a year on a straight-line basis. Tax losses may
be carried back against taxable profit of the previous five years. The tax rate for all years is
40%, and in 2004 the companys taxable profit was $500. In each year from 2005 to 2009, the
company reported profits before depreciation expense and taxes of $200.
Instructions
a)
For each year from 2005 to 2009, determine the companys taxable profit or loss and the
current tax expense recognized.
b)
For each year from 2005 to 2009, determine the amount of any year-end taxable or deductible
temporary difference and the related balance of the deferred tax asset or liability account
reported on the balance sheet, and the deferred tax expense reported for the year.
c)
To the extent possible with the information provided and the results of (a) and (b), prepare a
partial statement of comprehensive income for each year from 2005 to 2009.
(adapted from Appendix B of IAS 12)

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End-of-Chapter Practice
23-4 In this chapter, flag icons identify areas
where there are GAAP differences between
IFRS requirements and national standards.
Instructions
Access the website(s) identified on the inside
back cover of this book, and prepare a concise
summary of the differences that are flagged
throughout the chapter material.
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