Income Taxes:

IAS 12

Wiecek and Young

IFRS Primer
Chapter 23
 Income Taxes

 Related standards
 IAS 12
 Current GAAP comparisons
 IFRS financial statement disclosures
 Looking ahead
 End-of-chapter practice

2
 Related Standards

 FAS 109 Accounting for income taxes

3
 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

4
 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
5
 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

6
 IAS 12 – Recognition of Current
Tax Liabilities and Assets
 Current tax = amount of income taxes
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

7
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
 Underlying assumption of accounting model:
– 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
8
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
Q. Why a tax consequence?
A. Because carrying amount of 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
9
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets

10
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
 Example: Installment A/R carrying amount -
$40; revenues recognized on sale; taxable
when cash received. Tax base = $0
 Why is tax base $0?
– When the $40 is received (asset’s carrying
amount is recovered), it is all taxable. No amount
($0) is deductible from the $40 received.
 Taxable temporary difference = $40 - $0 =
$40

11
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets

12
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
 Example: Warranty liability carrying amount -
$90; deductible for tax only when warranty
expenditures are made. Tax base = $0
 Why is tax base $0?
– 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
13
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
 Future tax consequence (assume tax rate of
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%):
– 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

15
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
 Deferred 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

16
 IAS 12 – Recognition of Deferred
Tax Liabilities and Assets
 Probable that taxable income will be
available in future? Consider:
– Existence of taxable temporary differences that
will reverse in future resulting in taxable income
– History of profitability
– Tax planning opportunities
 If 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
– Goodwill
– A & L in a business combination
– Investments in subsidiaries, associates, joint
ventures

18
 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 year’s taxes

overpaid = current tax receivable/recoverable
19
 IAS 12 – Measurement

 Deferred 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
20
 IAS 12 – Recognition of Current
and Deferred Tax
 Recognize current and deferred taxes in
profit or loss unless
– The related income or expense is recognized
elsewhere such as OCI or directly in other equity
item
– Tax results from a business combination

21
 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
22
 IAS 12 – Disclosures

 Report separately the major components of

tax expense or income
– 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
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 IAS 12 – Disclosures

 Report (continued)
– 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 op’ns – separately
for operating results and other gain or loss

24
 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

25
 Current GAAP Comparisons

Pages 29 to 30 of 49
of
http://www.ey.com/Global/assets.nsf/International/IFRS
_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.GAA
PAnOverview(2008).pdf
26
 IFRS Financial Statement
Disclosures

The Nestlé Group

http://www.nestle.com/Resource.axd?Id=24E5A5E2-93F8-43A3-
956E-0F259448CB90

Accounting policy for tax Page 16 of 118

Income statement related disclosures Page 31 of 118
Deferred tax assets and liabilities Page 55 of 118

27
 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
28
 Looking Ahead
 Proposed changes likely in exposure draft
– 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’

29
 Looking Ahead
 Proposed changes (continued)
– 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
30 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.

31
 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 company’s 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 company’s 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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