Presentation on theme: "Workshop on Deferred Taxation"— Presentation transcript:
1 Workshop on Deferred Taxation Tahmeen Ahmad (ACA)
2 Understanding Deferred Tax An entity shall, with certain limited exceptions, recognize a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of the asset or liability will make the future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences.
4 Identifying temporary differences The carrying amountThe tax base of:An asset-future tax deductible amountsA liability- carrying amount less future tax deductible amountsRevenue received in advance- carrying amount less any future non taxable amountTwo kinds of temporary differences : taxable and deductible
5 Identifying temporary differences (contd.) B/s itemTaxable Temporary differenceDeductible temporary differenceAssetCarrying amount greater than tax baseTax base greater than carrying amountLiability
6 Identifying temporary differences (contd.) ExamplesGroup A to identify tax base and carrying amountGroup B to identify taxable temporary differencesGroup C to identify deductible temporary differences
7 Recognition criteria DTL “Deferred tax liability shall be recognized on all taxable temporary differences except to the extent that it arises fromInitial recognition of GoodwillInitial recognition of an asset or liability in a transaction that :Is not a Business combination; andAt the time of the transaction, affects neither accounting nor taxable profit (tax loss)However, for taxable temporary differences associated with investment in subsidiaries, branches, associates and interests in joint ventures, a deferred tax liability shall be recognized with exceptions.”* inv. In subsidiaries etc… deferred tax liability recognized unless parent can control timing of reversal of differences and the reversal of differences are not probable in the near future
8 Recognition criteria DTA “a deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:Is not a business combinationAt the time of the transaction affects neither accounting profit not taxable profit (tax loss)However for deductible temporary differences associated with investment in subsidiaries, associates, branches and interests in joint ventures, a deferred tax asset shall be recognized subject to conditionsConditions: profits will be available against which utilization of differences. And it is probable that the differences will reverse in the foreseeable future
9 Specific guidance on Deferred tax Recognition Goodwillbusiness combinationsAssets at fair valueInitial recognition of assets and liabilitiesShare based payments
10 I. GoodwillInitial recognition –deferred tax not recognized as goodwill is a residualSubsequent reductions in unrecognized DTL that arose from the initial recognition of goodwill- deferred tax liability not recognizedSubsequent tax allowable differences – deferred tax liability recognizedGood will is the excess of the cost of the combination over the acquirers interest in the net fair value of identifiable assets, liabilities and contingent liabilities.
11 II. Business combinations Identifiable assets and liabilities are valued at fair value at acquisition dateTax base may be differentTemporary differences ariseDeferred tax calculated and corresponding effect adjusted in goodwill or negative goodwill*Case : Acquirer’s own deferred tax asset not recognized in a business combination due to unavailable taxable profitsCase: Acquiree’s deferred tax asset not recognized due to non satisfaction of separate recognition criteria*excess of acquirer’s interest over net fair value of accquiree’s identifiable assets liabilities and contingent liabilities over the cost of the combinationCase 1Recognize it if it can be utilized against acquiree’s profit but not accounted for as part ofCase 2 the deferred tax asset will be subsequently recognized in the combination books if the criteria is then being met with an corresponding decrease in goodwill (charge to expense)
12 III. Assets at fair value Revaluations as per IASsDifferent tax base and carrying amountTemporary difference arises and a deferred tax asset/ liability is calculated
13 IV. Initial recognition of assets/ liabilities where tax base is different carrying amount at initial recognition, temporary differences ariseDeferred tax asset/ liability recognized with:Adjustment in goodwill (Part of a business combination)Recognition of deferred tax expense/ income( where the transaction affects profits)Adjustment to equity (for transactions that affect equity)Deferred tax asset/liability not recognized if the transaction is not a business combination or does not affect accounting or tax profits.deferred tax not recognized if the initial recognition is not part of a business combination/ doesnt affect a/c or tax profits
14 V. Investment in subsidiaries etc When carrying amount of investment in subsidiaries, branches and associates or interests in joint ventures differs from tax baseReason for difference include:Undistributed profitsChange in forex ratesImpairmentThe DTL recognized for taxable temporary differences exceptwhere the parent can control the timing of reversal andthe differences are not probable to reverse in the foreseeable futureThe DTA recognized for all deductible temporary differences where:The differences are probable to reverse in the foreseeable futureTaxable profit will be available against which the temporary difference can be utilized.
15 VI. Share based payments Timing of expense allowed in case of share based payments may differEmployee remuneration in share optionsTax authorities normally may allow deduction at a different date eg of actual exercise of share rightsDeductible temporary difference arises on which deferred tax is recognized
16 Applicable rates and measurement Rate applicable in the period the differences are expected to reverseAverage rate applied in case of slab ratesRate depends on intended manner of recovery or settlement of the asset or liabilityTax rate may depend on dividend payout. (higher for non distribution) deferred tax computed at ‘undistributed profit’ rateDTL and DTA not discountedDTA reviewed at each B/s date**reduced for unavailability of profit
17 Items credited or charged directly to equity Deferred tax will be charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or different period, directly to equity.Examples are on:Revaluation surplusAdjustment to the opening balance of retained earningsForex differences on translation of foreign operation’f f/s
18 Unrecognized deferred tax assets Reassessed at each b/s dateRecognized to the extent it is probable that future taxable profits will be available
19 Presentation and disclosure Offsetting of deferred tax assets and liabilities allowed under certain conditionsTax expense in income statementDisclosures of:Components of tax expenseAggregate deferred tax on items charged to equityReconciliation of tax expense (income) with accounting profitUnrecognized deferred tax assets- amount of deductible differencesChanges in tax rates from previous period explainedAmt and expiry date of deductible temporary differences, unused tax losses and tax credits for which no deferred tax asset has been recognizedAggregate amount of temp diff related to inv in subs etc for which no deferred tax liabilities have been recognizedAn entity shall offset the deferred tax asset and deferred tax liabilities if and only if:The entity has a legally enforceable right to set off current taxes assets against current tax liabilities, &The deferred tax asset/liability relate to the same tax authority on same taxable entity or entities that intend to settle current tax assets and liabilities on a net basis. An entity shall offset the deferred tax asset and deferred tax liabilities if and only if:The deferred tax asset/liability relate to the same tax authority on same taxable entity or entities that intend to settle current tax assets and liabilities on a net basis.
20 Presentation and disclosure (contd.) For each type of temporary difference (and unused tax loss and tax credit):DTL & DTA in b/sDTI and DTE in income statementFor DTA, supporting evidence for recognition when:The utilization of the DTA will exceed the available taxable temporary differences in the period of reversalLosses suffered in the current or prior period to DTAPotential income tax consequences of payment of dividends to shareholders
21 Illustrations Group C to work out deferred tax assets and liabilities Group B to present the f/s portions as relevantGroup A to prepare the reconciliations