1. 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.

2. Introduction
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. MW

3. Income tax: all domestic and foreign tax based on taxable profit
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
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

4. Determining whether a tax is an income tax
Judgement
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. MW

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 |

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 |

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 |

8. Example: current tax continued
Accounting profit ,000
Less nontaxable royalty (20,000)
Plus nondeductible meals ,000
Plus nondeductible bad debts
Less additional tax depreciation (8,000)
Taxable profit ,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
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

9. Current tax Judgements and estimates
Accounting for uncertain tax positions
Judging when a tax rate becomes substantively enacted MW

10. Carrying amount: measurement under IFRSs
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
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

11. Recognition—deferred tax balances
Recognise deferred tax asset (liability) for all temporary difference
initial recognition exemptions
other exemptions
special recognition requirements for deferred tax assets (next slide) MW

12. Recognition—deferred tax assets
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. MW

13. Recognition—deferred 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 IAS12.34–36) it is probable that only CU30 will be utilised
Tax rate 20%
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

14. Recognition—deferred tax assets continued Example: tax loss
Journal entry at 31/12/20X1
Debit
Credit
Asset—deferred tax
[calculation: CU120 × 20%] 24
Asset—deferred tax—unrecognised
[calculation: CU90 × 20%] 18
Income—profit or loss: income tax
(deferred tax)
[calculation: CU30 × 20%] 6
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

15. Recognition—deferred tax assets Judgements and estimates
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 12.27–31)
unused tax losses and unused tax credits (for application guidance see IAS 12.34– 36) MW

16. Recognition exemptions—deferred 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 |

17. Recognition exemptions—deferred tax Example—initial 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 |

18. tax base = CU0 (no future deductions) temporary difference = CU800
Recognition exemptions—deferred tax Example—initial 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)
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

19. Recognition exemptions—deferred tax Investments in subsidiaries
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 MW

20. Measurement—deferred tax
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 MW

21. Measurement—deferred tax continued
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 MW

22. On 1/1/20X1 acquire machine for CU100,000
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 |

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 |

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 |

25. Assume carrying amount still = CU80,000
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 |

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 |

27. Example 3: deferred tax continued
Journal entry for revaluation of machine
31/12/X2
Debit
Credit
Asset—PPE (machine)
60,000
Income—other comprehensive income
48,000
Liability—deferred 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 |

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 |

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 |

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
Temporary difference
30,000
Deferred tax liability
6,000
22,000
20,500
Calculations:
- recoup depreciation
20% × 30,000
20% × 100,000
- capital gain
10% × 20,000
10% × 5,000
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

31. Example 5: deferred tax continued
Reconciliation of deferred tax liability:
31/12/20X1
31/12/20X2
30/06/20X3
Opening balance
6,000
22,000
Fair value change
(4,000)
(1,500)
Tax depreciation
10,000
Closing balance
20,500
Calculations:
- fair value change
20% × -20,000
20% × 20, %× 20,000
10% × -15,000
- tax depreciation
20% × 50,000
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

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
Temporary difference
30,000
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 |

33. Example 6: deferred tax continued
Reconciliation of deferred tax liability:
31/12/20X1
31/12/20X2
30/06/20X3
Opening balance
6,000
24,000
Fair value change
(4,000)
8,000
(3,000)
Tax depreciation
10,000
(500)
Closing balance
20,500
Calculations:
- fair value change
20% × -20,000
20% × 40,000
20% × -15,000
- tax depreciation
20% × 50,000
- Change intention
10% × -5,000
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

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 |

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
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

36. Measurement—deferred tax continued tax rate change
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 period’s profit) MW

37. Example: 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) MW

38. Measurement—deferred tax Judgements and estimates
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 MW

39. All deferred tax assets and liabilities as non-current Offsetting:
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 |

40. Current tax and deferred tax see IAS 12.79–88
Disclosure
Current tax and deferred tax
see IAS 12.79–88
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

41. Comparison to the IFRS for SMEs
IAS 12 and Section 29 Income Tax of the IFRS for SMEs are significantly different. MW
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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.
© 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK |

43. 43 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 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.
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