1. 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.

2. 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

3. © 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

4. 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

5. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 5 Current tax defined Current tax: amount of income tax payable/refundable based on taxable profit/loss for the current period or past periods

6. © 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

7. © 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

8. © 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

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

10. © 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

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

12. 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 Recognition—deferred tax assets

13. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 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%

14. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 14 Recognition—deferred tax assets continued Example: tax loss Journal entry at 31/12/20X1DebitCredit 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

15. 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) 15 Recognition—deferred tax assets Judgements and estimates

16. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 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).

17. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 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

18. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 18 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)

19. 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 exemptions—deferred tax Investments in subsidiaries

20. 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 Measurement—deferred tax

21. 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 Measurement—deferred tax continued

22. © 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

23. © 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%

24. © 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

25. © 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

26. © 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)

27. © 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/X2DebitCredit Asset—PPE (machine)60,000 Income—other comprehensive income48,000 Liability—deferred tax12,000 Reconciliation of deferred tax liability: 1/1/20X2 opening balanceCU6,000 20X2depreciationCU6,000 31/12/20X2 revaluationCU12,000 31/12/20X2 closing balanceCU24,000

28. © 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%)

29. © 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 balanceCU24,000 30/6/20X36 months depreciation(CU3,000) 30/6/20X3 change of intention (CU500) 31/12/20X2 closing balanceCU20,500

30. © 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 31/12/20X131/12/20X230/06/20X3 Carrying amount80,000120,000105,000 Tax base50,00000 Temporary difference30,000120,000105,000 Deferred tax liability6,00022,00020,500 Calculations: - recoup depreciation20% × 30,00020% × 100,000 - capital gain10% × 20,00010% × 5,000

31. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 31 Example 5: deferred tax continued Reconciliation of deferred tax liability: 31/12/20X131/12/20X230/06/20X3 Opening balance06,00022,000 Fair value change(4,000)6,000(1,500) Tax depreciation10,000 0 Closing balance6,00022,00020,500 Calculations: - fair value change20% × -20,00020% × 20,000 +10%× 20,000 10% × -15,000 - tax depreciation20% × 50,000

32. © 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 31/12/20X131/12/20X230/06/20X3 Carrying amount80,000120,000105,000 Tax base50,00000 Temporary difference30,000120,000105,000 Deferred tax liability6,00024,00020,500 Calculations: - rental income20% × 30,00020% × 120,000 - recoup depreciation20% × 100,000 - capital gain10% × 5,000

33. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 33 Example 6: deferred tax continued Reconciliation of deferred tax liability: 31/12/20X131/12/20X230/06/20X3 Opening balance06,00024,000 Fair value change(4,000)8,000(3,000) Tax depreciation10,000 (500) Closing balance6,00024,00020,500 Calculations: - fair value change20% × -20,00020% × 40,00020% × -15,000 - tax depreciation20% × 50,000 - Change intention10% × -5,000

34. © 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

35. © 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

36. 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) 36 Measurement—deferred tax continued tax rate change

37. 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

38. 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 Measurement—deferred tax Judgements and estimates

39. © 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

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

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

42. © 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.

43. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 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