Update Date: April 11, 2013 Presenters: Andrew Forbes, Pamela Zabarylo, Ji Kwon, Henri Klein 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Agenda 1. Introduction
3. US GAAP Tax Accounting Developments / Update US GAAP / IFRS Conversion Update US GAAP Exposure Draft for Unrecognized Tax Benefits US GAAP & IFRS Revenue Recognition Convergence
4. Selected Tax Accounting Issues / Experiences Ontario CMT and Pension Plan Part VI.1 Tax Upstream Loans Asset Retirement Obligations Discontinued Operations
5. ASPE Update
6. Wrap-up / Questions 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 3 Learning Objectives This session will:
Provide an overview of current tax accounting developments under IFRS
Review overview of current tax accounting developments under US GAAP
Discuss selected practical tax accounting examples involving Ontario CMT, Part VI.1 tax, upstream loans, asset retirement obligations and discontinued operations IFRS Tax Accounting Developments 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. IAS 12 Amendments Deferred Tax: Recovery of Underlying Assets [IAS 12.51C] In general, measurement of deferred tax assets and liabilities based on expected manner of recovery or settlement of underlying asset or liability
Amendment provides limited exception from the general measurement principle for investment property measured using the fair value model in accordance with IAS 40 (Investment Property)
Under exception, the measurement of deferred tax assets and liabilities is based on a rebuttable presumption that the carrying amount of the investment property will be recovered entirely through sale
Presumption can only be rebutted if the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the assets economic benefits over the assets life
Effective for annual periods beginning on or after January 1, 2012 and to be applied retroactively (early adoption was permitted if disclosed)
5 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. IAS 12 Amendments Example: How to measure deferred tax? Investment property acquired consisting of land and building Elects to account at fair value Rebuts the presumption that carrying amount of the building will be recovered through sale Building depreciable over 20 years for tax ($60/20 = $3 depreciation per year) Land not depreciable Income tax rate of 26%
Cost and fair market value (FMV) as follows:
6 Cost FMV Land $540 $650 Building 60 70 Total
$600
$720
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. IAS 12 Amendments Example: How to measure deferred tax? How to measure deferred tax asset (DTA) or deferred tax liability (DTL)?
In Year 1, following should be recorded:
Building used 26% tax rate because recovered through use rather than sale Land 13% capital gain tax rate because land non-depreciable, therefore sale presumption not rebutted
7 Carrying Amount Tax Basis Temporary Difference DTA (DTL) Land $ 650 $ 540 ($ 110) ($ 14) Building $ 70 $ 57 ($ 13) ($ 3) 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Substantive Enactment Enacted or substantively enacted tax rates (and tax laws) by end of the reporting period are used to measure current and deferred taxes
- Under IFRS, substantively enacted requires likelihood of legislation passage
Provincial Budget contained some change in tax rates:
- British Columbia general corporate income tax rate increase to 11% (from 10%) effective April 1, 2013
- New Brunswick general corporate income tax rate to 12% (from 10%) effective July 1, 2013
- Ontario budget expected to be released in weeks, some speculation of possible corporate tax rate increases
When is the tax rate change considered substantively enacted? 8 US GAAP Tax Accounting Developments 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. FASB/IASB Income Tax Accounting Convergence Goal of convergence reduction of differences
Project status reassessed as low priority, no longer on the active agenda
Key differences between the two GAAPS remain unresolved and in place Uncertain Tax Positions Investment Tax Credits Outside basis disclosure Enacted vs Substantively Enacted Tax Rates Re-measurement of tax assets and liabilities Others (e.g. deferred taxes on foreign exchange rate changes on non-monetary assets and liabilities)
10 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. US GAAP Exposure Draft for Unrecognized Tax Benefits Exposure Draft issued on February 21, 2013
Codification of presentation of unrecognized tax benefits
Generally presentation requires reduction of deferred tax assets
Exception for losses or tax credits unavailable to offset additional taxes when settling unrecognized tax benefit
Unrecognized benefit to be presented as a liability Not combined with other deferred tax assets and liabilities Liability is either current or deferred
11 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. US GAAP Exposure Draft for Unrecognized Tax Benefits: Example Facts: Book net loss of $100 (includes $100 charge for certain permanent expenses) Tax return reflects same $100 net loss resulting in NOL carry forward 60% chance that if challenged by the taxing authority the $100 deduction would be disallowed Company operates in a single tax jurisdiction
Treatment: Unrecognized tax benefit would be presented as a reduction of the DTA for the NOL, except if: To extent NOL not available under tax law of applicable jurisdiction to settle any additional income taxes that would result from disallowance of tax position, in which case then the unrecognized tax benefit presented as liability 12 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. US GAAP & IFRS Revenue Recognition Convergence Tentative effective date of January 1, 2017
Standard changes may accelerate revenue recognition for accounting and tax purposes
Software vendors no longer require Vendor Specific Objective Evidence estimate stand alone selling prices
Capitalization of costs of obtaining a contract
Collectability no longer a recognition threshold for revenue allowance for credit impairment recognized separately may accelerate revenue recognition
Adoption considerations include specific contractual for multiple element contracts that may result in different allocation for tax and financial reporting
See KPMG Defining Issues March 2013 #13-14 for additional discussion
13 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Canada. Selected Tax Accounting Issues / Experiences
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Ontario CMT and Pension Plan Corporations with defined benefit pension plans
Upon IFRS transition, election to record an adjustment for actuarial gains and losses directly to retained earnings
Permanent difference between regular taxable income and income for CMT
Can generate CMT as pension plan is funded by cash payments
15 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Ontario CMT and Pension Plan - Example Corporation with December 31 taxation year-end On IFRS transition, actuarial losses in pension plan of $250 million to retained earnings Deficiency will be funded by $50 million per year over next 5 years (2011 2015)
16 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Part VI.1 Tax
Tax imposed on the payer of dividends on specific types of preferred shares
Computed based on the amount of dividend paid and is payable by a corporation regardless of its amount of taxable income
Deduction (equal to a specified multiple of the dividend) in computing its taxable income
Issue: Where to report part VI.1 tax on financial statements?
17 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Part VI.1 Tax Where to record? Equity classified Liability classified Tax recorded in retained earnings Tax recorded in P&L - interest expense Canadian GAAP IFRS Equity classified Statement of Comprehen sive Income? Liability classified ? 18 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Part VI.1 Tax Where to record? 19 View A: Profit or Loss Tax charged when dividends paid to preferred shareholders
Part VI.1 tax, along with the related deduction should be recorded in profit or loss, except for unusual circumstance when distribution itself arose from transaction recorded outside of profit or loss
View B: Equity Should trace the tax to the item to which it relates
52A and 52B of IAS 12 not relevant, because meant to capture taxes that are adjustment to income taxes and not any other taxes
Part VI.1 tax not within the scope of IAS 12 because computed with reference to dividend and independent of entitys income taxes VS. 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Upstream Loans In certain circumstances a taxpayer may be required to include in income the amount of an upstream loan from a foreign affiliate if it is not repaid within two years
Depending on the extent of appropriate tax attributes (i.e., surplus account balances), the taxpayer (Canadian Parent) would be entitled to an offsetting (or partially offsetting) deduction
Where the taxpayer includes the amount of the loan in income, the taxpayer is entitled to a deduction when and to the extent the loan is repaid
The rules apply to loans or advances made on or after August 19, 2011, and transitional rules apply to outstanding loans existing prior to that date
20 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Upstream Loans - Example
Scenario 1: Canco plans to repay the loan from its own sources within the two-year repayment time frame
Scenario 2: Canco plans to repay the loan by having FA pay a dividend within the two-year repayment time frame
Scenario 3: Canco does not plan to repay the loan within the two-year time frame
21 Canco FA loan Does a temporary difference exist on the loan? 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Asset Retirement Obligations AROs When entity recognizes a provision in the financial statements for site restoration, typical accounting JE is as follows:
DR Property, plant & equipment (PPE) $100 CR ARO liability ($100)
Two temporary differences: 1. Taxable temporary difference on PPE as no increase in tax basis of PPE 2. Deductible temporary difference on ARO liability as expense not typically deductible for tax until paid
Possible approaches Initial recognition exception applies Two separate temporary differences exist, which are tracked separately
22 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Asset Retirement Obligations AROs example On Day 1
During Year 1 PPE depreciated $10 per year $8 accretion booked to ARO liability
At Year-End Net liability of $18 on FS ($90 PPE - $108 liability)
23 DR. Property plant equipment (PPE) $100 CR. ARO Liability $(100) JE to recognize provision for site restoration DR. DTA ($18 x 26%) $4.7 CR. ARO Liability $(4.7) JE to record net DTA 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. 24 Discontinued Operations Tax expense on income from continuing operations generally determined separately Tax effect of loss from continuing operations should take into account all components Consider disclosure impact for comparative periods
Loss from continuing operations $(2,000) Tax expense at 25%* $(250) Income from discontinued operations $1,000 Tax expense at 25% $250 Total tax expense - * Valuation Allowance / Non-recognition for $250 required as criteria to recognize deferred tax asset not met for remaining $250 2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Canada. Accounting Standards for Private Enterprise
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Accounting Standards for Private Enterprise Accounting policy choice
Taxes Payable Method
Future Income Taxes Method
26 Questions?
2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Canada. Contact Us
Andrew Forbes Partner, Tax KPMG T. 416.777.8004 E. andrewforbes@kpmg.ca
Ji Kwon Senior Manager, Tax KPMG T. 416.777.3110 E. jihyunkwon@kpmg.ca
Pamela Zabarylo Partner, Tax KPMG T. 416.777.8691 E. pzabarylo@kpmg.ca
Henri Klein Manager, Tax KPMG T. 416.777.8290 E. hklein@kpmg.ca
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This information is current to April 11, 2013.
2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services.
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