The Institute of Chartered Accountants of Nigeria

Taxation Implications of

By Taiwo Oyedele FCA, FCCA, FCTI, CISA Partner, PwC 2011 MCPE

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IFRS

Taxation implications of IFRS

Objectives
At the end of this session, participants should be able to:

Explain the principles of IFRS Identify the tax implications of IFRS Manage the impact of IFRS on their organisations

Agenda
Overview of IFRS Managing the tax impacts on the organisation Tax implications and planning opportunities Fiscal filters Strategies for effectiveness Conclusion Case studies Questions Time: 2 hrs 30 mins

Taxation implications of IFRS

Overview of IFRS
IFRSs have been developed primarily to meet the information needs of

shareholders, lenders and other investors. These needs do not always align with those of the tax authorities (e.g. extensive use of fair value and the application of substance over form).
Taxable profit of any specific period may differ between two standards,

however, the cumulative earnings of an entity over time will tend to be the same as the individual transactions are cashed.
From taxation point of view, however, there are additional variables that

may influence tax position such as impairment and treatment of tax losses etc.

Taxation implications of IFRS

Overview of IFRS
IFRS stands for International Financial Reporting Standards issued by the International Accounting Standards Board (IASB). Body was previously known as International Accounting Standards Committee issuing International Accounting Standards (IAS). Essentially, IFRS comprises of four types of documents: - International Accounting Standards (IASs); - International Financial Reporting Standards (IFRSs); - Interpretations of the International Financial Reporting Interpretations Committee (IFRICs) formerly the Standing Interpretations Committee (SICs); and - IASB Framework for the Preparation and Presentation of Financial Statements
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Taxation implications of IFRS

Overview of IFRS
By comparison, Nigerian GAAP is made up of the following:

The Companies and Allied Matters Act (CAMA) LFN 2004 Statements of Accounting Standards (SAS) issued by the Nigerian Accounting Standards Board (NASB) Other local legislation and industry specific Guidelines such as BOFIA, Prudential Guidelines, Insurance Act and SEC Rules International best practice (optional)

Taxation implications of IFRS

Overview of IFRS gaining ground worldwide

Require or permit IFRS

Converging/converting to adopt IFRS

Pursing convergence but no plan to adopt yet 7

Taxation implications of IFRS

Overview of IFRS - Key drivers

More efficient access to capital for global corporations Increasing demand for public accountability and transparency by all stakeholders

Improved transparency and comparability for investors and rating agencies Industry perception of market leadership

Need to attract international investors and to enable easy monitoring of overseas investments. Facilitate comparison between public entities (IPSAS)

IFRS:
The Uniform Global Accounting Language

More room for managements judgment and truer reflection of economic reality with principlesbased GAAP Reduced cost of financial reporting for global companies

Ability to analyse impact on tax-related issues Ability to understand interaction with strategic initiatives to generate value from synergies

Streamlined M&A activity

Tax Implications of IFRS Conversion

Taxation implications of IFRS

Overview of IFRS

Taxation implications of IFRS

Overview of IFRS conversion roadmap

Listed & significant public entities (SPEs)

Entities with listed securities (domestic and foreign stock exchanges) Government business entities e.g. NNPC Unquoted entities required by law to file returns with regulatory authorities (excluding returns with CAC & tax authorities) e.g. private banks and insurance companies

Transition Date: 2010

Reporting Date: 2012

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Other public interest entities (Other PIEs)
Unquoted or private entities which are of significant public interest because of their nature of business, size, number of employees or their corporate status which require wide range of stakeholders. Examples are large not for profit entities such as charities and pension funds and may include publicly owned entities and other entities where there is a potentially significant effect on financial stability.

Transition Date: 2011

Reporting Date: 2013

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Small and Medium-size Enterprises (SMEs)
Entities that have no public accountability whose debt or equity instruments are not listed; and Not in the process of issuing such instruments for trading in a public market; and Do not hold assets in a fiduciary capacity for a broad group of outsiders; and Annual turnover not more than N500 million or such amount as may be fixed by the CAC; and Total asset not more than N200 million or such amount as may be fixed by the CAC; and

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Small and Medium-size Enterprises (SMEs)
No Board member is a foreigner; and No member is a government or a government corporation or agency or its nominee, and The directors among them hold not less than 51 percent of its equity share capital.

Transition Date: 2012

Reporting Date: 2014

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Transition date To Dos
Awareness Planning (people, systems & process) Training Assessment & impact analysis Transition adjustments (Recognise, De-

recognise, Reclassify & Re-measure)

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Reporting date To Dos
Interim reporting based on IFRS (Listed entities and SPEs) Statutory audit File IFRS returns (CAC, FIRS, SEC, CBN, NAICOM etc) Investors communication Compliance monitoring Training

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Intervening period To Dos
Consultations and stakeholders engagement (NASB, FIRS, Other

Regulators, Investors etc)

Accounting policies / manual review and changes Chart of accounts and mapping Prepare IFRS opening balance sheet (statement of financial position) Prepare comparative figures Conduct Dry Runs

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Intervening period To Dos
Legislative changes Communicate transition to

stakeholders
Present a reconciliation of

shareholders equity and net income between N-GAAP and IFRS

Training

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Post Conversion To Dos
Monitor changes in IFRS and market practice Sustain benefits from the transition process Supervision, monitoring and enforcement of IFRS implementation Capacity building and support establish experts units at the NASB,

CBN, NDIC and NAICOM to tackle new or revised standards

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Taxation implications of IFRS

Overview of IFRS conversion roadmap

Example _ Timeline for SPEs with Dec 31st Year End Date

Transition adjustments Opening balance sheet Comparative figures First IFRS financial statements Published audited IFRS financials

1 Jan 2011 1 Jan 2011 31 Dec 2011 31 Dec 2012 30 June 2013

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Taxation implications of IFRS

Managing the tax impacts on the organisation

Practical Issues
First time adoption (IFRS 1) minimum requirements, exceptions,

mandatory and optional exemptions

Group entities (parent vs subsidiaries in different categories) Changes in legislation (CAMA, ISA, BOFIA, CITA etc) Transition guidelines Knowledge gap (professionals, regulators & preparers) Early adoption issues Tight conversion deadline and implications of non-compliance
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Taxation implications of IFRS

Managing the tax impacts on the organisation Key changes with tax impact
Item Impairment IFRS Requirements Required for assets (tangible & intangible) including financial instruments. Transactions are accounted for in line with their economic substance rather than strictly legal form. This is required in certain cases (as in the case of some financial instruments) or allowed (in the case of non-current assets). Incurred loss model (compared to expected loss model under N-GAAP). Tax Consideration Should impairment be treated as provisions (general & specific) or losses (realised & unrealised)? This would have both current and deferred tax implications as in the case of coumpound instruments. The tax impact of fair value should be substantially limited to deferred taxation.

Substance over form Fair value

Provisions

Materiality and aggregation

Only specific provisions for doubtful receivables are tax deductible. Expenses that do not meet the criteria Should tax rule on capital expense for capitalisation will be expensed or be modified? otherwise reclassified as intangible or other assets.
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Taxation implications of IFRS

Managing the tax impacts on the organisation

Key changes with tax impact
Companies may have to include qualitative impact analysis of IFRS implementation in their 2010 financial statements Present in the 2011 accounts a reconciliation between current GAAP and IFRS: o Shareholders equity as of 1.Jan.2011 & 31.Dec.2011 o Net income at 31.Dec.2011
1.1.11 Shareholders equity in accordance with NGAAP Impairment of assets Fair value adjustments Intangible assets Non current assets Revenue recognition Consolidation Deferred taxes (...) Shareholders equity in accordance with IFRS Impact of IFRS adoption
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Taxation implications of IFRS

Managing the tax impacts on the organisation

What do we have to do differently?
Government to amend relevant reporting legislation, regulations and tax rules Keep separate tax books / maintain parallel books of accounts? Record keeping, chart of accounts and mapping Preparation and presentation of financial statements Measurement bases for assets and liabilities Revenue recognition Disclosure requirements, nomenclature and format Impact on audit of tax and tax compliance

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Taxation implications of IFRS

Managing the tax impacts on the organisation

Tax Implications Possible impact on tax reporting, tax cost and tax cash flow
Transition adjustments and tax reconciliation Related party transactions and disclosures Early adoption issues Business combination Fair value as deemed cost capital allowance Mark-to-market treatment

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Taxation implications of IFRS

Managing the tax impacts on the organisation

Tax Implications
Advances and fair value treatment (capital loss vs unwinding income) Uncertain tax position and disclosures Deferred tax (balance sheet vs income statement approach, non current classification and effective to statutory rate reconciliation) Equity accounting for JV and associates (stand-alone vs consolidated) Revenue recognition Customer loyalty programme and promotional offers Warranty claim / provisions Inventory vs fixed assets reclassification & VAT treatment
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Taxation implications of IFRS

Managing the tax impacts on the organisation

Tax Implications

Leases (finance vs operating) different tax treatment Substance over form (equity vs liability classification e.g. preference shares) Uncertain tax positions & disclosure requirements Depreciation of intangible assets Componentisation of assets Functional and reporting currency vs tax returns currency Segment reporting vs tax filing and other income taxation

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Taxation implications of IFRS

Managing the tax impacts on the organisation

Tax Returns Reconciliation
It will be necessary to prepare a reconciliation of tax returns under N-GAAP to IFRS. This should cover major tax attributes including: Provisions (taxed & untaxed) QCE and capital allowances Unutilised capital allowances Unutilised tax losses Withholding tax credit notes VAT and WHT (revenue & opex) Staff cost & PAYE/ITF returns
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Taxation implications of IFRS

Tax Planning Opportunities

Review of tax reporting systems and processes Embedding chart of accounts into Extensible Business Reporting Language (XBRL) for tax analysis Cash advances and staff loan possible classification of write off as employees benefit (subject to PAYE implications) Re-appraising the tax cycle and tax management framework (tax planning, provisions, resourcing, compliance, reporting and tax dispute resolution etc) Provisions and impairments to be treated as specific as much as possible Ensure proper record keeping and explanation to support tax treatment in the event of a tax enquiry
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Taxation implications of IFRS

Fiscal Filter
Tax limitations of IFRS transition can be surpassed by the introduction of fiscal filters" to cushion the tax burden. Thus, the taxable income will consider the IFRS accounting profit, adjusted to reflect the requirements of tax legislation. This model: - Introduces a high level of flexibility in fiscal reporting; - Avoids the need for a double accounting system; - Eliminates almost all effects on tax revenues from IFRS adoption Fiscal filters" should have two primary functions: the preservation of tax base (e.g. capital gains roll over, losses and revaluation reserves) and the minimisation of effects from the transition adjustments.

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Taxation implications of IFRS

Fiscal Filter - Examples

Issue Transition adjustments Difficulty IFRS level Yes Complex IFRS 1 Transition adjustments will be registered in equity, namely in retained earnings and reserves. Specific taxation rules should be defined for these adjustments. For example, a transition period of three years for recognition of tax charge or income. Yes Complex IAS 39, IFRS9 Current fiscal legislation states that only realised capital gains and losses are subject to taxation. In an IFRS environment, current fiscal rules should be maintained. Evaluate Complex IAS 39, 36 Tax authority should evaluate whether to accept impairment losses determined under IFRS or define specific rules and support the introduction of a fiscal filter. Yes Easy IAS 16 IFRS allow entities to measure their fixed tangible assets at amortised cost or at fair value. Each entity can choose between one of the referred measurement methods. For tax purposes, the amortised cost method should be considered, with the definition of assets economic life. Introduction of new fiscal filters

Financial Instruments

Impairment

Fixed tangible assets

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Taxation implications of IFRS

Strategies for effectiveness

Be proactive. Carry out a detailed plan, develop a budget, set KPIs and

develop a conversion strategy which should be agreed and properly documented

Consider using a project team with a clear timetable of action points

attached to individuals with appropriate authority to ensure accountability

Set clear milestones and request regular progress reports Appoint a senior personnel (possibly the CFO / Finance Director) to carry

out the oversight function and project monitoring

Involve external professionals to leverage best practice For multinationals, consider exchange programme or secondment for key

staff to countries already reporting under IFRS

Report regularly to stakeholders (board, shareholders, regulators etc) Use the conversion opportunity to reassess tax, accounting and reporting

processes and consider how to optimise value and other benefits

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Taxation implications of IFRS

Conclusion
IFRS is driving the revolutionary world of accounting with over 100

countries worldwide either requiring or permitting its use.

There is no doubt that conversion to IFRS is a huge task and a big

challenge.
Its revolutionary impact requires a great deal of decisiveness and

commitment.
It is a new world order in corporate reporting that will alter not only the

financial accounting and reporting landscape in Nigeria but also tax accounting, tax cash flow and tax distributable reserves.

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Taxation implications of IFRS

Conclusion
Given the interrelationship between accounting measurements and

taxation, as part of the conversion process, companies need to consider the possible impact of the changes on their tax accounting methods, and possible impacts on taxable profits, tax assets and liabilities and tax distributable reserves.
For instance, extensive use of fair value under IFRS may give rise to

differences in recognised income and carrying values of assets and liabilities and a resulting difference in current and deferred tax liability or asset.
Consider impact on communication with external stakeholders

including the tax authorities.

Considering these factors, a successful conversion requires not only

the commitment of the finance team, but also demands full involvement of the tax team.
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Taxation implications of IFRS

Conclusion
In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.
Eric Hoffer, U.S. philosopher.

Thank you
The views and opinions expressed in this presentation are those of the author and do not in any way represent the views of the authors employer or the Institute of Chartered Accountants of Nigeria. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication. The author does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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Taxation implications of IFRS

Case Study
Financial Reporting Nigeria Limited (FRNL ) is a wholly owned subsidiary of Financial Reporting Incorporated (FRI) based in England and Wales. FRNL is involved in assisting entities with corporate reporting and financial advisory. The company has been operating in Nigeria for many years. As a company incorporated in Nigeria, RPNL prepares its accounts under Nigerian GAAP, essentially SAS, for statutory reporting purposes including filing of returns with regulatory authorities (the Corporate Affairs Commission and the Federal Inland Revenue Service). However, the Consolidated Financial Statements of the parent entity FRI and its subsidiaries are prepared in accordance with International Financial Reporting Standards (IFRS). Given that the FRI group does not report under Nigerian GAAP, FRNL has to prepare its financial information in line with IFRS as a voluntary preparer for group reporting purposes. However, the Federal Government of Nigeria in a bid to improve transparency of financial reporting has announced a mandatory conversion to IFRS with different conversion dates for different categories of entities between 2012 and 2014. Questions 1. Discuss the categories of reporting entities for conversion purposes as contained in the IFRS conversion roadmap issued by the Federal Government of Nigeria. 2. In your opinion, which category does FRNL fall into and why? 3. Based on your response to (2) above, state the transition and reporting dates for FRNL and two activities each to be performed under each of the dates identified. 4. What are the differences (if any) between the voluntary IFRS accounts prepared by FRNL for group reporting and the mandatory IFRS adoption for local reporting? 5. What are the challenges FRNL is likely to face in the IFRS transition process and what are your recommendations to minimise the impact?
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