IAS 12 INCOME TAXES

SCOPE
IAS 12 Income Taxes must be applied in accounting for all income taxes. Domestic tax on taxable profits

Foreign taxes on taxable profits, and

Withholding taxes payable on distributions

DEFINITIONS


Accounting profit Profit or loss for period before deducting tax expense. Tax profit (Loss) Profit (loss) for a period on which income taxes are payable (recoverable). Tax expense (Income) Aggregate amount included in the determination of profit or loss for the period for current and deferred tax.

CURRENT TAX


Income taxes payable (recoverable) on taxable profit (loss) for period. Recognise
as expense in period in which profit is earned.  as income in period in which loss incurred when loss carried back to recover tax paid in prior period.


Measurement
enacted tax rates at balance sheet date.  current tax legislation at balance sheet date.


DEFERRED TAX

Income taxes payable in future periods on taxable temporary differences. Income taxes recoverable in future periods on
deductible temporary differences.  unused tax losses carried forward.  unused tax credits carried forward.


DEFERRED TAX: PRINCIPLE

Account for the tax consequences of:
future recovery of carrying amount of an asset.  future settlement of carrying amount of a liability.


Carrying amount Plant & equipment 1,000 Inventories 800 Provision 500 Asset/liability

Recovery Settlement 1,000 800 500

Tax consequences ? ? ?

DEFERRED TAX: PRINCIPLE

 Compare

carrying amount with amount attributed to that asset or liability for tax purposes. deferred tax assets and liabilities using:

 Measure


tax rates and tax laws that apply to the expected manner of recovery of asset or settlement of liability.  enacted tax rates and tax laws at balance sheet date.

TAX BASE OF AN ASSET

the amount attributed to that asset ... for tax purposes Asset  amount which will be deductible for tax purposes when any taxable benefits flow to enterprise.

TAX BASE OF A LIABILITY

the amount attributed to that ... liability for tax purposes Liability  carrying amount of liability less any amount which will be deductible for tax purposes

TAXABLE TEMPORARY DIFFERENCES

differences between the carrying amount in the balance sheet and ... tax base Taxable temporary differences  will result in taxable amounts when asset is recovered or liability settled.  hence, result in deferred tax liabilities.

DEDUCTIBLE TEMPORARY DIFFERENCES

differences between the carrying amount in the balance sheet and ... tax base Deductible temporary differences  will result in deductible amounts when asset is recovered or liability is settled  hence, result in deferred tax assets.

DEFERRED TAX ASSETS AND LIABILITIES

IFRS Balance Sheet Asset Liability

Carrying amount greater than tax base Carrying amount less than tax base *DT- Deferred Tax

DT Liability DT Asset

DT Asset

DT Liability

POSSIBLE TEMPORARY DIFFERENCES

Item
PP&E Property Provisions Pensions Revenue Interest

IFRS treatment
Depreciation over useful economic life Revaluation (fair value) IAS 37 liability Present value Accrual basis (IAS 19) Accrual basis (IAS 18) Accrual basis

Tax treatment
Accelerated Depreciation Cost basis Payments basis Undiscounted amount Payments basis Receipts basis Payments/receipts basis

MEASUREMENT ISSUES.
Rates The tax rate that should be used is the rate that is expected to apply to the period when the asset is realised or the liability is settled , based on tax rates that have been enacted by the end of the reporting period. Change in tax rates Companies are required to disclose the amount of deferred taxation in the tax expense that relates to change in the tax rates.

PRESENTATION


Tax assets and tax liabilities should be presented separately from other assets and liablilities in the satement of financial position. Deferred tax and liabilities should be distinguished from current tax assets and liabilities. An entity should offset current tax assets and current tax liabilities if , and only if , the entity :
 

has a legally enforceable right to set off the recognized amounts ; and Intends either to settle on a net basis , or to realise the asset and settle the liability simultaneously.

CONTD...

 

An entity should offset deferred tax assets and deferred tax liabilities if, and only if:
The entity has a legally enforceable right to set off current tax assets against current tax liabilities; and The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:
the same taxable entity; or

different taxable entities which intend either to settle current tax liabilities and assets on a net basis,or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.


The tax expense (income) related to profit/loss from ordinary activities should be presented in the statement of comprehensive income.

DISCLOSURE
Income taxes (extract) The reconciliation of theoretical to actual income tax expense (income) for the Group is as follows: 2006 million % Theoretical income tax expense (income) 695 100 Reduction in taxes due to tax-free income Tax-free income from affiliated companies and divestiture proceeds (5) (1) Other (107) (15) First-time recognition of previously unrecognized deferred tax assets on loss carry/forwards (203) (29) Tax effects of changes in tax rates (1) 0 Tax income and expenses relating to other periods 13 2 Increase in taxes due to non-tax-deductible expenses Write-downs of investments Expense related to litigation Other Other tax effects Actual income tax expense (income) Effective tax rate in % Notes to the consolidated financial amounts. 2007 million 795 % 100

(2) (47) (1) (921) 4

0 (6) 0 (116) 1

8 1 94 (41) 454 22.9

1 0 13 (6) 65

2 10 85 3 (72) (3.2)

0 1 11 0 (9)

EXAMPLES
The following information relates to Boniek Sp. z.o.o. as at 31 December 2008: Note Carrying value Tax base $ $ Non-current assets Plant and equipment 200,000 175,000 Receivables Trade receivables 1 50,000 Interest receivable 1,000 Payables Fine 10,000 Interest payable 2,000 Note 1 The trade receivables balance in the accounts is made up of the following amounts: Balances $55,000 Doubtful debt provision $(5,000) $50,000

EXAMPLES
Further information:

1.

The deferred tax balance as at 1 January 2008 was $1,200. Interest is taxed on a cash basis. Allowances for doubtful debts are not deductible for tax purposes. Amounts in respect of receivables are only deductible on application of a court order to a specific amount.

2.

3.

4.

Fines are not tax deductible. The tax rate is 30% for 2008. The government has not announced the tax rate for 2009 but it is expected to rise to 31%

5.

Required: Calculate the deferred tax provision which is required at 31 December 2008 and the charge to profit or loss for the period.

EXAMPLES
The following information relates to Tomaszewski Sp. Z.o.o. at 31 December 2008: Carrying value Tax base $ $ Non-current assets 460,000 320,000 Tax losses 90,000 Further information: 1. Tax rates (enacted by the 2007 year end) 2008 2009 36% 34%

2010 32%

2011 31%

2. The loss above is the tax loss incurred in 2008. The company is very confident about the trading prospects in 2009. 3. The temporary difference in respect of non-current assets is expected to grow each year until beyond 2011. 4. Losses may be carried forward for offset, one third into each of the next three years Required: Calculate the deferred tax provision that is required at 31 December 2008.

EXAMPLES
Carrying Tax base value $ 460,000 18,000 (15,000) $ 320,000

Non-current assets Accrued interest: Receivable Payable

The balance on the deferred tax account on 1 January 2008 was $10,000. This was calculated at a tax rate of 30%. During 2008 the government announced an unexpected increase in the level of corporate income tax up to 35%. Required: Set out the note showing the movement on the deferred tax account showing the charge to profit or loss and clearly identify that part of the charge that is due to an increase in the rate of taxation.