for Accounting Professionals

IAS 12 Income Taxes

2011
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IAS 12 Income Taxes

IFRS WOR !OO S "# million $o%nloa$e$&

Welcome to IFRS Workbooks' (hese are the latest versions of the legendary workbooks in Russian and Englis pro$uce$ by ) (*+IS pro,ects- sponsore$ by the Euro!ean "nion ".//)-.//0& an$ le$ by Pricewater ouse#oo!ers. (hey have also appeare$ on the %ebsite of the $inistry of %inance of t e Russian %ederation. (he %orkbooks cover various concepts of IFRS base$ accounting. (hey are inten$e$ to be practical self-instruction ai$s that professional accountants can use to upgra$e their kno%le$ge- un$erstan$ing an$ skills. 1ach %orkbook is a self-stan$ing short course $esigne$ for appro2imately of three hours of stu$y. *lthough the %orkbooks are part of a series- each one is in$epen$ent of the others. 1ach %orkbook is a combination of Information& Exam!les& Self'Test (uestions and Answers . * basic kno%le$ge of accounting is assume$- but if any a$$itional kno%le$ge is re3uire$ this is mentione$ at the beginning of the section. 4aving %ritten the first three e$itions- we want to u!date t em and !ro)ide t em to you to download* Please tell your friends and colleagues* Relating to the first three e$itions an$ up$ate$ te2ts- the copyright of the material containe$ in each %orkbook belongs to the 1uropean 5nion an$ accor$ing to its policy may be used free of c arge for any non'commercial !ur!ose. (he copyright an$ responsibility of later books an$ the up$ates are ours. Our copyright policy is the same as that of the 1uropean 5nion. We %ish to especially thank Eli+abet A!!raxine "1uropean 5nion& %ho a$ministere$ these (*+IS pro,ects- Ric ard ,* -regson "6artner- 6rice%aterhouse+oopers& %ho le$ the pro,ects an$ all friends at .ankir*Ru for hosting the books. (*+IS pro,ect partners inclu$e$ Rose2perti7a "Russia&- *++* "5 &- *griconsulting "Italy&- F! "Russia&- an$ 1uropean Savings !ank 8roup "!russels&. (he help of P ili! /* Smit "e$itor of the thir$ e$ition& an$ Allan -amborg- pro,ect managers an$ Ekaterina 0ekraso)a- 9irector of 6rice%aterhouse+oopers- %ho manage$ the pro$uction of the Russian version ".//:-0& is gratefully ackno%le$ge$. -lyn R* P illi!s- manager of the first t%o pro,ects conceive$ the i$ea- $esigne$ the %orkbooks an$ e$ite$ the first t%o versions. We are prou$ to realise his vision.

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IAS 12 Income Taxes

#20TE0TS
Introduction 2 IAS 12 for .anks 5 Permanent 6ifferences 6efinitions 3 4 7 7

4 6eferred Tax 8 basic idea 9 7 Tax Accounting 8 t e !rocess*********************************19 : %air 1alue Ad;ustments 9 6eferred Tax Assets 5: 41

< 6etermine a!!ro!riate tax rates******************************49 10 6etermine mo)ement in deferred tax balances* * *77 11 Presentation 15 6isclosure 79 :4 12 Accounting for 6eferred Tax ' 6etailed Rules ****:0 13 A!!endix 8 Some I%RS = Russian Accounting #om!arisons************************************************************************:< 14 $ulti!le # oice (uestions ************************************99 17 Answers to multi!le c oice >uestions****************<2 1: 0"$ERI#A? ("ESTI20S**************************************<2 19 A0S/ERS T2 0"$ERI#A? ("ESTI20S*************<7
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)

IAS 12 Income Taxes

Introduction
Aim
(he aim of this %orkbook is to assist the in$ivi$ual in un$erstan$ing the IFRS accounting treatment an$ $isclosures of Income (a2es- as $etaile$ in I*S #.. 9efinitions of the terms use$ are set in section ) on page <. 9eferre$ ta2 is making an accrual for ta2- %hich is then reverse$ %hen the ta2 is pai$. (he purpose is to account for ta2 in the same accounting perio$ as the economic event that incurs the ta2- regar$less of %hen the ta2 is pai$ "or recovere$&. It links the accounting system %ith the systems of ta2ation reporte$ in the financial statements. In simple terms- sales generally generate a ta2 charge. Revaluations generate a $eferre$ ta2 charge "an accrual for ta2&. Objective (he accounting profit may $iffer from the ta2able profit as each is compile$ accor$ing to its o%n set of rules an$ regulations. IFRS is a common set of gui$elines for compiling the financial statements but the ta2 la% an$ ta2 co$e of Russia stipulates ho% the ta2 liability %ill be calculate$- an$ %hen it %ill be pai$. (a2 is often only collecte$ in arrears or in a$vance. When this happens- there %ill be timing $ifferences bet%een %hen the profit is reporte$ an$ %hen the ta2 on it is pai$. (his generates a ta2 liability "or ta2 asset&. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IFRS #. sets out to overcome this problem in terms of presentation so that financial statements prepare$ un$er $ifferent ta2 regimes inclu$e the effect of ta2es at the appropriate time. I*S #. prescribes the accounting treatment for income ta2es- an$ the ta2 conse3uences of: "#& (ransactions of the current perio$ that are recor$e$ the financial statements= an$ ".& (he future li3ui$ation of assets an$ liabilities that are recor$e$ only the balance sheet. If li3ui$ation of those assets an$ liabilities %ill make future ta2 payments larger or smaller- I*S #. generally re3uires an un$ertaking to recor$ a $eferre$ ta2 liability "or $eferre$ ta2 asset&. I*S #. re3uires an un$ertaking to account for the ta2 conse3uences of transactions- in the same manner that it accounts for the transactions:

For transactions recor$e$ in the income statementany relate$ ta2 conse3uences are also recor$e$ in the income statement. For transactions recor$e$ $irectly in e3uity- any relate$ ta2 conse3uences are also recor$e$ $irectly in e3uity "for e2ample- property revaluations un$er I*S #>&.

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IAS 12 Income Taxes

(he recognition of $eferre$ ta2 assets- an$ liabilities- in a business combination affects the amount of goo$%ill arising in that combination. I*S #. also covers: #. Recognition of $eferre$ ta2 assets arising from unuse$ ta2 losses- or unuse$ ta2 cre$its.. 6resentation of income ta2es- an$ ). 9isclosure of information relating to income ta2es. Scope I*S #. shoul$ be applie$ in accounting for income ta2es inclu$ing: #. *ll $omestic- an$ foreign- ta2es base$ on ta2able profits. .. (a2es- such as %ithhol$ing ta2es payable by a subsi$iaryassociate- tra$e investment or ,oint venture on $istributions to the reporting un$ertaking. I*S #. $oes not $eal %ith the metho$s of accounting for government grants- or investment ta2 cre$its "see I*S ./&. 4o%ever- I*S #. $oes $eal %ith the accounting for temporary $ifferences that may arise from such grants- or investment ta2 cre$its each of %hich alter the timing of %hen the ta2 is payable. *s bank accounting for income ta2 is base$ on the national ta2 system- banks have little more than to follo% the presentation re3uirements of I*S #.- using the figures alrea$y compile$. 9ifferences may occur in the treatment of carrie$ for%ar$ ta2 losses an$ ta2 cre$its. (he ma,or a$$itional %ork is the $eferre$ ta2 computationseffectively accruing for future ta2 on revaluations. In Russiathere is a re3uirement to account for ta2 "6!5 #:&- but banks have- so far- been e2empt from this re3uirement. In simple terms- sales generally generate a ta2 charge. Revaluations generate a $eferre$ ta2 charge "an accrual for ta2&. (he revaluations gains %ill be effectively sho%n as :/? of the total gain- having accrue$ $eferre$ ta2 at ./?. !anks alrea$y revalue their currency positions $aily in Russia- but generally have not revalue$ their financial instruments to reflect the latest market prices. 9eferre$ ta2 %ill nee$ to be accrue$ for all revaluations of financial instruments- %here this is re3uire$ by IFRS 0 Financial Instruments- unless the profits %ill not be liable for ta2. 9eferre$ ta2 %ill nee$ to be accrue$ for the fair values of assets compute$ in accounting for ac3uisitions an$ revaluations of property. Where transformation from Russian accounting to IFRS moves profit from one perio$ to another an$ the ta2 payment $oes not move- $eferre$ ta2 %ill nee$ to be accrue$. (his %ill
@

2 IAS 12 for .anks

*ccounting for income ta2 is firmly base$ on the national ta2 system. http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 12 Income Taxes

especially apply to finance leases "I*S #A Beases& %hich are not recognise$ for ta2 purposes as any $ifferent from operating leases. E@A$P?E'Permanent 6ifferences Dour firm receives a ta2- free E<million grant to employ more staff. It is later also fine$ E#m for environmental misuse- after illegally $ischarging chemicals into a river. (he fine cannot be $e$ucte$ for ta2. (he financial statements %ill reflect these items- but your ta2 computation %ill e2clu$e them- or recor$ that no ta2 is payable nor receivable. Dour ta2 computation %ill reconcile these a$,ustments to the accounting profit. Co $eferre$ ta2 nee$s to be calculate$ for permanent $ifferences. (his is because $eferre$ ta2 is an accrual of ta2- an$ there %ill be no further ta2 to be accrue$. *ssuming that both items are taken into profit in full in the same perio$- the ta2 computation coul$ reflect: In the follo%ing e2amples- I=. refer to Income Statement an$ .alance Sheet "SF6&. Cm *ccounting 6rofit <:> Bess grant -< 6lus fine F# DTaxable !rofit 395 (a2 charge G <:) H ./? G 0>->// I=. 6R #R http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng (a2 e2pense I 0>->// *ccrual for income ta2 ! 0>->// Tax expense for the period When revie%ing financial statements of clients an$ correspon$ent banks- banks %ill nee$ to ensure that $eferre$ ta2 has been fully accrue$.

5 Permanent 6ifferences
6ermanent $ifferences bet%een the financial profit an$ ta2able profit arise %hen income is not ta2able or e2penses are not allo%e$ for ta2. * government grant may be a gift that is not ta2e$. 8overnment bon$s often provi$e ta2-free interest income- or may be ta2e$ at a lo%er rate than the stan$ar$ income ta2 rate for companies. Fines pai$ by an un$ertaking may not be ta2-$e$uctible. (he ta2 computation for the perio$ %ill calculate the impact of these transactions. Co further accounting is nee$e$ an$ no $eferre$ asset or liability %ill be recor$e$.

6efinitions
Accounting profit (net profit before tax) *ccounting profit is net profit for a perio$- before $e$ucting ta2. TA@A.?E PR2%IT A2R TA@ ?2SSB (a2able profit "ta2 loss& is the profit "loss& for a perio$calculate$ accor$ing to the rules of the ta2 authorities- upon %hich income ta2es are payable "recoverable&.
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IAS 12 Income Taxes

TA@ E@PE0SE A2R TA@ I0#2$EB (a2 e2pense "ta2 income& is the total amount inclu$e$ in the net profit "or loss& for the perio$- in respect of current ta2- an$ $eferre$ ta2. (a2 e2pense "ta2 income& comprises both current ta2 e2pense "income& an$ $eferre$ ta2 e2pense "income&. Current tax +urrent ta2 is the total of income ta2es payable "recoverable& in respect of the ta2able profit "loss& for a perio$. Deferred tax liabilities 9eferre$ ta2 liabilities are the amounts of ta2es payable- in future perio$s- in respect of ta2able temporary $ifferences. 6E%ERRE6 TA@
ASSETS

"#&

ta2able temporary $ifferences that %ill increase ta2able profit of future perio$s- %hen the carrying amount of the asset "or liability&- is li3ui$ate$= or $e$uctible temporary $ifferences that %ill re$uce ta2able profit "ta2 loss& of future perio$s- %hen the carrying amount of the asset "or liability& is li3ui$ate$.

".&

Tax base (he ta2 base of an asset "or liability& is the value of that asset "or liability&- for ta2 purposes. (his may be the %ritten $o%n value of a fi2e$ asset for ta2 basis. Others are $escribe$ belo%. (he ta2 base is the amount that %ill be $e$uctible for ta2 purposes over the life of the asset. E@A$P?E ' 6etermine t e tax base of assets and liabilities Issue *n assetIs ta2 base is the amount that %ill be $e$uctible for ta2 purposes against any ta2able economic benefits that %ill flo% to an entity %hen it recovers the assetIs carrying amount. If those economic benefits %ill not be ta2able- the assetIs ta2 base is e3ual to its carrying amount. 4o% shoul$ management calculate the ta2 base of a $ivi$en$ receivable balanceJ .ackground 1ntity 8Is management has recognise$- in 8Is single-entity financial statements- a $ivi$en$ receivable of #//-/// from a %holly-o%ne$ subsi$iary. (he $ivi$en$ is not ta2able.
A

9eferre$ ta2 assets are the ta2es recoverable- in future perio$s- in respect of: "#& $e$uctible temporary $ifferences "accruals of ta2 receivable&= ".& ")& unuse$ ta2 losses= an$ unuse$ ta2 cre$its.

Temporar differences (emporary $ifferences are $ifferences bet%een the carrying amount of an asset "or liability& in the balance sheet- an$ its ta2 base. (emporary $ifferences may be either: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 12 Income Taxes

Solution ;anagement shoul$ calculate the ta2 base of the $ivi$en$ receivable as follo%s: In this e2ample- a financial asset "at fair value through profit an$ loss& is purchase$ for #./// in Dear # an$ revalue$ at #.#// at the perio$ en$- recor$ing a profit of #//. (he financial asset is then sol$ in Dear . for #.#//- its revalue$ amount. Income Tax ex!ense F 20G 0et !rofit Eear 1 100 0 100 Eear 2 0 '20 '20

+arrying amount Future ta2able amounts Future $e$uctible amounts (a2 base

#//-/// #//-/// "the $ivi$en$ is not ta2able&

(he ta2 e2pense is a $irect result of the income in perio$ #. Rea$ers of financial statements shoul$ be ma$e a%are that a ta2 charge %ill be levie$ in the follo%ing year. 9eferre$ ta2 is use$ to i$entify future ta2 payments generate$ by transactions in the current year K it is an accrual for ta2- an$ like all accruals- %ill be reverse$ %hen the ta2 is actually pai$. Eear 1 Eear 2 Income 100 0 Tax ex!ense F 20G 0 '20 6eferred tax F 20G '20 20 0et !rofit 90 0 (he $eferre$ ta2 reverses over time "an$ %ill thus $isappear&. (his provi$es a more comprehensive picture to rea$ers. Without the $eferre$ ta2 accrual- profits in Dear # %oul$ be overstate$- %ith the risk that $ivi$en$s might be higher than the un$ertaking coul$ affor$. In this case- it creates an accrual of the ta2 charge in year # to link %ith the timing of the transaction.
:

4 6eferred Tax 8 basic idea 9eferre$ ta2 is an accrual for ta2- receipt or payment- create$ %hen the economic activity an$ the ta2 impact are either in $ifferent perio$s- or $o not completely match in amounts or time perio$. *ccounting for ta2 is simpler %hen the transaction is booke$ for both accounting an$ ta2 purposes in the same year. In such a case income ta2 is recor$e$ an$ no $eferre$ ta2 nee$s to be accrue$. If a transaction takes place in year # an$ ta2 is pai$ in year .year # %ill sho% a transaction %ithout a ta2 charge- an$ year . %ill sho% a ta2 charge %ithout a transaction: http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng

IAS 12 Income Taxes

It is reverse$ in year . to reflect that ta2 has been accrue$ in year #- even though it %as charge$ in year .. On the balance sheet- this $eferre$ ta2 %oul$ be sho%n as a liability "accrual& at the en$ of perio$ #. It %ill $isappear at the en$ of perio$ .. 1L*;6B1 - ta2 is pai$ on receipt of the money in perio$ #- but only treate$ as income in perio$ .. Eear 1 Eear 2 Income 0 100 Tax ex!ense F '20 0 20G 0et !rofit '20 100 In year # there is a ta2 charge %ithout a transaction. In year . there is a transaction %ithout a ta2 charge. *gain- %e use $eferre$ ta2 to link the transaction to the ta2 charge. Eear 1 Eear 2 Income 0 100 Tax ex!ense F '20 0 20G 6eferred tax F H20 '23 20G 0et !rofit 0 90 In this case- $eferre$ ta2 accrues a ta2 cre$it in year # to carry for%ar$ the ta2 pai$ to perio$ . to link %ith the timing of the transaction. (he accrual is reverse$ in year .. On the balance sheet- this $eferre$ ta2 %oul$ be sho%n as an asset "or prepayment of ta2& at the en$ of perio$ #. It %ill $isappear by being reverse$ at the en$ of perio$ ..

1L*;6B1 - the cash is receive$ an$ ta2e$ in year #- but the income is split bet%een years #- . an$ ). (his might occur %hen an a$vance payment is receive$ for a longterm contract. Eear 1 Eear 2 Eear 5 Income 200 200 200 Tax ex!ense F '120 0 0 20G 0et !rofit 90 200 200 (he income is the same for each year- but the net profit changes $ue to the ta2 payment. (he income in years . M ) is ta2e$ in the first year. 9eferre$ ta2 is use$ to apportion the ta2 charge to match the income: Eear 1 Eear 2 Eear 5 Income 200 200 200 Tax ex!ense F '120 0 0 20G 6eferred tax F H90 '30 '30 20G
0

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IAS 12 Income Taxes

0et !rofit 170 170 170 (he total ta2 charge for year # %ill be </ "#./ minus :/&so the Income Statement for each year %ill be the same. (he $eferre$ ta2 re$uces the ta2 charge in year #- but increases it in years . M ). 1L*;6B1 -e2penses attract ta2 cre$its "Nta2 incomeI&. If a transaction takes place in year # an$ ta2 is cre$ite$ in year .- year # %ill sho% a transaction %ithout a ta2 cre$it- an$ year . %ill sho% a ta2 cre$it %ithout a transaction: Eear 1 Eear 2 Ex!ense '100 0 Tax income F 0 H20 20G 0et !rofit '100 H20 (he ta2 income- or benefit of paying less ta2 $ue to the e2pense- is a $irect result of the e2pense in perio$ #. Rea$ers of financial statements shoul$ be ma$e a%are that ta2 %ill be cre$ite$ in the follo%ing year. 9eferre$ ta2 is use$ to accrue future ta2 cre$its generate$ by transactions in the current year. Eear 1 Eear 2 Ex!ense '100 0 Tax income F 0 H20 20G 6eferred tax F H20 '20 20G http://bankir.ru/technology/vestnik/uchebnye-posobiya-po-msfoeng 0et !rofit '90 0 On the balance sheet- this $eferre$ ta2 %oul$ be sho%n as an asset at the en$ of perio$ #. It %ill $isappear at the en$ of perio$ . by being reverse$. 1L*;6B1- ta2 is cre$ite$ on payment of the money in perio$ #- but only treate$ as an e2pense in perio$ .. Eear 1 Eear 2 Ex!ense 0 '100 Tax income F H20 0 20G 0et !rofit H20 '100 In year # there is a ta2 cre$it %ithout a transaction. In year . there is a transaction %ithout a ta2 cre$it. (he ta2 %ill be sho%n as a prepayment. *gain- %e use $eferre$ ta2 to link the transaction to the ta2 cre$it. Eear 1 Eear 2 Ex!ense 0 '100 Tax income F H20 0 20G 6eferred tax F '20 H20 20G 0et !rofit 0 '90 In this case- it accrues a ta2 cre$it in year # to carry for%ar$ the ta2 pai$ to perio$ . to link %ith the timing of the transaction. It is reverse$ in year ..

#/

IAS 12 Income Taxes

1L*;6B1- an a$vance payment on a construction contract. (he cash is pai$ an$ cre$ite$ for ta2 in year #- but the e2pense is split bet%een years #- . an$ ). Eear 1 Eear 2 Eear 5 Ex!ense '200 '200 '200 Tax income F H120 0 0 20G 0et !rofit '90 '200 '200 (he e2pense is the same for each year- but the net profit changes $ue to the ta2 cre$it. (he e2pense in years . M ) is cre$ite$ for ta2 in the first year. 9eferre$ ta2 is use$ to apportion the ta2 cre$it by accrual to match the e2pense: Eear 1 Eear 2 Eear 5 Ex!ense '200 '200 '200 Tax income F 120 0 0 20G 6eferred tax F '90 H30 H30 20G 0et !rofit '170 '170 '170 (he total ta2 cre$it for year # %ill be </ "#./ minus :/&so the Income Statement for each year %ill be the samematching the economic reality. (he $eferre$ ta2 re$uces the ta2 cre$it in year #- but increases it in years . M ).

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##

1 2 5 #alculation A2B=10

4 A2B'A3B

7 A2B=12

9 A2B'A:B

< A3B'A:B

10 A<B x 23G

11 A5 ' 7B x 23G

12 15 A7B x 23G A11BHA12B

916R1+I*(IOC D1*R +OS( 1L61CS1 Eear #um # > /// >// >// . >// #.// ) >// #:// < >// .<// @ >// )/// > >// )>// A >// <.// : >// <:// 0 >// @<// #/ >// >/// ## #.

C1( @ <// < :// < .// ) >// ) /// . <// # :// # .// >// / / /

91F1RR19 (*L (*L91F1RR19 *BBOW*C+1 (I;IC8 !*B*C+1 (*L-IC+O;1 +5RR1C( (O(*B "+R19I(& (*L !*S1 9IFF1R1C+1 S411( S(*(1;1C( (*L (*L Eear #um @// @// @ @// #// .< .< #./ #<< @// #/// @ /// .// <: .< #./ #<< @// #@// < @// )// A. .< #./ #<< @// ./// < /// <// 0> .< #./ #<< @// .@// ) @// @// #./ .< #./ #<< @// )/// ) /// >// #<< .< #./ #<< @// )@// . @// A// #>: .< #./ #<< @// </// . /// :// #0. .< #./ #<< @// <@// # @// 0// .#> .< #./ #<< @// @/// # /// # /// .</ .< #./ #<< @// @@// @// @// #./ -#./ #./ / @// >/// / / / -#./ #./ /

E@A$P?E ' t e !urc ase of a building in year 1* See table abo)e* 9epreciation is charge$ in years #-#/- after %hich the buil$ing is fully $epreciate$. (he ta2 allo%ance is sprea$ over years #-#.. In years #-#/- $epreciation is more than the ta2 allo%ance. In years ## an$ #.- ta2 cre$its are receive$ even though no $epreciation is charge$. (his creates timing $ifferences. By charging deferred tax in years 1-10, and crediting deferred tax in years 11 and 12, the total tax for years 1-10 is equalised each year and matches the depreciation. In years 11 and 12, there is no total tax which matches the lack of depreciation in these years.

9R/+R !alance Sheet +ost *mortisation Off-!alanceSheet (a2 *mortisation (a2 !ase Income Statement *mortisation (a2 O .<? 9eferre$ ta2 Cet profit/loss

/ )///

<

-#///

-#///

-#///

-)/// A@/ -)/// -..@/ A@/ -#@// A@/ -A@/ A@/ /

#/// -#:/ :./

#/// -#:/ :./

#/// -#:/ :./

/ -#:/ -#:/

In the abo)e exam!le- a computer is bought for )./// %ith an economic life of 5 years- but the ta2 benefit %ill be sprea$ over 3 years. (he ta2 base is sho%n as the ta2 benefit less is accumulate$ amortisation. "(he income statement is an e2tract- e2clu$ing other items.& (his creates . problems of presentation: the loss after ta2 is CO( at A>? "#//-.<&- an$ in year < there is a ta2 cre$it %ithout any economic activity. 9R/+R !alance Sheet +ost *mortisation Off-!alanceSheet (a2 *mortisation (a2 !ase / )/// -#/// -#/// -#/// / # . ) <

-)/// A@/ -)/// -..@/ A@/ -#@// A@/ -A@/ A@/ /

Income Statement *mortisation (a2 O .<? 9eferre$ ta2 0et !rofit=loss #//? #/// -#:/ :./ :70 #/// -#:/ :./ :70 #/// -#:/ :./ :70 / -#:/ -#:/ 0

:7G

(he first step is to calculate the net loss as A>? of the e2pense for each perio$. 9R/+R !alance Sheet +ost *mortisation Off-!alanceSheet (a2 *mortisation (a2 !ase Income Statement *mortisation (a2 O .<? 6eferred tax Cet profit/loss #R A>? #//? #/// -#:/ :./ '70 A>/ #/// -#:/ :./ '70 A>/ #/// -#:/ :./ '70 A>/ / -#:/ -#:/ 190 / / )/// -#/// -#/// -#/// / # . ) <

-)/// A@/ -)/// -..@/ A@/ -#@// A@/ -A@/ A@/ /

(he secon$ step is to compute the $eferre$ ta2 as the $ifference bet%een the net loss an$ the loss after ta2. I$entify %hether the entry for Dear # is a $ebit or a cre$it. 9R/+R !alance Sheet +ost *mortisation / )/// -#/// -#/// -#/// / # . ) <

Off-!alanceSheet (a2 *mortisation (a2 !ase Income Statement *mortisation (a2 O .<? 9eferre$ ta2 .alance S eet 6eferred tax Asset = liabilityIII #umulati)e #R

-)/// A@/ -)/// -..@/ A@/ -#@// A@/ -A@/ A@/ /

#//?

A>? 6R

#/// -#:/ :./ ->/ A>/ 70

#/// -#:/ :./ ->/ A>/ 70

#/// -#:/ :./ ->/ A>/ 70

/ -#:/ -#:/ #:/ / '190

70

120

190

(he entry to the balance sheet for each year is compute$ by $ouble entry bookkeeping: Eear 1 Eear 2 Eear 5 Eear 3 Income Statement '70 '70 '70 190 #redit #redit #redit 6ebit .alance S eet 70 70 70 '190 6ebit 6ebit 6ebit #redit

(he cumulative figure sho%s the number that %ill be seen in the balance sheet. In this e2ample- the balance sheet entry is a $ebit. * $ebit in the balance sheet is an *SS1(- so the result is a deferred tax asset. *t the en$ of year <- the balance on the balance sheet is eliminate$ K a control check that the $eferre$ ta2 accrual has been reverse$. In the next exam!le- a security is bought for #./// %ith an economic life of 4 years- but the ta2 benefit %ill be sprea$ over 3 years. (he ta2 base is sho%n as the ta2 benefit less is accumulate$ amortisation. "(he income statement is an e2tract- e2clu$ing other items.&

(his creates . problems of presentation: the loss after ta2 is CO( at A>? "#//-.<&- an$ in year @ there is economic activity a ta2 cre$it %ithout a ta2 cre$it.
9R/+R !alance Sheet +ost *mortisation Off-!alance-Sheet (a2 *mortisation (a2 !ase / #/// -.// -.// -.// -.// -.// # . ) < @

-#/// .@/ -#/// -A@/ .@/ -@// .@/ -.@/ .@/ / / /

Income Statement *mortisation (a2 O .<? 9eferre$ ta2 Cet profit/loss !alance Sheet 9eferre$ ta2 *sset / liabilityJJJ +umulative Follo%ing the proce$ure of the previous e2ample:
9R/+R !alance Sheet +ost *mortisation / #/// -.// -.// -.// -.// -.// # . ) < @

#//?

.// ->/ #</

.// ->/ #</

.// ->/ #</

.// ->/ #</

.// / .//

A>?

Off-!alance-Sheet (a2 *mortisation (a2 !ase Income Statement *mortisation (a2 O .<? 9eferre$ ta2 Cet profit/loss !alance Sheet 9eferre$ ta2 *sset / liabilityJJJ +umulative #R 6R

-#/// .@/ -#/// -A@/ .@/ -@// .@/ -.@/ .@/ / / /

#//?

A>?

.// ->/ #</ #. #@.

.// ->/ #</ #. #@.

.// ->/ #</ #. #@.

.// ->/ #</ #. #@.

.// / .// -<: #@.

-#.

-#.

-#.

-#.

<:

-#.

-.<

-)>

-<:

(he entry to the balance sheet for each year is compute$ by $ouble entry bookkeeping: Eear 1 Income Statement .alance S eet 12 6ebit '12 #redit Eear 2 12 6ebit '12 #redit Eear 5 12 6ebit '12 #redit Eear 3 12 6ebit '12 #redit Eear 4 '39 #redit 39 6ebit

(he cumulative figure sho%s the number that %ill be seen in the balance sheet. In this e2ample- the balance sheet entry is a cre$it. * cre$it in the balance sheet is a liability- so the result is a deferred tax liability. *t the en$ of year @- the balance on the balance sheet is eliminate$ K a control check that the $eferre$ ta2 accrual has been reverse$.

From these e2amples- %e can conclu$e that if management accelerates $epreciation faster than the ta2 authorities- a $eferre$ ta2 *SS1( %ill arise. In contrast- if management $epreciates an asset over a longer perio$ than the ta2 authorities- a $eferre$ ta2 BI*!IBI(D %ill arise. (he use of $eferre$ ta2 $oes not change the $ates of payment of any ta2. It is an e2tension of the matching "accruals& concept use$ in IFRS. 7 Tax Accounting 8 t e !rocess (a2 accounting comprises the follo%ing steps: i& calculate an$ recor$ current income ta2 payable "or receivable&= ii& $etermine the ta2 base of assets an$ liabilities= iii& calculate the $ifferences bet%een "the accounting& carrying amount of assets an$ liabilities an$ their ta2 base to $etermine temporary $ifferences= iv& i$entify temporary $ifferences that are not recor$e$ $ue to specific e2ceptions in IFRS= v& calculate the net temporary $ifferences= vi& revie% net $e$uctible temporary $ifferences an$ unuse$ ta2 losses to $eci$e if recor$ing $eferre$ ta2 assets is correct= vii& calculate $eferre$ ta2 assets an$ liabilities by applying the appropriate ta2 rates to the temporary $ifferences= viii& $etermine the movement bet%een opening an$ closing $eferre$ ta2 balances= i2& $eci$e %hether offset of $eferre$ ta2 assets an$ liabilities bet%een $ifferent group un$ertakings is appropriate in the consoli$ate$ financial statements= an$

2& recor$ $eferre$ ta2 assets an$ liabilities- %ith the net change recor$e$ in income or e3uity as appropriate. (he current ta2 e2pense "or income& is the amount payable "or receivable& as calculate$ in the ta2 return- plus any a$,ustment to $eferre$ ta2. (he current ta2 e2pense is recor$e$ in the income statement- e2cept any ta2 relates to a transaction that is recor$e$ in e3uity rather than the income statement. For e2ample- any ta2 relate$ to the revaluation of property- plant an$ e3uipment shoul$ be recognise$ in e3uity. E@A$P?E' Tax ex!ense s!lit between t e income statement and e>uity* Dour ta2 computation sho%s an e2pense of E:Am for the year- of %hich E)m relates to a property revaluation un$er I*S #>. I=. 6R #R (a2 e2pense K income statement I :<m (a2 e2pense-revaluation reserve ! )m (a2 accrual ! :Am Tax expense split bet!een t"e income statement and e#uit If the ta2 alrea$y pai$ e2cee$s the ta2 $ue for the perio$- the e2cess %ill be recor$e$ as an asset- assuming it is recoverable. E@A$P?E' Tax ex!enseJ Pre!ayment Dou have pai$ E#//m as a ta2 prepayment. Dour ta2 computation sho%s an e2pense of E:Am for the year- of %hich E)m relates to a property revaluation. I=. 6R #R (a2 prepayment ! #//m +ash ! #//m $ecording tax prepa ment (a2 e2pense K income statement I :<m (a2 e2pense-revaluation reserve ! )m (a2 prepayment ! :Am Tax expense split bet!een t"e income statement and e#uit % matc"ed against t"e tax prepa ment

* ta2 loss- that can be carrie$ back to recover ta2 of a previous perio$- shoul$ be recor$e$ as an asset in the perio$ in %hich the ta2 loss occurs. E@A$P?E' Tax lossJ asset Dour ta2 computation sho%s a loss of E>m for the year- %hich can be carrie$ back to recover ta2 of a previous ta2 perio$. I=. 6R #R (a2 recoverable ! >m (a2 income I >m $ecording recoverable tax loss (he ta2 base of an asset or liability is the amount attribute$ to it for ta2 purposes. (he $epreciation for an item of property plant or e3uipment on an accounting basis may $iffer from the calculation on a ta2 basis. E@A$P?E' 6ifferent de!reciation rates for accounting and tax Dour buil$ing is to be $epreciate$ over ./ years for accounting purposes- but the ta2 authorities insist on a minimum life of )/ years for this type of buil$ing. Whilst the accounting recor$s %ill reflect the ./-year $epreciation perio$- the ta2 base %ill use the )/-year $epreciation mo$el. i& Revenue receive$ in a$vance Special rules apply to liabilities that represent revenue receive$ in a$vance. (he ta2 base is e3uivalent to: -the liabilityPs carrying amount- if the revenue is ta2able in a subse3uent perio$= E@A$P?E' Re)enue recei)ed in ad)ance Revenue is ta2e$ in a later perio$. In year #- it has a ta2 base of #//. I=. 6R #R +ash ! #// 9eferre$ revenue ! #// $eceipt of cas"&period '

9eferre$ revenue Revenue (a2 e2pense O ./? +urrent ta2 liability $evenue recognition and tax expense&period ( -nil if the revenue is ta2e$ in the perio$ receive$.

! I I !

#// #// ./ ./

E@A$P?E' Re)enue recei)ed in ad)ance Revenue is ta2e$ in the same perio$. In year #- it has a ta2 base of /. (here is a timing $ifference as the revenue is recognise$ for ta2 before it is recognise$ for accounting. I=. 6R #R +ash ! #// 9eferre$ revenue ! #// 9eferre$ ta2 asset O ./? ! ./ +urrent ta2 liability ! ./ $eceipt of cas" and tax pa ment &period ' 9eferre$ revenue ! #// Revenue I #// (a2 e2pense O ./? I ./ 9eferre$ ta2 asset ! ./ $evenue and tax expense recognition &period ( E@A$P?E ' Re)enues recei)ed in ad)ance Issue (he ta2 base of a liability is its carrying amount less any amount that %ill be $e$uctible for ta2 purposes in respect of that liability in

future perio$s. In the case of revenue receive$ in a$vance- the ta2 base of the resulting liability is its carrying amount- less any amount of revenue that %ill not be ta2able in future perio$s. 4o% shoul$ management calculate the ta2 base of revenue receive$ in a$vanceJ .ackground 1ntity * receives royalties from users of its license$ technology of .@-/// relating to the follo%ing financial year. Royalties are ta2e$ on a cash receipts basis. (he royalty income is $eferre$ in the balance sheet until the perio$ it relates to. Solution ;anagement shoul$ calculate the ta2 base of the royalties receive$ in a$vance as follo%s: +arrying amount .@-///

Revenue not ta2able in future perio$

".@-///&

"(a2 %as assesse$ %hen revenue %as receive$&

(a2 base

1ntity * has a $e$uctible temporary $ifference of .@-/// ".@-/// - nil&. ;anagement shoul$ recognise a $eferre$ ta2 asset in respect of the $e$uctible temporary $ifference.

E@A$P?E ' Tax base of long ser)ice lea)e !ro)ision Issue (he ta2 base of a liability is its carrying amount less any amount that %ill be $e$uctible for ta2 purposes in respect of that liability in future perio$s. In the case of revenue receive$ in a$vance- the ta2 base of the resulting liability is its carrying amount- less any amount of revenue that %ill not be ta2able in future perio$s. 4o% shoul$ management calculate the ta2 base of a long service leave provisionJ !ackgroun$ 1ntity +Is management has recognise$ a liability un$er I*S #0 for accrue$ long service leave of #@/-/// at the balance sheet $ate. Co $e$uction %ill be available for ta2 until the long service leave is pai$. Solution ;anagement shoul$ calculate the ta2 base of the long service leave provision as follo%s: +arrying amount #@/-/// Future $e$uctible amounts "#@/-///& "a $e$uction %ill be receive$ for ta2 purposes %hen pai$& Future ta2able amounts (a2 base -

1ntity + has a $e$uctible temporary $ifference of #@/-/// "#@/-/// - nil&. ;anagement shoul$ recognise a $eferre$ ta2 asset in respect of the $e$uctible temporary $ifference.

ii& *mounts not reflecte$ in the balance sheet 9e$uctible or ta2able amounts may arise from items that are not recor$e$ in the balance sheet. Research an$ $evelopment costs may be e2pense$ in the current perio$- but $e$uctible for ta2 purposes over subse3uent perio$s. (he ta2 base reflects the amount of the $e$uction that can be claime$ in future perio$s. E@A$P?E'Researc and de)elo!ment costs Dou spen$ E./m on research in the current perio$- an$ it is treate$ as an e2pense. (a2 authorities only allo% the e2pense to be $e$ucte$ over a <-year perio$. Only E@m is allo%e$ in this perio$. (he remaining E#@m is the ta2 base at the en$ of year #- an$ %ill be allo%e$ over the ne2t ) years. Research cost +ash (a2 cre$it O ./? +urrent ta2 liability "re$uction& 9eferre$ ta2 asset $esearc" cost and tax income &period ' +urrent ta2 liability "re$uction& 9eferre$ ta2 asset Tax income &period ( (and t"e same for periods ) * +) I=. I ! I ! ! ! ! 6R ./m #R ./m <m #m )m #m #m

E@A$P?E ' 6eferred tax on !ro)ision for general insurance risk Issue Some items have a ta2 base but are not recognise$ as assets

an$ liabilities in the balance sheet. (he $ifference bet%een the ta2 base an$ the carrying amount of nil is a temporary $ifference that results in a $eferre$ ta2 balance. Shoul$ management recognise a $eferre$ ta2 liability regar$ing provision for general insurance risk that %as not inclu$e$ in the financial statements but %hich %as claime$ in the ta2 accountsJ .ackground *n insurance entityIs management has recognise$ in the income statement net premium income of @-/// $uring the year. ;anagement is permitte$ for ta2 purposes to set up a provision for general insurance risks of #/? of the entityIs net premium income. ;anagement claims this benefit in full an$ recognises a provision of @// $uring the year in the ta2 accounts. It $oes not recognise the provision in the entityIs financial statements. (he accumulate$ provision in the ta2 accounts has been increasing every year. (he balance at the balance sheet $ate is )-@//- net of any utilisation of the provision. (he possibility of a $ecrease in this provision is remote- probably occurring only if the entity %as li3ui$ate$. Solution Des- management shoul$ recognise a $eferre$ ta2 liability in respect of this provision %ith the correspon$ing entry to the ta2 charge in the income statement. ;anagement shoul$ calculate the ta2 base of the provision as follo%s: "the provision is not recognise$ in the financial

+arrying amount

Future $e$uctible amounts Future ta2able amounts (a2 base

)-@//

statements& "the provision is $e$uctible for ta2 purposes in the current perio$& "the e2pense of future utilisation of the provision %ill not be $e$uctible for ta2 purposes&

)-@//

(he entity has a ta2able temporary $ifference of )-@// "nil )-@//&. ;anagement shoul$ recognise a $eferre$ ta2 liability in respect of the ta2able temporary $ifference. IFRS a$opt the balance sheet mo$el. ;anagement shoul$ therefore recognise the $eferre$ ta2 liability even though a future li3ui$ation of the entity might appear to be remote. iii& Investments %ithin groups (he ac3uisition of an investment in a subsi$iary- associate- branch or ,oint venture %ill give rise to a ta2 base for the investment in the parent un$ertakingPs financial statements. (he ta2 base is often the cost pai$. 9ifferences bet%een the ta2 base an$ the carrying amount %ill arise in the perio$s after ac3uisition $ue to changes in the carrying amount. (he carrying amount %ill change- for e2ample- if the investment is accounte$ for using the e3uity metho$- or if an impairment charge is recor$e$. E@A$P?E' In)estment in subsidiary and im!airment Dou buy a subsi$iary for EA/m. (ra$ing is poor- an$ you book an impairment charge of E#/m. (he ta2 base is EA/m- representing the cost. It is not a$,uste$ for the impairment charge- creating a $ifference bet%een the ta2 base an$ the carrying amount of E#/m.

Investment in subsi$iary +ash $ecording purc"ase of subsidiar Impairment of subsi$iary Investment in subsi$iary (a2 income "$eferre$ ta2& O ./? 9eferre$ ta2 asset $ecording impairment c"arge and (deferred) tax c"arge, T"e deferred tax asset !ill be released !"en t"e investment is finall li#uidated and t"e loss is allo!ed for tax,

I=. ! ! I ! I !

6R A/m #/m

#R A/m #/m .m

.m

iv& 12pecte$ manner of li3ui$ating assets an$ liabilities (he measurement of $eferre$ ta2 liabilities an$ assets shoul$ reflect the %ay in %hich management e2pects to li3ui$ate the un$erlying asset or liability. For e2ample- in some countries a $ifferent ta2 rate may apply $epen$ing on %hether management $eci$es to sell or use the asset. 4o%ever- the $eferre$ ta2 liabilities or assets associate$ %ith non-$epreciable assets "such as lan$& can only reflect the ta2 conse3uences that %oul$ follo% from the sale of that asset. (his is because the asset is not $epreciate$. (herefore- for ta2 purposes- the carrying amount "or ta2 base& of the non-$epreciable asset reflects the value recoverable from the sale of the asset. #alculate tem!orary differences (he concept of temporary $ifferences is central to $eferre$ ta2 accounting. (his means that the $ifference %ill eventually reverse. (emporary may not mean short-term: it may take many years until the accruals are completely reverse$. (emporary $ifferences arise %hen the carrying amount of an asset or liability $iffers from its ta2 base.

* deductible tem!orary difference generates a deferred tax asset "%hich %ill re$uce future payments& an$ a taxable tem!orary difference gi)es rise to a deferred tax liability "%hich %ill increase future payments&. (a2able temporary $ifferences occur %hen ta2 is charge$ in a perio$ after the accounting perio$ suffers the e2pense in the financial accounts. (a2able temporary $ifferences arise %hen: -an assetPs carrying amount is greater than its ta2 base= or %hen -a liabilityPs carrying amount is less than its ta2 base. ;any ta2able temporary $ifferences arise because the transaction is recognise$ in $ifferent perio$s for ta2 an$ accounting purposes.

E@A$P?E' 6eductible Tem!orary 6ifference interest revenue is inclu$e$ in pre-ta2 accounting profit on a timeapportionment basis but may be ta2able on a cash basis. I=. 6R #R +ash ! )// Interest revenue I #// 9eferre$ interest revenue ! .// (a2 e2pense O ./? 9eferre$ ta2 asset +urrent ta2 liability $eceipt of cas" and tax pa ment &period ' -artial recognition of revenue and tax 9eferre$ interest revenue Interest revenue (a2 e2pense O ./? I ! ! ! I I ./ </ >/ #// #// ./

9eferre$ ta2 asset .nterest revenue and tax expense recognition &period ( (Same for period ))

./

E@A$P?E' Taxable Tem!orary 6ifference i& interest revenue is inclu$e$ in pre-ta2 accounting profit %hen accrue$ but may be ta2able on a cash basis. I=. 6R Interest receivable ! A// Interest revenue I 9eferre$ ta2 liability ! (a2 e2pense O ./? "$eferre$ ta2& I #</ $ecognition of revenue and application of deferred tax& period ' +ash ! A// Interest receivable I (a2 e2pense O ./? I #</ +ash K ta2 payment ! 9eferre$ ta2 liability ! #</ (a2 e2pense I $eceipt of cas" and tax pa ment& period (

#R A// #</

A// #</ #</

E@A$P?E' Taxable Tem!orary 6ifference ii& revenue from the sale of goo$s is inclu$e$ in pre-ta2 accounting profit %hen goo$s are $elivere$- but may be inclu$e$ in ta2able profit %hen cash is collecte$. 8oo$s sol$ for #// $elivere$ in year #- cash collecte$ an$ ta2e$ in year .. I=. 6R #R *ccounts receivable ! #// Revenue I #// 9eferre$ ta2 liability ! ./ (a2 e2pense "$eferre$ ta2& O ./? I ./

$eceipt of cas" and tax recognition &period ' +ash *ccounts receivable 9eferre$ ta2 liability +urrent ta2 liability $eceipt of cas" and tax liabilit recognition &period (

! ! ! !

#// #// ./ ./

E@A$P?E' Taxable Tem!orary 6ifference iii& accumulate$ accounting $epreciation may $iffer from cumulative ta2 $epreciation because $epreciation is accelerate$ for ta2 purposes= *ccounting $epreciation is #// an$ for ta2 purposes it is #@/. I=. 6R #R 9epreciation I #// *ccumulate$ $epreciation ! #// +urrent ta2 "re$uction& #@/ O ./? ! )/ (a2 income I ./ 9eferre$ ta2 liability ! #/ Depreciation and "ig"er tax credit &period ' 9epreciation I #// *ccumulate$ $epreciation ! #// +urrent ta2 "re$uction& @/ O ./? ! #/ (a2 income I ./ 9eferre$ ta2 liability ! #/ Depreciation and lo!er tax credit &period (

E@A$P?E' Taxable Tem!orary 6ifference iv& $evelopment costs have been capitalise$ for accounting purposes an$ %ill be amortise$ to the income statement- but may have been $e$ucte$ as an e2pense in $etermining ta2able profit in the perio$ in %hich they %ere incurre$. *mortise$ over < years starting from the year after they %ere incurre$. I=. 6R #R 9evelopment costs "capitalise$& ! #// +ash ! #// +urrent ta2 "re$uction& O ./? ! ./ 9eferre$ ta2 liability ! ./ Development costs capitalised but allo!ed for tax credit &period ' 9epreciation K $evelopment costs I .@ *ccumulate$ $epreciation ! .@ 9eferre$ ta2 liability ! @ (a2 income O ./? I @ Depreciation and adjustment for tax &period (

E@A$P?E' Taxable Tem!orary 6ifference v& prepai$ e2penses for accounting purposes may have been $e$ucte$ on a cash basis in $etermining the ta2able profit. I=. 6R #R +ash ! #// 6repai$ e2penses ! #// +urrent ta2 "re$uction& O ./? ! ./ 9eferre$ ta2 liability ! ./ -a ment of cas" and tax credit &period ' 12pense I #// 6repai$ e2penses ! #// 9eferre$ ta2 liability ! ./

(a2 income "$eferre$ ta2& O ./? I ./ Cost and tax income recognition &period ( (he ta2 la%s of the un$ertakingPs operations %ill $etermine the temporary $ifferences. 9e$uctible temporary $ifferences occur %hen ta2 is charge$ in a perio$ after the accounting perio$ suffere$ the e2pense in the financial accounts. 9e$uctible temporary $ifferences arise %hen: -an assetPs carrying amount is less than its ta2 base= or %hen -a liabilityPs carrying amount is greater than its ta2 base. Bike ta2able temporary $ifferences- many $e$uctible temporary $ifferences arise from $ifferences in the timing of recor$ing the un$erlying transaction for accounting an$ ta2 purposes. 9e$uctible temporary $ifferences e2amples: E@A$P?E' 6eductible Tem!orary 6ifference i& accumulate$ $epreciation $iffers from cumulative ta2 $epreciation as $epreciation may be accelerate$ for accounting purposes. *ccumulate$ $epreciation is #@/ but cumulative ta2 $epreciation is #//. I=. 6R #R 9epreciation I #// *ccumulate$ $epreciation ! #// +urrent ta2 "re$uction& @/ O ./? ! #/ (a2 income I .< 9eferre$ ta2 asset ! #/ Depreciation and lo!er tax credit &period ' 9epreciation I #//

*ccumulate$ $epreciation +urrent ta2 "re$uction& #@/ O ./? (a2 income 9eferre$ ta2 asset Depreciation and "ig"er tax credit &period (

! ! I !

#// )/ ./ #/

E@A$P?E' 6eductible Tem!orary 6ifference ii& employee e2penses- or pension payments- are recor$e$ %hen incurre$ for accounting purposes an$ but only for ta2 purposes %hen pai$ in cash. I=. 6R #R 6ension e2pense I #// *ccrual ! #// 9eferre$ ta2 asset ! ./ (a2 income "$eferre$ ta2& O ./? I ./ Accrual of pension costs +ash ! #// *ccrual ! #// +urrent ta2 "re$uction& O ./? ! ./ 9eferre$ ta2 asset ! ./ Cost and tax income recognition &period ( E@A$P?E' 6eductible Tem!orary 6ifference iii& an impairment loss recor$e$ for accounting purposes %ill not affect the current ta2 liability until $isposal of the property. I=. 6R #R Impairment of property I #/m *ccumulate$ $epreciation of property ! #/m (a2 income "$eferre$ ta2& O ./? I .m 9eferre$ ta2 asset ! .m

$ecording impairment c"arge and (deferred) tax c"arge E@A$P?E' 6eductible Tem!orary 6ifference iv& research costs are e2pense$ in the perio$ for accounting purposes- but may only be $e$ucte$ in a later perio$ for ta2 purposes. I=. 6R Research cost I #/m +ash ! (a2 income "$eferre$ ta2& O ./? I 9eferre$ ta2 asset ! .m $esearc" cost and deferred tax asset &period ' +urrent ta2 liability "re$uction& ! .m 9eferre$ ta2 asset ! Tax income &later period

#R #/m .m

.m

E@A$P?E' 6eductible Tem!orary 6ifference v& the recognition of income is $eferre$ for accounting purposesbut may be inclu$e$ in ta2able profit in the current perio$. I=. 6R #R +ash ! @// 9eferre$ revenue ! @// 9eferre$ ta2 asset O ./? ! #// +urrent ta2 liability ! #// $eceipt of cas" and tax pa ment &period ' 9eferre$ revenue ! @// Revenue I @// (a2 e2pense "$eferre$ ta2& O ./? I #// 9eferre$ ta2 asset ! #// $evenue and tax expense recognition &period (

E@A$P?ES' 6eferred tax on s are o!tions #. 1 plc has grante$ share options to key employees both before an$ after A Covember .//.. On a$option of IFRS .- Share-based Payment- 1 plc is not opting to apply the stan$ar$ fully retrospectively so no e2pense %ill be recognise$ in the income statement in respect of those share a%ar$s grante$ before A Covember .//.. 5n$er 5 ta2 legislation- a ta2 $e$uction- e3ual to the intrinsic value of the options at e2ercise $ate- %ill be available to 1 plc %hen the employees e2ercise their options an$ receive the shares. 9oes this give rise to a $eferre$ ta2 asset $uring the perio$ bet%een the options being grante$ an$ e2ercise$J If the amount of that $eferre$ ta2 asset changes in the future- %ill the change be recognise$ in profit or loss or $irectly in e3uityJ I*S #. re3uires $eferre$ ta2 to be recognise$ on all temporary $ifferences. (hat is- the $ifference bet%een the ta2 base an$ the accounting carrying amount of assets an$ liabilities. In respect of the options grante$ after A Covember .//.- a temporary $ifference arises bet%een the ta2 base of the share option that has been recognise$ in the income statement "base$ on the future ta2 $e$uctions& an$ its carrying value in the balance sheet "nil because the IFRS . share-base$ payment e2pense is offset by a correspon$ing cre$it entry in retaine$ earnings&. (his gives rise to a $eferre$ ta2 asset. Similarly- a $eferre$ ta2 asset %ill arise in respect of the options grante$ before A Covember .//.. (he ta2 base of these options- like those grante$ more recently- is base$ on the future ta2 $e$uctions. (he carrying value of the options in

the balance sheet is- again- nil because there is no share-base$ payment e2pense. On first-time a$option of IFRS- the cre$it entry in respect of this $eferre$ ta2 asset %ill be recognise$ in e3uity. (he ta2 $e$uction %ill- on e2ercise of the option- be e3ual to the intrinsic value of the options at the e2ercise $ate- %hich cannot be kno%n for certain until the $ate of e2ercise. (herefore- the ta2 base "that is- the amount of the ta2 $e$uction to be obtaine$ in the future& shoul$ be estimate$ on the basis of the information available at the en$ of the perio$ "the entityIs share price at the balance sheet $ate&. *t each balance sheet $ate- the $eferre$ ta2 asset %ill be reestimate$ on the basis of information available at that time an$ the movements in the asset recognise$ in profit or loss for share options grante$ after A Covember .//. "e2cept to the e2tent that the $eferre$ ta2 e2cee$s the total IFRS . charge- in %hich case movements are recognise$ in e3uity& an$ in e3uity for share options grante$ before that $ate. .. 6eferred tax on s are'based !ayments 1ntity * is resi$ent in a country %here e3uity-settle$ share-base$ payments are $e$uctible for ta2 purposes. (he ta2 authorities allo% the entire ta2 $e$uction on the grant $ate of the a%ar$. 1ntity * grants an e3uity-settle$ share-base$ payment a%ar$ to its employees on the last $ay of its .//A financial year. (he a%ar$ vests in three yearsI time. On grant $ate- the full ta2 $e$uction is provi$e$ by the ta2 authorities. Since no service has been provi$e$ %hen the year-en$ financial statements are $ra%n up- entity * recor$s no e2pense in terms of IFRS ..

Shoul$ entity * recognise $eferre$ ta2 in respect of the a%ar$ in its year-en$ financial statementsJ (here are no recognise$ assets or liabilities in the accounts of entity * in respect of this a%ar$. (he initial recognition e2emption ho%ever $oes not apply since the ta2able profit has been affecte$ by this transaction "para .."b& of I*S #.&. (his situation is analogous to e2ample @ of *ppen$i2 ! in I*S #.. In that e2ample- the ta2 authorities provi$e the company %ith a ta2 $e$uction after the IFRS . e2pense is recor$e$. (here is no recognise$ asset or liability in that e2ample either- yet a $eferre$ ta2 asset is recognise$ since- in the future- the company %ill pay less ta2 than it shoul$ base$ on its accounting profit. 1ntity * shoul$ therefore recognise a $eferre$ ta2 liability in its .//A financial statements. (his treatment is confirme$ in para )#< of the basis of conclusion to IFRS .. (a2able an$ $e$uctible temporary $ifferences arise %here the accounting measurement of assets an$ liabilities $iffers from the ta2 basis. : %air 1alue Ad;ustments 9ifferences arising from fair value a$,ustments- %hether on ac3uisition or other%ise- are treate$ the same as any other ta2able an$ $e$uctible $ifferences. In simple terms- sales generally generate a ta2 charge. Revaluations "fair value a$,ustments& generate a $eferre$ ta2 charge "an accrual for ta2&. 9ifferences arising from fair value a$,ustments e2amples: E@A$P?E ' %air 1alue Ad;ustments i& financial instruments are carrie$ at fair value- but no matching revaluation may be ma$e for ta2 purposes.

Financial instrument 8ain K fair value a$,ustment (a2 e2pense "$eferre$ ta2& O ./? 9eferre$ ta2 liability $evaluation of financial instrument

I=. ! I I !

6R #// ./

#R #// ./

E@A$P?E ' 6eferred tax on a)ailable'for'sale e>uity in)estments *n entity hol$s an available-for-sale investment- ie- shares in a liste$ company. (he ta2 base of the shares is Q@//- %hich %as the amount initially pai$ for the shares. (he fair value of the shares at the year en$ is Q#-///. *t the balance sheet $ate- the entity e2pects to sell the shares in five years an$ receive $ivi$en$s of Q@// $uring this five-year perio$. 9ivi$en$s are not e2pecte$ to impair the carrying amount of the investment %hen pai$. 9ivi$en$s are non-ta2able. !ase$ on the current ta2 legislation- if the shares %ere sol$ after five years- capital gains ta2 at a rate of #/? %oul$ be payable on the e2cess of sales price over cost. 4o% much $eferre$ ta2 "if any& shoul$ the entity recognise at the balance sheet $ateJ (he principle in I*S #. is that an entity shoul$ recognise $eferre$ ta2 base$ on the e2pecte$ manner of recovery of an asset- or liability- at the balance sheet $ate. (he $ivi$en$s are e2pecte$ to be $erive$ from the investeeIs future

earnings rather than from its e2isting resources at the balance sheet $ate. 8iven that there is no impairment e2pectation arising from the $ivi$en$s- the entity $oes not e2pect the carrying amount at the balance sheet $ate to be recovere$ through future $ivi$en$s but rather through sale. (his is important since the e2pecte$ manner of recovery %ill $etermine the $eferre$ ta2 treatment. (he carrying amount of Q#-/// has a correspon$ing ta2 base of Q@// on sale. (here is a ta2able temporary $ifference of Q@// at the balance sheet $ate. (he applicable ta2 rate is the capital gains rate of #/?. (he entity shoul$ recognise a $eferre$ ta2 liability of Q@/ relating to the shares. E@A$P?E ' %air 1alue Ad;ustments ii& revaluation of property- plant an$ e3uipment "I*S #>& to fair value- but no a$,ustment for is allo%e$ for ta2 purposes. I=. 6R #R Revaluation of property- plant an$ e3uipment ! A// Revaluation reserve-e3uity ! A// (a2 e2pense "$eferre$ ta2& O ./? charge$ ! #</ to e3uity 9eferre$ ta2 liability ! #</ $evaluation of propert E@A$P?E ' Recognition of ca!ital losses 1ntity F "a 5 company sub,ect to 5 ta2& has a portfolio of properties an$ has capital ta2 losses arising from that portfolio. In the current year- entity F has revalue$ its lan$ an$ buil$ings resulting in a "capital gains ta2& $eferre$ ta2 liability being recognise$ in respect of lan$ an$ buil$ings.

1ntity F $oes not e2pect to realise the capital gain arising from the revaluation for a number of years. Is entity F re3uire$ to recognise a $eferre$ ta2 asset no% in respect of the capital losses un$er I*S #.J I*S #. uses the %or$ s all %hen it states that $eferre$ ta2 assets shall be recognise$ for all $e$uctible temporary $ifferences to the e2tent that ta2able profit %ill be available against %hich the $e$uctible temporary $ifference can be utilise$. 1ntity F is re3uire$- therefore- to recognise a $eferre$ ta2 asset in respect of the capital losses if those losses can properly be utilise$ against the future crystallisation of the capital gains. (he fact that there is no current intention to realise the capital gain through the sale of the properties $oes not affect the recognition of the $eferre$ ta2 liability. (he $ifference bet%een the ta2 base%hich remains the same $espite the revaluation- an$ the revalue$ carrying amount of the asset- is a temporary $ifference that gives rise to a $eferre$ ta2 liability. 1ntity F shoul$ offset the presentation of the $eferre$ ta2 liability arising from the revaluation an$ the $eferre$ ta2 asset in respect of the capital losses if they meet the criteria in I*S #.. In other %or$sthere is a legal right to offset the $eferre$ ta2 assets an$ liabilities an$ they relate to the same ta2ation authority. *s long as these criteria are met- there is no re3uirement to sche$ule the reversal of the temporary $ifferences to ensure that the timing matches. On ac3uisition- assets of the company purchase$ shoul$ be fair value$. (his %ill reflect their market value rather than their book value. (hese values %ill be use$ in the consoli$ate$ accounts.

Cormally any change in value %ill not imme$iately create a ta2 charge or ta2 cre$it. 9eferre$ ta2 shoul$ reflect the value change. Revaluations "fair value a$,ustments& generate a $eferre$ ta2 charge "an accrual for ta2&.(he net $ifference %ill increase or $ecrease goo$%ill. E@A$P?E ' %air 1alue Ad;ustments iii& fair value of assets an$ liabilities on ac3uisition- $oes not affect the current ta2 in the consoli$ate$ accounts until each asset is realise$. I=. 6R #R Fair value of property- plant an$ e3uipment ! >// Inventory K fair value provision ! A@ *ccounts receivable K fair value provision ! .@ 8oo$%ill 9eferre$ ta2 liability ">//-A@-.@& O./? /air valuing assets after ac#uisition ! ! <// #//

(emporary $ifferences %ill arise from consoli$ation %hen the carrying amount of an item in the consoli$ate$ financial statements $iffers from its ta2 base. (he ta2 base is often base$ on the carrying values an$ ta2 charges of the in$ivi$ual group members. (emporary $ifferences %ill arise from consoli$ation e2amples: "In consoli$ate$ accounts- profits that have been generate$ from moving inventory from one unit to another are eliminate$- unless the inventory has left the group. (his removes unrealise$ profits.&

E@A$P?E 8 #onsolidation i& unrealise$ profits resulting from intra-group transactions are eliminate$ on consoli$ation but not from the ta2 base. I=. 6R #R Revenue-Intra-group sales I @/// +ost of sales-Intra-group purchases I @/// +ost of sales-re$uction of intra-group profit I <// Inventory ! <// 9eferre$ ta2 asset ! :/ (a2 income "$eferre$ ta2& O ./? ! :/ 6rovision against loss of investment Investment 9eferre$ ta2 asset (a2 income "$eferre$ ta2& O ./? .ntra&group transactions eliminated on consolidation I ! ! I )// )// >/ >/

E@A$P?E 8 #onsolidation ii& the retaine$ earnings of controlle$ un$ertakings are inclu$e$ in consoli$ate$ retaine$ earnings- but ta2es are pai$ on profits %hen $istribute$ to the parent. I=. 6R #R Cet assets of subsi$iary ! </// 6rofits/retaine$ earnings I/! </// 9eferre$ ta2 liability ! :// (a2 e2pense "$eferre$ ta2& O ./? I :// $etained earnings of controlled underta0ings included in consolidated

retained earnings E@A$P?E 8 #onsolidation iii& investments in foreign un$ertakings that are affecte$ by changes in foreign e2change rates. (he carrying amounts of assets an$ liabilities are restate$ for accounting purposes for changes in e2change rates- but no similar a$,ustment is ma$e for ta2 purposes. "See I*S .#.& I=. 6R #R Cet assets of subsi$iary ! >/// Foreign currency gain - e3uity ! >/// 9eferre$ ta2 liability ! #.// (a2 e2pense "$eferre$ ta2& O ./? -e3uity ! #.// /oreign currenc gain of controlled underta0ings included in consolidated retained earnings E@A$P?E 8 6eferred tax on subsidiary loan 1ntity +- a French entity %ith a euro functional currency- has a Russian subsi$iary- entity 9- %ith a rouble functional currency. 1ntity + has ma$e a 5S $ollar loan to entity 9- %hich 3ualifies as part of +Is net investment "3uasi-capital& in 9 in accor$ance %ith I*S .#. * temporary $ifference e2ists bet%een the book value an$ the ta2 base of the loan for the parent- +- an$ the subsi$iary- 9. (here also e2ists a temporary $ifference in respect of the loan on consoli$ation. (he book value of the loan is nil on consoli$ation because the amount receivable by the parent eliminates against the amount payable by the subsi$iary. 4o%ever- the ta2 base of the parentIs loan receivable an$ the ta2

base of the subsi$iaryIs loan payable are not eliminate$ because they relate to $ifferent ta2 ,uris$ictions an$ are of $ifferent values. ;anagement is consi$ering the accounting for the temporary $ifferences an$ $eferre$ ta2 in the parentIs separate financial statements- in the subsi$iaryIs separate financial statements an$ in the consoli$ate$ financial statements. Co- $eferre$ ta2 shoul$ be recognise$ in the parentIs separate financial statements in respect of the temporary $ifference bet%een the book value of the loan an$ the ta2 base of the loan. (his is because I*S #. $oes not permit the recognition of $eferre$ ta2 by a parent in respect of investments in subsi$iaries provi$e$ certain con$itions are met. (he con$itions are: a& for ta2able temporary $ifferences that the parent can control the timing of the reversal of the temporary $ifference= an$ it is probable that the temporary $ifference %ill not reverse in the foreseeable future. b& for $e$uctible temporary $ifferences- it is not probable that the temporary $ifference %ill reverse in the foreseeable future= an$ that there %ill be ta2able profit against %hich the $e$uctible temporary $ifference can be utilise$. Similarly- no $eferre$ ta2 is recognise$ in the consoli$ate$ financial statements. (he e2ceptions provi$e$ by I*S #. apply in the consoli$ate$ financial statements provi$e$ the con$itions set out above are met. 4o%ever- $eferre$ ta2 shoul$ be recognise$ in the separate financial statements of the subsi$iary in respect of the temporary $ifference that arises on the loan from the parent. (he e2ceptions in I*S #. only apply for investments of investors an$ not for correspon$ing loans payable by the investees. E@A$P?E 86eferred tax' sales to associates

1ntity * has a )# 9ecember year en$. * ac3uire$ a </? interest in an associate- entity !- on )# 9ecember ./L@ for @//-///. On the same $ate- * sol$ goo$s costing >/-/// to ! for A/-///. ! still hol$s all these goo$s in inventory at the year-en$. 1ntity ! $i$ not earn any profits on )# 9ecember ./L@ so there is no share of !.s profits for * to recognise %hen applying e3uity accounting. 4o%ever- * recognises an a$,ustment in its consoli$ate$ financial statements to eliminate its share of the unrealise$ profit of #/-/// arising on the sale of inventory to !. (his consoli$ation a$,ustment is: 9r: Share of results of associates "</? 2 #/-///& <-/// +r: Investment in associate <-/// ! %ill probably sell the inventory in the ne2t #. months. If so- the $e$uctible temporary $ifference associate$ %ith the unrealise$ profit %ill reverse in the ne2t #. months. 1ntities * an$ ! resi$e in $ifferent ta2 ,uris$ictions an$ pay income ta2 at </? an$ )/? respectively. What $eferre$ ta2 a$,ustments shoul$ *Is management recognise in respect of the inventory sol$ by * to !J 1ntity * shoul$ recognise a $eferre$ ta2 asset of #->//- provi$e$ it is probable that it %ill have ta2able profits against %hich to utilise this $eferre$ ta2. (he a$,ustment to eliminate *Is share of the unrealise$ profit on

sale of inventory to ! creates a temporary $ifference in respect of the carrying amount of *Is investment in ! in *Is consoli$ate$ financial statements. (he temporary $ifference relates to *Is asset "its investment in !&. It is therefore *Is ta2 rate that is use$ to calculate the $eferre$ ta2.(he temporary $ifference is calculate$ in accor$ance %ith I*S #. as: *ccounting base of investment in ! "@//-/// - <-///& <0>-/// (a2 base of investment in ! 9e$uctible temporary $ifference 9eferre$ ta2 asset @//-/// <-/// "<-/// 2 </?& #->//

E@A$P?E 8Accounting for a tax re)aluation 1ntity ! operates in country L. ! has un$ertaken a group restructuring $uring the current year an$ as a conse3uence the ta2 authorities have allo%e$ a revaluation of the fi2e$ assets to market value at the $ate of the reorganisation for ta2 purposes. 4o%ever- the reorganisation is not a business combination for IFRS purposes an$ so there has been no change in the IFRS carrying value of the fi2e$ assets. +onse3uently the ta2 base on all the fi2e$ assets concerne$ has increase$ an$ is no% higher than the IFRS book values. 4o% shoul$ entity ! account for this change in ta2 values of the fi2e$ assets in its consoli$ate$ financial statementsJ (he $ifferences bet%een the IFRS book values for the fi2e$ assets an$ the ta2 values represent temporary $ifferences.

(he temporary $ifferences %ill potentially result in the recognition of $eferre$ ta2 assets. ! shoul$ therefore assess %hether it is probable that the $eferre$ ta2 assets %ill be recovere$ an$ recognise them to the e2tent that it is probable. (he recognition of the $eferre$ ta2 assets %ill result in the recognition of $eferre$ ta2 income in the income statement. (his cre$it cannot be reporte$ in e3uity as I*S #.- Income (a2esonly allo%s $eferre$ ta2 to be recognise$ in e3uity if the correspon$ing IFRS entry %as also to e3uity. (his is not the case here as the revaluation %as not recognise$ at all for IFRS purposes. E@A$P?E 8 Recognition of deferred tax 8 first'time ado!tion 1ntity !- a manufacturing entity- is a$opting IFRS for the year en$ing )# 9ecember .//@ %ith a transition $ate of # Ranuary .//<. 1ntity ! operates in a country %here the government provi$es ta2 incentives to invest in property- plant an$ e3uipment "661& in certain sectors of the economy by provi$ing a$$itional ta2 $e$uctions for the cost of the 661. For e2ample- an item of plant an$ machinery %hich cost #// 3ualifies for ta2 $e$uctions "capital allo%ances& of #)/.(he a$$itional ta2 $e$uction of )/ "#)/ - #//& represents a temporary $ifference that arises on initial recognition of the asset. (he gui$ance I*S #. re3uires that no $eferre$ ta2 is recognise$ in respect of the temporary $ifference that arises on initial recognition of the 661 e2cept %hen the asset concerne$ is ac3uire$ in a business combination "the initial recognition e2emption.&. When preparing the transition balance sheet at # Ranuary .//<-

shoul$ entity ! apply the initial recognition e2emption %hen calculating the $eferre$ ta2: "a& to 661 purchase$ $irectly by the group= "b& to 661 ac3uire$ in a business combinationJ "a& Des- entity ! shoul$ apply the initial recognition e2emption %hen calculating $eferre$ ta2 in the transition balance sheet. (he basic principle in IFRS #- First-time Adoption of IFRS- is the retrospective application of all IFRSs e2cept %here an e2emption or e2ception permits or re3uires other%ise. +onse3uently entity ! shoul$ not recognise $eferre$ ta2 on transition in respect of that portion of the temporary $ifference that arose on initial recognition of a $irectly purchase$ item of 661. "b& (he initial recognition e2emption $oes not apply to assets an$ liabilities ac3uire$ in a business combination. +onse3uently $eferre$ ta2 is calculate$ on transition on the full temporary $ifference bet%een accounting base an$ ta2 base for 661 originally ac3uire$ in a business combination. (his inclu$es business combinations %here the IFRS # business combinations e2emption is applie$ $ue to the re3uirement of IFRS # that the measurement of $eferre$ ta2 shoul$ follo% from the measurement of other assets an$ liabilities. Cot all temporary $ifferences are recognise$ as $eferre$ ta2 balances. (he e2ceptions are: i& goo$%ill an$ negative goo$%ill= ii& initial recognition of certain assets an$ liabilities= an$

iii& certain investments. -oodwill 8oo$%ill is the resi$ual amount after $e$ucting assets an$ liabilities at fair value from the purchase price in an ac3uisition. IFRS $o not permit the recognition of a $eferre$ ta2 liability for goo$%ill %hen its amortisation/impairment is not $e$uctible. "If it is fully $e$uctible- there is no timing $ifference- so no $eferre$ ta2 arises.& Since ;arch .//<- goo$%ill can no longer be amortise$ un$er IFRS "see IFRS ) %orkbook&. * $eferre$ ta2 liability in respect of goo$%ill is not permitte$- because it %oul$ increase the value of goo$%ill. 8enerally- goo$%ill is a group accounting concept. In most countries- it is the in$ivi$ual companies that are ta2e$- not the group. It is 3uite rare for goo$%ill "an$ its amortisation or impairment& to be items that attract ta2 relief. Where authorities $o ta2 a business combination- $eferre$ ta2 may arise. If an item "income or e2pense& is not ta2able- it shoul$ be e2clu$e$ from the calculations as a permanent $ifference "see above&. (a2able temporary $ifferences also arise in the follo%ing situations: +ertain IFRSs permit assets to be carrie$ at a fair value or to be revalue$: - if the revaluation of the asset is also reflecte$ in the ta2 base then no temporary $ifference arises. - if the revaluation $oes not affect the ta2 base then a temporary $ifference $oes arise an$ $eferre$ ta2 must be provi$e$. 0egati)e -oodwill I*S #. $oes not permit the recognition of a $eferre$ ta2 asset arising from $e$uctible temporary $ifferences associate$ %ith negative goo$%ill- %hich is treate$ imme$iately as income "see IFRS )&. It is therefore a permanent $ifference "see above& an$ $eferre$ ta2 $oes CO( apply. Initial recognition of certain assets and liabilities (he secon$ e2ception relates to a temporary $ifference that arises from the initial recognition of an asset or liability "other than from a business combination& an$ affects neither accounting income nor ta2able profit.

(his e2ception %ill apply in limite$ circumstances- such as: i& assets for %hich no $e$uctions are available for ta2 purposes an$ %ill be recovere$ through use. For e2ample- some ta2 authorities $o not ta2 the gain or loss on $isposal of an e3uity investment= the ta2 base of such an investment is therefore 7ero= an$ ii& assets %hich have a ta2 base that is $ifferent from the cost base at ac3uisition. For e2ample- an asset %hich attracts an investment ta2 cre$it. (his may also apply %hen a non-ta2able government grant relate$ to an asset is $e$ucte$ in arriving at the carrying amount of the asset butfor ta2 purposes- is not $e$ucte$ from its ta2 base= the carrying amount of the asset is less than its ta2 base- an$ this gives rise to a $e$uctible temporary $ifference. 8overnment grants may also be set up as $eferre$ income "see I*S ./&- in %hich case the $ifference bet%een the $eferre$ income- an$ its ta2 base of nil- is a $e$uctible temporary $ifference. Whichever metho$ of presentation an un$ertaking a$opts- the un$ertaking $oes not recor$ the resulting $eferre$ ta2 asset. (his e2ception $oes not apply to a compoun$ financial instrument that is recognise$ as both $ebt an$ e3uity. (he $eferre$ ta2 impact of the temporary $ifference on the $ebt component is recognise$ as part of the carrying amount of the e3uity component. #ertain in)estments 5n$ertakings shoul$ recognise $eferre$ ta2 assets or liabilities for investments in subsi$iaries- associates an$ ,oint ventures e2cept in the follo%ing situations: i& $eferre$ ta2 liabilities shoul$ not be recor$e$ %here the parent "or investor& is able to control the timing of the reversal of the temporary $ifference- an$ it is probable that the temporary $ifference %ill not reverse in the foreseeable future= an$ ii& $eferre$ ta2 assets shoul$ not be recor$e$ if the temporary $ifferences are e2pecte$ to continue to e2ist in the foreseeable future. E@A$P?E'#ontrol of timing of di)idends (hese con$itions may be met %here a parent has control over a subsi$iaryPs $ivi$en$ policy an$ has $eci$e$ that un$istribute$ profits %ill not be $istribute$ in the foreseeable future.

Investors shoul$ usually recor$ $eferre$ ta2 liabilities for associates an$ ,oint ventures- unless there is an agreement bet%een the parties that profits %ill not be $istribute$ in the foreseeable future. E@A$P?E'Associate Dou have a </? share of a company. It has been agree$ that $ivi$en$s %ill be pai$ annually- if cash is available. 9eferre$ ta2 shoul$ be calculate$ for any timing $ifferences. (his reflects the ta2 that %oul$ be pai$ in the parent un$ertaking if $ivi$en$s are receive$ from group companies- especially foreign investments. (he assumption is that the profits ma$e by these investments %ill be pai$ to the parent- an$ that $eferre$ ta2 nee$s to be provi$e$. (o avoi$ provi$ing $eferre$ ta2- the parent must sho% that such $ivi$en$s %ill not be pai$. 9 6eferred Tax Assets 9eferre$ ta2 assets arising from $e$uctible temporary $ifferences must be revie%e$ to $etermine to %hat e2tent they shoul$ be recognise$. (he realisation of $eferre$ ta2 assets $epen$s on ta2able profits being available in the future. E@A$P?E'"nusable deferred tax assets Dou have a $eferre$ ta2 asset of E#m. (he firm is continually generating losses- an$ the $irectors $eci$e to li3ui$ate the firm over the ne2t t%o years. Further losses are anticipate$ in the ne2t t%o years. (he $eferre$ ta2 asset shoul$ be %ritten off- unless there is a realistic metho$ to transfer it to another firm that can use it. 9eferre$ ta2 asset (a2 e2pense 1rite off of deferred tax asset I=. ! I 6R #m #R #m

(a2able profits "on %hich ta2 %ill be pai$& arise from three sources: i& Existing taxable tem!orary differencesJ ta2able temporary $ifferences e2ist relating to the same ta2 authority an$ the same ta2able un$ertaking.

(o 3ualify as a $eferre$ ta2 asset- these $ifferences shoul$ reverse in the same perio$ as the e2pecte$ reversal of the $e$uctible temporary $ifference= or in the perio$s into %hich a ta2 loss arising from a $eferre$ ta2 asset can be carrie$ back or for%ar$. E@A$P?E'"sable deferred tax assets Dou have a ta2 loss of E#/m. (he firm %ill have a ta2 liability ne2t year from a ta2able temporary $ifference of E#@m. * $eferre$ ta2 asset shoul$ be recor$e$- as it %ill re$uce ne2t yearIs payment. I=. 6R #R 9eferre$ ta2 asset ! #/m (a2 income I #/m Creation of deferred tax asset from a tax loss ii& %uture taxable !rofitsJ the un$ertaking may recognise a $eferre$ ta2 asset %here it anticipates sufficient future ta2able profits. iii& Tax'!lanning acti)itiesJ un$ertakings commonly engage in ta2-planning activities to use ta2 assets. (a2-planning activities manage ta2able profit so that e2isting ta2 losses an$ cre$its $o not e2pire. (a2-planning activities usually attempt to move ta2able profit bet%een perio$s to use cre$its an$ losses. (a2-planning opportunities shoul$ be consi$ere$ in $etermining %hether recognition of a $eferre$ ta2 asset is appropriate. (hey shoul$ not ho%ever be use$ as a basis for re$ucing a $eferre$ ta2 liability until it is settle$. "nused tax losses and credits *n un$ertaking may recor$ a $eferre$ ta2 asset arising from unuse$ ta2 losses "or cre$its& %hen it is probable that future ta2able profit %ill be available against %hich the unuse$ losses "an$ cre$its& may be utilise$. (a2 losses- ho%ever- may in$icate that future ta2able profit %ill not be available. (his %oul$ be the case if the un$ertaking is continually tra$ing at a loss. Outstan$ing sales contracts an$ a strong earnings history- e2clusive of a loss "for e2ample from the sale of an unprofitable operation&- may provi$e evi$ence of future ta2able profit.

E@A$P?E ' Interim financial statements ' c ange in estimate Issue Income ta2 e2pense is recognise$ in each interim perio$ base$ on the best estimate of the %eighte$ average annual income ta2 rate e2pecte$ for the full financial year. *mounts accrue$ for income ta2 e2pense in one interim perio$ may have to be a$,uste$ in a subse3uent interim perio$ of that financial year if the estimate of the annual income ta2 rate changes SI*S)<T. 4o% shoul$ management account for the change in interim ta2 estimates in the subse3uent financial statementsJ .ackground 1ntity * has unuse$ ta2 losses carrie$ for%ar$ at )# 9ecember ./L. of )-///-///. *Is management $i$ not recognise a $eferre$ ta2 asset in the ./L. annual financial statements because of uncertainties regar$ing the utilisation of those losses. Forecasts sho%e$ no e2pecte$ ta2able profits for the ne2t three years. ;anagement took the same vie% in the first 3uarter of ./L) after incurring further losses. ;anagement therefore $i$ not recognise a $eferre$ ta2 asset in respect of the losses. (he losses carrie$ for%ar$ at )# ;arch ./L) %ere )-/>/-///. ;anagement signe$ a ne% )-year contract %ith a ma,or customer $uring the secon$ 3uarter of ./L).(he contract provi$e$ a significant increase in plant utilisation. ;anagement revise$ their profit forecasts base$ on this ne% contract an$ pre$ict that the ta2 losses %ill be fully utilise$ in .< months. ;anagement therefore have a vali$ basis for recognising a $eferre$ ta2 asset for the %hole of the ta2 losses carrie$ for%ar$ in the secon$ 3uarter interim financial statements.

Solution ;anagement shoul$ recognise a $eferre$ ta2 asset for the %hole of the ta2 losses carrie$ for%ar$- %ith the correspon$ing $eferre$ ta2 cre$it recognise$ in the secon$ 3uarter income statement. (he event that has cause$ the recognition of the $eferre$ ta2 asset is the signing of the contract in the secon$ 3uarter. Recognition of the $eferre$ ta2 in the secon$ 3uarter is appropriate even though the income to be generate$ from the contract %ill not be earne$ until future 3uarters. (he un$ertaking shoul$ recor$ a $eferre$ ta2 asset only to the e2tent that it has sufficient ta2able temporary $ifferences to match it- or %here there is strong evi$ence that sufficient ta2able profit %ill be available. E@A$P?E ' 6eferred tax assets for losses 1ntity + has significant ta2 losses- having ma$e tra$ing losses for the last t%o years an$ is consi$ering ho% much of this can be recognise$ as a $eferre$ ta2 asset. (he bu$gets an$ forecasts for the ne2t five years sho% a return to profitability in year four. What factors shoul$ be taken into account %hen $etermining %hether a $eferre$ ta2 asset can be recognise$J I*S #. $oes not specify a time perio$ in %hich recognise$ ta2 losses shoul$ be recovere$. (herefore- there shoul$ be no arbitrary cut-off in the time hori7on over %hich an assessment of recoverability is ma$e%hether or not bu$get information is available after a certain perio$. Only if it is not probable that future ta2able profit %ill be available at all is a $eferre$ ta2 asset not recognise$. Other%ise- a $eferre$ ta2 asset is recognise$ to the e2tent it is consi$ere$ probable there %ill be future ta2able profits.

Where an entity has a history of recent losses- it recognises a $eferre$ ta2 asset only %here there are sufficient ta2able temporary $ifferences or %here there is convincing other evi$ence that there %ill be future ta2able profits= such a history may be strong evi$ence that future ta2able profit %ill not be available. It may be that the probability of ta2able profits $ecreases the further into the future %e look- but any such assessment shoul$ be base$ on the facts. In some cases- it may be clear that no ta2able profits are probable after a specific time- for e2ample- %here significant contracts or patent rights terminate at a specific $ate. In other cases- the assessment shoul$ take into account the ma2imum ta2able profits that are consi$ere$ ,ust more probable than not in each year prior to e2piry of the ta2 losses. (his may result in lo%er estimates for years in the $istant future- but it $oes not mean that those years shoul$ not be consi$ere$. +are shoul$ also be taken to ensure that the pro,ections on %hich such assessments are ma$e are consistent %ith other communications ma$e by management an$ %ith the assumptions ma$e about the future in relation to other aspects of financial accounting "eg- impairment testing&- e2cept %here relevant stan$ar$s re3uire a $ifferent treatment "eg- impairment testing must not take account of future investment&. In a$$ition- in such circumstances- consi$eration shoul$ be given to the $isclosures about key sources of uncertainty re3uire$ by I*S #6resentation of Financial Statements .

E@A$P?E ' Portfolio !ro)ision ' deferred tax Issue * $eferre$ ta2 asset shoul$ be recognise$ for all $e$uctible temporary $ifferences to the e2tent that it is probable that ta2able profit %ill be available against %hich the $e$uctible temporary $ifference can be utilise$- unless certain limite$ e2ceptions apply. Shoul$ a bankIs management calculate a $eferre$ ta2 asset on the allo%ance for loan impairment $etermine$ on a portfolio basisJ .ackground !ank * calculates its allo%ance for loan impairment on a portfolio basis. (he approach is applie$ to sub-portfolios of loans that either have not been i$entifie$ as in$ivi$ually impaire$ or are not in$ivi$ually significant. Impairment an$ uncollectibility are measure$ an$ recognise$ in the financial statements of the bank in accor$ance %ith IFRS 0. *Is management e2pect the loan portfolio to increase in future years an$ the amount of the provision is also e2pecte$ to increase. (a2 relief is obtaine$ only %hen a specific loan is %ritten off. ;anagement believe that is not likely that the temporary $ifferences %ill reverse in the me$ium term- if at all. Solution Des- management shoul$ recognise a $eferre$ ta2 asset. (he allo%ance for loan impairment affects the carrying value of the loan portfolio an$ accounting profit. (here is no a$,ustment to the ta2 base of any loans. +onse3uently- a $e$uctible temporary $ifference e2ists bet%een the ta2 base of the loan portfolio an$ its carrying value. 9eferre$ ta2 shoul$ be recognise$ on this temporary $ifference.

(he un$ertaking must also consi$er the time limits for %hich ta2 authorities permit such losses an$ cre$its to be carrie$ for%ar$- in assessing recoverability. E@A$P?E ' 6eferred tax asset on deductible tem!orary differences based on a business !lan Issue When there are insufficient ta2able temporary $ifferences relating to the same ta2ation authority an$ the same ta2able entity- a $eferre$ ta2 asset is recognise$ to the e2tent that ta2able profit %ill be available. +an management recognise a $eferre$ ta2 asset if the entity $oes not have a track recor$ of profit generationJ .ackground ;anagement of entity +- a car-making entity- un$ertakes a reorganisation. (he reorganisation involves the transfer of +Is I( services $epartment to a separate entity- entity *. 1ntity * %ill have a net $e$uctible temporary $ifference- because of the transfer of accrue$ pension costs relate$ to the employees of the I( $epartment. ;anagement e2pects * to incur losses for the first year of *Is operations but e2pects it to become profitable thereafter. (he forecast future profit is base$ on sales to thir$ parties using e2isting business processes. Solution ;anagement shoul$ not recognise a $eferre$ ta2 asset. *Is performance %ill $epen$ on sales to thir$ parties- %ith %hich management is not e2perience$. ;anagement shoul$ therefore not recognise the $eferre$ ta2 asset because it is not probable that ta2able profits %ill be available.

< 6etermine a!!ro!riate tax rates 9eferre$ ta2 assets an$ liabilities shoul$ be measure$ at the ta2 rates e2pecte$ to apply to the perio$ %hen the asset or liability is li3ui$ate$. E@A$P?E'Tax rates Dou have a ta2able temporary $ifference of E.//m. (he rate of income ta2 is ./?. *lthough there are rumours that the rate for future years %ill be lo%er- no official announcement has yet been ma$e. (he current rate must be use$. (he $eferre$ ta2 liability %ill be E.//m H ./? G E<:m. 9eferre$ ta2 liability (a2 e2pense K $eferre$ ta2 </m Creation of a deferred tax liabilit (he best estimate of the ta2 rate that %ill apply in the future is the ta2 rates that have been enacte$ "or Nsubstantively enacte$I& at the balance sheet $ate. (a2 rates have been Nsubstantively enacte$I %hen $raft legislation is nearing the en$ of the approval process. When $ifferent rates of ta2 apply to $ifferent types an$ amounts of ta2able income- an average rate is use$. I=. ! I 6R #R </m

E@A$P?E ' "se of a)erage rate Issue 9eferre$ ta2 assets an$ liabilities are measure$ using the average rates that are e2pecte$ to apply to the ta2able profit "ta2 loss& of the perio$s in %hich the temporary $ifferences are e2pecte$ to reverse- %hen $ifferent ta2 rates apply to $ifferent levels of ta2able income SI*S#.R.<0T. +an management use one ta2 rate for a specific temporary $ifference an$ a $ifferent- average- ta2 rate for the remaining temporary $ifferences%hen gra$uate$ ta2 rates applyJ .ackground 1ntity * operates in a country %here $ifferent rates apply to $ifferent levels of ta2able income. *t )# 9ecember ./L) the net $e$uctible temporary $ifferences total )/-///. ;anagement e2pects the temporary $ifferences to reverse over the ne2t seven years. (he average pro,ecte$ profit for the ne2t seven years is >/-///. * $e$uctible temporary $ifference relate$ to impairment of tra$e receivables of .@-/// is e2pecte$ to fully reverse in ./L@- %hen the relate$ e2pense %ill be $e$uctible for ta2 purposes. Solution Des- management shoul$ consi$er separately the impact of this temporary $ifference reversing in a single year. (he reversal of this large temporary $ifference %ill cause a $istortion in the average statutory ta2 rate. ;anagement shoul$ therefore consi$er its effect separately %hen calculating the average statutory rate to be use$ for $eferre$ ta2 assets an$ liabilities.
(he follo%ing table illustrates ho% management may calculate the $eferre$ ta2 assets an$ liabilities- assuming certain gra$uate$ ta2 rates: A)erage Range #-/// Tax rate #:? Profit #-/// Income tax #:/ Profit #-/// #:/ #-//# #/-//# #/-/// .@-/// .@? )/? #/-/// .@-/// .-@// A-@// #/-/// .<-/// .-@// A-.// Eear 2004 Income tax

.@-//#

@/-///

</?

.<-/// >/-///

0->// #0-A:/ )@-/// "a& 0-::/ .:?

*verage rate

))?

"a& *verage profit - temporary $ifference ">/-/// - .@-/// G )@-///& ;anagement shoul$ apply a ta2 rate of .:? for the $eferre$ ta2 asset relate$ to impairment of tra$e receivables- an$ ))? for the remaining temporary $ifferences. (he measurement of a $eferre$ ta2 asset or liability shoul$ reflect the %ay the un$ertaking e2pects to li3ui$ate the assetPs carrying value or the liability. For e2ample- if the un$ertaking e2pects to sell an investment an$ the transaction is sub,ect only to capital gains ta2- the un$ertaking shoul$ measure the relate$ $eferre$ ta2 liability at the ta2 rate applicable to capital gains- if $ifferent from the income ta2 rate. 6rofits may be ta2e$ at $ifferent rates $epen$ing on %hether they are $istribute$ to sharehol$ers. *n un$ertaking shoul$ measure $eferre$ ta2 assets an$ liabilities using the ta2 rates applicable to un$istribute$ profits. When a $ivi$en$ is subse3uently $eclare$ an$ recor$e$ in the financial statements- the un$ertaking shoul$ recognise the $ivi$en$Ps ta2 conse3uences to the un$ertaking "if any&. 9eferre$ ta2 assets an$ liabilities must not be measure$ on a $iscounte$ basis. E@A$P?E ' A!!licable tax rate for reconciliation between tax ex!ense and accounting !rofit w en t ere are se)eral domestic income'based taxes Issue ;anagement must e2plain the relationship bet%een ta2 e2pense "income& an$ accounting profit. (his may be a numerical reconciliation bet%een actual an$ e2pecte$ ta2 e2pense "income& or bet%een the average effective ta2 rate an$ the applicable ta2 rate. (he applicable ta2 rate that provi$es the most meaningful information to the users of the financial statements shoul$ be use$. What ta2 rates shoul$ management inclu$e in the applicable ta2 rate %hen an entity operates un$er a ta2 regime levying more than one income-base$ ta2J .ackground 1ntity 8 operates in country 4 in t%o locations * an$ !. *ll entities in country 4 incur three principal ta2es= a Fe$eral ta2- a Bocal ta2 an$ a 6resi$entIs Special ta2. 8 generates profits an$ incurs ta2 in regions * an$ ! as follo%s:

Region *ccounting profit (a2able profit for Fe$eral an$ 6resi$entIs Special ta2 purposes (a2able profit for Bocal ta2 purposes Fe$eral ta2 rate 6resi$entIs Special (a2 rate Bocal ta2 rate

A A@->// A/-)@/

. #0-#// #:-:>/

Total 0<-A//

<:->// .@? @.@? <?

#)-/// .@? @.@? A?

(he source of profits is consistent from year to year- that is 8 consistently generates appro2imately :/? of its profits in region * each year. (he ta2able profit for local income ta2 purposes is base$ on the ta2able profit for Fe$eral purposes- less the amount of Fe$eral an$ 6resi$entIs Special ta2 charge$ plus or minus some a$$itional minor items. ;anagement propose that only the Fe$eral ta2 rate of .@? be inclu$e$ in the applicable ta2 rate. Solution ;anagement shoul$ provi$e a reconciliation of the e2pecte$ ta2 charge rather than the effective ta2 rate.

E@A$P?E ' # ange in tax status effecti)e during t e !eriod Issue (he carrying amount of $eferre$ ta2 assets an$ liabilities may change even though there is no change in the amount of the relate$ temporary $ifferences. (his can result- for e2ample- from a change in ta2 rates or ta2 la%s. +an management recognise $irectly in e3uity the ta2 conse3uences of a change in an entityIs ta2 status effective $uring the accounting perio$J .ackground On )# *ugust ./L.- entity * change$ its status from one type of limite$ company to another. 1ntity * therefore became sub,ect to a higher income ta2 rate ")/?& than it %as previously ".@?&. (he change in applicable ta2 rate applies to ta2able income generate$ from # September ./L.. (he ta2 rates applicable to a profit on sale of lan$ are also $ifferent an$ amount to </? compare$ %ith )/? previously. (he information belo% relates to temporary $ifferences that e2ist at # Ranuary ./L. an$ at )# 9ecember ./L. "the en$ of accounting perio$& an$ %hich %ill all reverse after # Ranuary ./L).
#arrying amount 01=01=@2 .-.// :// Tax base 01=01=@2 .-@// @// Tem!orary difference ")//& )// #arrying amount 51=12=@2 .-@// :// Tax base Tem!orary difference 51=12=@2 ")//& .-:// @// )//

(ra$e receivables Ban$ "carrie$ at revalue$ amount& 6lant an$ machinery Warranty provisions (otal

)-/// "#-///& @-///

:// / )-://

.-.// "#-///& #-.//

.-0// "#-///& @-.//

>// / )-0//

.-)// "#-///& #-)//

Solution Co- the ta2 conse3uences of the change in applicable ta2 rate shoul$ be inclu$e$ in net profit or loss for the perio$- unless they relate to items originally recognise$ $irectly in e3uity. (he $eferre$ ta2 at the opening an$ closing balance sheet $ates is calculate$ as follo%s: (emporary $ifference /#//#/L. ")//& .-.// "#-///& 0// )// 9eferre$ ta2 (emporary $ifference )#/#./L. ")//& .-)// "#-///& #-/// )// 9eferre$ ta2

(ra$e receivables 6lant an$ machinery Warranty provisions (otal Ban$ "carrie$ at revalue$ amount&

..@ "0//2.@?& 0/ ")//2)/?&

)// "#-///2)/?& #./ ")//2</?&

(he change in $eferre$ ta2 relating to the receivables- the plant an$ machinery an$ the %arranty provisions is inclu$e$ in the income statement. (he change in $eferre$ ta2 relating to the lan$ is inclu$e$ in e3uity because the revaluation of the lan$ is inclu$e$ in e3uity. ;anagement must $isclose the change in the entityIs ta2 status an$ the 3uantification of this change in the notes to the financial statements. profits for the portion of net profit correspon$ing to $ivi$en$s E@A$P?E ' 6i)idends declared after balance s eet date $eclare$ after the balance sheet $ateJ Issue Income ta2es might be payable at a higher or lo%er rate if part or all of the net profit or retaine$ earnings is pai$ out as a $ivi$en$ to an entityIs sharehol$ers. ;anagement shoul$- in these circumstancesmeasure current an$ $eferre$ ta2 assets an$ liabilities at the ta2 rate applicable to un$istribute$ profits. Shoul$ management apply the ta2 rate applicable to $istribute$ .ackground ;anagement $eclare$ in February ./L< a $ivi$en$ of <// payable on )# ;arch ./L<. ;anagement $i$ not recognise a liability for the $ivi$en$ at )# 9ecember ./L) in accor$ance %ith the re3uirements of I*S )A. (he profit before ta2 %as .-///. (he ta2 rate is )/? for un$istribute$ profits an$ </? for $istribute$ profits.

Solution Co- management shoul$ apply the ta2 rate applicable to un$istribute$ profit. (he recognition of the obligation to pay $ivi$en$s is the trigger that re3uires management to use the ta2 rate for $istribute$ profit. ;anagement shoul$ therefore recognise a current income ta2 e2pense of >// ".-/// 2 )/?&. 9uring ./L< management %ill recognise a liability for $ivi$en$s payable of <//. It shoul$ also recognise a$$itional ta2 liability </ "<// 2 #/?& as a current ta2 liability an$ an increase of the current income ta2 e2pense for ./L<. Kero ca!ital gains tax Issue (he measurement of $eferre$ ta2 liabilities an$ $eferre$ ta2 assets shoul$ reflect the ta2 conse3uences that %oul$ follo% from the %ay in %hich management ex!ects to reco)er or settle t e underlying asset or liability SI*S#.R.@#T. 4o% %oul$ this affect the calculation of $eferre$ ta2 of an entity that $oes not suffer any ta2 conse3uences from the gain on sale of an assetJ .ackground *n entity ac3uire$ a buil$ing on # Ranuary ./L# for )-///-///. 9epreciation for the buil$ing is over )/ years an$ is not $e$uctible for ta2 purposes. *ny gain on the sale of buil$ing is not ta2able. (he entity carries the buil$ing at revalue$ amount. *s at )# 9ecember ./L#- the buil$ing is revalue$ at )-.//-///. (a2 rate of )/? %oul$ apply to other income.

Solution On # Ranuary ./L# "$ate of ac3uisition& (he temporary $ifferences as at # Ranuary ./L# can be measure$ as follo%s: +arrying amount Bess: future ta2able income )-///-/// ")-///-///& "ac3uisition cost& "future assessable income shoul$ be at least the carrying amount& 9epreciation is not $e$uctible

*$$: future $e$uctible amounts

(a2 base +arrying amount (a2able temporary $ifferences

)-///-/// )-///-///

(here is a ta2able temporary $ifference- but it arises from the initial recognition of the asset an$- accor$ingly- no $eferre$ ta2 liability is recognise$. *s at )# 9ecember ./L# "+arrying amount recovere$ through use of asset&

*s at the en$ of the financial year- the entity inten$s to recover the buil$ingIs carrying amount through the use of the buil$ing. (he temporary $ifferences as at )# 9ecember ./L# can be measure$ as follo%s: +arrying amount Bess: future ta2able income )-.//-/// ")-.//-///& "revalue$ amount& "future assessable income shoul$ be at least the carrying amount& 9epreciation is not $e$uctible

")-///-///#//-///& Revalue$ amountHH )//-/// )-.//-/// )/? 0/-/// 0/-///

L: (a2able temporary $ifferences arise from the initial recognition an$ accor$ingly no $eferre$ ta2 liability is provi$e$ HH: (a2able temporary $ifferences arise from subse3uent recognition of the increase in the buil$ingIs value. (he subse3uent increase %ill be recovere$ through the use of the buil$ing- %hich %ill generate profit from operation that is ta2able at )/?. (he ta2 rate applicable therefore %oul$ be )/?- an$ a $eferre$ ta2 liability %oul$ be recognise$. (he correspon$ing entry is to e3uity because the un$erlying revaluation is recognise$ in e3uity. *s at )# 9ecember ./L# "+arrying amount recovere$ through the sale of asset& *s at the en$ of the financial year- the entity inten$s to recover the buil$ingIs carrying amount by selling it. (he entity has entere$ into a bin$ing agreement to sell the buil$ing before the en$ of the financial year. (he temporary $ifferences as at )# 9ecember ./L# can be measure$ as follo%s: +arrying amount )-.//-/// ")-.//-///& "revalue$ amount& "future assessable income shoul$ be at least the carrying amount&

*$$: future $e$uctible amounts

(a2 base +arrying amount (a2able temporary $ifferences

)-.//-/// )-.//-///

Taxable tem!orary differences

Tax rate .-0//-/// -

6eferred tax liability -

Bess: future ta2able income

Initial recognition H

*$$: future $e$uctible amounts

)-///-///

Initial cost is $e$uctible on sale

E@A$P?E'Tax rates c anges Dou have a temporary ta2able $ifference of E.//m. (he rate of income ta2 is .<?.

(a2 base

)-///-///

In the ne2t perio$- an official announcement is ma$e that the income ta2 rate %ill fall to ./?. (he $eferre$ ta2 liability %ill be re$uce$ to E.//m H ./? G E</m. "(his e2ample assumes that all of the $eferre$ ta2 relates to the income statement.& I=. 6R #R 9eferre$ ta2 liability ! <:m (a2 e2pense K $eferre$ ta2 I <:m Creation of a deferred tax liabilit 9eferre$ ta2 liability ! :m (a2 income "or re$uction of ta2 e2pense& K I :m $eferre$ ta2 C"ange of rate of deferred liabilit Subse>uent recognition *t each balance sheet $ate- an un$ertaking shoul$ revie% unrecor$e$ $eferre$ ta2 assets to $etermine %hether ne% con$itions %ill permit the recovery of the asset.

+arrying amount (a2able temporary $ifferences

)-.//-/// .//-///

Taxable tem!orary differences 6rocee$s in e2cess of costH .//-///

Tax rate /?

6eferred tax liability

L: (a2able temporary $ifference arising from the sale of the buil$ing%hich is ta2able at a rate of /?. 10 6etermine mo)ement in deferred tax balances (he movements in $eferre$ ta2 assets an$ liabilities shoul$ be recor$e$: -either as $eferre$ ta2 e2pense/cre$it in the income statement= -or in e3uity- for those transactions for %hich the ta2 effects are recognise$ in e3uity.

E@A$P?E'"nrecognised deferred tax asset Dour firm has been making losses- an$ has generate$ ta2 losses of E@/m. (hese %ere not sho%n on the balance sheet as no tra$ing improvement %as anticipate$. * Rapanese company signs contracts to use your components in its ne% factory- %hich %ill return your firm to profit. Dou $eci$e that you %ill be able to use the carrie$-for%ar$ losses before they e2pire. Dou recognise these losses as a $eferre$ ta2 asset. (he $eferre$ ta2 asset %ill be E@/m H ./? G E#/m. 9eferre$ ta2 asset (a2 income K $eferre$ ta2 Creation of a deferred tax asset I=. ! I 6R #/m #R #/m

"(his scenario assumes that the ta2 losses are not cancelle$ by the change in o%nership of the ac3uiree.& Subse>uent measurement (he carrying amount of $eferre$ ta2 assets an$ liabilities %ill change in subse3uent perio$s %ith the recognition an$ re$uction of temporary $ifferences. (he carrying amount of a $eferre$ ta2 asset shoul$ be revie%e$ at each balance sheet $ate for: i& changes in ta2 rates= ii& changes in the e2pecte$ manner of recovery of an asset= iii& changes in future profits. E@A$P?E' # anges in future !rofits Dour firm has been making losses- an$ has generate$ ta2 losses of E@/m. (hese %ere not sho%n on the balance sheet as no tra$ing improvement %as anticipate$. * Rapanese company signs contracts to use your components in its ne% factory- %hich %ill return your firm to profit. Dou $eci$e that you %ill be able to use the carrie$-for%ar$ losses before they e2pire. Dou recognise these losses as a $eferre$ ta2 asset. (he $eferre$ ta2 asset %ill be E@/m H ./? G E#/m. (he follo%ing year- increase$ costs in$icate that ta2able profits %ill only use E#/m of the E@/m losses. Dou re$uce the $eferre$ ta2 asset by E</H./? G E:m.

For e2ample- an ac3uirer in a business combination may not have recor$e$ a $eferre$ ta2 asset in respect of ta2 losses. Subse3uently- the ac3uire$ un$ertaking may ho%ever generate sufficient ta2able profit to absorb these losses an$ permit recognition in the consoli$ate$ financial statements. Similarly- an ac3uiree may have an unrecor$e$ $eferre$ ta2 asset relating to ta2 losses. Subse3uent to ac3uisition- these losses are recoverable through utilisation of future ta2able profit generate$ by the ac3uire$ group.

9eferre$ ta2 asset (a2 income K $eferre$ ta2 Creation of a deferred tax asset (a2 e2pense K $eferre$ ta2 9eferre$ ta2 asset $eduction of deferred tax asset due to c"anges in future profits

I=. ! I I !

6R #/m :m

#R #/m :m

+urrent an$ $eferre$ ta2 assets an$ liabilities shoul$ be presente$ separately on the face of the balance sheet. 9eferre$ ta2 assets an$ liabilities shoul$ be classifie$ as noncurrent. 2ffset Anetting an asset and a liabilityB +urrent ta2 assets an$ liabilities shoul$ only be offset %hen: -an un$ertaking has a legal right of offset= an$ -inten$s to settle on a net basis- or -to li3ui$ate the asset an$ liability simultaneously. (he legal right only arises %hen the same ta2 authority levies the ta2es- an$ that authority accepts settlement on a net basis. E@A$P?E'2ffset Dour firm has carry-for%ar$ ta2 losses of E#@m that are recor$e$ as a current asset. (hese %ere cause$ by tra$ing losses last year. (his year you have a ta2 charge for the year- $ue to tra$ing profits. (his is a current liability. When the ta2 authorities agree that the loss may be use$ to re$uce the liability- it can be offset. I=. 6R #R (a2 loss-current asset ! #@m (a2 income I #@m $ecording previous ear tax loss (a2 e2pense I </m (a2 liability ! </m $ecording tax c"arge for t"is ear (a2 liability ! #@m (a2 loss-current asset ! #@m Offsetting carr & for!ard loss against current liabilit

11 Presentation # ange in tax status of an undertaking or its s are older * change in the ta2 status of an un$ertaking or its sharehol$er "parent& may have an imme$iate impact on the un$ertakingPs current ta2 liabilities an$ assets- an$ alter its $eferre$ ta2 assets or liabilities. E@A$P?ES 8# ange of tax status #. Dour hea$ office is relocate$ to another country. It a$opts the ne% countryIs ta2 system. .. Dour firm changes its legal status from a company to a limite$ partnership- %hich re3uires it to a$opt ta2 rules for limite$ partnerships. ). Dour firm is bought by another firm. (he ta2 authorities cancel all brought-for%ar$ ta2 losses $ue to the change in o%nership. (he ta2 conse3uences of a change in ta2 status shoul$ be inclu$e$ in ta2 e2pense- unless the un$erlying transaction %as recor$e$ in e3uity. Tax assets and liabilities

E@A$P?E' IAS 12 disclosures *t the year-en$ company +- reporting un$er IFRS- has propertyplant an$ e3uipment "661& %ith carrying amounts- ta2 bases an$ temporary $ifferences outline$ in (able #.(hese result from assets being $e$uctible for ta2 purposes in a manner that $iffers from the $epreciation recognise$ for accounting purposes. *t an effective ta2 rate of )/?- the 661 in a $eferre$ ta2 liability position "the property an$ the office e3uipment& give rise to a $eferre$ ta2 liability of Q0 an$ the assets in a $eferre$ ta2 asset position give rise to a $eferre$ ta2 asset of Q<.@/. (he entity has a right to use the $eferre$ ta2 asset to offset the $eferre$ ta2 liabilities so- on the face of the balance sheet- the company $iscloses the net $eferre$ ta2 liability position of Q<.@/. I*S #. re3uires $isclosure in the notes to the financial statements in respect of each type of temporary $ifference. (he amount of the $eferre$ ta2 assets an$ liabilities recognise$ in the balance sheet for each perio$ presente$. 9oes this mean that the $isclosure in the notes to the financial statements shoul$ sho% the gross position "that is- a $eferre$ ta2 asset of Q<.@/ an$ a $eferre$ ta2 liability of Q0J& Co. We $o not believe that I*S #. re3uires a gross presentation because the $eferre$ ta2 note$ in the above table relates to the same type of temporary $ifference: that is- $ifferences bet%een $epreciation for ta2 an$ accounting purposes. (he company has the right to offset the $eferre$ ta2 asset an$ liability "so is presenting the net position in the balance sheet& so the amount of that net position relating to the $ifference bet%een the carrying amount an$ ta2 base of 661 "that is- Q<.@/& shoul$ be

$isclose$ as a component of the total $eferre$ ta2 liability recognise$. Table 1

+lass of 661 +arrying (a2 base "Q& amount "Q& 6roperty +ars Office e3uipment #// @/ ./ :/ >@ #/ (emporary 9( $ifference asset/"liability& "Q& ./ -#@ #/ O)/? "Q& -> <-@ -)

(a2 assets in consoli$ate$ financial statements of one group member may only be offset against a ta2 liability of another member if there is a right to offset an$ the group inten$s to settle on a net basis- or to li3ui$ate the asset an$ liability simultaneously. Similar con$itions apply to offsetting $eferre$ ta2 assets an$ liabilities. 9eferre$ ta2 assets an$ liabilities in consoli$ate$ financial statements relating to $ifferent ta2 ,uris$ictions shoul$ not be offset. (he groupPs ta2 planning opportunities are not usually groun$s for offset unless the opportunity relates to income ta2es levie$ by the same ta2 authority on $ifferent group members- an$ the un$ertakings inten$ to li3ui$ate the ta2 assets an$ liabilities on a net basis or simultaneously. Tax ex!ense (a2 e2pense "income& relate$ to profit from or$inary activities shoul$ be presente$ on the face of the income statement. (he main components of the ta2 e2pense "income& shoul$ also be $isclose$ "see 9isclosure belo%&.

12 Accounting for 6eferred Tax ' 6etailed Rules Assets #arried at %air 1alue Stan$ar$s permit certain assets to be carrie$ at fair value- or to be revalue$ "for e2ample- I*S #>- I*S ):- IFRS 0- an$ I*S </&. In some countries- the revaluation of an asset to fair value affects ta2able profit for the current perio$. *s a result- the ta2 base of the asset is a$,uste$- an$ no temporary $ifference arises. E@A$P?E'Re)aluation of asset t at is taxed Dour group %ishes to revalue its balance sheet prior to a public listing. Its subsi$iary %ill suffer current ta2 on the revaluation. I=. 6R #R 6roperty ! .//m Revaluation reserve ! .//m $ecording propert revaluation (a2 e2pense Krevaluation reserve ! <:m +urrent ta2 liability ! <:m $ecording current tax c"arge on t"e e#uit component In other countries- the revaluation of an asset $oes not affect ta2able profit in the perio$- an$ the ta2 base of the asset is not a$,uste$. Such revaluations re3uire $eferre$ ta2 to be accrue$. (he future li3ui$ation of the carrying amount %ill result in a ta2able flo% of benefits to the un$ertaking- an$ the amount that %ill be assesse$ for ta2 purposes %ill $iffer from the amount of those benefits.

(he $ifference bet%een the carrying amount of a revalue$ asset- an$ its ta2 base- is a temporary $ifference an$ gives rise to a $eferre$ ta2 liability- or asset. E@A$P?E'Re)aluation of an IAS 17 asset t at is not sub;ect to current tax* Dour group %ishes to revalue its balance sheet prior to a public listing. Its subsi$iary %ill suffer no current ta2 on the revaluation. I=. 6R #R 6roperty ! )//m Revaluation reserve ! )//m $ecording propert revaluation Revaluation reserve - (a2 e2pense ! >/m 9eferre$ ta2 liability ! >/m $ecording deferred tax c"arge on t"e e#uit component (his is true even if: "#& the un$ertaking $oes not inten$ to $ispose of the asset. (he revalue$ carrying amount of the asset %ill be recovere$ through use "for e2ample- $epreciation&. (his %ill generate ta2able income %hich e2cee$s the $epreciation that %ill be allo%able for ta2 purposes in future perio$s= or ".& ta2 on capital gains is $eferre$- if the procee$s of the $isposal of the asset are reinveste$ in similar assets. In such cases- the ta2 %ill become payable on sale "or use& of the similar assets. E@A$P?E ' 6eferred tax arising from re)aluation of land Issue

* $eferre$ ta2 liability shoul$ be measure$ at the ta2 rates that are e2pecte$ to apply to the perio$ in %hich the liability is settle$ SI*S#.R.<AT. Which ta2 rate shoul$ management use for calculating the $eferre$ ta2 liability in respect of revalue$ lan$J !ackgroun$ 1ntity * con$ucts its business in country U. ;anagement has revalue$ the lan$ on %hich the entityIs in$ustrial plant is locate$an$ has recognise$ the increase from the revaluation in e3uity SI*S#>R.)0T. (he ta2 rate applicable to a profit on sale of 661 in +ountry U is )/?- an$ the ta2 rate applicable to ta2able profits earne$ from using the asset is </?. Solution ;anagement shoul$ use the ta2 rate applicable to a profit on sale of the lan$- that is- )/?- to $etermine the $eferre$ ta2 associate$ %ith the property. (he $ifference bet%een the revalue$ amount of the lan$ an$ its ta2 base is a temporary $ifference an$ gives rise to a $eferre$ ta2 liability SI*S#.R../T. (he correspon$ing $eferre$ ta2 charge shoul$ be recognise$ in e3uity because the revaluation increase is recognise$ in e3uity. (he lan$ is a non-$epreciable asset. (he correspon$ing $eferre$ ta2 liability that arises from the revaluation is measure$ base$ on the ta2 conse3uences that %oul$ follo% from recovery of the lan$Is carrying amount through sale SSI+-.#.@T. (his is because the revalue$ amount of the lan$ is not recovere$ through an accounting charge such as $epreciation.

E@A$P?E ' #on)ertible debt Issue (he ta2 base of a liability component of a compoun$ instrument on initial recognition may be e3ual to the initial carrying amount of the sum of the liability an$ e3uity components. (he resulting ta2able temporary $ifference arises from the initial recognition of the e3uity component separately from the liability component. 4o% shoul$ management calculate the $eferre$ ta2 liability on the ta2able temporary $ifference arising from the initial recognition of a compoun$ instrumentJ .ackground *n entity issues a convertible bon$ on # Ranuary ./L) %hich %ill mature on )# 9ecember ./LA. (he hol$ers of the bon$ have the right to convert the instrument into a fi2e$ number of the entityIs or$inary shares at any time. (he interest rate of the bon$ is @? an$ is pai$ annually. (he market interest rate is A?. ;anagement calculates the initial amount of the liability an$ e3uity components by $iscounting the future cash flo%s associate$ %ith the liability element at A?. ;anagement $etermines the components as follo%s: Biability component 13uity component #-:)> #><

(otal amount of the bon$

.-///

;anagement %ill recognise an interest e2pense for accounting purposes base$ on #-:)> at the market interest rate of A?. (he interest charge for accounting purposes %ill therefore be higher than the cash pai$ as interest on the bon$. * ta2 $e$uction %ill be receive$ for the interest pai$ in cash. (he $ifference bet%een the interest e2pense for accounting purposes an$ the cash amount of interest is not $e$uctible for ta2 purposes. (he entity is sub,ect to an income ta2 rate of </?. Solution ;anagement shoul$ calculate the $eferre$ ta2 liability as the $ifference bet%een the carrying amount of the liability element an$ the ta2 base of the bon$. +arrying amount of the liability component (a2 base of the liability component (emporary $ifference 9eferre$ ta2 liability "#>< 2 </?& #-:)> .-/// #>< >>
9eferre$ ta2 liability 9eferre$ ta2 e2pense >> @< #. <. #. .0 #) #@ #< #@ +arrying amount of the liability component (a2 base of the liability component (a2able temporary $ifference #>< #)@ #/@ A. )A -

#/#/L ) #-:)>

)#/#./L ) #-:>@

)#/#./L < #-:0@

)#/#./L @ #0.:

)#/#./L > #-0>)

)#/#./L A .-///

.-///

.-///

.-///

.-///

.-///

.-///

(he correspon$ing entry to the $eferre$ ta2 liability is to the e3uity instrument. (he e3uity element %ill therefore be state$ at 0: "#><>>&. 4o%ever- the effect of the subse3uent changes in the carrying value of the liability component %ill be reflecte$ as a $eferre$ ta2 e2pense in the income statement. (he follo%ing table summarises the effects of the $eferre$ ta2 over the perio$ to maturity:

(he $eferre$ ta2 e2pense correspon$s to the $ifference bet%een the accounting interest e2pense an$ the cash interest e2pense of the bon$. (he

follo%ing table illustrates: )#/#./L) )#/#./L< )#/#./L@ )#/#./L> )#/#./LA

".& an a$,ustment to the opening balance of retaine$ earnings- resulting from either a change in accounting policy applie$ retrospectively- or the correction of an error. I*S : has seriously limite$ this application= ")& e2change $ifferences- arising on the translation of the financial statements of a foreign un$ertaking in consoli$ation= an$ "<& amounts arising on initial recognition of the e3uity component of a compoun$ financial instrument "see IFRS 0&. It may be $ifficult to $etermine the amount of current an$ $eferre$ ta2 that relates to items cre$ite$- or charge$- to e3uity. (his may be the case %hen: "#& there are gra$uate$ rates of income ta2- an$ it is impossible to $etermine the rate at %hich a specific component of ta2able profit "ta2 loss& has been ta2e$= ".& a change in the ta2 rate or rules- affects a $eferre$ ta2 asset- or liability- relating to an item that %as previously charge$ to e3uity= or ")& an un$ertaking $etermines that a $eferre$ ta2 asset shoul$ be recor$e$- or shoul$ no longer be recor$e$ in full- an$ the $eferre$ ta2 asset relates to an item that %as previously charge$ to e3uity. In such cases- the current an$ $eferre$ ta2 is base$ on a reasonable pro-rata allocation of the current- an$ $eferre$ ta2 in the ta2 ,uris$iction concerne$- or other metho$ that achieves a better allocation in the circumstances.

Cominal interest "@?& Interest market rate "A?&

#//

#//

#//

#//

#//

#.0

#)#

#))

#)@

#)A

9ifference Income ta2 on the $ifference "</?&

.0 #.

)# #.

)) #)

)@ #<

)A #@

Items #redited or # arged 6irectly to E>uity +urrent ta2 an$ $eferre$ ta2 shoul$ be charge$- or cre$ite$$irectly to e3uity- if the ta2 relates to items that are cre$ite$- or charge$- in the same or a $ifferent perio$- $irectly to e3uity "see revaluation e2amples above&. Stan$ar$s re3uire or permit certain items to be cre$ite$- or charge$- $irectly to e3uity. 12amples of such items are: "#& a change in carrying amount arising from the revaluation of property- plant an$ e3uipment un$er I*S #> =

5n$er I*S #>- an un$ertaking may transfer each perio$- from revaluation surplus to retaine$ earnings- an amount e3ual to: the $ifference bet%een the $epreciation "or amortisation& on a revalue$ asset- an$ the $epreciation "or amortisation& base$ on the cost of that asset. "see I*S #> %orkbook.& If an un$ertaking makes such a transfer- the amount transferre$ is net of any relate$ $eferre$ ta2. Similar consi$erations apply to transfers ma$e on $isposal of an item of property- plant or e3uipment an$ any relate$ revaluation surplus. When an asset is revalue$ for ta2 purposes- an$ that revaluation is relate$ to an accounting revaluation of an earlier perio$- or to a future perio$- the ta2 effects of both the asset revaluation an$ the a$,ustment of the ta2 base are cre$ite$ "or charge$& to e3uity- in the perio$s in %hich they occur. 4o%ever- if the revaluation for ta2 purposes is not relate$ to an accounting revaluation- any ta2 effects of the a$,ustment of the ta2 base are recor$e$ in the income statement. #urrent and deferred tax arising from s are'based !ayment transactions *n un$ertaking may receive a ta2 $e$uction that relates to remuneration pai$ in shares- share options or other e3uity instruments of the entity. (he amount of that ta2 $e$uction may $iffer from the relate$ cumulative remuneration e2pense- an$ may arise in a later accounting perio$. For e2ample- an entity may recognise an e2pense for the salaries pai$ for in share options grante$- in accor$ance %ith

IFRS . Share-base$ 6ayment- an$ not receive a ta2 $e$uction until the share options are e2ercise$- %ith the ta2 $e$uction base$ on the entityPs share price at the $ate of e2ercise. (he $ifference bet%een the ta2 base of the employee services receive$ "the amount the ta2ation authorities %ill permit as a $e$uction in future perio$s&- an$ the carrying amount of nil- is a $e$uctible temporary $ifference that results in a $eferre$ ta2 asset. If the amount of the ta2 $e$uction for future perio$s is not kno%n at the en$ of the perio$- it shall be estimate$- base$ on information available at the en$ of the perio$. For e2ample- if the amount that the ta2 $e$uction in future perio$s is $epen$ent upon the un$ertakingPs share price at a future $ate- the measurement of the $e$uctible temporary $ifference shoul$ be base$ on the entityPs share price at the en$ of the perio$. Re)aluations under IAS 17 H IAS 30 If a $eferre$ ta2 liability or $eferre$ ta2 asset arises from a non$epreciable asset measure$ using the revaluation mo$el in I*S #> or I*S </- the measurement of the $eferre$ ta2 liability or $eferre$ ta2 asset shall reflect the ta2 conse3uences of recovering the carrying amount of the non-$epreciable asset through sale- regar$less of the basis of measuring the carrying amount of that asset. *ccor$ingly- if the ta2 la% specifies a ta2 rate applicable to the ta2able amount $erive$ from the sale of an asset that differs from the ta2 rate applicable to the ta2able amount $erive$ from using an asset- the former "sale& rate is applie$ in measuring

the $eferre$ ta2 liability or asset relate$ to a non-$epreciable asset. In the case of I*S </- this assumption can be rebutte$. 2t er #om!re ensi)e Income 9eferre$ ta2 on revaluation movements liste$ in Other +omprehensive Income %ill be inclu$e$ %ith them in that financial statement. (he notes %ill i$entify the amount of $eferre$ ta2 relating to each component.

".& any a$,ustments- recor$e$ in the perio$- for current ta2 of prior perio$s= ")& the amount of $eferre$ ta2 e2pense "income& relating to the start- an$ reversal- of temporary $ifferences= "<& the amount of $eferre$ ta2 e2pense "income& relating to changes in ta2 rates- or ne% ta2es= "@& the amount arising from a previously unrecor$e$ ta2 loss- ta2 cre$it- or temporary $ifference of a prior perio$that is use$ to re$uce current ta2 e2pense= ">& the amount from a previously unrecor$e$ ta2 loss- ta2 cre$it- or temporary $ifference of a prior perio$- that is use$ to re$uce $eferre$ ta2 e2pense= "A& $eferre$ ta2 e2pense arising from the %rite-$o%n- or reversal of a previous %rite-$o%n- of a $eferre$ ta2 asset= an$ ":& the amount of ta2 e2pense "income& relating to those changes in accounting policies- an$ errors- %hich are inclu$e$ in the net profit for the perio$.

15 6isclosure
"6lease also refer to NIllustrated #or!orate #onsolidated %inancial StatementsI an$ NIllustrati)e consolidated financial statements for .anksM publishe$ by 6rice%aterhouse+oopers an$ available on its %ebsite. (his provi$es sample notes illustrating some of the $isclosures liste$ here.& (he ma,or components of ta2 e2pense "income& shoul$ be $isclose$ separately. +omponents of ta2 e2pense "income& may inclu$e: "#& current ta2 e2pense "income&=

-rou!Ms reconciliation between tax ex!enses and accounting !rofit w en t ere are se)eral subsidiaries wit different tax rates Issue ;anagement shoul$ $isclose an e2planation of the relationship bet%een ta2 e2pense an$ accounting profit- by presenting a numerical reconciliation either bet%een ta2 e2pense an$ accounting profit or bet%een the average effective ta2 rate an$ the applicable ta2 rate. 4o% shoul$ management present such a reconciliation in a groupIs financial statements %hen there are several subsi$iaries %ith $ifferent ta2 ratesJ .ackground 1ntity B is incorporate$ in Bu2embourg an$ is a non-operating hol$ing entity. B has subsi$iaries in Italy- Finlan$ an$ !ra7il. (he follo%ing table provi$es information for each member of the group in respect of its statutory ta2 rate an$ its profit before ta2: #ountry Statutory tax rate AAB Profit before tax A.B Tax at statutory tax rate AAx.B Tax at difference between ?uxembourg rate and statutory rate AA'24GBxA.B Tax c arge !er consolidated financial statements

Bu2embourg Italy Finlan$ !ra7il (otal

.@? )A? .0? ))?

./ A// <// @// #->./

@ .@0 ##> #>@ @<@

:< #> </ #</ @./

;anagement %oul$ prefer to present a reconciliation of monetary amounts rather than a reconciliation of the ta2 rates. Solution

(he follo%ing shoul$ also be $isclose$ separately: "#& the total current an$ $eferre$ ta2 relating to items that are charge$- or cre$ite$- to e3uity= ".& an e2planation of the relationship bet%een ta2 e2pense "income& an$ accounting profit- in either- or both- of the follo%ing forms: "i& a numerical reconciliation bet%een ta2 e2pense "income& an$ the pro$uct of accounting profit multiplie$ by the applicable ta2 rate"s&- $isclosing also the basis on %hich the applicable ta2 rate"s& is "are& compute$- or "ii& a numerical reconciliation bet%een the average effective ta2 rate an$ the applicable ta2 rate$isclosing also the basis on %hich the applicable ta2 rate is compute$= ")& an e2planation of changes in the applicable ta2 rate"s& compare$ to the previous accounting perio$= "<& the amount "an$ e2piry $ate- if any& of $e$uctible temporary $ifferences- unuse$ ta2 losses- an$ unuse$ ta2 cre$its for %hich no $eferre$ ta2 asset is recor$e$ in the balance sheet= "@& the total amount of temporary $ifferences associate$ %ith investments in subsi$iaries- branches an$ associates- an$ in ,oint ventures- for %hich $eferre$ ta2 liabilities have not been recor$e$=

">& for each type of temporary $ifference- an$ for each type of unuse$ ta2 losses an$ cre$its: "i& the amount of the $eferre$ ta2 assets- an$ liabilitiesrecor$e$ in the balance sheet for each perio$ presente$= "ii& the amount of the $eferre$ ta2 income- or e2penserecor$e$ in the income statement- if this is not apparent from the changes in the amounts recor$e$ in the balance sheet= "A& in respect of $iscontinue$ operations- the ta2 e2pense relating to: "i& the gain "or loss& on $iscontinuance= an$ "ii& the profit "or loss& from the or$inary activities of the $iscontinue$ operation for the perio$- %ith the correspon$ing amounts for each prior perio$ presente$= an$ ":& the income ta2 conse3uences of $ivi$en$s that %ere propose$- or $eclare$- before the financial statements %ere approve$ for issue- but are not recor$e$ as a liability in the financial statements. *n un$ertaking shoul$ $isclose the amount of a $eferre$ ta2 asset- an$ the evi$ence supporting its recognition- %hen: "#& the un$ertaking has suffere$ a loss- in either the current- or prece$ing- perio$ in the ta2 ,uris$iction to %hich the $eferre$ ta2 asset relates= an$ ".& the utilisation of the $eferre$ ta2 asset is $epen$ent on future ta2able profits- in e2cess of the profits arising

from the reversal of e2isting ta2able temporary $ifferences. In these circumstances- an un$ertaking shoul$ $isclose the nature of the potential ta2 conse3uences that %oul$ result from the payment of $ivi$en$s to its sharehol$ers. In a$$ition- the un$ertaking shoul$ $isclose the amounts of the potential ta2 conse3uences $eterminable- an$ %hether there are any potential ta2 conse3uences not $eterminable * (hese $isclosures enable users to un$erstan$ %hether the relationship bet%een ta2 e2pense "income& an$ accounting profit is unusual- an$ to un$erstan$ the factors that coul$ affect that relationship in the future. (he relationship bet%een ta2 e2pense "income&- an$ accounting profit may be affecte$ by such factors as: - revenue that is e2empt from ta2- e2penses that are not $e$uctible in $etermining ta2able profit- the effect of ta2 losses- an$ - the effect of foreign ta2 rates. In e2plaining the relationship bet%een ta2 e2pense "income& an$ accounting profit- an un$ertaking uses an applicable ta2 rate that provi$es the most meaningful information to the users. 5sually the most meaningful rate is the un$ertakingIs local rate of ta2. For an un$ertaking operating in several countries- it may be more meaningful to aggregate separate reconciliationsprepare$ using the $omestic rate in each in$ivi$ual ,uris$iction.

(he average effective ta2 rate is the ta2 e2pense "income& $ivi$e$ by the accounting profit. It %oul$ often be impracticable to compute the amount of unrecor$e$ $eferre$ ta2 liabilities arising from investments in subsi$iaries- branches an$ associates- an$ ,oint ventures. (herefore- I*S #. re3uires an un$ertaking to $isclose the aggregate amount of the un$erlying temporary $ifferences. 5n$ertakings may also $isclose the amounts of the unrecor$e$ $eferre$ ta2 liabilities- as users may fin$ such information useful. *n un$ertaking $iscloses the important features of the income ta2 systems- an$ the factors that %ill affect the amount of the potential income ta2 conse3uences "to the un$ertaking& of $ivi$en$s- if any. It may not be practicable to compute the ta2 conse3uences from the payment of $ivi$en$s to sharehol$ers. (his may be the case %here an un$ertaking has a large number of foreign subsi$iaries. 4o%ever- even in such circumstances- some portions of the total amount may be easily $eterminable. For e2ample- in a consoli$ate$ group- a parent- an$ some of its subsi$iaries- may have pai$ ta2es at a higher rate on un$istribute$ profits- an$ be a%are of the amount that %oul$ be refun$e$ on the payment of future $ivi$en$s- from consoli$ate$ retaine$ earnings. In this case- that refun$able amount is $isclose$. If applicable- the un$ertaking also $iscloses that there are a$$itional ta2 conse3uences not $eterminable.

In the parentPs separate financial statements- if any- the $isclosure of the ta2 conse3uences relates to the parentPs retaine$ earnings. *n un$ertaking- re3uire$ to provi$e these $isclosures- may also be re3uire$ to provi$e $isclosures relate$ to temporary $ifferences- associate$ %ith investments in subsi$iariesbranches an$ associates or ,oint ventures. For e2ample- an un$ertaking may be re3uire$ to $isclose the aggregate amount of temporary $ifferences associate$ %ith investments in subsi$iaries- for %hich no $eferre$ ta2 liabilities have been recor$e$. If it is impracticable to compute the amounts of unrecor$e$ $eferre$ ta2 liabilities- there may be ta2 conse3uences of $ivi$en$s not $eterminable- relate$ to these subsi$iaries. *n un$ertaking $iscloses any ta2-relate$ contingent liabilities an$ contingent assets "see I*S )A&. +ontingent liabilities- an$ contingent assets- may arise from unresolve$ $isputes %ith the ta2 authorities. Similarly- %here changes in ta2 rates- or ta2 la%s- are enacte$or announce$- after the balance sheet $ate- an un$ertaking $iscloses any significant effect of those changes on its current an$ $eferre$ ta2 assets an$ liabilities. Exc ange 6ifferences on 6eferred %oreign Tax ?iabilities or Assets 12change $ifferences that arise on foreign $eferre$ ta2 assets an$ liabilities- may be inclu$e$ as part of the $eferre$ ta2 e2pense "income&.

* more usual presentation %oul$ be to inclu$e the e2change $ifferences on $eferre$ ta2es as part of the foreign e2change gains an$ losses "see I*S.#&. Foreign currency-$enominate$ $eferre$ ta2 assets an$ liabilities are non-monetary items that are translate$ at the closing balance sheet rate- being the $ate at %hich they are measure$ "see I*S.#&.

13 A!!endix 8 Some I%RS = Russian Accounting #om!arisons* (his $ocument %as %ritten base$ on the assumption that the client %ill un$ertake all reasonable legal efforts to calculate current ta2 liability correctly. *t the same time ta2 planning schemes- %hich are not present at balance sheet $ate- are not taken into account for I*S #. $oes not allo% this. Abbre)iations usedJ #. (*L - Russian ta2 calculation .. IFRS - IFRS accounting ). 9(B - 9eferre$ ta2 liability <. 9(* - 9eferre$ ta2 asset

!alance sheet Cature of $ifference area *ll financial assets an$ liabilities Interest income an$ e2penses/ *ccruals

Tax treatment

IAS 12 treatment (emporary

Rationale

#onsult wit tax s!ecialistI

*ccruals are ta2able an$ $e$uctible.

(he $ifferences may arise %hen special types of accrual are use$ "e.g. amorti7e$ cost&. Result recogni7e$ in IFRS %ill be recogni7e$ later in (*L. 12cess e2penses %onIt be ever recogni7e$. Des

Interest e2penses in e2cess of #.# of +!R refinancing rate for RR an$ #@? for 5S9 "article V.>0 of the (a2 +o$e& are not $e$uctible.

6ermanent

6ermanent Con-market income/e2penses "article V</ of the (a2 +o$e& not a$,uste$ for the purposes of I*S )0. (hese a$,ustments are not (emporary ta2able/$e$uctible. !ut if the financial instrument is e2change$ for the similar instrument %ith market interest rate the resulting interests %ill be ta2e$ / $e$ucte$. 12cess e2penses recogni7e$ in IFRS %onIt be ever recogni7e$ in (*L. 12cess income recogni7e$ in (*L %onIt be ever recogni7e$ in IFRS. Result recogni7e$ in IFRS %ill be recogni7e$ later in (*L. 1.g. %hen the instrument %ill be $ispose$ off before maturity.

Des

*ll financial assets an$ liabilities

Fair value a$,ustment un$er IFRS 0

!alance sheet Cature of $ifference area Boans/ Interbank 6rovision for loan impairment

Tax treatment

IAS 12 treatment (emporary

Rationale

#onsult wit tax s!ecialistI

Boans/ Interbank/ Securities

6rovision for promissory notes

6rovisions create$ for first group of risk are not $e$uctible. (here is no $ifference bet%een secure$ an$ unsecure$ loans. 6rovisions are not $e$uctible. Exce!tions for securities 6rovisions are $e$uctible only for professional participants hol$ing the $ealerIs license. When promissory notes become over$ue an$ there is legal evi$ence that the !ank %oul$ incur losses "$ecision of the court= sale of the promissory note to thir$ party %ith losses= etc.& it is $e$uctible.

(emporary

Result recogni7e$ in IFRS %ill be recogni7e$ later in (*L since all accounting NlossesI become $e$uctible %hen R1*B problems occur an$ the company can assign to loan higher group of risk. Result recogni7e$ in IFRS %ill be recogni7e$ later in (*L %hen all accounting NlossesI become $e$uctible "eg. through sale of the ba$ promissory note %ith loss&.

Des

!alance sheet Cature of $ifference area Securities 9ealing gains/ losses

Tax treatment

IAS 12 treatment (emporary

Rationale

#onsult wit tax s!ecialistI

Revaluation is not $e$uctible/ta2able. Only reali7e$ results are $e$uctible/ta2able. Cote that clients not possessing professional licenses have to account for $ealing gains/losses using $ifferent baskets. (he result of each basket canIt be offset against each other.

(he ;(; %ill be reali7e$ in future perio$s %hen the security %ill be $ispose$ off. (hus it %ill be recogni7e$ in (*L. Des

Des 6ermanent 12cess e2penses recogni7e$ in IFRS %onIt be ever recogni7e$ in (*L. 12cess income recogni7e$ in (*L %onIt be ever recogni7e$ in IFRS.

Securities

Interest income

Con-market income/e2penses "articles V</ an$ V.:/ of the (a2 +o$e&. 1.g. the (a2 authorities may recalculate the prices of $eals for liste$ securities using WconvenientX 3uotations. *ll results are ta2able (emporary "inclu$ing accruals&. !ut $ifferent ta2 rates are use$ "see belo%&.

(he $ifferences may arise %hen special types of accrual are use$ "e.g. amorti7e$ cost&. Result recogni7e$ in IFRS %ill be recogni7e$ later in (*L.

!alance sheet Cature of $ifference area Securities +oupon income on RR fe$eral- subfe$eral an$ municipal bon$s

Tax treatment

IAS 12 treatment (emporary

Rationale

#onsult wit tax s!ecialistI

*ll results are ta2able "inclu$ing accruals&. Special rate applies to these gains K #@?.

(he $ifferences may arise %hen special types of accrual are use$ "e.g. amortise$ cost&. (he $ifference bet%een the basic rate of ./? an$ #@? shoul$ be sho%n as reconciling item. If they are material %e shoul$ gross them up. 9r. Income ta2 pai$ +r. 9ivi$en$s receive$ (he $ifference bet%een the basic rate of ./? an$ >? shoul$ be sho%n as reconciling item.

6ermanent "reconciling item& Securities 9ivi$en$ income *ll results are ta2able at source. Special rate applies to these gains K >?. 6ermanent "reconciling item&

!alance sheet Cature of $ifference area Investments in subsassociates 13uity accounting

Tax treatment

IAS 12 treatment (emporary

Rationale

#onsult wit tax s!ecialistI

+apital gains are ta2e$ at ./?.

(he $ifference may be recogni7e$ in (*L later %hen the investment %ill be sol$. If the management plans to receive $ivi$en$s use >?.

6ermanent !ut the company may "reconciling $eci$e to receive the gains item& from the investment in the form of $ivi$en$s. (hen >? is applicable. If the company $oesnIt have intentions to sell investment forever an$ has the same intentions concerning $ivi$en$s (41C these $ifferences %ill never have ta2 implications. 6ermanent "but these $ifferences are not $isclose$ in reconciling table. (hey are sho%n separately&

(he $ifferences from investments may not be recogni7e$ if: #& the parent- investor or venturer is able to control the timing of the reversal of the temporary $ifference= .& an$ it is probable that the temporary $ifference %ill not reverse in the foreseeable future (o i$entify the type of $ifference %e shoul$ consi$er the intentions of the management "sale or $ivi$en$s&. (he provisions of I*S #. allo%ing not to recogni7e 9(B if the company can control the timing of the reversal of the temporary $ifference are not applicable here since the $efinition of the investment available for sale involves the point that it %ill be reali7e$ in the foreseeable future.

Investments available for sale

Fair value accounting

(he same rules "see prece$ing para& are applicable to these gains/losses.

(emporary

!alance sheet Cature of $ifference area Investments in subsassociates Fi2e$ assets 8oo$%ill Fi2e$ assets revaluation

Tax treatment

IAS 12 treatment

Rationale

#onsult wit tax s!ecialistI

Fi2e$ assets

9epreciation

*morti7ation of goo$%ill is 6ermanent not $e$uctible un$er (a2 rules. Revaluation performe$ (emporary before # Ranuary .//. is $e$uctible. Revaluation performe$ in R*S accounts after # Ranuary .//. is not $e$uctible. Revaluation performe$ on # Ranuary .//. may be $e$uctible "not more that )/? of the book value as at /# Ranuary .//#&. (here is ambiguity in ta2 legislation. !ut the treatment may be in favour of client. Only $epreciation %ithin (emporary ta2 rates is $e$uctible.

I*S #. states that if amorti7ation of goo$%ill is not $e$uctible than this $ifference shoul$ be permanent. 9ifference %ill be reali7e$ either through sale of a fi2e$ asset or through cash flo%s generate$ by the asset in the future. If the ta2 treatment is approve$ by the client an$ our ta2 specialist %e shoul$ calculate the temporary $ifference bet%een t%o revaluations "R*S an$ IFRS& an$ recogni7e the $eferre$ ta2 liability "9(B& or $eferre$ ta2 asset "9(*&. (he correspon$ing entry %ill be to e3uity.

Des

9ifferences bet%een (*L an$ IFRS rates %ill become $e$uctible either through sale of a fi2e$ asset or through cash flo%s generate$ by the asset in the future. (hus they %ill lea$ to either to 9(* or 9(B.

!alance sheet Cature of $ifference area Fi2e$ assets Con-pro$uction Fi2e$ *ssets

Tax treatment

IAS 12 treatment 6ermanent

Rationale

#onsult wit tax s!ecialistI Des

9epreciation an$ losses from sale of fi2e$ assets use$ for non-pro$uction purposes are never $e$uctible. !5( gains receive$ from the sale are likely to be ta2able. Cet losses from non$eliverable for%ar$s on O(+ market may be carrie$ for%ar$ to future perio$s "not more than #/ years- not more than )/? of the ta2able profit&. Revaluation of off-balance sheet position is ta2able/$e$uctible $epen$ing on the policy chosen by the company.

If cost of purchase is greater than IFRS value than the ta2 value must be e3ual to IFRS value. (he e2cess of an IFRS value of the asset an$ ta2 base lea$s to 9(B.

(emporary

Other *ssets/ Biabilities

Fore2

(emporary

(his is an e2ample of ta2 loss carrie$ Des for%ar$. It can be use$ to $ecrease the current ta2 liabilities in future perio$s. We shoul$ estimate the recoverability of the asset an$ consi$er the creation of provision for it. Irrespective of ta2ability/$e$uctibility the revaluation %ill be reali7e$ in future perio$s %hen the $elivery or offset %ill occur. (hus it %ill be recogni7e$ in (*L. (a2 base e3uals 7ero. (hus IFRS value multiplie$ by ta2 rate G 9(B/9(*. When the payment un$er the guarantee is ma$e an$ there is legal evi$ence that the !ank %ill incur losses "$ecision of the court= sale of the $ebt to thir$ party %ith losses= etc.& it %ill be $e$uctible. Des

Other *ssets/ Biabilities

Fore2/ Securities/6recious metals "(erm $eals&

(emporary

Other liabilities

6rovision for cre$it relate$ commitments

6rovisions for cre$it relate$ commitments are not $e$uctible.

(emporary

Des

!alance sheet Cature of $ifference area Other liabilities *ccruals of e2penses on other operations

Tax treatment

IAS 12 treatment (emporary 6ermanent

Rationale

#onsult wit tax s!ecialistI

8eneral rule: all e2penses are $e$uctible. !ut e2penses in e2cess of norms are not $e$uctible: #& *$vertisement "? from salary& .& Representative e2penses "? from salary& )& RM9 e2penses "less than A/? of the incurre$ e2penses. It can be use$ $uring #/ years but not more than )/? of the current year profits. C/*

*ccruals in IFRS %ill be pai$ in cash in Des future perio$s thus they %ill be $e$uctible in (*L. 12cess e2penses recogni7e$ in IFRS %onIt be ever recogni7e$ in (*L.

Other assets

5nuse$ ta2 loss carrie$ for%ar$

(emporary

Other assets

9(*

C/*

It can be use$ to $ecrease the current ta2 liabilities in future perio$s. We shoul$ estimate the recoverability of the asset an$ consi$er the creation of provision for it. We shoul$ consi$er the recoverability of 9(*. (he ma,or 3uestion is if the company %ill have enough ta2able profits in ne2t perio$s to utili7e the 9(* in full.

Des

!alance sheet Cature of $ifference area 8eneral Income/ e2penses create$ through S6Ys an$ offshore 7ones 12amples: #& 9ealing gains an$ losses= .& Interest earne$/ incurre$ in other ta2 7ones %hile the asset/ liability is locate$ in main 7one.

Tax treatment

IAS 12 treatment 6ermanent "reconciling item&

Rationale

#onsult wit tax s!ecialistI Des

(he treatment of income an$ e2penses earne$ an$ incurre$ in S6Ys- offshore 7ones $epen$s on the ta2 regulations vali$ for those territories. (45S the calculation of 9(B for the consoli$ating S6Y shoul$ be separate from the ma,or one. Subse3uently the calculations are consoli$ate$. 5sually such income an$ e2penses are sub,ect to the ta2 rate $ifferent from the ma,or rate. !5( if there is an agreement bet%een the S6Y an$ Russian entity of the group to transfer the income/e2penses then transferre$ results %ill be ta2e$ using Russian ta2 rules. (he rules of non-market income/e2penses "articles V</ an$ V.:/ of the (a2 +o$e& may be applicable. 1.g. the (a2 authorities may recalculate the prices of $eals for liste$ securities using WconvenientX

(he $ifference bet%een the basic rate of ./? an$ offshore rate shoul$ be sho%n as reconciling item.

(emporary/ 6ermanent

If the gains %ill be transferre$ to Russian entity then they %ill be sub,ect to Russian ta2 rules. 1.g. interest %ill be ta2e$ at ./?. 12cess e2penses recogni7e$ in IFRS %onIt be ever recogni7e$ in (*L. 12cess income recogni7e$ in (*L %onIt be ever recogni7e$ in IFRS.

6ermanent

3uotations. #.I*S #. prescribes the accounting treatment for income ta2es- an$ the ta2 conse3uences of:

14 $ulti!le # oice (uestions

"i& "ii& "iii& #. "i& .. "i&-"ii&. ). "i&-"iii&

(ransactions of the current perio$ that are recor$e$ in an un$ertakingPs financial statements. (he future li3ui$ation of the of assets an$ liabilities that are recor$e$ in an un$ertakingPs balance sheet. (a2 planning opportunities.

"i& "ii& "iii& "iv&

9e$uctible temporary $ifferences. 5nuse$ ta2 losses. 5nuse$ ta2 cre$its. (a2able temporary $ifferences.

.. If li3ui$ation of carrying amounts %ill make future ta2 payments larger or smaller- I*S #. generally re3uires an un$ertaking to recor$ a #. 9eferre$ ta2 liability "or $eferre$ ta2 asset&. .. 6rovision. ). +ontingent liability. ). 6ermanent $ifferences re3uire: #.9eferre$ ta2 liability "or $eferre$ ta2 asset&. .. 6rovision. ). +ontingent liability. <. Cone of these.

#. "i& .. "i&-"ii&. ). "i&-"iii& <. "i&-"iv&

>. 9eferre$ ta2 relates to: "i& 9e$uctible temporary $ifferences. <. 6ermanent $ifferences re3uire a$,ustments in the: #. 6erio$s prior to the transaction. .. (he perio$s relating to the transaction. ). 6erio$s follo%ing the transaction. <. !oth . M ). @. 9eferre$ ta2 assets are the ta2es recoverable- in future perio$s- in respect of: "ii& "iii& 5nuse$ ta2 losses. 5nuse$ ta2 cre$its.

"iv& (a2able temporary $ifferences. "v& 6ermanent $ifferences.

#. "i&. .. "i&-"ii&. ). "i&-"iii&. <. "i&-"iv&. @. "i&-"v&. A. 9eferre$ ta2 #. Reverses over time. .. ;ay reverse over time. ). 9oes not reverse. :. (he use of $eferre$ ta2: #. +hange the $ates of payment of ta2. .. ;ay change the $ates of payment of ta2. ). 9oes not change the $ates of payment of any ta2. 0. If the ta2 alrea$y pai$ e2cee$s the ta2 $ue for the perio$the e2cess %ill be recor$e$ as: #. 9eferre$ ta2. .. * permanent $ifference. ). *n asset. #/. If revenue is ta2e$ in the perio$ receive$- the ta2 base: #. Is nil. .. Is only nil if the revenue is recognise$ in the same perio$. ). Is only nil if the revenue is recognise$ in the follo%ing perio$. <. Is the amount receive$. ##. Research an$ $evelopment costs may be e2pense$ in the current perio$- but $e$uctible for ta2 purposes over subse3uent perio$s. (he ta2 base: #. Is nil.

.. Is the amount of the $e$uction that can be claime$ in future perio$s. ). Is the amount e2pense$. #.. (emporary $ifferences arise: #. When the carrying amount of an asset or liability $iffers from its ta2 base. .. When $eferre$ ta2 is applie$. ). When $eferre$ ta2 $iffers from current ta2. #). * $e$uctible temporary $ifference generates a #. 9eferre$ ta2 Biability. .. 9eferre$ ta2 *sset. ). 1ither # or .. #<. * ta2able temporary $ifference gives rise to: #. 9eferre$ ta2 Biability. .. 9eferre$ ta2 *sset. ). 1ither # or .. #@. (a2able temporary $ifferences occur %hen ta2 is charge$ in a perio$: #. !efore the accounting perio$ benefits from the income in the financial accounts. .. *fter the accounting perio$ benefits from the income in the financial accounts. ). 1ither # or .. #>. 9e$uctible temporary $ifferences occur %hen ta2 is charge$ in a perio$:

#. !efore the accounting perio$ benefits from the income in the financial accounts. .. *fter the accounting perio$ benefits from the income in the financial accounts. ). 1ither # or ..

#0. (he realisation of $eferre$ ta2 assets $epen$s on: #. *ccounting profits being available in the future. .. (a2able profits being available in the future. ). Co increase in the rate of income ta2.

#A. 9ifferences arising from fair value a$,ustments are treate$: #.(he same as any other ta2able an$ $e$uctible $ifferences. .. 9ifferently $epen$ing on %hether they arise on ac3uisition or other%ise. ). Separately for $eferre$ ta2. #:. Cot all temporary $ifferences are recognise$ as $eferre$ ta2 balances. (he e2ceptions are: "i& 8oo$%ill. "ii& Initial recognition of certain assets an$ liabilities. "iii& +ertain investments. "iv& 6roperty revaluations. #. "i&. .. "i&-"ii&. ). "i&-"iii&. <. "i&-"iv&.

./. When $ifferent rates of ta2 apply to $ifferent types an$ amounts of ta2able income: #. *n average rate is use$. .. Co $eferre$ ta2 is charge$. ). 1ach item must be liste$. .#. *n un$ertaking shoul$ revie% unrecor$e$ $eferre$ ta2 assets to $etermine %hether ne% con$itions %ill permit the recovery of the asset: #. 1very ) years. .. 1very @ years. ). *t each balance sheet $ate. ... (he carrying amount of a $eferre$ ta2 asset shoul$ be revie%e$ for: "i& +hanges in ta2 rates. "ii& +hanges in the e2pecte$ manner of recovery of an asset. "iii& +hanges in future profits. #. "i&. .. "i&-"ii&. ). "i&-"iii&.

.). (he $ifference bet%een the carrying amount of a revalue$ asset an$ its ta2 base is a: #. (emporary $ifference. .. 6ermanent $ifference. ). 1ither # or .. .<. Stan$ar$s re3uire or permit certain items to be cre$ite$or charge$- $irectly to e3uity. 12amples of such items are: "i& * change in carrying amount arising from the revaluation of property- plant an$ e3uipment= ".& *n a$,ustment to the opening balance of retaine$ earnings- resulting from either a change in accounting policy applie$ retrospectively- or the correction of an error. I*S : has seriously limite$ this application. "iii& 12change $ifferences- arising on the translation of the financial statements of a foreign un$ertaking. "iv& *mounts arising on initial recognition of the e3uity component of a compoun$ financial instrument. #. "i&. .. "i&-"ii&. ). "i&-"iii&. <. "i&-"iv&. 17 Answers to multi!le c oice >uestions (uestion Answer 1* . .. # ). < <. . @. )

>. A. :. 0. #/. ##. #.. #). #<. #@. #>. #A. #:. #0. ./. .#. ... .). .<.

< # ) ) # . # . # . # # ) . # ) ) # <

1: 0"$ERI#A? ("ESTI20S #. -6ermanent 9ifferences Dour firm receives a E:/million grant to employ more staff. It is ta2- free. It is later fine$ E./m for environmental misuseafter illegally $ischarging chemicals into a river. (he fine cannot be $e$ucte$ for ta2. Dour ta2 computation %ill reconcile these a$,ustments to the accounting profit. *ccounting 6rofit G E <.:>/ m

*ssuming that both items are taken into profit in full in the same perio$- calculate the ta2 computation. .. If a transaction takes place in year # an$ ta2 is pai$ in year .- year # %ill sho% a transaction %ithout a ta2 charge- an$ year . %ill sho% a ta2 charge %ithout a transaction: Eear 1 300 0 300 Eear 2 0 '90 '90

20G 0et !rofit

'1000

H200

+alculate the $eferre$ ta2. @. (a2 is cre$ite$ on payment of the money in perio$ #- but only treate$ as an e2pense in perio$ .. Ex!ense Tax income F 20G 0et !rofit Eear 1 0 H70 H70 Eear 2 '500 0 '500

Income Tax ex!ense F 20G 0et !rofit

+alculate the $eferre$ ta2. ). In the ne2t e2ample- the cash is receive$ an$ ta2e$ in year #- but the income is split bet%een years #- . an$ ). Income Tax ex!ense F 20G 0et !rofit Eear 1 2000 '1200 900 Eear 2 2000 0 2000 Eear 5 2000 0 2000

+alculate the $eferre$ ta2 >. (he cash is pai$ an$ cre$ite$ for ta2 in year #- but the e2pense is split bet%een years #- . an$ ). Eear 1 Eear 2 Eear 5 Ex!ense '2000 '2000 '2000 Tax income F H1200 0 0 20G 0et !rofit '900 '2000 '2000 +alculate the $eferre$ ta2 A. (a2 e2pense split bet%een the income statement an$ e3uity. Dour ta2 computation sho%s an e2pense of E#:Am for the year- of %hich E)/m relates to a property revaluation. 6rovi$e the ,ournal entries. :. (a2 loss: asset

+alculate the $eferre$ ta2. <. If a transaction takes place in year # an$ ta2 is cre$ite$ in year .- year # %ill sho% a transaction %ithout a ta2 cre$itan$ year . %ill sho% a ta2 cre$it %ithout a transaction: Ex!ense Tax income F Eear 1 '1000 0 Eear 2 0 H200

Dour ta2 computation sho%s a loss of E#>m for the year%hich can be carrie$ back to recover ta2 of a previous ta2 perio$. 6rovi$e the ,ournal entries. 0. Research an$ $evelopment costs Dou spen$ E.//m on research in the current perio$- an$ it is treate$ as an e2pense. (a2 authorities only allo% the e2pense to be $e$ucte$ over a <-year perio$. Only E@/m is allo%e$ in this perio$. (he remaining E#@/m is the ta2 base at the en$ of year #an$ %ill be allo%e$ over the ne2t ) years. 6rovi$e the ,ournal entries for years # M .. #/. Revenue of <// from the sale of goo$s is inclu$e$ in preta2 accounting profit %hen goo$s are $elivere$ in year #- but may be inclu$e$ in ta2able profit %hen cash is collecte$ in year .. 6rovi$e the ,ournal entries for years # M .. ##. 9evelopment costs of #./// have been capitalise$ for accounting purposes an$ %ill be amortise$ to the income statement- but have been $e$ucte$ as an e2pense in $etermining ta2able profit in the perio$ in %hich they %ere incurre$. *mortise$ over < years starting in year .. 6rovi$e the ,ournal entries for years # M .. #.. 6ension payments of #./// are recor$e$ in year # for accounting purposes an$ but only for ta2 purposes %hen pai$ in cash in year ..

6rovi$e the ,ournal entries for years # M .. #). *n impairment loss of E#//m of property is recor$e$ for accounting purposes is ignore$ for ta2 purposes. 6rovi$e the ,ournal entries. #<. Financial instruments are carrie$ at fair value- revaluing them %ith a gain of <//- but no matching revaluation is ma$e for ta2 purposes. 6rovi$e the ,ournal entries. #@. 8oo$%ill impairment charge of <./// is not $e$uctible for ta2 purposes. 6rovi$e the ,ournal entries. #>. </./// of the retaine$ earnings of controlle$ un$ertakings are inclu$e$ in consoli$ate$ retaine$ earnings- but ta2es are only pai$ on profits %hen $istribute$ to the parent. 6rovi$e the ,ournal entries. #A. (a2 rates changes Dou have a temporary ta2able $ifference of E<//m. (he rate of income ta2 is .<?. In the ne2t year- an official announcement is ma$e that the income ta2 rate %ill fall to ./?. 6rovi$e the ,ournal entries for years # M ..

#:. Offset Dour firm has carry-for%ar$ ta2 losses of E@@m that are recor$e$ as a current asset. Dou have a ta2 charge for the year in the same ta2 ,uris$iction. (his is a current liability of EA//. (he ta2 authorities agree that the loss may be use$ to re$uce the liability. 6rovi$e the ,ournal entries for years # M ..

IAS 11 #20STR"#TI20 #20TRA#TS

#: A0S/ERS T2 0"$ERI#A? ("ESTI20S #. Cm <.:>/ -:/ F./ 3*900 I=. I ! 6R /.0>m #R /.0>m

20G 0et !rofit <. Ex!ense Tax income F 20G 6eferred tax F 20G 0et !rofit @. Ex!ense Tax income F 20G 6eferred tax F 20G 0et !rofit >. Ex!ense Tax income F 20G 6eferred tax F 20G 0et !rofit A.

1700 Eear 1 '1000 0 H200 '900

1700 Eear 2 0 H200 '200 0

1700

*ccounting 6rofit Bess grant 6lus fine DTaxable !rofit (a2 charge G <.:// H ./? G 0>/ (a2 e2pense *ccrual for income ta2 Tax expense for the period .. Income Tax ex!ense F 20G 6eferred tax F 20G 0et !rofit ). Income Tax ex!ense F 20G 6eferred tax F Eear 1 2000 '1200 H900 Eear 2 2000 0 '300 Eear 1 300 0 '90 520 Eear 2 0 '90 90 0

Eear 1 0 H70 '70 0 Eear 1 '2000 1200 '900 '1700

Eear 2 '500 0 H70 '230 Eear 2 '2000 0 H300 '1700 Eear 5 '2000 0 H300 '1700

Eear 5 2000 0 '300

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0>

IAS 11 #20STR"#TI20 #20TRA#TS

(a2 e2pense split bet%een the income statement an$ e3uity. Dour ta2 computation sho%s an e2pense of E#:Am for the yearof %hich E)/m relates to a property revaluation. I=. 6R #R (a2 e2pense K income statement I #@Am (a2 e2pense-revaluation reserve ! )/m (a2 accrual ! #:Am Tax expense split between the income statement and equity :. (a2 loss: asset Dour ta2 computation sho%s a loss of E#>m for the year- %hich can be carrie$ back to recover ta2 of a previous ta2 perio$. I=. 6R #R (a2 recoverable ! #>m (a2 income I #>m Recordin reco!erable tax loss 0. Research an$ $evelopment costs Dou spen$ E.//m on research in the current perio$- an$ it is treate$ as an e2pense. (a2 authorities only allo% the e2pense to be $e$ucte$ over a <-year perio$. Only E@/m is allo%e$ in this perio$. (he remaining E#@/m is the ta2 base at the en$ of year #- an$ %ill be allo%e$ over the ne2t ) years. Research cost +ash I=. I ! 6R .//m #R .//m
0A

(a2 cre$it O ./? +urrent ta2 liability "re$uction& 9eferre$ ta2 asset Research cost and tax income -period " +urrent ta2 liability "re$uction& 9eferre$ ta2 asset Tax income -period # $and the same for periods % & '(

I ! ! ! !

</m #/m )/m #/m #/m

#/. Revenue from the sale of goo$s is inclu$e$ in pre-ta2 accounting profit %hen goo$s are $elivere$- but may be inclu$e$ in ta2able profit %hen cash is collecte$. I=. 6R #R *ccounts receivable ! <// Revenue I <// 9eferre$ ta2 liability ! :/ (a2 e2pense O ./? I :/ Receipt of cash and tax reco nition -period " +ash ! <// *ccounts receivable ! <// 9eferre$ ta2 liability ! 0> +urrent ta2 liability ! 0> Receipt of cash and tax liability reco nition -period #

##.

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IAS 11 #20STR"#TI20 #20TRA#TS

9evelopment costs have been capitalise$ for accounting purposes an$ %ill be amortise$ to the income statement- but have been $e$ucte$ as an e2pense in $etermining ta2able profit in the perio$ in %hich they %ere incurre$. *mortise$ over < yearsstarting from the year after they %ere incurre$. I=. 6R #R 9evelopment costs "capitalise$& ! #/// +ash ! #/// +urrent ta2 "re$uction& O ./? ! .// 9eferre$ ta2 liability ! .// )e!elopment costs capitalised but allowed for tax credit -period " 9epreciation K $evelopment costs I .@/ *ccumulate$ $epreciation ! .@/ 9eferre$ ta2 liability ! @/ (a2 income O ./? I @/ )epreciation and ad*ustment for tax -period # #.. 6ension payments of #./// are recor$e$ in year # for accounting purposes an$ but only for ta2 purposes %hen pai$ in cash in year .. I=. 6R #R 6ension e2pense I #/// *ccrual ! #/// 9eferre$ ta2 asset ! .// (a2 income O ./? I .// Accrual of pension costs +ash ! #/// *ccrual ! #/// +urrent ta2 "re$uction& O ./? ! .// 9eferre$ ta2 asset ! .//
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+ost and tax income reco nition -period # #). *n impairment loss of E#//m of property is recor$e$ for accounting purposes is ignore$ for ta2 purposes= I=. 6R Impairment of property I #//m *ccumulate$ $epreciation of property ! (a2 income O ./? I 9eferre$ ta2 asset ! ./m Recordin impairment char e and $deferred( tax char e

#R #//m ./m

#<. Financial instruments are carrie$ at fair value- revaluing them %ith a gain of <//- but no matching revaluation is ma$e for ta2 purposes. I=. 6R #R Financial instrument ! <// 8ain K fair value a$,ustment I <// (a2 e2pense O ./? I :/ 9eferre$ ta2 liability ! :/ Re!aluation of financial instrument

#@. 8oo$%ill impairment charge of <./// is not $e$uctible for ta2 purposes.
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IAS 11 #20STR"#TI20 #20TRA#TS

I=. 6R I </// ! #R </// 9eferre$ ta2 liability ! #>m (a2 income "or re$uction of ta2 e2pense& K I #>m $eferre$ ta2 +han e of rate of deferred liability #:. Offset Dour firm has carry-for%ar$ ta2 losses of E@@m that are recor$e$ as a current asset. Dou have a ta2 charge for the year in the same ta2 ,uris$iction. (his is a current liability of EA//. (he ta2 authorities agree that the loss may be use$ to re$uce the liability. I=. 6R #R (a2 loss-current asset ! @@m (a2 income I @@m Recordin pre!ious year tax loss (a2 e2pense I A//m (a2 liability ! A//m Recordin tax char e (a2 liability ! @@m (a2 loss-current asset ! @@m ,ffsettin carry- forward loss a ainst current liability Cote: ;aterial from the follo%ing 6rice%aterhouse+oopers publications has been use$ in this %orkbook: -*pplying IFRS- IFRS Ce%s- *ccounting Solutions

Impairment-goo$%ill 8oo$%ill Impairment of oodwill. 2O D3/3$$3D TA4 5.A6.5.T7 .S $3CO$D3D,

#>. </./// of the retaine$ earnings of controlle$ un$ertakings are inclu$e$ in consoli$ate$ retaine$ earnings- but ta2es are only pai$ on profits %hen $istribute$ to the parent. I=. 6R #R Cet assets of subsi$iary ! <//// 6rofits/retaine$ earnings I/! <//// 9eferre$ ta2 liability ! :/// (a2 e2pense O ./? I :/// #A. (a2 rates changes Dou have a temporary ta2able $ifference of E<//m. (he rate of income ta2 is .<?. In the ne2t perio$- an official announcement is ma$e that the income ta2 rate %ill fall to ./?. (he $eferre$ ta2 liability %ill be re$uce$ to E<//m H ./? G E:/m. "(his e2ample assumes that all of the $eferre$ ta2 relates to the income statement.& I=. 6R #R 9eferre$ ta2 liability ! 0>m (a2 e2pense K $eferre$ ta2 I 0>m +reation of a deferred tax liability
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