2. 2
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3. 3
OVERVIEW OF MODULE 4
Deferred
tax
Step 1
Tax bases
Step 2
Deductible
temporary
differences
Step 4
Recognise
deferred
tax
Disclosure
Reversal of
deferred
tax assets
Deferred
tax of PPE
Step 3
Measure
deferred
tax
Step 2
Taxable
temporary
differences
Probability recognition criterion
Professional
judgment
Income
taxes
Current
tax
Taxable
profit
Cash
basis
Deferred
tax
Four
steps
4. LEARNING OBJECTIVES
After completing this module, you should be able to:
1. apply the requirements of IAS 12 Income Taxes on income with respect to
current and deferred tax assets and liabilities
2. explain the terms ‘taxable temporary differences’ and ‘deductible temporary
differences’
3. apply the tax rates and tax bases that are consistent with the manner of
recovery or settlement of an asset or liability
4. apply the probability recognition criterion for deductible temporary
differences, unused tax losses and unused tax credits
5. account for the recognition and reversal of deferred tax assets arising from
deductible temporary differences, unused tax losses and unused tax credits
6. determine the deferred tax consequences of revaluing property, plant and
equipment; and
7. apply the requirements of IAS 12 with respect to financial statement
presentation and disclosure requirements.
4
6. INTRODUCTION
Part A examines the fundamentals of accounting for income tax under IAS 12.
The core principle of IAS 12 is that financial statements should recognise the
current and future tax consequences of:
• transactions and other events of the current period that are recognised in an
entity’s financial statements
• the future recovery (settlement) of the carrying amounts of assets (liabilities)
that are recognised in an entity’s statement of financial position
These are reflected in the financial statements as:
• current tax liability
• current tax asset
• deferred tax assets
• deferred tax liabilities
• tax expense (tax income)
6
7. TAX EXPENSE
• Tax expense is the sum of current tax and deferred tax recognised in the profit
or loss for the period (IAS 12, para. 5).
• Tax expense may be negative, in which case it is described as tax income and
has a credit balance.
• Income tax expense (tax benefit) is presented as a separate line item in the
statement of profit or loss and other comprehensive income.
7
8. CALCULATING CURRENT TAX
• Current tax expense (current tax income): ‘the amount of income
taxes payable (recoverable) in respect of the taxable profit (tax
loss) for a period’ (IAS 12, para. 5).
• From a practical perspective, current tax is generally calculated by
either:
• directly applying the relevant tax laws and tax rate to the
transactions and other events of the current reporting period, or
• adjusting the accounting profit of the current reporting period for
differences between accounting and tax treatments to indirectly
determine taxable profit and apply the relevant tax rate.
8
Cash basis
9. RECOGNITION OF CURRENT TAX
• Current tax: usually recognised as an expense (or income, if tax is
recoverable) and included in profit or loss
• Exceptions
• (a) a transaction or event which is recognised, in the same or a different
period, outside profit or loss, either in other comprehensive income or directly
in equity …; or
• (b) a business combination (other than the acquisition by an investment
entity, as defined in IFRS 10 Consolidated Financial Statements, of a
subsidiary that is required to be measured at fair value through profit or loss).
9
Dr Income tax expense
Cr Current tax payable
10. DEFERRED TAX
• Four key steps to calculating deferred tax:
• Step 1: Determine the tax base of assets and liabilities.
• Step 2: Compare the tax base with the carrying amount to determine the
taxable temporary differences and deductible temporary differences.
• Step 3:Measure deferred tax assets and deferred tax liabilities.
• Step 4: Recognise deferred tax assets and deferred tax liabilities, taking
into account the limited recognition exceptions.
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11. STEP 1: DETERMINING THE TAX BASE OF ASSETS
The tax base of an asset is either:
11
Discuss: Question 4.1
100
90 90 100
The (gross) carrying amount of
the asset, if the carrying amount
is not taxable when it is
recovered (Carrying amount)
The amount deductible against any
taxable economic benefits that will
flow to the entity when it recovers the
carrying amount of the asset.
12. 12
Tax base = Carrying amount + Future deductible amounts - Future taxable amounts
$70 = ($100 - $30) +$70 - $70
Tax base 70 = Carrying amount 70 then TD = 0 no deferred tax effect
CA = 100 – 30 = 70 = TB
13. 13
Tax base = Carrying amount + Future deductible amounts - Future taxable amounts
$60 = $50 +$60 - $50
For tax purpose: CA = 100 – 100/5 x 2 = 60 = FDA
For accounting profit purpose: CA = 100 – 100/4 x 2 = 50 = FTA
TD = TB – CA = 60 -50 = 10; DTA = 10 x .3 = 3
14. STEP 1: DETERMINING THE TAX BASE OF
LIABILITIES
• The tax base of a liability is ‘its carrying amount, less any amount that will
be deductible for tax purposes in respect of that liability in future periods.
14
Discuss: Question 4.2
15. STEP 2: COMPARE THE TAX BASE TO THE
CARRYING AMOUNT TO DETERMINE
TEMPORARY DIFFERENCES
15
DTL
DTA
DTA
DTL
16. STEP 3: MEASURE DEFERRED TAX ASSETS
AND DEFERRED TAX LIABILITIES
• The measurement of deferred tax assets and liabilities must reflect:
• the expected manner of the recovery (settlement) of the underlying asset
(liability) – sell or be held for use
• the tax rates that will apply in the period when the underlying asset (liability) is
realised (settled) (IAS 12, para 51)
• Discounting of deferred tax assets and deferred tax liabilities is not permitted.
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17. STEP 3: MEASURE DEFERRED TAX ASSETS
AND DEFERRED TAX LIABILITIES
• IAS 12: In some tax jurisdictions, the amount of tax ultimately payable or
recoverable may depend on the manner in which an entity recovers (settles) the
carrying amount of an asset (liability).
17
CA 100 000
TB 60 000
TD 40 000
For use: 40 000 x 30%
For sell: 40 000 x 20%
(is subject to the
capital gain tax)
18. 18
1. CA = 20 000
Tax base = 0
2. CA > TB
3. DTA = 20 000 x .3
= 6 000
19. SUMMARY
Part A discussed how current and future tax consequences are
reflected in the financial statements as:
• current tax liability
• deferred tax assets
• deferred tax liabilities
• tax expense (tax income) for a period.
It also introduced the following terms:
• taxable temporary difference
• deductible temporary difference.
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21. EXCEPTIONS TO RECOGNITION 1
• A deferred tax liability must be recognised for all taxable temporary
differences (some exclusions).
• Deferred tax liabilities are not required to be recognised when they
arise from:
• ‘the initial recognition of goodwill’, or
• ‘initial recognition of an asset or liability in a transaction that is
not a business combination’ and that ‘affects neither accounting
profit nor taxable profit (tax loss)’ at the time of the transaction
(IAS 12, para. 15).
21
Yes
No
22. EXCEPTIONS TO RECOGNITION 2
Deferred tax assets may arise from:
1. deductible temporary differences
2. unused tax losses and unused tax credits.
Recognition exceptions:
• Deferred tax assets are not recognised when they arise
‘from the initial recognition of an asset or liability in a
transaction that’:
• ‘is not a business combination’
• ‘at the time of the transaction, affects neither accounting
profit nor taxable profit (tax loss)’ (IAS 12, para. 24).
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23. RECOGNITION OF DEFERRED TAX 1
Application of the probability criterion
• If the amount can be measured reliably, an entity recognises an asset or liability
when it is probable that the asset or liability will be recovered or settled in the
future.
• The probability of the flow of economic benefits to the entity from the reversal of
deductible temporary differences is dependent on the probability of future taxable
profits, against which the related deductible temporary difference can be
deducted (IAS 12, paras 24 and 27).
• Deferred tax assets arising from deductible temporary differences are
recognised only when it is probable that any future economic benefit
associated with the item will flow to the entity.
• Deductible temporary differences reverse when the carrying amounts of assets
or liabilities are recovered or settled and result in deductions in determining
taxable amounts in future periods.
• The benefits of a deferred tax asset are probable of recovery only if it is
probable that the entity will earn sufficient taxable profits against which the
temporary differences can be deducted.
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24. RECOGNITION OF DEFERRED TAX 2
29 of IAS 12, which explains that when there are insufficient taxable
temporary differences, the deferred tax asset is recognised to the
extent that:
• it is probable that there will be other taxable profit, after allowing
for future taxable profit required in order to utilise future deductible
temporary differences, or
• the entity can create taxable profit by using tax planning
opportunities.
Tax planning opportunities are ‘actions that the entity would take to
create or increase taxable income in a particular period before the
expiry of a tax loss or tax credit carry-forward’ (IAS 12, para. 30).
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28. 28
20x0 20x1
DTD 60 000
TTD 45 000 55 000
If TTD < DTD, DTA is not recognised
e.g., 45 000 < 60 000 then
DTA = 15 000 x .3 = 4 500 is not
recognised in 2009, only
DTA = 45 000 x .3 = 13 500 is
recognised in 2009,
30. RECOGNITION OF DEFERRED TAX 3
Accounting treatment for tax should be consistent with the
accounting treatment of the transaction or event itself and so:
• recognised as income or an expense and included in profit or loss
(with exceptions), or
• recognised outside of profit or loss:
• in other comprehensive income, or
• directly in equity.
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31. RECOGNITION RULES FOR UNUSED TAX
LOSSES AND UNUSED TAX CREDITS
• Deferred tax assets also arise when the taxation legislation within a
particular jurisdiction allows an entity to carry forward unused tax losses
and tax credits for use against later years profits. The legislation usually
contains several provisions and exceptions.
• Deferred tax assets arising from unused tax losses and unused tax
credits should be recognised on the same basis as other deferred tax
assets. That is, to the extent that ‘it is probable that future taxable profit
will be available against which the unused tax losses and unused tax
credits can be utilised’ (IAS 12, para. 34).
• Criteria for assessing the probability that taxable profit will be available
against which the unused tax loses or unused tax credits can be utilised.
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34. RECOVERY OF TAX LOSSES
• The accounting treatment of the recovery of tax losses is dependent
on whether or not the tax losses were recognised as a deferred tax
asset.
• When tax losses are recovered, the benefit from the recovery of those
losses is allocated:
• first to tax losses for which no deferred tax asset was previously
recognised (which, in effect, results in the recognition of an income
tax benefit)
• second to tax losses for which a deferred tax asset was previously
recognised (which, in effect, results in the reduction of the
previously recognised deferred tax asset).
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Dr Deferred tax expense
Cr Current tax income
Dr Deferred tax expense
Cr Deferred tax asset
35. REASSESSMENT OF THE CARRYING AMOUNTS
OF DEFERRED TAX ASSETS AND LIABILITIES
IAS 12 contains several requirements relating to the reassessment of
the carrying amounts of deferred tax assets and liabilities:
• that an entity will recognise any previously deferred unrecognised
tax asset to the extent it is likely that taxable profit earned in future
will permit recovery of the previously deferred tax asset (IAS 12,
para. 37)
• that the deferred tax asset’s carrying amount should be reduced to
the point where it is no longer likely that a taxable profit sufficient to
allow realisation of the asset will be left (IAS 12, para. 56).
35
Discuss: Question 4.8
36. SUMMARY
Part B discussed the following:
• deferred tax liabilities are recognised for all taxable temporary
differences (with certain limited exceptions)
• deferred tax assets are recognised to the extent that it is probable
that future taxable profit will be available against which the
deferred tax asset can be used (with certain limited exceptions)
• a primary source of taxable profit against which the deferred tax
asset can be used is the taxable amounts that arise when taxable
temporary differences reverse.
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38. Part C considers:
• temporary differences that arise when assets are carried at
revalued amounts
• temporary differences that arise when the tax base is not adjusted
by an amount equivalent to the revaluation.
INTRODUCTION
39. ASSETS CARRIED AT REVALUED AMOUNTS
• International Financial Reporting Standards (IFRSs) permit a
range of assets to be carried at fair value or revalued amount.
• For example, after the initial recognition as an asset, an item
of property, plant and equipment may be carried at a revalued
amount, being its fair value at the date of revaluation, less
any subsequent accumulated depreciation and subsequent
impairment losses.
• Whether a temporary difference arises when an asset is
revalued, depends on how a revaluation is treated in the tax
jurisdiction.
39
40. ASSETS CARRIED AT REVALUED AMOUNTS
• When an asset is revalued, there are two possibilities:
• the tax base is adjusted by the same amount as the change in the
carrying amount of the asset – no temporary difference
• the tax base is not adjusted, or is adjusted by an amount that differs
from the amount by which the asset was revalued – taxable or
deductible temporary difference.
40
Discuss: Question 4.9
41. RECOGNITION OF DEFERRED TAX ON
REVALUATION
• Deferred tax is recognised as income or expenses except when
the tax relates to items that are credited or charged in other
comprehensive income or directly in equity.
• When the tax relates to items that are recognised in other
comprehensive income, the current and deferred tax is
recognised in other comprehensive income.
• When the current and deferred tax relates to items that are
recognised directly in equity, current and deferred tax is
recognised directly in equity.
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42. RECOVERY OF REVALUED ASSETS
THROUGH USE OR THROUGH SALE
• The amount of tax payable is affected by the manner of recovery of
an asset.
• An entity may realise the future economic benefits of an asset
either through use or through sale.
• Calculating the tax base is based on how an entity expects, at the
end of the reporting period, to recover or settle the carrying
amounts of its assets and liabilities.
• The tax base may differ in circumstances where different tax
treatments exist for each method.
42
Discuss: Question 4.10
43. ADDITIONAL GUIDANCE ON RECOVERY OF
NON-DEPRECIABLE ASSETS
• ‘recovery’ in relation to an asset that is not depreciated and is
revalued in accordance with IAS 16.
• Tax consequences that should be considered:
• those that would follow from recovery of the carrying amount of
that asset through sale, regardless of the basis of measuring the
carrying amount of that asset.
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45. SUMMARY
Part C covered:
• Whether a temporary difference arises when the fair value of an
asset is adjusted or an asset is revalued depends on how a
revaluation increase or decrease is treated in the relevant tax
jurisdiction.
• No temporary difference is created when the tax base is adjusted
by the same amount as the carrying amount of the asset.
• A taxable or deductible temporary difference arises when the tax
base is not adjusted or is adjusted by an amount that differs from
the amount by which the asset was revalued.
• The accounting treatment of deferred tax resulting from a
revaluation follows the treatment of the revaluation surplus.
• The manner of recovery of an asset may affect the tax rate and/or
the tax base applicable on recovery or settlement.
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47. INTRODUCTION
Presentation:
• enable users to understand and evaluate the impact of current and deferred
tax on the financial position and performance of the entity
• focus primarily on the presentation of tax balances in the statement of
financial position
Disclose information about:
• major components of tax expense (tax income)
• relationship between tax expense (tax income) and accounting profit
• particulars of temporary differences that give rise to the recognition of
deferred tax assets and the deferred tax liabilities
• particulars of temporary differences, unused tax losses and unused tax
credits for which no deferred tax asset was recognised (i.e. because the
probability criterion was not satisfied).
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48. PRESENTATION OF CURRENT TAX AND
DEFERRED TAX
• Current tax assets and liabilities and deferred tax assets and
liabilities are presented in separate line items in the statement of
financial position as required by IAS 1.
• Further, IAS 1 prohibits the classification of deferred tax assets and
deferred tax liabilities as current assets or liabilities.
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50. OFFSETTING TAX ASSETS AND LIABILITIES
IAS 12 requires that current tax assets (tax recoverable) and current tax
liabilities (tax payable) are offset when the entity:
• ‘has a legally enforceable right to set off the recognised amounts’
• ‘intends either to settle on a net basis, or to realise the asset and
settle the liability simultaneously’ (IAS 12, para. 71).
IAS 12 permits deferred tax assets and deferred tax liabilities to be
offset when:
• ‘the entity has a legally enforceable right to set off current tax
assets against current tax liabilities’
• ‘the deferred tax assets and the deferred tax liabilities relate to
income taxes levied by the same taxation authority’ (IAS 12, para.
74).
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51. MAJOR COMPONENTS OF TAX EXPENSE
• Tax expense (tax income) is presented as a single line item in the
statement of profit or loss and other comprehensive income as
required by para. 82(d) of IAS 1.
• In order to provide more useful information to the users of financial
statements, para. 79 of IAS 12 requires ‘the major components of
tax expense (tax income) to be disclosed separately’. This
information is usually disclosed in the notes to the financial
statements.
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53. RELATIONSHIP BETWEEN TAX EXPENSE
(INCOME) AND ACCOUNTING PROFIT
• Profit or loss for the reporting period and tax expense (tax income)
are presented as single line items in the statement of profit or loss
and other comprehensive income.
• In order to fully understand the financial performance of the entity,
IAS 12 requires an explanation of the relationship between tax
expense (income) and accounting profit be provided in the notes to
the financial statements. （Example 4.16)
53
54. INFORMATION ABOUT EACH TYPE OF
TEMPORARY DIFFERENCE
• It is important for the users of the financial statements to
understand
• the nature and amount of each type of temporary difference
• Recognised deferred tax assets and deferred tax liabilities
• Unrecognised deferred tax assets and deferred tax liabilities
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55. SUMMARY
The objective of the presentation and disclosure requirements of IAS 12 is
to disclose information that enables users of the financial statements to
understand and evaluate the impact of current tax and deferred tax on the
financial position and performance of the entity.
Presentation and disclosure items discussed in Part D included:
• major components of tax expense (tax income)
• relationship between tax expense (tax income) and accounting profit
• particulars of temporary differences that give rise to the recognition of
deferred tax assets and the deferred tax liabilities
• particulars of temporary differences, unused tax losses and unused tax
credits for which no deferred tax asset was recognised (i.e. because the
‘probability criterion’ was not satisfied).
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56. REVIEW
This module covered:
• accounting for income tax under IAS 12, which requires the
application of the balance sheet liability method
• the core principle of recognition of current and future tax
consequences of:
• transactions and other events of the current period that are
recognised in an entity’s financial statements
• the future recovery (settlement) of the carrying amount of assets
(liabilities) that are recognised in an entity’s statement of
financial position.
• recognition of deferred tax assets and liabilities
• special considerations for assets measured at revalued amounts
• presentation and disclosure requirements.
56
