IAS 12 Income Taxes

IAS 12 Income Taxes



Contents


Introduction
Objective
Scope
Definitions
Recognition of Current Tax Liabilities and Current TaxAssets
Recognition of Deferred Tax Liabilities and Deferred TaxAssets
Measurement
Recognition of Current and Deferred Tax
Presentation
Disclosure
Effective Date
Appendix A - Examples of Temporary Differences
Appendix B - Illustrative Computations and Presentation

This Standard is effective for financial statementscovering periods beginning on or after 1 January 1998.
In May 1999, IAS 10 (revised 1999), Events After theBalance Sheet Date, amended paragraph 88. The amended text became effective forannual financial statements covering periods beginning on or after 1 January2000.
In April 2000, paragraphs 20, 62(a), 64 and Appendix A,paragraphs A10, A11 and B8 were amended to revise cross-references andterminology as a result of the issuance of IAS 40, Investment Property.
In October 2000, the Board approved amendments to IAS 12which added paragraphs 52A, 52B, 65A, 81(i), 82A, 87A, 87B, 87C and 91 anddeleted paragraphs 3 and 50. The limited revisions specify the accountingtreatment for income tax consequences of dividends. The revised text waseffective for annual financial statements covering periods beginning on orafter 1 January 2001.
The following SIC Interpretations relate to IAS 12:
SIC-21, Income Taxes - Recovery ofRevalued Non-Depreciable Assets; and
SIC-25, Income Taxes - Changes in the TaxStatus of an Enterprise or its Shareholders.

Introduction


This Standard ('IAS 12 (revised)') replaces IAS 12,Accounting for Taxes on Income ('the original IAS 12'). IAS 12 (revised) iseffective for accounting periods beginning on or after 1 January 1998. Themajor changes from the original IAS 12 are as follows.
1    The original IAS 12required an enterprise to account for deferred tax using either the deferralmethod or a liability method which is sometimes known as the income statementliability method. IAS 12 (revised) prohibits the deferral method and requiresanother liability method which is sometimes known as the balance sheetliability method.
The income statement liability methodfocuses on timing differences, whereas the balance sheet liability methodfocuses on temporary differences. Timing differences are differences betweentaxable profit and accounting profit that originate in one period and reversein one or more subsequent periods. Temporary differences are differencesbetween the tax base of an asset or liability and its carrying amount in thebalance sheet. The tax base of an asset or liability is the amount attributedto that asset or liability for tax purposes.
All timing differences are temporarydifferences. Temporary differences also arise in the following circumstances,which do not give rise to timing differences, although the original IAS 12treated them in the same way as transactions that do give rise to timingdifferences:
(a) subsidiaries, associates or jointventures have not distributed their entire profits to the parent or investor;
(b) assets are revalued and no equivalentadjustment is made for tax purposes; and
(c) the cost of a business combination isallocated to the identifiable assets acquired and liabilities assumed byreference to their fair values, but no equivalent adjustment is made for taxpurposes.
Furthermore, there are some temporarydifferences which are not timing differences, for example those temporarydifferences that arise when:
(a) the non-monetary assets and liabilitiesof an entity are measured in its functional currency but the taxable profit ortax loss (and, hence, the tax base of its non-monetary assets and liabilities)is determined in a different currency;
(b) non-monetary assets and liabilities arerestated under IAS 29, Financial Reporting in Hyperinflationary Economies; or
(c) the carrying amount of an asset orliability on initial recognition differs from its initial tax base.
Editorial note: Sub-paragraph (a) substituted by IAS 21 (as amended by CorrectionsList 9, May 2004) Previously "(a) the non-monetary assets and liabilitiesof a foreign operation that is integral to the operations of the reportingentity are translated at historical exchange rates;"

Sub-paragraph (c) substituted by IFRS 3 with effect for business combinationsfor which the agreement date is on or after 31 March 2004, subject to furthertransitional provisions. Previously "(c) the cost of a businesscombination that is an acquisition is allocated to the identifiable assets andliabilities acquired, by reference to their fair values but no equivalent adjustmentis made for tax purposes."
2    The original IAS 12permitted an enterprise not to recognise deferred tax assets and liabilitieswhere there was reasonable evidence that timing differences would not reversefor some considerable period ahead. IAS 12 (revised) requires an enterprise torecognise a deferred tax liability or (subject to certain conditions) asset forall temporary differences, with certain exceptions noted below.
3    The original IAS 12required that:
(a) deferred tax assets arising from timingdifferences should be recognised when there was a reasonable expectation ofrealisation; and
(b) deferred tax assets arising from taxlosses should be recognised as an asset only where there was assurance beyondany reasonable doubt that future taxable income would be sufficient to allowthe benefit of the loss to be realised. The original IAS 12 permitted (but didnot require) an enterprise to defer recognition of the benefit of tax lossesuntil the period of realisation.
IAS 12 (revised) requires that deferredtax assets should be recognised when it is probable that taxable profits willbe available against which the deferred tax asset can be utilised. Where anenterprise has a history of tax losses, the enterprise recognises a deferredtax asset only to the extent that the enterprise has sufficient taxabletemporary differences or there is convincing other evidence that sufficienttaxable profit will be available.
4    As an exception to thegeneral requirement set out in paragraph 2 above, IAS 12 (revised) prohibitsthe recognition of deferred tax liabilities and deferred tax assets arisingfrom certain assets or liabilities whose carrying amount differs on initialrecognition from their initial tax base. Because such circumstances do not giverise to timing differences, they did not result in deferred tax assets orliabilities under the original IAS 12.
5    The original IAS 12required that taxes payable on undistributed profits of subsidiaries andassociates should be recognised unless it was reasonable to assume that thoseprofits will not be distributed or that a distribution would not give rise to atax liability. However, IAS 12 (revised) prohibits the recognition of suchdeferred tax liabilities (and those arising from any related cumulativetranslation adjustment) to the extent that:
(a) the parent, investor or venturer is ableto control the timing of the reversal of the temporary difference; and
(b) it is probable that the temporarydifference will not reverse in the foreseeable future.
Where this prohibition has the result thatno deferred tax liabilities have been recognised, IAS 12 (revised) requires anenterprise to disclose the aggregate amount of the temporary differencesconcerned.
6    The original IAS 12 didnot refer explicitly to fair value adjustments made on a business combination.Such adjustments give rise to temporary differences and IAS 12 (revised)requires an entity to recognise the resulting deferred tax liability or(subject to the probability criterion for recognition) deferred tax asset witha corresponding effect on the determination of the amount of goodwill or anyexcess of the acquirer's interest in the net fair value of the acquiree'sidentifiable assets, liabilities and contingent liabilities over the cost ofthe combination. However, IAS 12 (revised) prohibits the recognition ofdeferred tax liabilities arising from the initial recognition of goodwill.

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[1] Under this analysis, there is no taxable temporary difference. An alternative analysis is that the accrued dividends receivable have a tax base of nil and that a tax rate of nil is applied to the resulting taxable temporary difference of 100. Under both analyses, there is no deferred tax liability.

[2] Under this analysis, there is no deductible temporary difference. An alternative analysis is that the accrued fines and penalties payable have a tax base of nil and that a tax rate of nil is applied to the resulting deductible temporary difference of 100. Under both analyses, there is no deferred tax asset.

[3] paragraph 91 refers to "annual financial statements" in line with more explicit language for writing effective dates adopted in 1998 paragraph 89 refers to "financial statements"

Summary
     Income statement    Balance sheet
     Employee services expense    Current tax expense (income)    Deferred tax expense (income)    Total tax expense (income)    Equity    Deferred tax asset
Year 1    188,000    0    (33,333)    (33,333)    0    33,333
Year 2    185,000    0    (62,667)    (62,667)    0    96,000
Year 3    190,000    0    (112,000)    (112,000)    0    208,000
Year 4    0    0    (17,200)    (17,200)    (46,800)    272,000
Year 5    0    (225,200)    225,200    0    46,800    0
                         (94,800)    
Totals    563,000    (225,200)    0    (225,200)    (94,800)    0

Year 5
Deferred tax expense (reversal of deferred tax asset)    272,000    
Amount recognised directly in equity (reversal of cumulative deferred tax income recognised directly in equity)    46,800    
Amount recognised in profit or loss         225,200
Current tax income based on intrinsic value of options at exercise date (40,000 20 0.40) =    320,000    
Amount recognised in profit or loss (563,000 0.40) =    225,200    
Amount recognised directly in equity         94,800

The deferred tax income is recognised partly in profit or loss and partly directly in equity as follows:
Estimated future tax deduction (40,000 17) =    680,000    
Cumulative remuneration expense    563,000    
Excess tax deduction         117,000
Deferred tax income for year    64,000    
Excess recognised directly in equity (117,000 0.40) =    46,800    
Recognised in profit or loss         17,200

Year 3
Deferred tax asset at year-end:
(40,000 13 0.40) =    208,000    
Less deferred tax asset at start of year    (96,000)    
Deferred tax income for year         112,000
The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 520,000 (40,000 × 13) is less than the cumulative remuneration expense of 563,000 (188,000 + 185,000 + 190,000).
Year 4
Deferred tax asset at year-end:
(40,000 17 0.40) =    272,000    
Less deferred tax asset at start of year    (208,000)    
Deferred tax income for year         64,000

*This amount consists of the following:
Deferred tax income for the temporary difference between the tax base of the employee services received during the year and their carrying amount of nil:
(45,000 × 8 × 1/3 × 0.40)    48,000
Tax income resulting from an adjustment to the tax base of employee services received in previous years:
(a) increase in intrinsic value:
(45,000 3 1/3 0.40)    18,000    
(b) decrease in number of options:
(5,000 5 1/3 0.40)    (3,333)    
Deferred tax income for year         62,667
The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 240,000 (45,000 × 8 × 2/3) is less than the cumulative remuneration expense of 373,000 (188,000 + 185,000).

Year 1
Deferred tax asset and deferred tax income:
(50,000 5 1/3* 0.40) =    33,333
*The tax base of the employee services received is based on the intrinsic value of the options, and those options were granted for three years' services. Because only one year's services have been received to date, it is necessary to multiply the option's intrinsic value by one-third to arrive at the tax base of the employee services received in year 1.
The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 83,333 (50,000 × 5 × 1/3) is less than the cumulative remuneration expense of 188,000.
Year 2
Deferred tax asset at year-end:
(45,000 8 2/3 0.40) =    96,000    
Less deferred tax asset at start of year    (33,333)    
Deferred tax income for year         62,667*

     Employee services expense    Number of options at year-end    Intrinsic value per option
Year 1    188,000    50,000    5
Year 2    185,000    45,000    8
Year 3    190,000    40,000    13
Year 4    0    40,000    17
Year 5    0    40,000    20
The entity recognises a deferred tax asset and deferred tax income in years 1-4 and current tax income in year 5 as follows. In years 4 and 5, some of the deferred and current tax income is recognised directly in equity, because the estimated (and actual) tax deduction exceeds the cumulative remuneration expense.