IAS 12

IAS 12: Income Taxes

IAS 12 Income Taxes prescribes the accounting treatment for income taxes, including how to account for the current and future tax consequences of assets, liabilities and transactions recognised in the financial statements.

The Standard implements a so-called ‘comprehensive balance sheet method’ of accounting for income taxes which recognises both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity’s assets and liabilities.

Differences between the carrying amount and tax base of assets and liabilities, and carried forward tax losses and credits, are recognised, with limited exceptions, as deferred tax liabilities or deferred tax assets, with the latter also being subject to a ‘probable profits’ test.

Current Tax

Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet been settled, and as an asset to the extent that the amounts already paid exceed the amount due. The benefit of a tax loss which can be carried back to recover current tax of a prior period is recognised as an asset.

Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from) taxation authorities, using the rates/laws that have been enacted or substantively enacted by the balance sheet date.

Recognition of current tax liabilities and assets

Current tax is the amount payable to the tax authorities in relation to the current trading activities.

IAS 12 requires any unpaid tax in respect of the current or prior periods to be recognised as a liability. Conversely, any excess tax paid in respect of current or prior periods over what is due should be recognised as an asset to the extent it is probable that it will be recoverable

The tax rate to be used in the calculation for determining a current tax asset or liability is the rate that is expected to apply when the asset is expected to be recovered, or the liability to be paid. These rates should be based on tax laws that have already been enacted (are already part of law) or substantively enacted (have already passed through sufficient parts of the legal process that they are virtually certain to be enacted) by the reporting date.

Measurement

Measurement of current tax liabilities (assets) for the current and prior periods is very simple. They are measured at the amount expected to be paid to (recovered from) the tax authorities. The tax rates (and tax laws) used should be those enacted (or substantively enacted) by the reporting date.

Recognition of current tax

Normally, current tax is recognised as income or expense and included in the net profit or loss for the period. However, where tax arises from a transaction or event which is recognised as other comprehensive income or recognised directly in equity (in the same or a different period) rather than in profit or loss, then the related tax should also be reported within other comprehensive income or reported directly in equity.

An example of such a situation is where, under IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, an adjustment is made to the opening balance of retained earnings due to either a change in accounting policy that is applied retrospectively, or to the correction of a material error. Any related tax is therefore also recognised directly in equity.

Presentation

In the statement of financial position, tax assets and liabilities should be shown separately.

Current tax assets and liabilities may only be offset under the following conditions.

• The entity has a legally enforceable right to set off the recognised amounts
• The entity intends to settle the amounts on a net basis, or to realise the asset and settle the liability at the same time.

The tax expense (income) related to the profit or loss from ordinary activities should be shown on the face of the statement of profit or loss and other comprehensive income as part of profit or loss for the period.

Deferred Tax

When a company recognises an asset or liability, it expects to recover or settle the carrying amount of that asset or liability. In other words, it expects to sell or use up assets, and to pay off liabilities. What happens if that recovery or settlement is likely to make future tax payments larger (or smaller) than they would otherwise have been if the recovery or settlement had no tax consequences? In these circumstances, IAS 12 requires companies to recognise a deferred tax liability (or deferred tax asset).

Deferred tax is not a tax that the entity pays. It is an accounting measure, used to match the tax effect of transactions with their accounting effect.

Accounting vs taxable profits

Although accounting profits form the basis for computing taxable profits, on which the tax liability for the year is calculated, accounting profits and taxable profits are often different for two main reasons:

• Permanent differences
• Temporary differences

Permanent Differences

These arise when items of revenue or expense included in the accounting profit are excluded from the computation of taxable profits. For example:

• Client entertaining expenses are not tax allowable in the UK.
• UK companies are not taxed on dividends from other UK companies and overseas companies.

Temporary differences

These arise when items of revenue or expense are included in both accounting profits and taxable profits, but not in the same accounting period. For example, both depreciation and capital allowances write off the cost of a non-current asset, though not necessarily at the same rate and over the same period.

In the long run, the total taxable profits and total accounting profits will be the same (except for permanent differences). In other words, temporary differences which originate in one period will reverse in one or more subsequent periods.

Deferred tax is an accounting adjustment to smooth out the discrepancies between accounting profit and the tax charge caused by temporary differences.

Accounting for deferred tax

To calculate deferred tax, the following steps must be taken:

• Identify temporary differences
• Apply the tax rate to the temporary differences to calculate the deferred tax asset or liability
• Recognise the resulting deferred tax amount in the financial statements

Identification of temporary differences

Above we have considered temporary differences as being the result of income or expenditure being recognised in accounting and taxable profit in different periods.

IAS 12, however, requires that a ‘net assets approach’ rather than an ‘income statement approach’ is taken to calculate temporary differences.

Applying this approach to a company that buys an item of machinery at a cost of £100,000 and applies straight-line depreciation at a rate of 10%, with capital allowances available at 20% reducing balance, we would simply compare the carrying amount and the tax written-down value rather than depreciation and capital allowances in order to calculate the temporary difference:

Apply the tax rate to temporary differences to calculate deferred tax asset or liability

The tax rate to be used is not necessarily the current tax rate. It should be the rate which is expected to apply to the period when the asset is realised or liability settled.

Record deferred tax in the financial statements

Depending on the circumstances, a deferred tax asset or liability may arise in the statement of financial position. The corresponding entry is normally recorded in:

• the tax charge in profit or loss; or
• other comprehensive income.

Identification of Temporary differences

Calculation of temporary differences

Temporary differences are calculated as the difference between:

• the carrying amount of the asset or liability in the statement of financial position; and
• the ‘tax base’ of the asset or liability - the amount attributed to an asset or liability for tax purposes.

Tax base

Assets

The tax base of an asset is the value of the asset in the current period for tax purposes. This is either:

• the amount that will be tax deductible in the future against taxable economic benefits when the carrying amount of the asset is recovered; or
• if those economic benefits are not taxable, the tax base is equal to the carrying amount of the asset.

Liabilities

• The tax base of a liability is its carrying amount less any amount that will be tax deductible in the future.
• For revenue received in advance, the tax base of the resulting liability is its carrying amount less any amount of the revenue that will not be taxable in future periods.

IAS 12 guidance

IAS 12 states that in the following circumstances, the tax base of an asset or liability will be equal to its carrying amount:

• Accrued expenses that have already been deducted in determining an entity’s tax liability for the current or earlier periods
• A loan payable that is measured at the amount originally received and this amount is the same as the amount repayable on final maturity of the loan
• Accrued income that will never be taxable

The table below gives some examples of tax rules and the resulting tax base:

Types of temporary differences

IAS 12 makes a distinction between two types of temporary difference:

• Taxable temporary differences
• Deductible temporary differences

Taxable temporary differences

• Taxable temporary differences arise where the carrying amount exceeds the tax base.
• They result in a deferred tax liability.

Deductible temporary differences

• Deductible temporary differences arise where the tax base exceeds the carrying amount.
• These result in a deferred tax asset.

Temporary differences with no tax impact

A deferred tax liability or asset should be recognised for all taxable and deductible temporary differences unless they arise from:

• the initial recognition of goodwill; or
• the initial recognition of an asset or liability in a transaction which:
  • is not a business combination; and
  • at the time of the transaction, affects neither accounting nor taxable profit.

Example of initial recognition of assets or liabilities with no deferred tax effect

Examples of initial recognition of assets or liabilities in a transaction which does not affect either accounting or taxable profit at the time of the transaction are:

• An intangible asset with a finite life which attracts no tax allowances. In this case, taxable profit is never affected, and amortisation is only charged to accounting profit after the transaction.

• A non-taxable government grant related to an asset which is deducted in arriving at the carrying amount of the asset. For tax purposes it is not deducted from the tax base.

Although a deductible temporary difference arises in both cases (on initial recognition in the second case, and subsequently in the first case), this is not permitted to be recognised as a deferred tax asset, as it would make the financial statements less transparent.

The first of the two cases, an intangible asset with a finite life which attracts no tax allowances, only gives rise to a deferred tax asset if it has a chargeable gains cost, that is, if it was acquired separately after April 2002. If it was acquired on consolidation, no deferred tax asset arises as the amortisation of the intangible just decreases consolidated retained earnings.

Summary

The following diagram summarises the calculation and different types of temporary differences:

Measurement of Deferred tax

The tax rate should be applied to temporary differences in order to calculate deferred tax:

• Taxable temporary differences x tax rate = deferred tax liability
• Deductible temporary differences x tax rate = deferred tax asset

Tax rate

The tax rates that should be used to calculate deferred tax are the ones that are expected to apply in the period when the asset is realised or the liability settled. The best estimate of this tax rate is the rate which has been enacted or substantively enacted by the reporting date.

For example, in the Summer Budget of 2015, the government announced legislation setting the Corporation Tax main rate (for all profits except ring fence profits) at 19% for the years starting on 1 April 2017, 2018 and 2019 and at 18% for the year starting 1 April 2020.

The Accounting Standards Board (ASB) has stated that substantive enactment occurs when any future steps in the enactment process will not change the outcome. Specifically, in relation to the UK, the ASB has stated that this occurs when the House of Commons passes a resolution under the Provisional Collection of Taxes Act 1968.

Progressive rates of tax

In some countries, different tax rates apply to different levels of taxable income. In this case, an average rate expected to apply to the taxable profit of the entity in the period in which the temporary difference is expected to reverse should be identified and used to calculate the temporary difference.

Different rates of taxes

Some countries also apply different rates of tax to different types of income eg, one rate to profits and another to gains.

Where this is the case, the tax rate used to calculate the deferred tax amount should reflect the manner in which the entity expects to recover the carrying amount of assets or settle the carrying amount of liabilities.

The manner of recovery may also affect the tax base of an asset or liability. Tax base should be measured according to the expected manner of recovery or settlement

Discounting

IAS 12 states that deferred tax assets and liabilities should not be discounted because the complexities and difficulties involved will affect reliability. Discounting would require detailed scheduling of the timing of the reversal of each temporary difference, but this is often impracticable. If discounting were permitted, this would affect comparability.

Note, however, that where carrying amounts of assets or liabilities are discounted (eg, a pension obligation), the temporary difference is determined based on a discounted value.

Deferred tax in financial statements

Principles of recognition

As with current tax, deferred tax should normally be recognised as income or an expense amount within the tax charge, and included in the net profit or loss for the period. Only the movement in the deferred tax asset / liability on the statement of financial position is recorded:

DEBIT Tax charge X
CREDIT Deferred tax liability X

or

DEBIT Deferred tax asset X
CREDIT Tax charge X

Exceptions to recognition in profit or loss

• Deferred tax relating to items dealt with as other comprehensive income (such as a revaluation) should be recognised as tax relating to other comprehensive income within the statement of profit or loss and other comprehensive income.
• Deferred tax relating to items dealt with directly in equity (such as the correction of an error or retrospective application of a change in accounting policy) should also be recognised directly in equity.
• Deferred tax resulting from a business combination is included in the initial cost of goodwill

Components of deferred tax

Deferred tax charges will consist of two components:

• Deferred tax relating to temporary differences
• Adjustments relating to changes in the carrying amount of deferred tax assets/liabilities (where there is no change in temporary differences) eg, changes in tax rates/laws, reassessment of the recoverability of deferred tax assets, or a change in the expected recovery of an asset

Deferred tax assets

A deferred tax asset must satisfy the recognition criteria given in IAS 12. These state that a deferred tax asset should only be recognised to the extent that it is probable that taxable profit will be available against which it can be used.

This is an application of prudence.

Future taxable profits

When can we be sure that sufficient taxable profit will be available, against which a deductible temporary difference can be used?

IAS 12 states that this is assumed when:

• there are sufficient taxable temporary differences;
• the taxable and deductible temporary differences relate to the same entity and same tax authority;
• the taxable temporary differences are expected to reverse either:
  • in the same period as the deductible temporary differences; or
  • in periods in which a tax loss arising from the deferred tax asset can be used.

Insufficient taxable temporary differences

Where there are insufficient taxable temporary differences, a deferred tax asset may only be recognised to the extent that:

• it is probable that taxable profits will be sufficient in the same period as the reversal of the deductible temporary difference (ignoring taxable amounts arising from future deductible temporary differences); and
• tax planning opportunities exist that will allow the entity to create taxable profit in the appropriate periods.

If an entity has a history of recent losses, then this is evidence that future taxable profit may not be available.

Reassessment of unrecognised deferred tax assets

For all unrecognised deferred tax assets, at each reporting date an entity should reassess the availability of future taxable profits and whether part or all of any unrecognised deferred tax assets should now be recognised. This may be due to an improvement in trading conditions which is expected to continue.

Common Scenarios

There are a number of common examples which result in a taxable or deductible temporary difference. However, this list is not exhaustive.

Taxable temporary differences

Accelerated capital allowances

• These arise when capital allowances for tax purposes are received before deductions for accounting depreciation are recognised in the statement of financial position (accelerated capital allowances).

• The temporary difference is the difference between the carrying amount of the asset at the reporting date and its tax written-down value (tax base).

• The resulting deferred tax is recognised in profit or loss.

Interest revenue

• In some jurisdictions, interest revenue may be included in profit or loss on an accruals basis, but taxed when received.

• The temporary difference is equivalent to the income accrual at the reporting date, as the tax base of the interest receivable is nil.

• The resulting deferred tax is recognised in profit or loss.

Development costs

• Development costs may be capitalised for accounting purposes in accordance with IAS 38 while being deducted from taxable profit in the period incurred (ie, they receive immediate tax relief).

• The temporary difference is equivalent to the amount capitalised at the reporting date, as the tax base of the costs is nil since they have already been deducted from taxable profits.

• The resulting deferred tax is recognised in profit or loss.

Revaluations to fair value – property, plant and equipment

IFRS permits or requires some assets to be revalued to fair value, eg, property, plant and equipment under IAS 16, Property, Plant and Equipment.

Temporary difference

In some jurisdictions a revaluation will affect taxable profit in the current period. In this case, no temporary difference arises, as both carrying value and the tax base are adjusted

In other jurisdictions, including the UK, the revaluation does not affect taxable profits in the period of revaluation and consequently, the tax base of the asset is not adjusted. Hence a temporary difference arises.

This should be provided for in full based on the difference between carrying amount and tax base.

An upward revaluation will therefore give rise to a deferred tax liability, even if:

• the entity does not intend to dispose of the asset; or
• tax due on any future gain can be deferred through rollover relief.

This is because the revalued amount will be recovered through use which will generate taxable income in excess of the depreciation allowable for tax purposes in future periods.

Manner of recovery

The carrying amount of a revalued asset may be recovered:

• through sale
• through continued use

The manner of recovery may affect the tax rate applicable to the temporary difference and/or the tax base of the asset.

Recording deferred tax

As the underlying revaluation is recognised as other comprehensive income, so the deferred tax thereon is also recognised as part of tax relating to other comprehensive income. The accounting entry is therefore:

DEBIT Tax on other comprehensive income X
CREDIT Deferred tax liability X

Non-depreciated revalued assets

SIC 21, Income Taxes – Recovery of Revalued Non-Depreciable Assets requires that deferred tax should be recognised even where non-current assets are not depreciated (eg, land). This is because the carrying value will ultimately be recovered on disposal.

Revaluations to fair value – other assets

IFRSs permit or require certain other assets to be revalued to fair value, for example:

• Certain financial instruments under IFRS 9, Financial Instruments
• Investment properties under IAS 40, Investment Property

Where the revaluation is recognised in profit or loss (eg, fair value through profit or loss instruments, investment properties) and the amount is taxable/allowable for tax, then no deferred tax arises as both the carrying value and the tax base are adjusted.

Where the revaluation is recognised as other comprehensive income (eg, many investments in equity instruments) and does not therefore impact taxable profits, then the tax base of the asset is not adjusted and deferred tax arises.This deferred tax is also recognised as other comprehensive income.

Retirement benefit costs

In the financial statements, retirement benefit costs are deducted from accounting profit as the service is provided by the employee. They are not deducted in determining taxable profit until the entity pays either retirement benefits or contributions to a fund. Thus a temporary difference may arise.

• A deductible temporary difference arises between the carrying amount of the net defined benefit liability and its tax base. The tax base is usually nil.
• The deductible temporary difference will normally reverse.
• A deferred tax asset is recognised for this temporary difference to the extent that it is recoverable; that is, sufficient profit will be available against which the deductible temporary difference can be used.
• If there is a net defined benefit asset, for example when there is a surplus in the pension plan, a taxable temporary difference arises and a deferred tax liability is recognised.

Under IAS 12, both current and deferred tax must be recognised outside profit or loss if the tax relates to items that are recognised outside profit or loss. This could make things complicated as it interacts with IAS 19, Employee Benefits.

IAS 19 (revised) requires recognition of remeasurement (actuarial) gains and losses in other comprehensive income in the period in which they occur.

It may be difficult to determine the amount of current and deferred tax that relates to items recognised in profit or loss or in other comprehensive income. As an approximation, current and deferred tax are allocated on an appropriate basis, often pro rata

Dividends receivable from UK and overseas companies

Note the following.

• Dividends received from UK and overseas companies are not taxable on UK companies.
• Overseas dividends are thus a permanent difference and so there is no deferred tax payable. (Previously dividends received by a UK company from an overseas company were taxable and hence were a temporary difference.)

Deductible temporary differences

Tax losses

Where tax losses arise, for example in the UK as trading losses or non-trading loan relationship deficits, then the manner of recognition of these in the financial statements depends on how they are expected to be used.

• If losses are carried back to crystallise a refund, then a receivable is recorded in the statement of financial position and the corresponding credit is to the current tax charge.

• If losses are carried forward to be used against future profits or gains, then they should be recognised as deferred tax assets to the extent that it is probable that future taxable profit will be available against which the losses can be used.

Unused tax credits carried forward against taxable profits will also give rise to a deferred tax asset to the extent that profits will exist against which they can be used

Recognition of deferred tax asset

The existence of unused tax losses is strong evidence that future taxable profit may not be available. The following should be considered before recognising any deferred tax asset:

• Whether an entity has sufficient taxable temporary differences against which the unused tax losses can be offset
• Whether it is probable that the entity will have taxable profits before the unused tax losses expire
• Whether the tax losses result from identifiable causes which are unlikely to recur
• Whether tax planning opportunities are available to create taxable profit

Group tax relief

Where the acquisition of a subsidiary means that tax losses which previously could not be used can now be used against the profits of the subsidiary, a deferred tax asset may be recognised in the financial statements of the parent company. This amount is not taken into account in calculating goodwill arising on acquisition

Provisions

• A provision is recognised for accounting purposes when there is a present obligation, but it is not deductible for tax purposes until the expenditure is incurred.
• In this case, the temporary difference is equal to the amount of the provision, since the tax base is nil.
• Deferred tax is recognised in profit or loss.

Share-based payments

Share-based transactions may be tax deductible in some jurisdictions. However, the amount deductible for tax purposes does not always correspond to the amount that is charged to profit or loss under IFRS 2.

In most cases it is not just the amount but also the timing of the expense allowable for tax purposes that will differ from that required by IFRS 2.

For example, an entity recognises an expense for share options granted under IFRS 2, but does not receive a tax deduction until the options are exercised. The tax deduction will be based on the share price on the exercise date and will be measured on the basis of the options’ intrinsic value i.e., the difference between market price and exercise price at the exercise date. In the case of share-based employee benefits under IFRS 2, the cost of the services as reflected in the financial statements is expensed and therefore the carrying amount is nil.

The difference between the carrying amount of nil and the tax base of share-based payment expense received to date is a deferred tax asset, provided the entity has sufficient future taxable profits to use this deferred tax asset.

The deferred tax asset temporary difference is measured as:

If the amount of the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction also relates to an equity item.

The excess is therefore recognised directly in equity.

The diagrams below show the accounting for equity-settled and cash-settled transactions:

Recognition of deferred tax assets for unrealised losses

This amendment was issued in January 2016 in order to clarify when a deferred tax asset should be recognised for unrealised losses. For example, an entity holds a debt instrument that is falling in value, without a corresponding tax deduction, but the entity knows that it will receive the full nominal amount on the due date, and there will be no tax consequences of that repayment. The question arises of whether to recognise a deferred tax asset on this unrealised loss.

The IASB clarified that unrealised losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument’s holder expects to recover the carrying amount of the debt instrument by sale or by use.

This may seem to contradict the key requirement that an entity recognises deferred tax assets only if it is probable that it will have future taxable profits. However, the amendment also addresses the issue of what constitutes future taxable profits, and clarifies the following:

• The carrying amount of an asset does not limit the estimation of probable future taxable profits.
• Estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences.
• An entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilisation of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type.

The amendment is effective from January 2017.

Group Scenarios

There are some temporary differences which only arise in a business combination. This is because, on consolidation, adjustments are made to the carrying amounts of assets and liabilities that are not always reflected in the tax base of those assets and liabilities.

The tax bases of assets and liabilities in the consolidated financial statements are determined by reference to the applicable tax rules. Usually tax authorities calculate tax on the profits of the individual entities, so the relevant tax bases to use will be those of the individual entities.

Deferred tax calculation

Taxable temporary differences

Fair value adjustments on consolidation

IFRS 3, Business Combinations requires assets acquired on acquisition of a subsidiary to be recognised at their fair value rather than their carrying amount in the individual financial statements of the subsidiary. The fair value adjustment does not, however, have any impact on taxable profits or the tax base of the asset. This is much like a revaluation in an individual company’s accounts.

Therefore an upwards fair value adjustment made to an asset will result in the carrying value of the asset exceeding the tax base and so a taxable temporary difference will arise.

The resulting deferred tax liability is recorded in the consolidated accounts by:

DEBIT Goodwill (group share) X
CREDIT Deferred tax liability X

Undistributed profits of subsidiaries, branches, associates and joint ventures

• The carrying amount of, for example, a subsidiary in consolidated financial statements is equal to the group share of the net assets of the subsidiary plus purchased goodwill.
• The tax base is usually equal to the cost of the investment.
• The difference between these two amounts is a temporary difference. It can be calculated as the parent’s share of the subsidiary’s post-acquisition profits which have not been distributed.

Recognition of deferred tax

A deferred tax liability should be recognised on the temporary difference unless:

• the parent/investor/venturer is able to control the timing of the reversal of the temporary difference; and
• it is probable that the temporary difference will not reverse (ie, the profits will not be paid out) in the foreseeable future.

This can be applied to different levels of investment as follows:

Subsidiary

• As a parent company can control the dividend policy of a subsidiary, deferred tax will not arise in relation to undistributed profits.

Associate

• An investor in an associate does not control that entity and so cannot determine its dividend policy. Without an agreement requiring that the profits of the associate should not be distributed in the foreseeable future, therefore, an investor should recognise a deferred tax liability arising from taxable temporary differences associated with its investment in the associate. Where an investor cannot determine the exact amount of tax, but only a minimum amount, then the deferred tax liability should be that amount.

Joint Venture

• In a joint venture, the agreement between the parties usually deals with profit sharing. When a venturer can control the sharing of profits and it is probable that the profits will not be distributed in the foreseeable future, a deferred liability is not recognised.

Changes in foreign exchange rates

Where a foreign operation’s taxable profit or tax loss (and therefore the tax base of its non-monetary assets and liabilities) is determined in a foreign currency, changes in the exchange rate give rise to taxable or deductible temporary differences.

These relate to the foreign entity’s own assets and liabilities, rather than to the reporting entity’s investment in that foreign operation, and so the reporting entity should recognise the resulting deferred tax liability or asset. The resulting deferred tax is charged or credited to profit or loss.

However, a deferred tax asset should only be recognised to the extent that both these are probable:

• That the temporary difference will reverse in the foreseeable future
• That taxable profit will be available against which the temporary difference can be used

Deductible temporary differences

Unrealised profits on intra-group trading

• From a tax perspective, one group company selling goods to another group company is taxed on the resulting profit in the period that the sale is made.
• From an accounting perspective no profit is realised until the recipient group company sells the goods to a third party outside the group. This may occur in a different accounting period from that in which the initial group sale is made.
• A temporary difference therefore arises equal to the amount of unrealised intra-group profit. This is the difference between the following:
  • Tax base, being cost to the recipient company (ie, cost to selling company plus unrealised intra-group profit on sale to the recipient company)
  • Carrying value to the group, being the original cost to the selling company, since the intra-group profit is eliminated on consolidation
• Deferred tax is provided at the receiving company’s tax rate

Fair value adjustments

IFRS 3 requires assets and liabilities acquired on acquisition of a subsidiary to be brought in at their fair value rather than the carrying amount. The fair value adjustment does not, however, have any impact on taxable profits or the tax base of the asset.

Therefore a fair value adjustment which increases a recognised liability or creates a new liability will result in the tax base of the liability exceeding the carrying value and so a deductible temporary difference will arise.

A deductible temporary difference also arises where an asset’s carrying amount is reduced to a fair value less than its tax base.

The resulting deferred tax asset is recorded in the consolidated accounts by:

DEBIT Deferred tax asset X
CREDIT Goodwill X

Deferred tax assets of an acquired subsidiary

Deferred tax assets of a subsidiary may not satisfy the criteria for recognition when a business combination is initially accounted for but may be realised subsequently.

These should be recognised as follows:

• If recognised within 12 months of the acquisition date and resulting from new information about circumstances existing at the acquisition date, the credit entry should be made to goodwill. If the carrying amount of goodwill is reduced to zero, any further amounts should be recognised in profit or loss.
• If recognised outside the 12-month ‘measurement period’ or not resulting from new information about circumstances existing at the acquisition date, the credit entry should be made to profit or loss

Disclosure requirements

The tax expense (income) related to profit (or loss) from ordinary activities should be presented on the face of the statement of profit or loss and other comprehensive income.

The following are the main items that should be disclosed separately:

• Current tax expense (income)
• Any adjustments recognised in the period for current tax of prior periods
• The amount of deferred tax expense (income) relating to temporary differences
• The amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes
• Prior period deferred tax or current tax adjustments
• The aggregate current and deferred tax relating to items that are charged or credited to equity
• An explanation of the relationship between tax expense (income) and accounting profit which can be done in either (or both) of the following ways
  • A numerical reconciliation between tax expense and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate (s) is (are) computed
  • A numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed
• An explanation of changes in the applicable tax rate(s) compared to the previous accounting period
• The amount of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised in the statement of financial position

Statement of financial position

Tax assets and tax liabilities should be presented separately from other assets and liabilities in the statement of financial position. Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities.

Deferred tax assets (liabilities) should not be classified as current assets (liabilities). This is the case even if the deferred tax assets/liabilities are expected to be realised within twelve months.

There is no requirement in IAS 12 to disclose the tax base of assets and liabilities on which deferred tax has been calculated

Offsetting

Where appropriate deferred tax assets and liabilities should be offset in the statement of financial position

An entity should offset deferred tax assets and deferred tax liabilities if, and only if:

• the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
• the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority

There is no requirement in IAS 12 to provide an explanation of assets and liabilities that have been offset.

Other disclosures

An entity should disclose any tax-related contingent liabilities, and contingent assets, in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise, for example, from unresolved disputes with the taxation authorities.

Similarly, where changes in tax rates or tax laws are enacted or announced after the reporting date, an entity should disclose any significant effect of those changes on its current and deferred tax assets and liabilities (see IAS 10, Events after the Reporting Period).

Further Information