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Section 7400: Income Taxes

International Accounting Standard 12
Income Taxes

1. First version of IAS 12
"Accounting for taxes on income" issued in July 1979

2. Revisions
October 1996, Income taxes
October 2000, Income taxes

[U.S. GAAP Codification Topic]
740 Income taxes

3. Taxable and Deductible Temporary Differences
Taxable temporary differences
--> Temporary differences that will result in taxable amounts
Deductible temporary differences
--> Temporary differences that will result in deductions

4. Deferred Tax
Deferred tax liabilities
--> Amount of income taxes payable in the future due to (1)
(1) taxable temporary differences
Deferred tax assets
--> Amount of income taxes recoverable in the future due to (1), (2), (3)
(1) deductible temporary differences
(2) carryforward of unused tax losses
(3) carryforward of unused tax credits

5. Current Tax
Current tax = (1) - (2) for the period
(1) income taxes payable due to taxable profit
(2) income taxes recoverable due to tax loss

6. Taxable profit: Profit for a period as determined by tax rules
Tax loss: Loss for a period as determined by tax rules

7. Tax Expense
The sum of (1) and (2), included in profit or loss
(1) current tax
(2) deferred tax

8. Accounting profit
Profit or loss for a period before deducting tax expense

9. Tax base of an asset
Amount to be deductible against (1) for tax purposes
(1) taxable economic benefits that will occur
--> when the carrying amount of an asset is recovered

If there will be no taxable economic benefits,
tax base of an asset = carrying amount of an asset

10. Tax base of a liability = (1) - (2)
(1) carrying amount of a liability
(2) future deductions due to that liability

11. Revenue received before it is earned = liability
Tax base of such a liability = (1) - (2)
(1) carrying amount of liability
(2) non-taxable portion of revenue

12. Temporary differences = (1) + (2)
(1) Timing differences
(2) Other temporary differences

13. Timing differences
Differences between (1) and (2) that occur in one period and reverse in other periods
(1) accounting profit
(2) taxable profit

14. Examples of timing differences
(1) Interest revenue recognised
--> on accrual basis for accounting and cash basis for tax
(2) Different depreciation methods
--> for tax purposes and accounting purposes

15. Examples of other temporary differences
(1) Assets revalued for accounting,
--> not adjusted for tax purposes
(2) Assets and liabilities recognised at fair value for accounting,
--> not adjusted for tax purposes in business combinations

16. Goodwill
From initial recognition of goodwill
(1) deferred tax liability is not recognised
(2) deferred tax asset is recognised

17. Deferred tax liability due to goodwill
--> is not allowed by IAS 12, IAS 12.15(a), 21

18. Deferred tax asset from the initial recognition of goodwill is recognised, if (1) is probable
(1) there will be taxable profit,
so that deductible temporary difference can be used, IAS 12.15(a), 32A

19. Investments in subsidiaries and associates
For (1), (2), (3), if carrying amount ≠ tax base, temporary differences occur
(1) investments in subsidiaries
(2) investments in associates
(3) interests in joint ventures

20. An Example
undistributed profits of subsidiaries, associates, joint ventures
--> can create differences between carrying amount and tax base of investments

21. Investments in subsidiaries and associates
For taxable temporary differences from the above investments
--> Deferred tax liabilities are recognised, IAS 12.39

22. Exceptions
if the parent can control the timing of profit distribution
and decided not to distribute in the foreseeable future,
--> deferred tax liabilities are not recognised

23. For deductible temporary differences
from investments in subsidiaries and associates
--> Deferred tax assets are recognised, IAS 12.44

24. Exceptions
if it is probable that the temporary difference will reverse
and taxable profit will be available, so that temporary difference can be used,
--> deferred tax assets are not recognised

25. Tax rates for current tax assets and liabilities, IAS 12.46, 47
(1) tax rates that apply to the current and previous periods
(2) based on the laws that have been enacted or
--> substantively enacted by the end of the reporting period
(3) tax rates expected to apply to the period when the asset is realised or liability is settled
(4) based on the laws that have been enacted or
--> substantively enacted by the end of the reporting period

Substantively enacted tax rate

[IAS 12.46, 47] Use of tax rates that have been substantively enacted is permitted.

26. Deferred tax assets and liabilities
--> are not discounted, IAS 12.53
IAS 12 does not require the discounting of deferred tax assets and liabilities
IAS 12 does not permit the discounting of deferred tax assets and liabilities

27. Deferred tax assets and liabilities from a business combination are recognised as (1)
(1) identifiable assets and liabilities at the acquisition date, IAS 12.66

28. Deferred tax assets and liabilities from a business combination will affect (2)
(2) goodwill or bargain purchase gain

29. Deferred tax liabilities are not recognised from (3)
(3) initial recognition of goodwill, IAS 12.15

30. Current tax assets and current tax liabilities are offset, IAS 12.71A
if, and only if, both (1) and (2) are met
(1) legally enforceable right to offset
(2) intention to settle on a net basis

31. Deferred tax assets and deferred tax liabilities are offset, IAS 12.74
if, and only if, (1), (2) and (3) are met
(1) legally enforceable right to offset current tax assets and liabilities
(2) deferred taxes are related to taxes imposed by same taxation authority
(3) imposed on same taxable entity or
different taxable entities that intend to settle on a net basis

32. Deferred tax assets are recognised, IAS 12.34
--> to the extent that (1) is probable
--> so that (2) can be used to create benefits
(1) future taxable profit will be available
(2) unused tax losses and credits

33. Deferred tax is not recognised if the above is not the case, IAS 12.36

34. Deferred Tax Assets, U.S. GAAP, ASC 740-10-30-5
Valuation Allowance
Deferred tax assets are reduced by a valuation allowance
if (3) is the case

(3) there is more than 50% probability that
--> a portion of deferred tax assets will not be realized

35. Deferred tax assets are not classified as current assets
Deferred tax liabilities are not classified as current liabilities
IAS 1.56, not IAS 12

36. Deferred Tax Presentation, U.S. GAAP, ASC 740-10-45-7
Deferred tax assets and liabilities presented as current
if they are based on current assets or current liabilities

Deferred tax assets and liabilities presented as non-current
if they are based on non-current assets or non-current liabilities

Presentation of deferred taxes

[IAS 1.56] Deferred taxes are not classified as current assets or current liabilities.
[ASC 740-10-45-7] Deferred taxes can be classified as current assets or current liabilities.