Corporate taxes

Also called income taxes, but than for corporates. Here we go…………  Just a reminder …… Two things in life are certain: …… DEATH……. and ……..TAXES

What is it about?

IAS 12 Income taxes prescribes the accounting treatment for income taxes being the accounting for the current and future tax consequences of:

  • the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial position, and
  • transactions and other events of the current period that are recognised in an entity’s financial report.

Current taxRecognition and measurement

IAS 12 requires the recognition of current tax in an entity’s financial statements. Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability. If the amount paid exceeds the amount due for those periods, the excess shall be recognised as an asset.

Both current tax liabilities and current tax assets arise based on the tax rates enacted or substantively enacted by the end of the reporting period. A corresponding amount is recognised as an expense or income in the profit or loss for the period.

Deferred tax – Recognition and measurement

Deferred tax assets

Deferred tax assets shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:

A deferred tax asset shall be recognised for the carry forward of unused tax losses and unused tax credits, but only 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.

Deferred tax liabilities

Deferred tax liabilities shall be recognised for all taxable temporary differences, subject to some stipulated exceptions.

A deferred tax liability shall be recognised when there is a taxable temporary difference between the tax base of an asset or liability and its corresponding carrying amount in the statement of financial position. This arises when the carrying amount of an asset exceeds its tax base. Consequently, the future recovery of the carrying amount will generate taxable profit; e.g:

  • accumulated depreciation of an asset in the financial statements is less than the cumulative depreciation allowed up to the reporting date for tax purposes, e.g. depreciation of an asset is accelerated for tax purposes;
  • development costs have been capitalised and will be amortised over future periods in determining accounting profit but deducted in determining taxable profit in the period in which they were incurred.

A taxable temporary difference also arises when the carrying amount of a liability is less than its tax base, because the future settlement of its tax base will generate taxable profit (e.g. a loan initially recognised at fair value net of borrowing costs incurred in the loan establishment but the tax deductions for the costs are amortised over the life of the loan).

A deferred tax liability will not be recognised if arising from:

  • the initial recognition of goodwill;
  • 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 profit nor taxable profit (tax loss).

Measurement of deferred tax assets and liabilities

A deferred tax asset or liability shall be measured based on the enacted, or substantively enacted, tax rates (tax laws) expected to apply when the asset is realised or the liability is settled.

The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Deferred tax assets and liabilities are not discounted.

Recognition of current and deferred tax assets

Current and deferred tax shall be recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from:

Current tax and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognised, in the same or a different period:

  • in other comprehensive income, shall be recognised in other comprehensive income; and
  • directly in equity, shall be recognised directly in equity.

International Financial Reporting Standards require or permit particular items to be recognised in other comprehensive income. Examples of such items are:

International Financial Reporting Standards require or permit particular items to be credited or charged directly to equity. Examples of such items are:

  • an adjustment to the opening balance of retained earnings resulting from either a change in accounting policy that is applied retrospectively or the correction of an error (see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors); and
  • amounts arising on initial recognition of the equity component of a compound financial instrument.

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