Liabilities and assets for current tax

Liabilities and assets for current taxCurrent tax for the current and prior periods should be 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. Liabilities and assets for current tax

Current tax assets and liabilities for the present and prior periods should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. A corresponding amount is recognised as an expense or income in the income statement for the period.IAS 12 Income taxes Corporate taxes

Current tax amounts are based on the taxable profits derived from the tax returns filed with the tax authorities. Because tax return are filed with a (sometimes significantly) delay, the IFRS Financial Statements many times include a best estimate for the current year and adjustments for the previous year based on differences between the best estimate recorded in the previous year and the actual tax return for that same period. Liabilities and assets for current tax

Important in such adjustments between provisional tax calculations of the best estimate calculation in the Financial Statements and the actual tax return over the same period is to identify the nature of such differences, permanent difference are causing an increase/decrease in the effective tax rate (compared to the nominal tax rate) and temporary differences cause timing differences, actual tax payments may be higher or lower than the total tax charge in a certain period, but in the future these differences will balance, hypothetically to zero.

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of that asset or liability. If it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, IAS 12 requires an entity to recognise a deferred tax liability (deferred tax asset), with certain limited exceptions. Liabilities and assets for current tax

The actual tax payable might differ from the tax liability recognised because a tax rule has been applied or interpreted incorrectly ot there is a dispute with the tax authorities.

Except where an adjustment is caused by a material error (which should be treated under IAS 8), it is treated as a change in accounting estimate and included in tax expanse of the period when the adjustment arises.Money back

Management should normally disclose a material adjustment resulting from a change in accounting estimate. If the amount paid for current and prior periods exceeds the amount due for those periods, the excess is recognised as an asset. [IAS 12 2] Liabilities and assets for current tax

An entity may incur a tax loss for the current period that can be carried back to set against the profits of an earlier accounting period. Management should recognise the benefit of the tax loss as an asset in the period in which the tax loss occurs, because the asset is reliably measurable and recovery is probable. Liabilities and assets for current tax

If the entity cannot carry back the tax loss, it might be able to carry it forward to set against income in a future period. For recognition of a deferred tax asset for carry-forward of unused tax losses reference it made to ‘Deferred tax assets‘. [IAS 12 13 – 14] Liabilities and assets for current tax

Allocation

IAS 12 requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognised in profit or loss, any related tax effects are also recognised in profit or loss. Liabilities and assets for current tax

For transactions and other events recognised outside profit or loss (either in other comprehensive income or directly in equity), any related tax effects are also recognised outside profit or loss (either in other comprehensive income or directly in equity, respectively). Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill arising in that business combination or the amount of the bargain purchase gain recognised. Liabilities and assets for current tax

For example:

  • Current income tax payable related to revenue that would be recognized under IFRS in future periods should be carried forward;
  • Income tax payable related to revenue that is recognized today under IFRS but which shall be taxed in future periods should be included in current period’s tax expense;
  • Tax benefit of expenses that shall be recognized under IFRS in future periods but which are allowed as tax deduction in current period should be carried forward; and
  • Tax benefit of expenses that are recognized under IFRS today but which shall be allowed as tax deduction in future should be subtracted from current period income tax expense.

Example tax calculation

The following schedules lead to a proper tabulation of the current tax related amounts:

  • Statement of financial position for IFRS and tax return purposes – differences show in property plant and equipment, investments in foreign subsidiaries, inventory and warranty provision,
  • Statement of profit or loss for IFRS and tax return purposes – differences show in costs of sales (inventory), depreciation (PPE), other operating expenses (warranties) and result foreign subsidiary,
  • Movements in shareholders’ equity for IFRS and tax return purposes – check that movements are consistent between IFRS and tax return,
  • Reconciliation IFRS amounts to amounts in tax return – check that differences in accounting policies for IFRS and tax purposes are consistently calculated in the financial position (Equity) and profit or loss (PNL). Permanent difference, Investments in foreign subsidiaries and Temporary differences, property plant and equipment, inventory and warranties,
  • Taxable result calculation – exclusion non-deductible expenses – some domiciles do not allow to deduct from the taxable result certain expenses in part or in full,
  • Current tax expenses calculation – different tax rates for certain tax brackets
  • Reconciliation to PNL charge – the PNL tax charge consist of the current tax expense best estimate for the year, difference in the best estimate of the previous year and the actual tax return for that period the movement in deferred taxes and differences arising from interpretations between the entity and the tax authorities.

Statement of Financial Position

Differences show in property plant and equipment, investments in foreign subsidiaries, inventory and warranty provision

Amounts in CU ‘000

31 December 20×5

31 December 20×4

IFRS

Tax return

IFRS

Tax return

Property plant and equipment Liabilities and assets for current tax

25,456

28,717

23,145

26,232

Investments in foreign subsidiaries

4,250

3,000

3,790

3,000

Total non-current assets

29,706

31,717

26,935

29,232

Inventory Liabilities and assets for current tax

1,566

1,250

800

650

Trade receivables Liabilities and assets for current tax

850

850

780

780

Other receivables and prepaid expenses

125

125

250

250

Total current assets

2,541

2,225

1,830

1,680

TOTAL ASSETS

32,247

33,942

28,765

30,912

Equity Liabilities and assets for current tax

Share capital Liabilities and assets for current tax

25

25

25

25

Retained earnings Liabilities and assets for current tax

9,211

12,486

6,324

9,711

Total shareholders’ equity

9,236

12,511

6,349

9,736

Warranty provision Liabilities and assets for current tax

1,580

1,240

Deferred tax liability Liabilities and assets for current tax

292

292

225

225

Long term liabilities Liabilities and assets for current tax

6,607

6,607

7,150

7,150

Total Non-current liabilities

8,479

6,899

8,615

7,375

Trade payables Liabilities and assets for current tax

10,821

10,821

11,148

11,148

Income tax Liabilities and assets for current tax

350

350

310

310

Other payables and accrued expenses

3,361

3,361

2,343

2,343

Total current liabilities

14,532

14,532

13,801

13,801

TOTAL EQUITY AND LIABILITIES

32,247

33,942

28,765

30,912

Statement of profit or loss

Differences show in costs of sales (inventory), depreciation (PPE), other operating expenses (warranties) and result foreign subsidiary

Amounts in CU ‘000

20×5

20×4

IFRS

Tax return

IFRS

Tax return

Revenue Liabilities and assets for current tax

40,445

40,445

36,000

36,000

Cost of revenue Liabilities and assets for current tax

25,645

25,811

24,654

25,010

Gross margin

14,800

14,634

11,346

10,990

Salaries and social securities

3,476

3,476

2,500

2,500

Depreciation

1,324

1,150

1,200

950

Other operating expenses

2,088

1,748

2,445

2,250

Total operating expenses

6,888

6,374

6,145

5,700

Operational result

7,912

8,260

5,201

5,290

Interest income

15

15

10

10

Interest expenses

210

210

225

225

Total financial expenses

-195

-195

-215

-215

Result foreign subsidiary

460

350

Result before income taxes

8,177

8,065

5,336

5,075

Income tax

2,290

2290

1,494

1,494

Net income after tax

5,887

5,775

3,842

3,581

Movements shareholders’ equity

Check that movements are consistent between IFRS and tax return

Amounts in CU ‘000

31 December 20×5

31 December 20×4

IFRS

Tax return

IFRS

Tax return

Opening

6,349

9,736

2,507

6,155

Net income after tax

5,887

5,775

3,842

3,581

Dividend

-3,000

-3,000

Closing balance

9,236

12,511

6,349

9,736

Reconciliation IFRS amounts to amounts in tax return

Check that differences in accounting policies for IFRS and tax purposes are consistently calculated in the financial position (Equity) and profit or loss (PNL). Permanent difference, Investments in foreign subsidiaries and Temporary differences, property plant and equipment, inventory and warranties

Amounts in CU ‘000

Equity

PNL

Balance IFRS

9,236

5,887

Permanent difference:

Investments in foreign subsidiaries

– IFRS valuation at equity value, tax valuation at cost

-1,250

460

Temporary differences:

Property plant and equipment

– IFRS depreciation period shorter than for tax purposes

3,216

174

Inventory

– IFRS FIFO – tax LIFO

-316

-166

Warranty provision

– IFRS forecasted, based on trend analysis past expense – Tax only recognition actual expense in the period

1,580

340

Balance tax return

12,511

5,775

Taxable result calculation

Exclusion non-deductible expenses – some domiciles do not allow to deduct from the taxable result certain expenses in part or in full

Amounts in CU ‘000

Fiscal result

5,775

Non deductible expenses

Mixed food expenses 35% not deductible

348

Traffic fines

100

Taxable result

6,223

Current tax expenses calculation

Different tax rates for certain tax brackets

CU ‘000

CU ‘000

Tax rate first CU 350,000 – 25%

350,000

87,500

Tax rate over CU350,000 – 30%

5,873,000

1,761,900

Total current tax expense – Best estimate

1,849,400

Reconciliation to PNL charge

The PNL tax charge consist of the current tax expense best estimate for the year, difference in the best estimate of the previous year and the actual tax return for that period the movement in deferred taxes and differences arising from interpretations between the entity and the tax authorities.

CU ‘000

Current tax expense

1,849,400

Difference previous period Best estimate – Tax return

373,600

Deferred tax movement

67,000

Total tax charge PNL

2,290,000

Liabilities and assets for current tax

Liabilities and assets for current tax

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