Liabilities and assets for current tax

Liabilities and assets for current tax – Current 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.

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.

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

Statement of profit or loss

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

Movements shareholders’ equity

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

Liabilities and assets for current tax