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

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