Topic 206 - Income taxes

This topic includes FAQs relating to the following IFRS standards, IFRIC Interpretations and SIC Interpretations:

IAS 12 Income Taxes

IFRIC 23 Uncertainty over Income Tax Treatments

SIC 25 Income Taxes—Changes in the Tax Status of an Entity or its Shareholders

Other resources

  • IFRS At a Glance by standard is available here

 

Sub-topic within this main topic are set out below, with links to IFRS Interpretation Committee agenda decisions and BDO IFRS FAQs relating to that sub-topic below each sub-topic:

Sub-topic Number Sub-topic and Related FAQ
206.1 Scope and definitions
  • 206.1.1.1
  • 206.1.1.2
  • 206.1.1.3
  • 206.1.1.4
  • 206.1.2.1
206.2 Tax base
  • 206.2.1.1
  • 206.2.1.2
  • 206.2.2.1
  • 206.2.2.2
206.3 Recognition of current tax liabilities and current tax assets
  • 206.3.1.1
206.4 Taxable temporary differences
  • 206.4.1.1
  • 206.4.2.1
  • 206.4.2.2
  • 206.4.2.3
  • 206.4.2.4
  • 206.4.2.5
  • 206.4.2.6
206.5 Deductible temporary differences
  • 206.5.1.1
  • 206.5.2.1
  • 206.5.2.2
  • 206.5.2.3
206.6 Unused tax losses and unused tax credits
  • 206.6.1.1
206.7 Reassessment of unrecognised deferred tax assets
206.8 Investments in subsidiaries, branches and associates and interests in joint arrangements
  • 206.8.1.1
  • 206.8.1.2
  • 206.8.1.3
206.9 Measurement
  • 206.9.1.1
  • 206.9.1.2
  • 206.9.1.3
  • 206.9.1.4
  • 206.9.2.1
206.10 Recognition of current and deferred tax
  • 206.10.1.1
  • 206.10.2.1
  • 206.10.2.2
  • 206.10.2.3
206.11 Uncertainty over income tax treatments
  • 206.11.2.1
  • 206.11.2.2
206.12 Presentation
  • 206.12.1.1
  • 206.12.2.1
  • 206.12.2.2
206.13 Disclosure
206.14 Other issues

 

FAQ#

Title

Text of FAQ

206.1.1.1

IFRIC Agenda Decision - Scope

March 2006 - The IFRIC considered whether to give guidance on which taxes are within the scope of IAS 12. The IFRIC noted that IAS 12 applies to income taxes, which are defined as taxes that are based on taxable profit. That implies that (i) not all taxes are within the scope of IAS 12 but (ii) because taxable profit is not the same as accounting profit, taxes do not need to be based on a figure that is exactly accounting profit to be within the scope. The latter point is also implied by the requirement in IAS 12 to disclose an explanation of the relationship between tax expense and accounting profit. The IFRIC further noted that the term ‘taxable profit’ implies a notion of a net rather than a gross amount. Finally, the IFRIC observed that any taxes that are not in the scope of IAS 12 are in the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets.

 

However, the IFRIC also noted the variety of taxes that exist world-wide and the need for judgement in determining whether some taxes are income taxes. The IFRIC therefore believed that guidance beyond the observations noted above could not be developed in a reasonable period of time and decided not to take a project on this issue onto its agenda.

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206.1.1.2

IFRIC Agenda Decision - Classification of tonnage taxes

May 2009 - The IFRIC received a request for guidance on whether a tax based on tonnage capacity can be considered an income tax in accordance with IAS 12. The IFRIC noted that the term ‘tonnage tax’ is applied to a variety of tax regimes. In some jurisdictions, shipping companies are permitted to choose to be taxed on the basis of tonnage transported, tonnage capacity or a notional profit instead of the standard corporate income tax regulations. In some jurisdictions, this choice is irrevocable.

The IFRIC has previously noted that IAS 12 applies to income taxes, which are defined as taxes that are based on taxable profit, and that the term ‘taxable profit’ implies a notion of a net rather than a gross amount. Taxes either on tonnage transported or tonnage capacity are based on gross rather than net amounts. Taxes on a notional income derived from tonnage capacity are not based on the entity’s actual income and expenses.

Consequently, the IFRIC noted that such taxes would not be considered income taxes in accordance with IAS 12 and would not be presented as part of tax expense in the statement of comprehensive income. However, the IFRIC also noted that, in accordance with paragraph 85 of IAS 1 Presentation of Financial Statements, an entity subject to tonnage tax would present additional subtotals in that statement if that presentation is relevant to an understanding of its financial performance. Given the requirements of IAS 12, the IFRIC decided not to add the issue to its agenda.

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206.1.1.3

IFRIC Agenda Decision - Presentation of payments on non-income taxes

July 2012 - The IFRS Interpretations Committee received a request seeking clarification of whether production-based royalty payments payable to one taxation authority that are claimed as an allowance against taxable profit for the computation of income tax payable to another taxation authority should be presented as an operating expense or a tax expense in the statement of comprehensive income.

As the basis for this request, the submitter assumed that the production-based royalty payments are, in themselves, outside the scope of IAS 12 Income Taxes while the income tax payable to the other taxation authority is within the scope of IAS 12. On the basis of this assumption, the submitter asks the Committee to clarify whether the production-based royalty payments can be viewed as prepayment of the income tax payable. The Committee used the same assumption when discussing the issue.

 

The Committee observed that the line item of ‘tax expense’ that is required by paragraph 82(d) of IAS 1 Presentation of Financial Statements is intended to require an entity to present taxes that meet the definition of income taxes under IAS 12. The Committee also noted that it is the basis of calculation determined by the relevant tax rules that determines whether a tax meets the definition of an income tax. Neither the manner of settlement of a tax liability nor the factors relating to recipients of the tax is a determinant of whether an item meets that definition.

 

The Committee further noted that the production-based royalty payments should not be treated differently from other expenses that are outside the scope of IAS 12, all of which may reduce income tax payable. Accordingly, the Committee observed that it is inappropriate to consider the royalty payments to be prepayment of the income tax payables. Because the production-based royalties are not income taxes, the royalty payments should not be presented as an income tax expense in the statement of comprehensive income.

The Committee considered that, in the light of its analysis of the existing requirements of IAS 1 and IAS 12, an interpretation was not necessary and consequently decided not to add this issue to its agenda.

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206.1.1.4

IFRIC Agenda Decision - Interest and penalties related to income taxes

September 2017 - IFRS Standards do not specifically address the accounting for interest and penalties related to income taxes (interest and penalties). In the light of the feedback received on the draft IFRIC Interpretation Uncertainty over Income Tax Treatments, the Committee considered whether to add a project on interest and penalties to its standard-setting agenda.

 

On the basis of its analysis, the Committee concluded that a project on interest and penalties would not result in an improvement in financial reporting that would be sufficient to outweigh the costs. Consequently, the Committee decided not to add a project on interest and penalties to its standard-setting agenda.

Nonetheless, the Committee observed that entities do not have an accounting policy choice between applying IAS 12 and applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets to interest and penalties. Instead, if an entity considers a particular amount payable or receivable for interest and penalties to be an income tax, then the entity applies IAS 12 to that amount. If an entity does not apply IAS 12 to a particular amount payable or receivable for interest and penalties, it applies IAS 37 to that amount. An entity discloses its judgement in this respect applying paragraph 122 of IAS 1 Presentation of Financial Statements if it is part of the entity’s judgements that had the most significant effect on the amounts recognised in the financial statements.

 

Paragraph 79 of IAS 12 requires an entity to disclose the major components of tax expense (income); for each class of provision, paragraphs 84⁠–⁠85 of IAS 37 require a reconciliation of the carrying amount at the beginning and end of the reporting period as well as other information. Accordingly, regardless of whether an entity applies IAS 12 or IAS 37 when accounting for interest and penalties, the entity discloses information about those interest and penalties if it is material.

The Committee also observed it had previously published agenda decisions discussing the scope of IAS 12 in March 2006 and May 2009.

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206.1.2.1

Accounting for investment tax credits

An entity receives Investment Tax Credits (ITCs) for investment in specific qualifying assets. The ITCs are in addition to the deductions that are available as part of an asset’s tax base in use or on disposal. The ITCs represent an additional deduction which can be made from future taxable profits, meaning that their recovery is dependent on the existence of those future taxable profits. 

 

The accounting for ITCs is scoped out of both IAS 12 and IAS 20. What is the appropriate IFRS accounting treatment for the ITCs? 

 

Analysis:

 

IAS 12 or IAS 20 should be applied based on the specific facts and circumstances. 

 

The fact that realisation is dependent on future taxable profits creates an initial presumption that IAS 12 should be applied. However, other factors need to be considered, including the purpose of the credit and the other eligibility criteria. For example, some credits may have a very long carry forward period; therefore the dependence on the existence of future taxable profit may not always be considered the most substantive element of an arrangement. 

 

IAS 20 defines government assistance and government grants (see IAS 20.3). Since the purpose of the ITCs is to incentivise investment in qualifying assets, there is an argument that the ITCs meet the definitions in IAS 20.  This is because, despite the ITCs only being recoverable through the generation of future taxable profit, this feature does not change the nature of the programme from being government support for qualifying activities. 

 

The accounting approach under IAS 12 and IAS 20 is set out below: 

 

IAS 12

The ITCs are recognised as a reduction in current tax expense to the extent that they can be utilised in the current period.  If the ITCs cannot be utilised in the current period, a deferred tax asset is recognised to the extent that it is probable that the ITCs will be utilised in future periods (IAS 12.34).  

 

IAS 20

The ITCs are recognised as a credit to profit or loss if the item(s) to which they relate are recorded in profit or loss.  If the ITCs relate to property, plant and equipment or an intangible asset in an entity’s statement of financial position, they are recognised as either a reduction in the carrying amount of the asset (a reduction of its cost) or separately as a deferred credit. 

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206.2.1.1

IFRIC Agenda Decision - Accounting for market value uplifts on assets that are to be introduced by a new income tax regime

July 2012 - The IFRS Interpretations Committee received a request to clarify the accounting for market value uplifts introduced in a new income tax regime in a jurisdiction.

In calculating taxable profit under the tax regime, entities are permitted to calculate tax depreciation for certain mining assets using the market value of the assets as of a particular date as the ‘starting base allowance’, rather than the cost or carrying amount of the assets. If there is insufficient profit against which the annual tax depreciation can be used, it is carried forward and is able to be used as a deduction against taxable profit in future years.

The Committee noted that the starting base allowance, including the part that is attributable to the market value uplift, is attributed to the related assets under the tax regime and will become the basis for depreciation expense for tax purposes. Consequently, the market value uplift forms part of the related asset’s ‘tax base’, as defined in paragraph 5 of IAS 12. The Committee observed that IAS 12 requires an entity to reflect an adjustment to the tax base of an asset that is due to an increase in the deductions available as a deductible temporary difference. Accordingly, the Committee noted that a deferred tax asset should be recognised to the extent that it meets the recognition criteria in paragraph 24 of IAS 12.

The Committee considered that, in the light of its analysis of the existing requirements of IAS 12, an interpretation was not necessary and consequently decided not to add this issue to its agenda.

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206.2.1.2

IFRIC Agenda Decision - Impact of an internal reorganisation on deferred tax amounts related to goodwill

May 2014 - The Interpretations Committee received a request for guidance on the calculation of deferred tax following an internal reorganisation of an entity. The submitter describes a situation in which an entity (Entity H) recognised goodwill that had resulted from the acquisition of a group of assets (Business C) that meets the definition of a business in IFRS 3 Business Combinations. Entity H subsequently recorded a deferred tax liability relating to goodwill deducted for tax purposes. Against this background, Entity H effects an internal reorganisation in which:

(a)

Entity H set up a new wholly-owned subsidiary (Subsidiary A);

(b)

Entity H transfers Business C, including the related (accounting) goodwill to Subsidiary A; however,

(c)

for tax purposes, the (tax) goodwill is retained by Entity H and not transferred to Subsidiary A.

The submitter asked how Entity H should calculate deferred tax following this internal reorganisation transaction in its consolidated financial statements in accordance with IAS 12.

The Interpretations Committee noted that when entities in the same consolidated group file separate tax returns, separate temporary differences will arise in those entities in accordance with paragraph 11 of IAS 12. Consequently, the Interpretations Committee noted that when an entity prepares its consolidated financial statements, deferred tax balances would be determined separately for those temporary differences, using the applicable tax rates for each entity’s tax jurisdiction.

The Interpretations Committee also noted that when calculating the deferred tax amount for the consolidated financial statements:

(a)

the amount used as the carrying amount by the ‘receiving’ entity (in this case, Subsidiary A that receives the (accounting) goodwill) for an asset or a liability is the amount recognised in the consolidated financial statements; and

(b)

the assessment of whether an asset or a liability is being recognised for the first time for the purpose of applying the initial recognition exception described in paragraphs 15 and 24 of IAS 12 is made from the perspective of the consolidated financial statements.

The Interpretations Committee noted that transferring the goodwill to Subsidiary A would not meet the initial recognition exception described in paragraphs 15 and 24 of IAS 12 in the consolidated financial statements. Consequently, it noted that deferred tax would be recognised in the consolidated financial statements for any temporary differences arising in each separate entity by using the applicable tax rates for each entity’s tax jurisdiction (subject to meeting the recoverability criteria for recognising deferred tax assets described in IAS 12).

The Interpretations Committee also noted that if there is a so-called ‘outside basis difference’ (ie a temporary difference between the carrying amount of the investment in Subsidiary A and the tax base of the investment) in the consolidated financial statements, deferred tax for such a temporary difference would also be recognised subject to the limitations and exceptions applying to the recognition of a deferred tax asset (in accordance with paragraph 44 of IAS 12) and a deferred tax liability (in accordance with paragraph 39 of IAS 12).

The Interpretations Committee also noted that transferring assets between the entities in the consolidated group would affect the consolidated financial statements in terms of recognition, measurement and presentation of deferred tax, if the transfer affects the tax base of assets or liabilities, or the tax rate applicable to the recovery or settlement of those assets or liabilities. The Interpretations Committee also noted that such a transfer could also affect:

(a)

the recoverability of any related deductible temporary differences and thereby affect the recognition of deferred tax assets; and

(b)

the extent to which deferred tax assets and liabilities of different entities in the group are offset in the consolidated financial statements.

The Interpretations Committee considered that, in the light of its analysis, the existing IFRS requirements and guidance were sufficient and, therefore, an Interpretation was not necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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206.2.2.1

Determining the tax base for an asset

IAS 12.7 states that the tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.

 

Examples:

 

  1. A building is purchased for CU100. For tax purposes, it is depreciated on a straight-line basis over 5 years. At the end of year 1, its tax basis is CU80 (CU100 – (CU100 / 5)).
  2. A lender issues a loan to a customer for CU100. Assuming the customer repays the loan, no tax consequences will take place. Therefore, the tax base is CU100 because the economic benefits will not be taxable when the loan is repaid.
  3. A lender issues a loan to a customer for CU100 at 5% interest per annum, but only taxable when received. At the end of year 1, CU5 of interest receivable has been recorded, however, the customer will not repay the interest until the loan matures. The tax base of the interest receivable is nil.
  4. Trade receivables have a carrying amount of CU100. The related revenue was recognised in profit or loss previously and subject to current tax, therefore, the tax base of the trade receivable is CU100 because the economic benefits that will flow to the entity when the amount is collected will not be taxable.

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206.2.2.2

Determining the tax base for a liability

IAS 12.8 states that the tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.

 

Examples:

 

  1. A provision of CU100 is recognised in accordance with IAS 37 relating to a lawsuit. No amount is deductible for tax purposes until a payment is made. The tax base of the liability is nil (carrying amount of CU100 less CU100 that will be deductible in future periods if and when the provision is paid).
  2. A trade payable of CU100 is recognised relating to electricity consumed. The related expense was recognised in profit or loss previously and reduced taxable income, therefore, the tax base of the liability is CU100 (carrying amount of CU100 less nil that will be deductible in future periods when the trade payable is paid).

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206.3.1.1

IFRIC Agenda Decision - Recognition of current income tax on uncertain tax position

July 2014 - The Interpretations Committee received a request to clarify the recognition of a tax asset in the situation in which tax laws require an entity to make an immediate payment when a tax examination results in an additional charge, even if the entity intends to appeal against the additional charge. In the situation described by the submitter, the entity expects, but is not certain, to recover some or all of the amount paid. The Interpretations Committee was asked to clarify whether IAS 12 is applied to determine whether to recognise an asset for the payment, or whether the guidance in IAS 37 Provisions, Contingent Liabilities and Contingent Assets should be applied.

 

The Interpretations Committee noted that:

(a)

paragraph 12 of IAS 12 provides guidance on the recognition of current tax assets and current tax liabilities. In particular, it states that: (i) current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability; and (ii) if the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognised as an asset.

(b)

in the specific fact pattern described in the submission, an asset is recognised if the amount of cash paid (which is a certain amount) exceeds the amount of tax expected to be due (which is an uncertain amount).

(c)

the timing of payment should not affect the amount of current tax expense recognised.

The Interpretations Committee understood that the reference to IAS 37 in paragraph 88 of IAS 12 in respect of tax-related contingent liabilities and contingent assets may have been understood by some to mean that IAS 37 applied to the recognition of such items. However, the Interpretations Committee noted that paragraph 88 of IAS 12 provides guidance only on disclosures required for such items, and that IAS 12, not IAS 37, provides the relevant guidance on recognition, as described above.

On the basis of this analysis, the Interpretations Committee noted that sufficient guidance exists. Consequently, the Interpretations Committee concluded that the agenda criteria are not met and decided to remove from its agenda the issue of how current income tax, the amount of which is uncertain, is recognised.

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206.4.1.1

IFRIC Agenda Decision - Recognition of deferred taxes when acquiring a single-asset entity that is not a business

March 2017 - The Committee received a submission questioning how, in its consolidated financial statements, an entity accounts for a transaction in which it acquires all the shares of another entity that has an investment property as its only asset. In the fact pattern submitted, the acquiree had recognised in its statement of financial position a deferred tax liability arising from measuring the investment property at fair value. The amount paid for the shares is less than the fair value of the investment property because of the associated deferred tax liability. The transaction described in the submission does not meet the definition of a business combination in IFRS 3 Business Combinations because the acquired entity is not a business. The acquiring entity applies the fair value model in IAS 40 Investment Property. The submitter asked whether the requirements in paragraph 15(b) of IAS 12 permit the acquiring entity to recognise a deferred tax liability on initial recognition of the transaction. If this is not the case, the submitter asked the Committee to consider whether the requirements in paragraph 15(b) of IAS 12 should be amended so that, in these circumstances, the acquiring entity would not recognise a gain on measuring the investment property at fair value immediately after initial recognition of the transaction.

 

The Committee noted that:

a.

because the transaction is not a business combination, paragraph 2(b) of IFRS 3 requires the acquiring entity, in its consolidated financial statements, to allocate the purchase price to the assets acquired and liabilities assumed; and

b.

paragraph 15(b) of IAS 12 says that an entity does not recognise a deferred tax liability for taxable temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither accounting profit or loss nor taxable profit (tax loss).

Accordingly, on acquisition, the acquiring entity recognises only the investment property and not a deferred tax liability in its consolidated financial statements. The acquiring entity therefore allocates the entire purchase price to the investment property.

The Committee concluded that the requirements in IFRS Standards provide an adequate basis for an entity to determine how to account for the transaction. The Committee also concluded that any reconsideration of the initial recognition exception in paragraph 15(b) of IAS 12 is something that would require a Board-level project. Consequently, the Committee decided not to add this matter to its standard-setting agenda.

The Committee noted that the Board had recently considered whether to add a project on IAS 12 to the Board’s agenda but had decided not to do so. Consequently, the Committee did not recommend that the Board consider adding a project to its agenda on this topic.

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206.4.2.1

Common examples of taxable temporary differences

Taxable temporary differences will vary depending on the tax legislation and regulations of jurisdictions; however, common examples of taxable temporary differences may include:

 

  1. The carrying value of property, plant and equipment exceeding its tax base (e.g. depreciation for tax purposes is accelerated in comparison to the depreciation required by IAS 16).
  2. The carrying value of investment property exceeding its tax base (e.g. the fair value of investment property as required by IAS 40 exceeds the tax base of the property, which in some jurisdictions is unaffected by the change in its fair value).
  3. Revenue that is recognised in accordance with IFRS 15, but is not taxed until a later date (e.g. when substantially all of the consideration has been received).

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206.4.2.2

Initial recognition exemption - example

IAS 12.15 and 24 require that deferred tax liabilities and assets be recognised for all taxable and deductible temporary differences (subject to recoverability requirements for deferred tax assets) unless the deferred tax liability or asset arises from the initial recognition of an asset or liability in a transaction that:

  1. Does not relate to the initial recognition of goodwill;
  2. is not a business combination; and
  3. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Therefore, if a difference exists between the carrying value of an asset or liability and its tax base on initial recognition, and this difference meets the above criteria, deferred tax is not recognised, despite the fact that a taxable/deductible temporary difference exists.

 

The initial recognition exemption does not apply to business combinations. See FAQ 206.4.2.3 for guidance on deferred taxes arising from business combinations.

 

The IASB has amended the requirements of IAS 12 to broaden the scope of the initial recognition exemption. These amendments are effective for annual reporting periods beginning on or after 1 January 2023. See IFR Bulletin 2021/10 here.

 

Example

 

An automobile is purchased for CU50,000, which is its carrying amount in accordance with IAS 16. The tax authority limits the deduction for automobiles at CU30,000 in total. The tax base of the asset is CU30,000, because this is the amount that will be deductible for tax purposes in the future. At the initial recognition of the automobile, a taxable temporary difference of CU20,000 exists (CU50,000 – CU30,000), however, this difference does not result in the recognition of a deferred tax liability.

 

The initial recognition exemption applies because the deferred tax liability arises from the initial recognition of an asset (the automobile) and the transaction was not a business combination and it did not affect accounting or taxable profit at the time of initial recognition.

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206.4.2.3

Deferred taxes and business combinations – general guidance

Deductible and taxable temporary differences arise often in business combinations. This is because IFRS 3 requires fair value measurement for many assets and liabilities acquired in business combinations. For tax purposes, in many cases, the tax bases of many assets and liabilities will be unaffected by a business combination. For example, if the acquirer obtains control of the acquiree via the purchase of shares, the tax base of the acquired assets and liabilities may not change.

 

IFRS 3.24 requires that the acquirer recognise and measure deferred tax assets and liabilities arising from a business combination in accordance with IAS 12.

 

Example

 

Entity A acquires control of Entity B by purchasing 100% of the shares of B. The transaction is a business combination. The business combination does not affect the tax bases of any of the assets and liabilities acquired. The tax rate is 40%. The carrying amounts of Entity B’s assets, and their values as determined by applying the requirements of IFRS 3 are as follows:

 

Items

Carrying amounts - Entity B

Tax bases

Carrying amounts recognised by Entity A

Cash

100

100

100

Property, plant and equipment

300

200

475

Customer lists

Nil

Nil

100

Goodwill before deferred tax is recognised

Nil

Nil

150

Accounts payable

(200)

(200)

(200)

Bank loans

(150)

(150)

(155)

 

The carrying amounts recognised by Entity A (the acquirer) differ from the carrying amounts in Entity B’s separate financial statements. For example, IFRS 3 requires property, plant and equipment to be measured at fair value (CU475), which exceeds its carrying value in Entity B’s accounts.

 

The differences between Entity A’s carrying amounts recognised and their tax bases gives rise to taxable and deductible temporary differences. These differences result in the recognition of deferred tax liabilities and assets as follows:

 

Items

Tax bases

Carrying amounts recognised by Entity A

(Taxable)/Deductible temporary difference

Deferred tax (liability)/asset

Cash

100

100

Nil

Nil

Property, plant and equipment

200

475

(275)

(110)

Customer lists

Nil

100

(100)

(40)

Goodwill before deferred tax is recognised

Nil

150

Nil*

Nil

Accounts payable

(200)

(200)

Nil

Nil

Bank loans

(150)

(155)

5

2

*IAS 12.15(a) prohibits the recognition of a deferred tax liability relating to the initial recognition of goodwill (see FAQ 206.4.2.2).

 

Therefore, a net deferred tax liability of CU148 (CU110 + CU40 - 2) is recognised in the business combination.

 

The initial carrying value of deferred tax balances are part of the acquisition-date amounts of the identifiable assets and liabilities acquires in the business combination, and therefore, they affect the initial carrying value of goodwill as required by IFRS 3.32. The ‘balancing’ entry once deferred tax is recognised is to adjust goodwill, therefore increasing it to CU298 (CU150 carrying amount prior to deferred tax + CU148). This is a practical consequence of the fact that deferred taxes are typically the final amounts calculated in a business combination because the carrying amounts of all other assets and liabilities must be determined first with goodwill being recognised as the residual.

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206.4.2.4

Deferred tax liabilities – intangible assets acquired in a business combination

Does the structuring of a business combination (e.g. a share-based or asset-based purchase) affect the recognition of deferred taxes?

 

Analysis: the structuring of a business combination may affect whether deferred taxes or recognised, because the structure of the transaction may affect the tax bases of assets and liabilities recognised from the perspective of the acquirer. This is because in many share-based acquisitions, the tax base of the assets and liabilities will be unaffected by the acquisition because tax bases are often not changed since the legal entity that owns the assets and liabilities does not change.

 

Example 1 – share-based purchase

Entity A acquires control of Entity B by purchasing 100% of the shares of B. The transaction is a business combination. The business combination does not affect the tax bases of any of the assets and liabilities acquired. The tax rate is 40%. As part of the business combination, Entity A recognises CU100 of customer lists, which were not recognised by B prior to the business combination. The customer lists have no tax base because the acquisition of B by A does not affect the tax values ascribed to the assets and liabilities of B.

 

As part of the purchase accounting, Entity A recognises CU40 of deferred tax liabilities, because of the taxable temporary difference relating to the customer lists.

 

Example 2 – asset-based purchase

 

Entity A acquires control of Entity B's operations by purchasing its assets and liabilities individually in a master purchase agreement. The transaction is a business combination. The business combination does affect the tax bases of the assets and liabilities acquired because Entity A owns the assets and liabilities itself. The tax rate is 40%. As part of the business combination, Entity A recognises CU100 of customer lists, which were not recognised by B prior to the business combination. The customer lists have a tax base of CU100 in this case, because Entity A is recognising the customer lists and the tax authorities allow such assets to be deducted for income tax purposes over 10 years.

 

As the carrying amount and tax base of the customer lists are both CU100, no taxable or deductible temporary differences exist, therefore, no deferred tax is recognised.

 

In this case, purchasing B by acquiring its shares or its assets and liabilities separately has tax consequences to Entity A, which is reflected in the purchase accounting. Presumably, if such a difference exists, it would be considered when determining the consideration payable to the previous owners of B depending on the structure of the acquisition.

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206.4.2.5

Deferred tax balances relating to investments in subsidiaries

The difference between the carrying amount of an investment in the consolidated financial statements of the parent and its tax base is often referred to as an ‘outside basis’ difference. This is because it compares the investment of the parent to the tax bases ‘outside’ of the parent’s legal structure. Such differences arise often due to undistributed profits, since the consolidated financial statements include those profits in the carrying amounts but the tax basis of the parent would not reflect them as they have not been distributed to the parent through dividends or other distributions.

 

Do such ‘outside basis’ differences result in deferred tax balances?

 

Analysis: IAS 12.39 and 44 require that deferred tax liabilities and assets be recognised for all taxable and deductible temporary differences associated with subsidiaries, branches and associates, and interests in joint ventures, except to the extent that the following conditions are met:

 

Deferred tax liabilities are recognised except to the extent that both of the following conditions are satisfied:

  1. the parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and
  2. it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognised to the extent that, and only to the extent that, it is probable that:

  1. the temporary difference will reverse in the foreseeable future; and
  2. taxable profit will be available against which the temporary difference can be utilised.

This FAQ focuses on the criteria that must be met in order to not recognise a deferred tax liability.

 

In the case of a parent-subsidiary relationship, criterion (a) is met because the parent controls the subsidiary and therefore can control when reversal occurs. For example, the parent can control when the subsidiary distributes dividends, which might trigger tax consequences for the parent.

 

To satisfy criterion (b), an entity must demonstrate that there is no planned intention to reverse the temporary difference. This would occur if the parent disposed of the subsidiary or intended to trigger distributions in the near future.

 

If either of these criteria are not met, deferred taxes must be recognised. If the subsidiary is in a relatively low tax jurisdiction and the payment of dividends to the parent would trigger significant tax consequences to the parent, then this determination might have a significant impact in the consolidated financial statements of the parent.

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206.4.2.6

Deferred tax balances relating to investments in associates and joint ventures

The difference between the carrying amount of an investment accounted for using the equity method (i.e. an associate in the scope of IAS 28 or a joint venture in the scope of IFRS 11) and its base will often differ. For example, the initial cost of an associate might often equal its tax base at initial recognition when the investment is purchased, but subsequent changes in the carrying value of the investment due to the application of the equity method will often not change the tax base. This would result in taxable or deductible temporary differences.

 

Do these taxable and/or deductible temporary differences result in deferred tax balances?

 

Analysis: IAS 12.39 and 44 require that deferred tax liabilities and assets be recognised for all taxable and deductible temporary differences associated with subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are met:

 

Deferred tax liabilities are recognised except to the extent that both of the following conditions are satisfied:

  1. the parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and
  2. it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognised to the extent that, and only to the extent that, it is probable that:

  1. the temporary difference will reverse in the foreseeable future; and
  2. taxable profit will be available against which the temporary difference can be utilised.

This FAQ focuses on the criteria that must be met in order to not recognise a deferred tax liability.

An entity will have significant influence over an associate and joint control over a joint venture, however, criterion (a) will typically not be met because this does not result in control. Therefore, differences between the carrying amount and the tax base of an investment accounted for using the equity method will often give rise to deferred tax liabilities.

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206.5.1.1

IFRIC Agenda Decision - Recognition and measurement of deferred tax assets when an entity is loss making

May 2014 - The Interpretations Committee received a request for guidance on the recognition and measurement of deferred tax assets when an entity is loss making. The Interpretations Committee was asked to clarify two issues:

(a)

whether IAS 12 requires that a deferred tax asset is recognised for the carryforward of unused tax losses when there are suitable reversing taxable temporary differences, regardless of an entity’s expectations of future tax losses; and

(b)

how the guidance in IAS 12 is applied when tax laws limit the extent to which tax losses brought forward can be recovered against future taxable profits. In the tax systems considered for the second issue, the amount of tax losses brought forward that can be recovered in each tax year is limited to a specified percentage of the taxable profits of that year.

 The Interpretations Committee noted that according to paragraphs 28 and 35 of IAS 12:

(a)

a deferred tax asset is recognised for the carryforward of unused tax losses to the extent of the existing taxable temporary differences, of an appropriate type, that reverse in an appropriate period. The reversal of those taxable temporary differences enables the utilisation of the unused tax losses and justifies the recognition of deferred tax assets. Consequently, future tax losses are not considered.

(b)

when tax laws limit the extent to which unused tax losses can be recovered against future taxable profits in each year, the amount of deferred tax assets recognised from unused tax losses as a result of suitable existing taxable temporary differences is restricted as specified by the tax law. This is because when the suitable taxable temporary differences reverse, the amount of tax losses that can be utilised by that reversal is reduced as specified by the tax law. Also, in this case future tax losses are not considered.

(c)

in both cases, if the unused tax losses exceed the amount of suitable existing taxable temporary differences (after taking into account any restrictions), an additional deferred tax asset is recognised only if the requirements in paragraphs 29 and 36 of IAS 12 are met (ie to the extent that it is probable that the entity will have appropriate future taxable profit, or to the extent that tax planning opportunities are available to the entity that will create appropriate taxable profit).

On the basis of this analysis, the Interpretations Committee concluded that neither an Interpretation nor an amendment to the Standard was needed and consequently decided not to add these issues to its agenda.

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206.5.2.1

Common examples of deductible temporary differences

Deductible temporary differences will vary depending on the tax legislation and regulations of jurisdictions; however, common examples of deductible temporary differences may include:

 

  1. The recognition of expected credit losses on trade receivables/loans receivable when an amount is not deductible for tax purposes until a later date (e.g. the loan is written off, becomes more than >365 days past due, etc.).
  2. Provisions and other liabilities that are not deductible for tax purposes until paid.
  3. Revenue that is taxable earlier than when it is recognised in accordance with IFRS 15 (e.g. revenue being taxed when it is received in cash, but is still unrecognised due to the variable consideration constraint in IFRS 15).

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206.5.2.2

Assessing the recoverability of deferred tax assets

The recognition of deferred tax assets is limited to ‘the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised’ (IAS 12.24), or in the case of unused tax losses and tax credits, ‘to the extent that it is probable that future taxable profit will be available against which the unused tax losses and used tax credits can be utilised’.

 

‘Probable’ is generally considered to mean ‘more likely than not’ (i.e. >50% likely).

 

IAS 12.27 states that the existence of deductible temporary differences alone are insufficient to justify the recognition of deferred tax assets because reduced tax payments (i.e. the benefit of deferred tax assets) will only flow to the entity if it earns sufficient taxable profits in the future.

 

In estimating future taxable profits, entities should consider the extent to which such estimates should be consistent with other estimates that affect the measurement of items in the financial statements. For example, estimates made relating to impairment of assets (IAS 36) and going concern assessments (IAS 1). These assumptions may be identical because IFRSs have differing requirements, however, fundamental assumptions should be consistent (e.g. an entity plans to promote this particular product line, exit this jurisdiction, etc.).

 

With regards to unused tax losses and tax credits, many entities may not be able to demonstrate that it is probable that sufficient taxable profits will exist in the future. This may be true for start-up entities or entities with significant trading losses. In such circumstances, IAS 12.82 will often require specific disclosure about the nature of the evidence supporting recognition of deferred tax assets.

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206.5.2.3

Deferred tax on indexation of land 

On 1 January 20X1, company A purchased land at a cost of CU 1,000,000. Company A’s accounting policy for land is to carry it at cost; the land is not depreciated, in accordance with IAS 16. 

 

The tax regulations that apply to company A mean that if it sells the land, it is entitled to an indexation allowance based on an inflation index when computing the capital gain or loss for tax purposes. If the sale results in a capital loss (including the effect of the indexation allowance), company A is permitted to set this loss against any other capital gains. 

At the end of 20X2, the inflation index is 125% of the rate at 1 January 20X1. This means that the tax base of the land has increased to CU 1,250,000. The fair value of the land is CU 1,400,000. 

 

Company A does not intend to sell the land in future, and it is anticipated that the fair value of the land will always exceed the tax base. 

 

The questions are:

 

  1. Is there a deductible temporary difference?  
  2. If there is a deductible temporary difference, should a deferred tax asset be recognised due to the temporary difference (CU 250,000 based on cost of CU 1,000,000 versus the indexed tax base value of CU 1,250,000) on the basis that the amount will be recovered if/when the land is sold?  

 

Analysis (question 1):

 

It is clear that there is a deductible temporary difference, as IAS 12 bases the existence of a temporary difference on the balance sheet and tax carrying amounts. 

 

Analysis (question 2):

 

A deferred tax asset should be recognised, if the criteria in IAS 12 are met. 

 

IAS 12.51 requires that, when determining the amount of deferred tax to be recognised, the measurement reflects the manner in which an entity expects to recover the carrying amounts of its assets and liabilities (that is, through use or by sale).  However, for land, IAS 12.51B requires this measurement to be calculated on the basis of sale of the asset, regardless of the basis of measuring the carrying amount of that asset. 

 

In this case, the increase in the tax deductible amount as a result of an increase in the inflation index is driven by the tax legislation that is currently in place.  Consequently, it is appropriate for this to be taken into account in determining the calculation of deferred tax. 

 

In determining the amount of any deferred tax asset to be recognised in respect of the land, it is necessary to apply the guidance in IAS 12.  IAS 12.24 requires a deferred tax asset to be recognised, to the extent that taxable profit will be available against which the deductible temporary difference can be utilised.  Consequently, although the fair value of the land is expected to be in excess of the tax value in future, it may be necessary to look to other assets and the extent to which they will generate future taxable profits.  In addition, it would appear that the actual realisation of the deferred tax asset appears unlikely, as there is no intention to sell the land.  This means that judgement will need to be applied in determining whether it is appropriate to recognise a deferred tax asset in respect of the deductible temporary difference. 

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206.6.1.1

IFRIC Agenda Decision - Carryforward of unused tax losses and tax credits

June 2005 - The IFRIC considered whether to provide guidance on how to apply the probability criterion for the recognition of deferred tax assets arising from the carryforward of unused tax losses and unused tax credits, and in particular whether the criterion should be applied to the amount of unused tax losses or unused tax credits taken as a whole or to portions of the total amount.

The IFRIC decided not to develop any guidance because, in practice, the criterion is generally applied to portions of the total amount. The IFRIC was not aware of much diversity in practice.

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206.8.1.1

IFRIC Agenda Decision - Deferred tax arising from unremitted foreign earnings

July 2007 - The IFRIC was asked to provide guidance on whether entities should recognise a deferred tax liability in respect of temporary differences arising because foreign income is not taxable unless remitted to the entity’s home jurisdiction. The foreign income in question did not arise in a foreign subsidiary, associate or joint venture.

The submission referred to paragraph 39 of IAS 12 and noted that, if the foreign income arose in a foreign subsidiary, branch, associate or interest in a joint venture and met the conditions in IAS 12 paragraph 39(a) and (b), no deferred tax liability would be recognised. The submission noted that IAS 12 does not include a definition of a branch. It therefore asked for guidance on what constituted a branch. Even if the income did not arise in a branch, the submission asked for clarity on whether the exception in paragraph 39 could be applied to other similar foreign income by analogy.

The IFRIC noted that the Board was considering the recognition of deferred tax liabilities for temporary differences relating to investments in subsidiaries, branches, associates and joint ventures as part of its Income Taxes project. As part of this project, the Board had tentatively decided to eliminate the notion of ‘branches’ from IAS 12 and to amend the wording for the exception for subsidiaries to restrict its application. The project team had been informed of the issue raised with the IFRIC.

Since the issue was being addressed by a Board project that was expected to be completed in the near future, the IFRIC decided not to add the issue to its agenda.

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206.8.1.2

IFRIC Agenda Decision - Recognition of deferred tax for a single asset in a corporate wrapper

July 2014 - The Interpretations Committee received a request to clarify the accounting for deferred tax in the consolidated financial statements of the parent, when a subsidiary has only one asset within it (the asset inside) and the parent expects to recover the carrying amount of the asset inside by selling the shares in the subsidiary (the shares).

The Interpretations Committee noted that:

(a)

paragraph 11 of IAS 12 requires the entity to determine temporary differences in the consolidated financial statements by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. In the case of an asset or a liability of a subsidiary that files separate tax returns, this is the amount that will be taxable or deductible on the recovery (settlement) of the asset (liability) in the tax returns of the subsidiary.

(b)

the requirement in paragraph 11 of IAS 12 is complemented by the requirement in paragraph 38 of IAS 12 to determine the temporary difference related to the shares held by the parent in the subsidiary by comparing the parent’s share of the net assets of the subsidiary in the consolidated financial statements, including the carrying amount of goodwill, with the tax base of the shares for purposes of the parent’s tax returns.

The Interpretations Committee also noted that these paragraphs require a parent to recognise both the deferred tax related to the asset inside and the deferred tax related to the shares, if:

(a)

tax law attributes separate tax bases to the asset inside and to the shares;

(b)

in the case of deferred tax assets, the related deductible temporary differences can be utilised as specified in paragraphs 24⁠–⁠31 of IAS 12; and

(c)

no specific exceptions in IAS 12 apply.

The Interpretations Committee noted that several concerns were raised with respect to the current requirements in IAS 12. However, analysing and assessing these concerns would require a broader project than the Interpretations Committee could perform on behalf of the IASB.

Consequently, the Interpretations Committee decided not to take the issue onto its agenda but instead to recommend to the IASB that it should analyse and assess these concerns in its research project on Income Taxes.

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206.8.1.3

IFRIC Agenda Decision - Deferred Tax related to an Investment in a Subsidiary

June 2020 - The Committee received a request about how an entity, in its consolidated financial statements, accounts for deferred tax related to its investment in a subsidiary. In the fact pattern described in the request:

a.

undistributed profits of the subsidiary give rise to a taxable temporary difference associated with the entity’s investment in the subsidiary.

b.

the entity has determined that the conditions in paragraph 39 of IAS 12 for applying the exception from recognising a deferred tax liability related to its investment in the subsidiary are not satisfied because the entity expects the subsidiary to distribute its profits (which are available for distribution) in the foreseeable future.

c.

the entity and subsidiary operate in a jurisdiction in which:

i.

profits are taxable only when distributed—that is, the income tax rate applicable to undistributed profits is nil (undistributed tax rate).

ii.

a 20% tax rate applies to profit distributions (distributed tax rate). However, profit distributions made by the entity are not taxable to the extent that the subsidiary has already been taxed on that profit—that is, profit distributions are taxed only once.

The request asked whether the entity recognises a deferred tax liability for the taxable temporary difference associated with its investment in the subsidiary.

Paragraph 39 of IAS 12 requires an entity to recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, except to the extent that (a) the parent is able to control the timing of the reversal of the temporary difference; and (b) it is probable that the temporary difference will not reverse in the foreseeable future.

In the fact pattern described in the request, there is a taxable temporary difference associated with the entity’s investment in the subsidiary. The entity has also determined that the recognition exception in paragraph 39 of IAS 12 does not apply because it is probable that the temporary difference will reverse in the foreseeable future when the subsidiary distributes its undistributed profits. Accordingly, the Committee concluded that the entity recognises a deferred tax liability for that taxable temporary difference.

Paragraph 51 of IAS 12 requires an entity to reflect—in the measurement of deferred tax assets and deferred tax liabilities—'the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities’.

In the fact pattern described in the request, the entity expects to recover the carrying amount of its investment in the subsidiary through distributions of profits by the subsidiary, which would be taxed at the distributed tax rate. Accordingly, the Committee concluded that, in applying paragraph 51 of IAS 12, the entity uses the distributed tax rate to measure the deferred tax liability related to its investment in the subsidiary.

The Committee observed that, in the fact pattern described in the request, the entity does not apply paragraph 57A of IAS 12—that paragraph applies only in the context of dividends payable by the reporting entity. Further, paragraph 52A of IAS 12 does not apply to the measurement of a current or deferred tax asset or liability that itself reflects the tax consequences of a distribution of profits.

The Committee concluded that the principles and requirements in IAS 12 provide an adequate basis for an entity to account for deferred tax in the fact pattern described in the request. Consequently, the Committee decided not to add the matter to its standard-setting agenda.

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206.9.1.1

IFRIC Agenda Decision - Rebuttable presumption to determine the manner of recovery

November 2011 - Paragraph 51C of IAS 12 contains a rebuttable presumption, for the purposes of recognising deferred tax, that the carrying amount of an investment property measured at fair value will be recovered through sale. The Committee received a request to clarify whether that presumption can be rebutted in cases other than the case described in paragraph 51C.

The Interpretations Committee noted that a presumption is a matter of consistently applying a principle (or an exception) in IFRSs in the absence of acceptable reasons to the contrary and that it is rebutted when there is sufficient evidence to overcome the presumption. Because paragraph 51C is expressed as a rebuttable presumption and because the sentence explaining the rebuttal of the presumption does not express the rebuttal as ‘if and only if’, the Committee thinks that the presumption in paragraph 51C of IAS 12 is rebutted in other circumstances as well, provided that sufficient evidence is available to support that rebuttal.

Based on the rationale described above, the Committee decided not to add this issue to its agenda.

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206.9.1.2

IFRIC Agenda Decision - Selection of applicable tax rate for the measurement of deferred tax relating to an investment in an associate

March 2015 - The Interpretations Committee received a request to clarify the selection of the applicable tax rate for the measurement of deferred tax relating to an investment in an associate in a multi‑tax rate jurisdiction. The submitter asked how the tax rate should be selected when local tax legislation prescribes different tax rates for different manners of recovery (for example, dividends, sale, liquidation, etc). The submitter described a situation in which the carrying amount of an investment in an associate could be recovered by:

(a)

receiving dividends (or other distribution of profit);

(b)

sale to a third party; or

(c)

receiving residual assets upon liquidation of the associate.

The submitter stated that an investor normally considers all of these variants of recovery. One part of the temporary difference will be received as dividends during the holding period, and another part will be recovered upon sale or liquidation.

The Interpretations Committee noted that paragraph 51A of IAS 12 states that an entity measures deferred tax liabilities and deferred tax assets using the tax rate and the tax base that are consistent with the expected manner of recovery or settlement. Accordingly, the tax rate should reflect the expected manner of recovery or settlement. If one part of the temporary difference is expected to be received as dividends, and another part is expected to be recovered upon sale or liquidation (for example, an investor has a plan to sell the investment later and expects to receive dividends until the sale of the investment), different tax rates would be applied to the parts of the temporary difference in order to be consistent with the expected manner of recovery.

The Interpretations Committee observed that it had received no evidence of diversity in the application of IAS 12 and that the Standard contains sufficient guidance to address the matters raised. Accordingly, the Interpretations Committee thought that neither an Interpretation of nor an amendment to IAS 12 was necessary.

Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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206.9.1.3

IFRIC Agenda Decision - Expected manner of recovery of intangible assets with indefinite useful lives

November 2016 - The Interpretations Committee received a request to clarify how an entity determines the expected manner of recovery of an intangible asset with an indefinite useful life for the purposes of measuring deferred tax.

The Interpretations Committee noted that paragraph 51 of IAS 12 Income Taxes states that the measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that follow from the manner in which an entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

 

The Interpretations Committee also noted the requirements in paragraph 88 of IAS 38 Intangible Assets regarding intangible assets with indefinite useful lives.

 

The Interpretations Committee observed that an intangible asset with an indefinite useful life is not a non-depreciable asset as envisaged by paragraph 51B of IAS 12. This is because a non-depreciable asset has an unlimited (or infinite) life, and IAS 38 explains that indefinite does not mean infinite. Consequently, the requirements in paragraph 51B of IAS 12 do not apply to intangible assets with an indefinite useful life.

The Interpretations Committee noted the Board’s observation about intangible assets with indefinite useful lives when the Board amended IAS 38 in 2004. The Board observed that an entity does not amortise an intangible asset with an indefinite useful life because there is no foreseeable limit on the period during which it expects to consume the future economic benefits embodied in the asset. Accordingly, amortisation over an arbitrarily determined maximum period would not be representationally faithful. The reason for non-amortisation of an intangible asset with an indefinite useful life is not because there is no consumption of the future economic benefits embodied in the asset.

The Interpretations Committee observed that an entity recovers the carrying amount of an asset in the form of economic benefits that flow to the entity in future periods, which could be through use or sale of the asset. Accordingly, the recovery of the carrying amount of an asset does not depend on whether the asset is amortised. Consequently, the fact that an entity does not amortise an intangible asset with an indefinite useful life does not necessarily mean that the entity will recover the carrying amount of that asset only through sale and not through use.

The Interpretations Committee noted that an entity applies the principle and requirements in paragraphs 51 and 51A of IAS 12 when measuring deferred tax on an intangible asset with an indefinite useful life. In applying these paragraphs, an entity determines its expected manner of recovery of the carrying amount of the intangible asset with an indefinite useful life, and reflects the tax consequences that follow from that expected manner of recovery.

The Interpretations Committee concluded that the principle and requirements in paragraphs 51 and 51A of IAS 12 provide sufficient requirements to enable an entity to measure deferred tax on intangible assets with indefinite useful lives.

In the light of existing requirements in IFRS Standards, the Interpretations Committee determined that neither an IFRIC Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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206.9.1.4

IFRIC Agenda Decision - Multiple Tax Consequences of Recovering an Asset

April 2020 - The Committee received a request about deferred tax when the recovery of the carrying amount of an asset gives rise to multiple tax consequences. In the fact pattern described in the request:

a.

an entity acquires an intangible asset with a finite useful life (a licence) as part of a business combination. The carrying amount of the licence at initial recognition is CU100. The entity intends to recover the carrying amount of the licence through use, and the expected residual value of the licence at expiry is nil.

b.

the applicable tax law prescribes two tax regimes: an income tax regime and a capital gains tax regime. Tax paid under both regimes meets the definition of income taxes in IAS 12. Recovering the licence’s carrying amount has both of the following tax consequences:

i.

under the income tax regime—the entity pays income tax on the economic benefits it receives from recovering the licence’s carrying amount through use, but receives no tax deductions in respect of amortisation of the licence (taxable economic benefits from use); and

ii.

under the capital gains tax regime—the entity receives a tax deduction of CU100 when the licence expires (capital gain deduction).

c.

the applicable tax law prohibits the entity from using the capital gain deduction to offset the taxable economic benefits from use in determining taxable profit.

The request asked how the entity determines the tax base of the asset and, consequently, how it recognises and measures deferred tax.

The fundamental principle in IAS 12

The fundamental principle upon which IAS 12 is based (as stated in paragraph 10 of IAS 12) is that ‘an entity shall, with certain limited exceptions, recognise a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences’.

Applying the fundamental principle to the fact pattern

The recovery of the asset’s carrying amount gives rise to two distinct tax consequences—it results in taxable economic benefits from use and a capital gain deduction that cannot be offset in determining taxable profit. Accordingly, applying the fundamental principle in IAS 12, an entity reflects separately these distinct tax consequences of recovering the asset’s carrying amount.

An entity identifies temporary differences in a manner that reflects these distinct tax consequences by comparing:

a.

the portion of the asset’s carrying amount that will be recovered under one tax regime; to

b.

the tax deductions the entity will receive under that same tax regime (which are reflected in the asset’s tax base).

In the fact pattern described in the request, the Committee concluded that the entity identifies both:

a.

a taxable temporary difference of CU100—the entity will recover the licence’s carrying amount (CU100) under the income tax regime, but will receive no tax deductions under that regime (that is, none of the tax base relates to deductions under the income tax regime); and

b.

a deductible temporary difference of CU100—the entity will not recover any part of the licence’s carrying amount under the capital gains tax regime, but will receive a deduction of CU100 upon expiry of the licence (that is, all of the tax base relates to deductions under the capital gains tax regime).

The entity then applies the requirements in IAS 12 considering the applicable tax law in recognising and measuring deferred tax for the identified temporary differences.

The Committee concluded that the principles and requirements in IAS 12 provide an adequate basis for an entity to recognise and measure deferred tax in the fact pattern described in the request. Consequently, the Committee decided not to add the matter to its standard-setting agenda.

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206.9.2.1

Dual method of recovery for investment property 

IAS 12.51C requires that when an entity chooses to measure its investment property at fair value (IAS 40.33), there is a rebuttable presumption that the carrying amount of its investment property will be recovered through sale. 

 

As a result, the deferred tax calculation is based on the tax rate that is applicable to a sale of the investment property and not on tax rates attached to operating profits.  In some jurisdictions, this results in a different amount of deferred tax being recognised because of differences between tax rates that are applied to trading profits and to capital gains. 

 

Under which circumstances is it appropriate to rebut the presumption that the investment property will be recovered through sale? 

Analysis: An entity can rebut the presumption that it will recover an investment property measured at fair value through sale if it plans (i.e its business model is) to recover substantially all of the economic benefits of the asset over time.  

 

An entity can also rebut the presumption, and split the recovery of an investment property measured at fair value as being partially from use and partially from sale if it has a clear business plan under which it can estimate how long the investment property will be held to generate rental income before its disposal. 

 

It is not possible to rebut the presumption for freehold land. This is because freehold land is a non depreciable asset with an unlimited useful life. Consequently IAS 12.51B requires any deferred tax to be calculated on the basis of the carrying value of the land being recovered through sale, and not through use. 

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206.10.1.1

IFRIC Agenda Decision - Recognition of deferred taxes for the effect of exchange rate changes

January 2016 - The Interpretations Committee received a submission regarding the recognition of deferred taxes when the tax bases of an entity’s non-monetary assets and liabilities are determined in a currency that is different from its functional currency. The question is whether deferred taxes that result from exchange rate changes on the tax bases of non-current assets are recognised through profit or loss.

The Interpretations Committee noted that paragraph 41 of IAS 12 Income Taxes states that when the tax base of a non-monetary asset or liability is determined in a currency that is different from the functional currency, temporary differences arise resulting in a deferred tax asset or liability. Such deferred tax does not arise from a transaction or event that is recognised outside profit or loss and is therefore charged or credited to profit or loss in accordance with paragraph 58 of IAS 12. Such deferred tax charges or credits would be presented with other deferred taxes, instead of with foreign exchange gains or losses, in the statement of profit or loss.

 

The Interpretations Committee also noted that paragraph 79 of IAS 12 requires the disclosure of the major components of tax expense (income). The Interpretations Committee observed that when changes in the exchange rate are the cause of a major component of the deferred tax charge or credit, an explanation of this in accordance with paragraph 79 of IAS 12 would help users of financial statements to understand the tax expense (income) for the period.

In the light of existing IFRS requirements, the Interpretations Committee determined that neither an Interpretation nor an amendment to a Standard was necessary. Consequently, the Interpretations Committee decided not to add this issue to its agenda.

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206.10.2.1

Backwards tracing to other comprehensive income - examples

The effect of recognising current and deferred taxes are generally recognised in profit or loss, however, if tax arises from a transaction or event which is recognised, in the same or a different period, outside of profit or loss, then the tax is recognised outside of profit or loss as well (IAS 12.58(a)). This includes transactions or events giving rise to other comprehensive income (OCI).

This is sometimes referred to as ‘backwards tracing’ as IAS 12 requires an entity to trace the origins of tax and record the tax effect in the same way as the underlying event or transaction.

How is the tax effect of a transaction recognised in OCI recorded?

Analysis: Entity A purchases an investment in equity instruments, which are in the scope of IFRS 9. As the shares are not held for trading, the entity is able to elect to record the movements in the fair value of the shares in OCI. The purchase price of the shares is CU100, and by the end of the reporting period, its value has increased to CU140. In Entity A’s tax jurisdiction, current tax is not payable on the increase in value of shares until they are sold and any gain is realised. The tax rate is 40%.

At the end of the reporting period, Entity A recognises a deferred tax liability, because the carrying amount of the shares (CU140) exceeds its tax base (CU100). The deferred tax liability is CU16 ((CU140 – CU100) * 40%). Entity A recognises the CU16 in other comprehensive income rather than P&L, which results in a net effect of 24 in OCI (CU40 increase in value less CU16 tax effect).

If Entity A sold the investment on the first day of the next reporting period for CU140, it would owe CU16 of current tax, and the deferred tax asset would reverse. The current tax expense of CU16 would be off-set by the deferred tax recovery of CU16 in other comprehensive income, resulting in no net tax effect, as the tax effect of the increase in value of the shares was recorded in the previous period.

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206.10.2.2

Backwards tracing to equity  - examples

The effect of recognising current and deferred taxes are generally recognised in profit or loss, however, if tax arises from a transaction or event which is recognised, in the same or a different period, outside of profit or loss, then the tax is recognised outside of profit or loss as well (IAS 12.58(a)). This includes transactions or events that are recorded directly in equity.

This is sometimes referred to as ‘backwards tracing’ as IAS 12 requires an entity to trace the origins of tax and record the tax effect in the same way as the underlying event or transaction.

How is the tax effect of a transaction recognised directly in equity recorded?

Analysis: Entity A issues common shares and receives CU100 of consideration. The shares meet the definition of equity in IAS 32. To issue the shares, Entity A incurred CU10 of incremental costs, which were charged to equity as required by IAS 32.37. The incremental costs are deductible for tax purposes in the period they were paid. The tax rate is 40%.

The tax effect of the transaction costs should be recorded in equity, rather than profit or loss, as the transaction giving rise to the deduction was recognised in equity. Therefore, the current tax benefit of CU4 (CU10 * 40%) is recorded in equity.

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206.10.2.3

Accounting for tax losses outside a business combination that are acquired at a discount

B is an inactive entity, which does not meet the definition of a business, with immaterial assets and liabilities (which are therefore not considered further in the analysis) but significant tax loss carry forwards with a fair value of CU 50.

Entity A acquires B and subsequently merges with B in order to use the tax loss carry forwards.

The consideration of CU 10 paid by A to acquire B is significantly lower than the fair value of the acquired tax losses as A expects to be able to use all of the tax losses whereas the tax losses were of no longer of any value to B.

How should the acquisition of the tax losses be accounted for? In particular what is the correct accounting treatment for difference between the consideration paid and the fair value of the tax loss carry forwards?

Analysis: In common with other assets acquisitions, such as inventory or PPE, the purchase price is the appropriate measurement value for initial recognition. The tax loss carry forwards are recorded at the consideration paid (CU 10). The tax loss carry forwards are subsequently remeasured in accordance with IAS 12. The entity recognises a gain when it recognises a deferred tax asset as it expects to recover all of the tax loss carry forwards. The carrying amount of the deferred tax asset will differ from the fair value of CU 50 because the measurement requirements of IAS 12 differ from fair value (e.g. discounting of deferred tax assets and liabilities is not permitted – IAS 12.53).

The two steps might take place in quick succession.

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206.11.2.1

Accounting for uncertainty over income tax treatments – scope of IFRIC 23

IFRIC 23 sets out requirements for recognising the effects of uncertainty over income taxes in measuring current and deferred tax balances.

Which taxes does IFRIC 23 apply to?

Analysis: IFRIC 23 is an interpretation of the recognition and measurement requirements of IAS 12, therefore, its scope is the same as IAS 12, meaning that IFRIC 23 applies to ‘income taxes’. IAS 12.2 states that income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity.

Therefore, other types of taxes that do not meet the definition of income taxes are excluded form the requirements of IFRIC 23. For example, value added taxes (VAT), import duties, levies, etc. are outside of the scope of IAS 12, and are therefore not within the scope of IFRIC 23.

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206.11.2.2

Detection risk and uncertainty over income tax treatments

Entity A has two subsidiaries, B and C, which operate in different tax jurisdictions.

B produces raw materials and sells them to third parties as well as to C, who produces various products for sale to end consumers.

The group has not completed a transfer pricing study. B is currently charging C 20% less than it does to other third parties, however, management notes this savings is due to lower administrative and shipping costs as C purchases in bulk.

The audit team has consulted with the tax experts, who believe it is not probable that the position will be accepted by tax authorities (only 25% chance it would be accepted). It would result in a CU 1,000,000 assessment to Entity C.

Based on recent activity and tax enforcement priorities announced by the government, tax experts consider there is only a 5% chance that the position will be examined by the tax authority before the examination period expires.

Analysis: how is the effect of the uncertainty over income taxes reflected?

The likelihood of the tax enforcer examining Entity A’s records is not relevant in recognising current and deferred tax balances. IFRIC 23.8 requires that an entity assume that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making these examinations. Therefore, ‘detection risk’ may not be incorporated.

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206.12.1.1

IFRIC Agenda Decision - Presentation of Liabilities or Assets Related to Uncertain Tax Treatments

September 2019 - The Committee received a request about the presentation of liabilities or assets related to uncertain tax treatments recognised applying IFRIC 23 Uncertainty over Income Tax Treatments (uncertain tax liabilities or assets). The request asked whether, in its statement of financial position, an entity is required to present uncertain tax liabilities as current (or deferred) tax liabilities or, instead, can present such liabilities within another line item such as provisions. A similar question could arise regarding uncertain tax assets.

 

The definitions in IAS 12 of current tax and deferred tax liabilities or assets

When there is uncertainty over income tax treatments, paragraph 4 of IFRIC 23 requires an entity to ‘recognise and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying IFRIC 23’. Paragraph 5 of IAS 12 Income Taxes defines:

a.

current tax as the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period; and

b.

deferred tax liabilities (or assets) as the amounts of income taxes payable (recoverable) in future periods in respect of taxable (deductible) temporary differences and, in the case of deferred tax assets, the carryforward of unused tax losses and credits.

Consequently, the Committee observed that uncertain tax liabilities or assets recognised applying IFRIC 23 are liabilities (or assets) for current tax as defined in IAS 12, or deferred tax liabilities or assets as defined in IAS 12.

Presentation of uncertain tax liabilities (or assets)

Neither IAS 12 nor IFRIC 23 contain requirements on the presentation of uncertain tax liabilities or assets. Therefore, the presentation requirements in IAS 1 apply. Paragraph 54 of IAS 1 states that ‘the statement of financial position shall include line items that present: …(n) liabilities and assets for current tax, as defined in IAS 12; (o) deferred tax liabilities and deferred tax assets, as defined in IAS 12…’.

Paragraph 57 of IAS 1 states that paragraph 54 ‘lists items that are sufficiently different in nature or function to warrant separate presentation in the statement of financial position’. Paragraph 29 requires an entity to ‘present separately items of a dissimilar nature or function unless they are immaterial’.

Accordingly, the Committee concluded that, applying IAS 1, an entity is required to present uncertain tax liabilities as current tax liabilities (paragraph 54(n)) or deferred tax liabilities (paragraph 54(o)); and uncertain tax assets as current tax assets (paragraph 54(n)) or deferred tax assets (paragraph 54(o)).

The Committee concluded that the principles and requirements in IFRS Standards provide an adequate basis for an entity to determine the presentation of uncertain tax liabilities and assets. Consequently, the Committee decided not to add the matter to its standard-setting agenda.

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206.12.2.1

Offsetting of current tax assets and liabilities

What are the requirements for offsetting current tax assets and liabilities?

Analysis: IAS 12.71 requires that an entity only offset current tax assets and current tax liabilities if, and only if, the entity:

  1. has a legally enforceable right to set off the recognised amounts; and
  2. intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

In the consolidated financial statements of a parent, current tax assets and liabilities might be recognised relating to multiple taxable entities. For these balances to be offset (e.g. the current tax asset of a subsidiary being offset against the current tax liability of the parent), then both criteria in IAS 12.71 must be met. In many jurisdictions, separate taxable entities will not have a legally enforceable right to set off the recognised amounts, therefore, the criteria will not be met.

The criteria are also unlikely to be met if the different taxable entities are subject to taxes in different jurisdictions by different taxation authorities, as such balances would not have enforceable rights to offset.

Current and deferred tax balances may not be offset (e.g. a current tax asset may not offset a deferred tax liability). This is because IAS 1.32 prohibits assets and liabilities from being offset unless required or permitted by an IFRS. As IAS 12 does not permit such an offsetting, it is prohibited.

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206.12.2.2

Offsetting of deferred tax assets and liabilities

What are the requirements for offsetting deferred tax assets and liabilities?

Analysis: IAS 12.74 requires that an entity only offset deferred tax assets and deferred tax liabilities if, and only if, the entity:

  1. the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
  2. the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:
  1. the same taxable entity; or
  2. different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Criterion (a) will often not be met relating to different entities in a consolidated group because such deferred tax balances will often not have a legally enforceable right to set off, especially in cases where the separate taxable entities are taxed in different jurisdictions.

In the consolidated financial statements of a parent, deferred tax assets and liabilities might be recognised relating to multiple taxable entities. Criterion (b)(i) will not be satisfied in this case, therefore, criterion (b)(ii) must be analysed carefully to determine whether an entity truly intends to settle the balances on a net basis or simultaneously.  

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