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The main issue here is how to account for the current and future consequences of
Transactions and other events of the current period recognized in the entitys financial
statements.
IAS 12 requires accounting for current and deferred income tax from certain transaction or
event exactly in the same way as the transaction or event itself.
Add back the expenses recognized but non-deductible for tax purposes
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.
For example, when you have an interest receivable and interest revenue is taxed on a cash basis,
then the tax base of interest receivable is 0. Why? Because when you actually receive the cash and
remove the interest receivable from your books, you will need to include full amount of cash received
into your tax return. At the same time you cannot deduct anything from this amount for tax purposes.
For example, when you accrue some expenses that will be deductible when paid, then the tax base
of a liability from accrued expenses is 0.
Temporary differences
Temporary differences are differences between the carrying amount of an asset or liability in the
statement of financial position and its tax base.
When the carrying amount of an asset or a liability is greater than its tax base, then there is
ataxable temporary difference and it gives rise to deferred tax liability.
In the opaque situation, when the carrying amount of an asset or a liability is lower than its tax base,
then there is a deductible temporary difference and it gives rise to deferred tax asset.
You need to recognize deferred tax liability for all taxable temporary differences you discovered,
except for the following situations:
No deferred tax liability shall be recognized from initial recognition of asset or liability in a
transaction that is not a business combination and at the time of the transaction it affects
neither accounting nor taxable profit (loss).
The most common examples of taxable temporary differences giving rise to deferred tax liabilities
are:
1.
Timing differences
Timing difference arises when the recognition of certain item in the financial statements occurs
in a different time than its recognition in tax return, for example, interest received is taxed
deductible only when cash is received.
2.
Business combinations
In a business combination identifiable assets and liabilities can be revalued upwards to fair
value at the acquisition date, but no adjustment is made for tax purposes. As a result, taxable
temporary difference arises.
3.
Assets carried at fair value
When a company applies policy of revaluation (for example, revaluation model for property,
plant and equipment in line with IAS 16) and some assets are revalued upwards to their fair
value, taxable temporary difference arises.
4.
Timing differences
Timing difference arises when the recognition of certain item in the financial statements occurs
in a different time than its recognition in tax return, for example, accrued expenses are tax
plant and equipment in line with IAS 16) and some assets are revalued downwards to their fair
value, deductible temporary difference arises.
4.
Initial recognition of an asset / liability
When an asset or liability are initially recognized in the financial statements, part or all of it
could be tax-non-deductible or not taxable. In this case, deferred tax asset is recognized based
on the specific situation.
Changes in foreign exchange rates when a parent and its subsidiary are based in different
countries
An entity shall recognize a deferred tax liability for all taxable temporary differences
associated with investments in subsidiaries, branches and associates, and interests in joint
arrangements, except to the extent that both of the following conditions are satisfied:
o
the parent, investor, joint venturer or joint operator is able to control the timing of the
reversal of the temporary difference; and
o
2.
it is probable that the temporary difference will not reverse in the foreseeable future.
An entity shall recognize a deferred tax asset for all deductible temporary differences
arising from investments in subsidiaries, branches and associates, and interests in joint
arrangements, to the extent that it is probable that:
taxable profit will be available against which the temporary difference can be utilized.
if a deferred tax arose from a transaction or even recognized outside profit or loss, then you
need to recognize deferred tax in the same way (in other comprehensive income or directly in
equity)
if a deferred tax arose in a business combination, deferred tax affects goodwill or bargain
purchase gain.
You can offset current income tax assets and liabilities if 2 conditions are fulfilled:
1.
2.
You have a legally enforceable right to set off the recognized amounts; and
You intend either to settle on a net basis or to realize the asset and settle the liability
simultaneously.
You have a legally enforceable right to set off the current income tax assets against current
income tax liabilities (see above when it happens); and
2.
The deferred tax assets and the deferred tax liabilities relate to income taxed levied by the
same taxation authority on either
o
different taxable entities which intend to settle current tax liabilities and assets on a
net basis or realize 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.
Just be careful when making consolidated financial statements because often you just cannot simply
combine deferred tax assets of a parent with deferred tax liabilities of a subsidiary and present them
as 1 net amount.
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