Income Taxes - Recap and Update: (HKAS 12) 31 August 2011

Income Taxes – Recap and Update
(HKAS 12) 31 August 2011
Lam Chi Yuen, Nelson 林智遠

MBA MSc BBA ACA ACS CFA CPA(Aust) CPA(US)
CTA FCCA FCPA FHKIoD FTIHK MHKSI MSCA
© 2005-11 Nelson Consulting Limited 1
Today’s Agenda
I. Introduction
II. HKAS 12 – Income Taxes
A. Current Taxes
B. Deferred Taxes
III. Amendments of HKAS 12 Deferred Tax:
Recovery of Underlying Assets
1
I. Introduction
Objective of HKAS 12
• The objective of IAS 12 is
– to prescribe the accounting treatment for income
taxes.
• The principal issue in accounting for income
taxes is
– how to account for the current and future tax
consequences of:
a) the future recovery (settlement) of the carrying
amount of assets (liabilities) that are
recognised in an entity's statement of financial
position; and
b) transactions and other events of the current
period that are recognised in an entity's
financial statements.
I. Introduction
Scope of HKAS 12
• HKAS 12 shall be applied in accounting for income taxes. (HKAS 12.1)
• For the purposes of HKAS 12, income taxes include
– all domestic and foreign taxes which are based on taxable profits.
– taxes, such as withholding taxes, which are payable by a subsidiary,
associate or joint venture on distributions to the reporting entity.
• HKAS 12 does not deal with the methods
of accounting for
– government grants (see HKAS 20) or
– investment tax credits.
• However, HKAS 12 does deal with the
accounting for
– temporary differences that may arise from
such grants or investment tax credits.
2
I. Introduction
Income
taxes
Deferred Current
taxes taxes
Deferred Deferred Current Current

Tax Tax Tax Tax
Liabilities Assets Liabilities Assets
Tax expense (tax income)

• is the aggregate amount included in the determination of profit or loss
for the period in respect of current tax and deferred tax. (HKAS 12.5)
Today’s Agenda

A. Current Taxes
B. Deferred Taxes
3
A. Current Taxes
Income
taxes
Current
taxes
Current Current
Tax Tax
Liabilities Assets
A. Current Taxes
Current Taxes
• is the amount of income taxes payable
(recoverable) in respect of the taxable
profit (tax loss) for a period. (HKAS 12.5)
Taxable profit (tax loss)

• is the profit (loss) for a period, determined
in accordance with the rules established
by the taxation authorities, upon which
income taxes are payable (recoverable).
(HKAS 12.5)
4
A. Current Tax Liabilities or Assets
Current Tax Liabilities
– Current tax for current and prior periods shall,
to the extent unpaid, be recognised as a liability. (HKAS 12.12)
Current Tax Assets

– 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. (HKAS 12.12)
– The benefit relating to a tax loss that can be carried back to
recover current tax of a previous period
 shall be recognised as an asset. (HKAS 12.13)
– When a tax loss is used to recover current tax of a previous period,
 an entity recognises the benefit as an asset
in the period in which the tax loss occurs because
• it is probable that the benefit will flow to the entity and
• the benefit can be reliably measured.
A. Current Tax – Measurement

• Current tax liabilities (assets) for the current and prior
periods
– shall be measured at the amount expected to be paid to
(recovered from) the taxation authorities,
– using the tax rates (and tax laws) that have been enacted
or substantively enacted by the end of the reporting
period. (HKAS 12.46)
5
A. Current Tax – Presentation
• An entity shall offset current tax assets and current tax liabilities if, and
only if, the entity:
a) has a legally enforceable right to set off the recognised amounts; and
b) intends either
• to settle on a net basis, or
• to realise the asset and settle the liability simultaneously
• The tax expense (income) related to
profit or loss from ordinary activities
– shall be presented in the statement
of comprehensive income. (HKAS 12.77)

• If an entity presents the components of profit or loss in a separate
income statement as described in HKAS 1.81 Presentation of Financial
Statements (as revised in 2007),
– it presents the tax expense (income) related to profit or loss from
ordinary activities in that separate statement. (HKAS 12.77A)
• Other disclosures
(to be discussed with deferred tax)
6
Case
BP plc – 2010 Annual Report

• Income tax expense represents the sum of
– the tax currently payable and
– deferred tax.
• Interest and penalties relating to tax are also included in income tax
expense.
• The tax currently payable is based on the taxable profits for the period.
– Taxable profit differs from net profit as reported in the income statement
because
• it excludes items of income or expense that are taxable or deductible in
other periods and
• it further excludes items that are never taxable or deductible.
• The group’s liability for current tax is calculated
– using tax rates that have been enacted or substantively enacted by the
balance sheet date.
Today’s Agenda

A. Current Taxes
B. Deferred Taxes
1. Overview of deferred taxes
2. Tax base
3. Temporary differences
4. Recognition of deferred tax assets/liabilities
5. Measurement
6. Recognition of deferred tax charge/credit
7. Presentation
8. Disclosure
7
B. Deferred Taxes
Income
taxes
Deferred
taxes
Deferred Deferred
Tax Tax
Liabilities Assets
1. Overview of Deferred Taxes
HKAS 12 Income taxes adopts

• Statement of financial
position liability method
Deferred
taxes • Full provision approach
8
HKAS 12 Income taxes adopts

• Statement of financial
position liability method
Deferred
taxes − Largely referenced to the temporary
difference between an asset or
liability's
Temporary  carrying amount and
difference
 its tax base
• Full provision approach
Tax base − Recognised all differences, except
for some limited cases

Case
Vodafone Group plc – 2011 Annual

report
• Deferred tax is the tax expected to be
payable or recoverable in the future
Deferred arising from temporary differences
taxes between
– the carrying amounts of assets and
liabilities in the financial statements and
Temporary – the corresponding tax bases used in the
difference computation of taxable profit.
• It is accounted for using the statement of
financial position liability method.
Tax base
9
2. Tax Base
Tax base of an asset or liability is
• the amount attributed to that asset or liability for tax purposes
(HKAS 12.5)
• HKAS 12 with reference to AASB 1020

Income Taxes of the Australian
Accounting Research Foundation
provides further guidance on calculating
tax base ……
Tax base
2. Tax Base
Assets
Future Future
Carrying
Tax base = - taxable + deductible
amount
amount amount
Liabilities
Future Future
Carrying
Tax base = - deductible + taxable
amount
amount amount
Liabilities for revenue received in advance

Carrying Revenue that will not be
Tax base = -
amount taxable in future periods
10
2. Tax Base
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. (HKAS 12.7)
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. (HKAS 12.7)
In the case of revenue which is received in
Tax base 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. (HKAS 12.7)
2. Tax Base
Example
Calculate the tax base of the following items.
• A car with a cost $1,000 was acquired in 2006. Tax base = $600
• For tax purposes, depreciation allowance of
$400 has been already deducted.
• The remaining cost can be deductible in future
periods. If revaluated?
• Revenue generated from the machine is
taxable.
• Trade receivables has a carrying amount of Tax base = $1,000

$800 after an impairment loss of $200. (carrying amount $800 +
future deductible amount
• The related revenue has already been included $200)
in taxable profits.
• The impairment loss of $200 has not been
deducted for the tax purposes.
11
2. Tax Base
Example
Calculate the tax base of the following items.
• Freehold land with a cost of $2 million is revalued
to $3 million.
• For tax purposes, there is no depreciation.
• Revenue generated from the use of the freehold
land is taxable.
• However, any gain on disposal of the land at the
revalued amount will not be taxable.
Tax base is the original

cost: $2 million
Carrying amount: $3 million
What is it?
3. Temporary Difference
Temporary differences are differences between
• The carrying amount of an asset or liability in the
statement of financial position and
• Its tax base. (HKAS 12.5)
Temporary Carrying
= - Tax base
difference amount
Tax base
12
Temporary differences may be either:
a. Taxable temporary differences
• which are temporary differences that will result in
taxable amounts in determining taxable profit (tax
loss) of future periods when the carrying amount
of the asset or liability is recovered or settled; or
Temporary
difference b. Deductible temporary differences
• which are temporary differences that will result in
amounts that are deductible in determining
taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is
recovered or settled. (HKAS 12.5)
Taxable
temporary
difference
Temporary
difference
Deductible
temporary
difference
13
Temporary differences
Carrying
Carrying - Tax
Taxbase
base
amount
amount Taxable
temporary
difference
Positive e.g. an asset’s carrying amount is
For
higher than its tax base
Assets
Negative
Deductible
temporary
difference
For Positive
e.g. an asset’s carrying amount is
Liabilities lower than its tax base
Negative
Temporary differences
Carrying
Carrying - Tax
Taxbase
base
amount
amount Taxable
Deferred
temporary
tax liability
difference
Positive
For
Assets
Negative
Deductible
Deferred
temporary
tax asset
difference
For Positive
Liabilities Unused tax
Negative losses &/or
credits
Statement of financial position
liability method
14
3. Temporary
Deferred tax Difference
Temporary
assets or = x Tax rates
differences
liabilities
Deferred tax liabilities are Taxable

Deferred
• the amounts of income taxes payable in temporary
future periods in respect of taxable tax liability
difference
temporary differences.
Deferred tax assets are
• the amounts of income taxes recoverable
in future periods in respect of: Deductible
Deferred
a) deductible temporary differences; temporary
tax asset
b) the carryforward of unused tax difference
losses; and
c) the carryforward of unused tax
Unused tax
credits. (HKAS 12.5) losses &/or
credits
liability method
Example
• Some items have a tax base but are not recognised as assets and
liabilities in the statement of financial position.
• For example, research costs of $1,000
– are recognised as an expense in determining accounting profit in the period
in which they are incurred
– may not be permitted as a deduction in determining taxable profit (tax loss)
until a later period.
• The difference between

– the tax base of the research costs, being the amount the taxation authorities
will permit as a deduction in future periods (i.e. $1,000), and
– the carrying amount of nil
is a deductible temporary difference that results in a deferred tax asset.
15
• Where the tax base of an asset or liability is not
immediately apparent,
– it is helpful to consider the fundamental principle upon
which HKAS 12 is based:
• that an entity shall, with certain limited exceptions, Deferred
recognise a deferred tax liability (asset) tax liability
– whenever recovery or settlement of the carrying
amount of an asset or liability would make
Future tax
future tax payments larger (smaller) than they
payment larger
would be
– if such recovery or settlement were to have no
tax consequences. (HKAS 12.10)
• HKAS 12.52 Example C illustrates circumstances
when it may be helpful to consider this fundamental
principle, for example, when the tax base of an
asset or liability depends on the expected manner of
recovery or settlement.
• In consolidated financial statements,
temporary differences are determined by
comparing
– the carrying amounts of assets and liabilities
in the consolidated financial statements with
– the appropriate tax base.
• The tax base is determined by reference to
– a consolidated tax return in those jurisdictions
in which such a return is filed, or
– in other jurisdictions, the tax returns of each
entity in the group. (HKAS 12.11)
16
Example
Deferred tax implications
• ABC Ltd. sold goods at a price $3 million to its parent, CCD, and made a
profit of $1 million on the transaction.
• The inventory of these goods recorded in CCD’s balance sheet at the
year end of 31 May 2011 was $1.8 million.
• The entities file income tax return individually.
Answers
To the group, the carrying amount of the inventory, excluding
unrealised profit, is $1.2 million ($1.8 million x 2/3) while the tax base
is $1.8 million (the unrealised profit taxed in the seller, ABC).
A deferred tax asset is resulted from a deductible temporary difference
(whether to be recognised or not subject to certain limitations under
HKAS 12, to be discussed later).
Example
• Bowtock purchased an item of plant for $2,000,000 on 1 Oct. 2010.

• It had an estimated life of eight years and an estimated residual value
of $400,000.
• The plant is depreciated on a straight-line basis.
• The tax authorities do not allow depreciation as a deductible expense.
• Instead a tax expense of 40% of the cost of this type of asset can be
claimed against income tax in the year of purchase and 20% per
annum (on a reducing balance basis) of its tax base thereafter.
• The rate of income tax can be taken as 25%.
• Calculate the deferred tax impact for years up to 30 Sep. 2013
17
Example
Answers
On 1 Oct. 2010, Bowtock purchased a plant: Depreciable

• Purchase cost $2,000,000 amount
• Estimated residual value $400,000 $1,600,000
• Estimated useful life 8 years 8 years
• Depreciation basis Straight-line $ 200,000
The tax authority does not allow depreciation as a deductible
expense but grants:
• Initial allowance 40% on cost $ 800,000
• Annual allowance 20% p.a on tax base
• Income tax rate 25%
Example
Answers
Carrying
($’000) amount Tax base
Addition 2,000 2,000
Depreciation (200) (800)
2011 year end 1,800 1,200
18
Example
Answers
Deferred Deferred
Carrying Temporary tax tax charge/
($’000) amount Tax base difference liabilities (credit)
25%
2011 year end 1,800 1,200 600 150 150
Example
Answers
Deferred Deferred
2011 year end 1,800 1,200 600 150 150
2012 year end 1,600 960
2013 year end 1,400 768
19
Example
Answers
Deferred Deferred
2011 year end 1,800 1,200 600 150 150
2012 year end 1,600 960 640 160 10
2013 year end 1,400 768 632 158 (2)
For an asset
an asset’s carrying amount
Carrying is higher than its tax base Taxable
amount > Tax base temporary
difference
an asset’s carrying amount
Carrying is lower than its tax base Deductible
amount < Tax base temporary
difference
For a liability
a liability’s carrying amount
Carrying is higher than its tax base Deductible
> Tax base temporary
amount
difference
a liability’s carrying amount
Carrying is lower than its tax base Taxable
< Tax base temporary
amount
difference
20
Example
Examples of circumstances resulting in taxable temporary differences:

1. Depreciation of an asset is accelerated
for tax purposes. Taxable
Deferred
2. Interest revenue is received in arrears temporary
tax liability
and is included in accounting profit on difference
a time apportionment basis but is
included in taxable profit on a cash basis.
3. Development costs have been capitalised and will be amortised to the income
statement but were deducted in determining taxable profit in the period in
which they were incurred.
4. Prepaid expenses have already been deducted on a cash basis in
determining the taxable profit of the current or previous periods.
5. Financial assets or investment property are carried at fair value which
exceeds cost but no equivalent adjustment is made for tax purposes.
6. An entity revalues property, plant and equipment (under HKAS 16) but no
equivalent adjustment is made for tax purposes.
Example
Examples of circumstances resulting in deductible temporary differences:

1. Accumulated depreciation of an asset in the financial statements is greater
than the cumulative depreciation allowed up to the balance sheet date for tax
purposes.
2. The net realisable value of an item of inventory, or the recoverable amount of
an item of property, plant or equipment, is less than the previous carrying
amount and an entity therefore reduces the carrying amount of the asset, but
that reduction is ignored for tax purposes until the asset is sold.
3. Research costs are recognised as an Deductible
expense in determining accounting
Deferred
temporary
profit but are not permitted as a tax asset
difference
deduction in determining taxable
profit until a later period.
4. Income is deferred in the balance sheet but has already been included in
taxable profit in current or prior periods.
5. Financial assets or investment property are carried at fair value which is less
than cost, but no equivalent adjustment is made for tax purposes.
21
Today’s Agenda

A. Current Taxes
B. Deferred Taxes
2. Tax base
5. Measurement
7. Presentation
8. Disclosure
3. Temporary
Deferred tax Difference
Temporary
assets or = x Tax rates
differences
liabilities
Taxable
Deferred
temporary
tax liability
difference
All
recognised?
Deductible
Deferred
temporary
tax asset
difference
Unused tax
losses or
credits
liability method
22
4. Recognition of D.T. Assets / Liabilities
Taxable
Deferred
temporary
tax liability
difference
All
recognised?
Deductible
Deferred
temporary
tax asset
difference
Unused tax
losses or
credits
liability method
Full provision approach

Except for
Some cases specified in HKAS 12
A deferred tax liability shall be Taxable
recognised for Deferred
temporary
tax liability
all taxable temporary differences difference
A deferred tax asset shall be Deductible

temporary
tax asset
all deductible temporary differences difference
to the extent that it is probable that
taxable profit will be available Unused tax
against which the deductible losses or
temporary difference can be utilised credits

23
Case
Deferred
tax liability
Vodafone Group plc – 2011 Annual report
• It is accounted for using the statement of financial
position liability method.
• Deferred tax liabilities are generally recognised for
all taxable temporary differences and Deferred
tax asset
• Deferred tax assets are recognised to the extent
that
– it is probable that taxable profits will be available
against which deductible temporary differences can
be utilised.


Except for
temporary
tax liability
Deferred tax assets are the amounts Deductible

of income taxes recoverable in future Deferred
temporary
periods in respect of: tax asset
difference
a) deductible temporary differences,
b) the carry-forward of unused tax Unused tax
losses, and losses or
c) the carry-forward of unused tax credits
credits
24
4. Recognition – Taxable Temp. Difference

temporary
tax liability
Except to the extent that the deferred tax

liability arises from:
a) the initial recognition of goodwill; or Goodwill exemption
b) the initial recognition of an asset or liability in a transaction which

1. is not a business combination; and
2. at the time of the transaction, Initial recognition exemption
affects neither accounting profit
nor taxable profit (tax loss) (HKAS 12.15)

Case
BP plc – 2010 Annual Report

• Deferred tax liabilities are recognized for
all taxable temporary differences:
– Except where the deferred tax liability
arises on
• goodwill that is not tax deductible or
Goodwill exemption
• the initial recognition of an asset or
liability in a transaction that
– is not a business combination and,
– at the time of the transaction,
affects neither the accounting Initial recognition exemption
profit nor taxable profit or loss …….
25
4. Recognition – Deductible Temp. Diff.

A deferred tax asset shall be Deductible
Deferred
recognised for temporary
tax asset
all deductible temporary differences difference
to the extent that it is probable that
taxable profit will be available Unused tax
against which the deductible losses or
temporary difference can be utilised credits
unless the deferred tax asset arises from the
initial recognition of an asset or liability in a
transaction that:
- the initial recognition of an asset or liability in a transaction which
2. at the time of the transaction, Initial recognition exemption
affects neither accounting profit
nor taxable profit (tax loss) (HKAS 12.24)
4. Recognition
4. Recognition– of
Initial Recog.
deferred Exemption
tax assets/liabilities
Does deferred tax arise from initial

recognition of an asset or liability? No
Yes
Is the recognition resulted from a
business combination? Yes
No
Does it affect either accounting
profit/loss or taxable profit/loss
at the time of the transaction? Yes
No
Not recognise Recognise deferred tax
deferred tax asset/liability (subject to other exceptions)
2. at the time of the transaction, affects neither accounting profit
nor taxable profit (tax loss)
26
4. Recognition – Initial Recog. Exemption
Examples in Hong Kong:

• Land cost of a property? 
• Cost of demolishing of a building? 
• Intangible assets not tax deductible

e.g. purchase of trademarks?
• Prescribed fixed assets? 

2. at the time of the transaction, affects neither accounting profit
nor taxable profit (tax loss)
4. Recognition – Goodwill

As discussed, an entity shall not recognise a deferred tax liability
arising from
a) the initial recognition of goodwill ……
Business Combination
Goodwill
27
• With limited exceptions, the identifiable assets acquired
and liabilities assumed in a business combination are
recognised
– at their fair values at the acquisition date.
• Temporary differences arise
– when the tax bases of the identifiable assets
acquired and liabilities assumed
• are not affected by the business combination or
• are affected differently. (HKAS 12.19)
Business Combination
• Goodwill arising in a business combination is measured as the excess
of (a) over (b) below
a. the aggregate of:
i. the consideration transferred measured in accordance with HKFRS 3,
which generally requires acquisition-date fair value;
ii. the amount of any non-controlling interest in the acquiree recognised in
accordance with HKFRS 3; and
iii. in a business combination achieved in stages, the acquisition-date fair
value of the acquirer’s previously held equity interest in the acquiree.
b. the net of the acquisition-date amounts of the identifiable assets acquired
and liabilities assumed measured in accordance with HKFRS 3.
(HKAS 12.21 and HKFRS 3.32)
Goodwill
28
• Deferred tax relating to goodwill arising from initial recognition of
goodwill
– when taxation authority does not allow any movement in goodwill as a
deductible expense in determining taxable profit (or when a subsidiary
disposes of its underlying business), goodwill has a tax base of nil
• any difference between the carrying amount of goodwill and its tax base
of nil is a taxable temporary difference. (HKAS 12.21)
HKAS 12 does not permit the recognition of

such resulting deferred tax liability because
goodwill is measured as a residual and the Goodwill
recognition of the deferred tax liability would
increase the carrying amount of goodwill
• HKAS 12 does not permit the recognition of the resulting deferred tax
liability
– because goodwill is measured as a residual and the recognition of the
deferred tax liability would increase the carrying amount of goodwill. (HKAS
12.21)
• Subsequent reductions in a deferred tax liability that is unrecognised
– because it arises from the initial recognition of goodwill are also regarded as
arising from the initial recognition of goodwill and are therefore not
recognised. (HKAS 12.21A)
• Deferred tax liabilities for taxable temporary differences relating to
goodwill are,
– however, recognised to the extent they do not arise from the initial recognition
of goodwill. (HKAS 12.21B)
Goodwill
29
Example
Deferred tax implications for the Bonnie Group of companies

• Bonnie Ltd. acquired Melody Ltd. on 1 January 2007 for $6 million when
the fair value of the net assets was $4 million, and the tax written down
value of the net assets was $3 million.
• According to the local tax laws for Bonnie, amortisation of goodwill is not
tax deductible.
Answers
The Bonnie group Carrying Tax Temporary
amount base differences Deferred
Goodwill $2 million - $2 million tax
Net assets $4 million $3 million $1 million liability
• Provision is made for the temporary differences of net assets
• But NO provision is made for the temporary difference of goodwill
• As an entity shall not recognise a deferred tax liability arising from
initial recognition of goodwill.
• If the carrying amount of goodwill arising in a business combination is
less than its tax base,
– the difference gives rise to a deferred tax asset.
• The deferred tax asset arising from the initial recognition of goodwill shall
be recognised as part of the accounting for a business combination
– to the extent that it is probable that taxable profit will be available
against which the deductible temporary difference could be utilised.
(HKAS 12.32A)
Deferred tax asset arising from such case

shall be recognised
• to the extent that it is probable that taxable
Goodwill
profit will be available against which the
deductible temporary difference could be
utilised
30
4. Recognition – Compound Fin. Instrument
• In accordance with HKAS 32 Financial Instruments:
Disclosure and Presentation
– the issuer of a compound financial instrument (for
example, a convertible bond) classifies the
instrument’s
Liability
• liability component as a liability and
• equity component as equity.
(HKAS 12.23) Equity

• In some jurisdictions, the tax base of the liability
component on initial recognition
• is equal to the initial carrying amount of the sum of the
liability and equity components.
• The resulting taxable temporary difference arises from
the initial recognition of the equity component Liability
separately from the liability component.
• Therefore, the exception (initial recognition exemption) Equity
set out in HKAS 12.15(b) does not apply.
• Consequently, an entity recognises the resulting
deferred tax liability.
– In accordance with HKAS 12.61A, the deferred tax is
charged directly to the carrying amount of the equity
component.
– In accordance with HKAS 12.58, subsequent changes in
the deferred tax liability are recognised in profit or loss as
deferred tax expense (income). (HKAS 12.23)
31
Example
• An entity issues a non-interest-bearing convertible loan and receives

$1,000 on 31 Dec. 2010
• The convertible loan will be repayable at par on 1 January 2014.
• In accordance with HKAS 32 Financial Instruments: Disclosure and
Presentation, the entity classifies the instrument’s liability component as
a liability and the equity component as equity.
• The entity assigns an initial carrying amount of $751 to the liability
component of the convertible loan and $249 to the equity component.
• Subsequently, the entity recognizes imputed discount as interest
expenses at an annual rate of 10% on the carrying amount of the
liability component at the beginning of the year.
• The tax authorities do not allow the entity to claim any deduction for the
imputed discount on the liability component of the convertible loan.
• The tax rate is 40%.

Example
The temporary differences associated with the liability component and the
resulting deferred tax liability and deferred tax expense and income are as
follows:
2010 2011 2012 2013
Carrying amount of liability component 751 826 909 1,000

Tax base 1,000 1,000 1,000 1,000
Taxable temporary difference 249 174 91 -
Opening deferred tax liability tax at 40% 0 100 70 37

Deferred tax charged to equity 100 - - -
Deferred tax expense (income) - (30) (33) (37)
Closing deferred tax liability at 40% 100 70 37 -
32
Example
As explained in HKAS 12.23, at 31 Dec. 2010, the entity recognises the

resulting deferred tax liability by adjusting the initial carrying amount of the
equity component of the convertible liability.
Therefore, the amounts recognised at that date are as follows:
Liability component $ 751
Deferred tax liability 100
Equity component (249 – 100) 149
1,000
Subsequent changes in the deferred tax liability are recognised in the
income statement as tax income (see HKAS 12.23).
Therefore, the entity’s income statement is as follows:
2010 2011 2012 2013
Interest expense (imputed discount) - 75 83 91

Deferred tax (income) - (30) (33) (37)
- 45 50 54
4. Recognition – Unused Tax Loss/Credit

• A deferred tax asset shall be Deductible
recognised for the carry-forward of Deferred
temporary
tax asset
− unused tax losses and difference
− unused tax credits
 to the extent that it is probable Unused tax
that future taxable profit will be losses or
available against which the credits
unused tax losses and unused tax
credits can be utilised
(HKAS 12.34)
• To the extent that it is not probable that taxable

profit will be available against which the unused
tax losses or unused tax credits can be utilised,
– the deferred tax asset is not recognised.
(HKAS 12.36)
33
4. Recognition – Unused Tax Loss/Credit
Example
Examples criteria in assessing available taxable profit:

a) whether there are sufficient taxable temporary differences relating to
the same taxation authority and the same taxable entity
b) whether it is probable to have taxable profits before the unused tax
losses or unused tax credits expire;
c) Whether the unused tax losses result from identifiable causes which
are unlikely to recur; and
d) whether tax planning opportunities are available
4. Recognition – Unrecognised D.T. Assets

Periodic Re-assessment
• At the end of each reporting period,
– an entity re-assesses unrecognised deferred
tax assets
• The entity recognises a previously unrecognised
deferred tax asset
– to the extent that it has become probable that
future taxable profit will allow the deferred tax
asset to be recovered. (HKAS 12.37)
34
Example
Examples to Indicate Recognition of Previously Unrecognised

Deferred Tax Assets
a) An improvement in trading conditions
– This may make it more probable that the entity will be able to
generate sufficient taxable profit in the future for the deferred tax
asset to meet the recognition criteria set out above
b) Another example is when an entity re-assesses deferred tax assets
at the date of a business combination or subsequently

Example
Deferred tax implications for a group

• When CCD acquired ABC, which had unused tax losses brought forward.
• At 1 June 2010, it appeared that ABC would have sufficient taxable profit
to realise the deferred tax asset created by these losses but subsequent
events have proven that the future taxable profit will not be sufficient to
realise all of the unused tax losses.
Answers
A deferred tax asset shall be recognised for the carry-forward of unused tax
losses to the extent that it is probable that future taxable profit will be available
against which the unused tax losses and unused tax credits can be utilised.
An entity shall recognise a previously unrecognised deferred tax asset to the
extent that it has become probable that future taxable profit will allow the
deferred tax asset to be recovered.
The deferred tax asset shall be recognised with a corresponding adjustment to
goodwill (subject to certain limitations).
35
4. Recognition – Sub., Asso., JV & Branch
• An entity shall recognise a deferred tax liability for
all taxable temporary differences associated with
investments in subsidiaries, branches and
associates, and interests in joint ventures,
– except to the extent that both of the following
conditions are satisfied:
a) the parent, investor or venturer 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. (HKAS 12.39)

Case
Royal Dutch Shell plc – 2008 Annual Report

– Deferred tax is not provided for taxes on possible
future distributions of retained earnings of
subsidiaries and equity-accounted investments
where
• the timing of the distribution can be controlled and
• it is probable that the retained earnings will be
reinvested by the companies concerned.
36
• An entity shall recognise a deferred tax asset for
all deductible temporary differences arising from
investments in subsidiaries, branches and
associates, and interests in joint ventures,
– to the extent that, and only to the extent that, it is
probable that:
a) the temporary difference will reverse in the
foreseeable future; and
b) taxable profit will be available against which the
temporary difference can be utilised. (HKAS
12.44)

Case
BP plc
(2010 Annual Report)
• Deferred tax liabilities are recognized for all
taxable temporary differences ……
– In respect of taxable temporary differences associated
with investments in subsidiaries, jointly controlled entities and associates,
• except where the group is able to control the timing of the reversal of the
temporary differences and it is probable that the temporary differences
will not reverse in the foreseeable future.
• Deferred tax assets are recognized ……
– In respect of deductible temporary differences associated with investments in
subsidiaries, jointly controlled entities and associates, deferred tax assets
• are recognized only to the extent that it is probable that the temporary
differences will reverse in the foreseeable future and taxable profit will be
available against which the temporary differences can be utilized.
37
5. Measurement Deferred
Deferredtax
assets
assetsor
tax
or =
Temporary
Temporary
differences
differences
x Tax
Taxrates
rates
liabilities
liabilities
a. Tax Rate
• Deferred tax assets and liabilities shall be measured at
the tax rates that
– are expected to apply to the period when the asset is
realised or the liability is settled,
– based on tax rates (and tax laws) that have been enacted or
substantively enacted by the end of the reporting period.
(HKAS 12.47)
• The measurement of deferred tax liabilities and deferred

tax assets
– shall reflect 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. (HKAS 12.51)
• Deferred tax assets and liabilities shall not be discounted.
(HKAS 12.53)
Deferredtax
assets
assetsor
tax
or =
Temporary
Temporary
differences
differences
x Tax
Taxrates
rates
liabilities
liabilities Example
Changes in the applicable tax rate

An entity has an asset with
• a carrying amount of $100
• a tax base of $60
Tax rate – 20% for the asset were sold
– 30% for other income
Answers
Temporary difference: $40 ($100 - $60)
a) If it expects to sell the asset without further use
Deferred tax liability: $8 ($40 at 20%)
b) if it expects to retain the asset and recover its carrying amount
through use
Deferred tax liability: $12 ($40 at 30%)
38
Deferredtax
assets
assetsor
tax
or =
Temporary
Temporary
differences
differences
x Tax
Taxrates
rates
liabilities
liabilities Example
Deferred tax implications

• The current tax rate for ABC is 30% and for companies listed on any
stock exchange is 35%.
• ABC plans to list its shares on the Stock Exchange of Hong Kong.
Answers
ABC is planning to list its shares on a stock exchange and it may in future
be subject to the tax rate for listed companies.
Deferred tax shall be measured at the tax rates expected to apply when
the asset is realised or the liability is settled, based on enacted or
substantively enacted tax rates and laws.
Some temporary differences may reverse at the higher tax rate and
deferred tax shall be provided at this rate, i.e. 35%.
Deferredtax
assets
assetsor
tax
or =
Temporary
Temporary
differences
differences
x Tax
Taxrates
rates
liabilities
liabilities
b. Deferred tax assets

• The carrying amount of a deferred tax asset shall be reviewed at the end
of each reporting period
• An entity shall reduce the carrying amount of a deferred tax asset to the
extent that it is no longer probable that sufficient taxable profit will be
available to allow the benefit of part or all of that deferred tax asset to be
utilised
• Any such reduction shall be reversed to the extent that it becomes
probable that sufficient taxable profit will be available. (HKAS 12.56)
39
Deferredtax
assets
assetsor
tax
or
liabilities
liabilities
Dr ???
Cr Deferred tax liabilities
Dr Deferred tax assets

Cr ???
• Current and deferred tax shall be recognised as income or an

expense and included in the profit or loss for the period
Dr Tax expenses

Cr Tax income That simple?
Today’s Agenda

A. Current Taxes
B. Deferred Taxes
2. Tax base
5. Measurement
7. Presentation
8. Disclosure
40
Dr Tax expenses,
expenses or OCI/Equity,
OCI/Equity or Goodwill

Cr Tax income,
income or OCI/Equity,
OCI/Equity or Goodwill
• Current and deferred tax shall be recognised as income or an

expense and included in the profit or loss for the period
except to the extent that the tax arises from:
a) a transaction or event which is recognised, in the same or a
different period, outside profit or loss, either
• in other comprehensive income, or
• directly in equity; or
b) a business combination. (HKAS 12.58)
6. Recognition – To OCI/Equity
Dr Tax expenses and OCI/Equity
• Current tax and deferred tax shall be recognised
outside profit or loss
− if the tax relates to items that are recognised,
in the same or a different period, outside
profit or loss.
• Therefore, current tax and deferred tax that
relates to items that are recognised, in the same
or a different period:
a. in other comprehensive income, shall be Other Comprehensive
recognised in other comprehensive income Income
(see HKAS 12.62).
b. directly in equity, shall be recognised directly
Equity
in equity (see HKAS 12.62A). (HKAS 12.61A)
41
Example
Extract of trial balance at year end $’000

Deferred tax liabilities (Note) 5,200
Note: Deferred tax liability is to be increased to $7.4 million, of which $1
million is related to the revaluation gain of a property
Answers
$’000 $’000
Dr Deferred tax expense ($7.4 - $5.2 - $1) 1,200
Other Comprehensive
Other comprehensive income 1,000 Income
Cr Deferred tax liabilities ($7.4 – $5.2) 2,200
Example
Certain HKASs and HKASs require or permit certain items to be

recognised in other comprehensive income, examples include:
1. A change in carrying amount arising from the revaluation of property, plant and
equipment (see HKAS 16);
2. Exchange differences arising on the translation of the financial statements of a
foreign operation (see HKAS 21)
Certain HKASs and HKASs require or permit certain items to be credited
or charged directly to equity, examples include:
1. An adjustment to the opening balance of retained earnings for a change in
accounting policy or error correction (see HKAS 8); and
2. Amounts arising on initial recognition of the equity component of a compound
financial instrument.
42
Case
2010 Annual Report

• Movements in deferred tax provision are recognised in
profit or loss
– with the exception of deferred tax related to
transactions recognised in other comprehensive
income (such as fair value re-measurement of
available-for-sale financial assets)
6. Recognition – From Business Comb.

Dr Tax expenses or Goodwill
Cr Tax income or Goodwill
• Temporary differences may arise in a business combination.

– In accordance with HKFRS 3, an entity recognises any resulting deferred tax
assets (to the extent they meet the recognition criteria) or deferred tax
liabilities are recognised as identifiable assets and liabilities at the date of
acquisition
– Consequently, those deferred tax assets and deferred tax liabilities affect
goodwill or the bargain purchase gain the entity recognises.
• However, in accordance with HKAS 12.15(a), an entity does not
recognise deferred tax liabilities arising from the initial recognition of
goodwill. (HKAS 12.66)
43
Example
• For example, the acquirer may be able to utilise the benefit of its unused
tax losses against the future taxable profit of the acquiree.
• In such cases, the acquirer
− recognises a change in the deferred tax asset in the period of
business combination,
− but does not include it as part of the accounting for business
combination.
− Therefore, the acquirer does not take it into account in measuring
the goodwill or the bargain purchase gain it recognises in the
business combination. (HKAS 12.67)

Example
Example
Fair BV at Tax
value subsidiary base
Net assets acquired $1,200 $1,000 $1,000
Subsidiary’s used tax losses $1,000
Tax rate 20%
 Taxable temporary difference $200
Deductible temporary difference $1,000
Deferred tax assets may be recognised as one of the identifiable assets
in the acquisition (subject to limitations).
44
• An entity shall recognise acquired deferred tax benefits that it realises

after the business combination as follows:
a. Acquired deferred tax benefits recognised within the measurement period
that result from new information about facts and circumstances that existed
at the acquisition date
• shall be applied to reduce the carrying amount of any goodwill related to
that acquisition.
If the carrying amount of that goodwill is zero, any remaining deferred tax
benefits shall be recognised in profit or loss.
b. All other acquired deferred tax benefits realised
• shall be recognised in profit or loss (or, if HKAS 12 so requires, outside
profit or loss). (HKAS 12.68)
Today’s Agenda

A. Current Taxes
B. Deferred Taxes
2. Tax base
5. Measurement
7. Presentation
8. Disclosure
45
7. Presentation
7. Presentation
a. Offset
• An entity shall offset deferred tax assets and deferred tax liabilities if,
and only if:
a) the entity has a legally enforceable right to set off current tax
assets against current tax liabilities; and
b) the deferred tax assets and the deferred tax liabilities relate to
income taxes levied by the same taxation authority on either:
i) the same taxable entity; or
ii) 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 (HKAS
12.74)
7. Presentation
7. Presentation
b. Tax expenses and income

• The tax expense and income related to profit or
loss from ordinary activities
− shall be presented in the statement of
comprehensive income (HKAS 12.77)
• If an entity presents the components of profit or
loss in a separate income statement as
described in HKAS 1.81 Presentation of
Financial Statements (as revised in 2007),
• it presents the tax expense (income) related
to profit or loss from ordinary activities in
that separate statement. (HKAS 12.77A)
46
Today’s Agenda

A. Current Taxes
B. Deferred Taxes
2. Tax base
5. Measurement
7. Presentation
8. Disclosure
8. Disclosure
• The major components of tax expense (income) shall be disclosed
separately (HKAS 12.79)
• Certain components of tax expense (income) (HKAS 12.80)
• The aggregate current and deferred tax relating to items that are
charged or credited directly to equity (see HKAS 12.62A) (HKAS 12.81a)
• The amount of income tax relating to each component of other
comprehensive income (see HKAS 12.62 and HKAS 1) (HKAS 12.81ab)
47
8. Disclosure
• An explanation of the relationship between tax expense (income) and
accounting profit in either or both of the following forms:
1. a numerical reconciliation between
• tax expense (income) and
• the product of accounting profit multiplied by the applicable tax rate(s),
disclosing also the basis on which the applicable tax rate(s) is (are)
computed; or
2. a numerical reconciliation between
• the average effective tax rate and
• the applicable tax rate,
disclosing also the basis on which the
applicable tax rate is computed. (HKAS 12.81c)
8. Disclosure
Example
Example note on tax reconciliation (no comparatives)

HK$’000 %
Profit before tax 3,500
Tax on profit before tax, calculated at applicable tax rate 613 17.5
Tax effect of non-deductible expenses 50 1.4
Tax effect of non-taxable revenue (215) (6.1)
Tax effect of unused tax losses not recognised 102 2.9
Effect on opening deferred tax balances resulting from
an increase in tax rate during the year 200 5.7
Over provision in prior years (150) (4.3)
Tax expenses and effective tax rate 600 17.1
48
8. Disclosure
Example
• An explanation of changes in the applicable tax rate(s) compared to the

previous period (HKAS 12.81d)
Example note on changes in the applicable tax rate

• In June 2008, the Hong Kong Legislative Council
approved a decrease in profits tax rate
applicable to the company’s operations in Hong
Kong from 17.5% to 16.5%.
• The decrease is taken into account in the
preparation of the company’s financial
statements for the year ended 31 December
2008. Accordingly, the provision for Hong Kong
profits tax for 2008 is calculated at 16.5%
(2007:17.5%) of the estimated assessable profits
for the year.
8. Disclosure
• The amount (and expiry date, if any) of deductible temporary
differences, unused tax losses, and unused tax credits for which no
deferred tax asset is recognised (HKAS 12.81e)
• The aggregate amount of temporary differences associated with
investments in subsidiaries, branches and associates and interests in
joint ventures, for which deferred tax liabilities have not been recognised
(HKAS 12.81d)
49
8. Disclosure
Example
• In respect of each type of temporary difference, and in respect of each

type of unused tax losses and unused tax credits:
i. the amount of the deferred tax assets and liabilities recognised in
the statement of financial position for each period presented;
ii. the amount of the deferred tax income or expense recognised in
profit or loss, if this is not apparent from the changes in the amounts
recognised in the statement of financial position (HKAS 12.81g)
Example note Depreciation
allowances in
Deferred tax excess of related Revaluation
arising from: depreciation of properties Total
HK$’000 HK$’000 HK$’000
At 1 January 2003 800 300 1,100
Charged to income statement (120) - (120)
Charged to reserves - 2,100 2,100
At 31 December 2003 680 2,400 3,080
Today’s Agenda
I. Introduction
A. Current Taxes
B. Deferred Taxes
III. Amendments of HKAS 12 Deferred Tax:
Recovery of Underlying Assets
50
Recovery of Underlying Asset
(Amendments to HKAS 12 Income Tax)
Introduction
• HKAS 12 Income Taxes requires an entity to
measure the deferred tax relating to an asset
depending on whether the entity expects to
recover the carrying amount of the asset through
– use or sale.
• It can be difficult and subjective to assess
whether recovery will be through use or through
sale
– when the asset is measured using the fair No such exemption
value model in HKAS 40 Investment Property. for PPE using
revaluation model
• The amendment provides a practical solution to under HKAS 16
the problem
– by introducing a presumption that recovery of
the carrying amount will, normally be, be
through sale.
51
Recovery of Underlying Asset
• If a deferred tax liability or asset arises from investment property
that is measured using the fair value model in HKAS 40,
– there is a rebuttable presumption that the carrying amount of the
investment property will be recovered through sale.
• Accordingly, unless the presumption is rebutted,
– the measurement of the deferred tax liability or deferred tax asset
shall reflect the tax consequences of recovering i.e. no deferred tax is
the carrying amount of the investment required when tax on sale
property entirely through sale. (HKAS 12.51C) is zero!
• This presumption is rebutted if the investment property

– is depreciable and
– is held within a business model whose objective is to
consume substantially all of the economic benefits embodied
in the investment property over time, rather than through sale.
• If the presumption is rebutted, the requirements of HKAS
12. 51 and 51A shall be followed.
Effective Date and Transition

• An entity shall apply the amendments for annual
periods beginning on or after 1 January 2012.
• Earlier application is permitted.
• If an entity applies the amendments for an earlier
period, it shall disclose that fact.
52
Amendments to HKAS 12
Case
Financial Statements 2010

• Note 2 states “Amendments to HKAS 12 Income Taxes” as follows:
– Amendments to HKAS 12 titled “Deferred Tax: Recovery of Underlying
Assets” have been applied in advance of their effective date (annual periods
beginning on or after 1 January 2012).
• Under the amendments, investment properties that are measured using
the fair value model in accordance with HKAS 40 “Investment Property”
are presumed to be recovered through sale, unless the presumption is
rebutted in certain circumstances.
Amendments to HKAS 12
Case
Financial Statements 2010

• Note 2 states “Amendments to HKAS 12 Income Taxes” as follows:
– As a result, the Group’s investment properties that are measured using the
fair value model have been presumed to be recovered through sale for the
purpose of measuring deferred tax liabilities and deferred tax assets in
respect of such properties.
• This resulted in deferred tax liabilities being decreased by HK$3,409
million and HK$3,616 million as at 1 January 2009 and 31 December
2009 respectively, with the corresponding adjustment being recognised in
retained profits.
– In the current year, no deferred tax has been provided for in respect of
changes in fair value of such investment properties, whereas previously
deferred tax liabilities were provided for in relation to the changes in fair value
of such investment properties.
• The application of the amendments has resulted in profit for the year
being increased by HK$426 million.
53
Full set of slides in PDF can be found in

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nelson@nelsoncpa.com.hk
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Full set of slides in PDF can be found in

Q&A Session

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www.Facebook.com/NelsonCPA
54

Income Taxes - Recap and Update: (HKAS 12) 31 August 2011

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Income Taxes - Recap and Update: (HKAS 12) 31 August 2011

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Income Taxes – Recap and Update

(HKAS 12) 31 August 2011

Lam Chi Yuen, Nelson 林智遠

© 2005-11 Nelson Consulting Limited 2

© 2005-11 Nelson Consulting Limited 3

© 2005-11 Nelson Consulting Limited 4

Deferred Deferred Current Current

Tax expense (tax income)

II. HKAS 12 – Income Taxes

© 2005-11 Nelson Consulting Limited 6

© 2005-11 Nelson Consulting Limited 7

Taxable profit (tax loss)

© 2005-11 Nelson Consulting Limited 8

Current Tax Assets

A. Current Tax – Measurement

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A. Current Tax – Presentation

© 2005-11 Nelson Consulting Limited 12

BP plc – 2010 Annual Report

II. HKAS 12 – Income Taxes

© 2005-11 Nelson Consulting Limited 14

© 2005-11 Nelson Consulting Limited 15

1. Overview of Deferred Taxes

HKAS 12 Income taxes adopts

© 2005-11 Nelson Consulting Limited 16

HKAS 12 Income taxes adopts

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1. Overview of Deferred Taxes

Vodafone Group plc – 2011 Annual

© 2005-11 Nelson Consulting Limited 18

• HKAS 12 with reference to AASB 1020

© 2005-11 Nelson Consulting Limited 19

Liabilities for revenue received in advance

© 2005-11 Nelson Consulting Limited 20

© 2005-11 Nelson Consulting Limited 21

• Trade receivables has a carrying amount of Tax base = $1,000

Tax base is the original

© 2005-11 Nelson Consulting Limited 23

© 2005-11 Nelson Consulting Limited 24

© 2005-11 Nelson Consulting Limited 25

© 2005-11 Nelson Consulting Limited 26

© 2005-11 Nelson Consulting Limited 27

Deferred tax liabilities are Taxable

• The difference between

© 2005-11 Nelson Consulting Limited 30

© 2005-11 Nelson Consulting Limited 32

© 2005-11 Nelson Consulting Limited 33

• Bowtock purchased an item of plant for $2,000,000 on 1 Oct. 2010.

© 2005-11 Nelson Consulting Limited 34

On 1 Oct. 2010, Bowtock purchased a plant: Depreciable

© 2005-11 Nelson Consulting Limited 35

© 2005-11 Nelson Consulting Limited 36

© 2005-11 Nelson Consulting Limited 37

© 2005-11 Nelson Consulting Limited 38

© 2005-11 Nelson Consulting Limited 39

Examples of circumstances resulting in taxable temporary differences:

© 2005-11 Nelson Consulting Limited 41

Examples of circumstances resulting in deductible temporary differences:

II. HKAS 12 – Income Taxes

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© 2005-11 Nelson Consulting Limited 44

4. Recognition of D.T. Assets / Liabilities