IAS 12 Income Taxes

By. Vicky Xu
Current tax
Current tax

Dr Income tax expenses

Cr Current tax liability

• Recognise liability for unsettled portion of tax expense

• The balance on current tax, if any, represents the under/over
provision of the tax liability for the year
• Tax loss which can be used against future taxable income can be
recognised as an asset (deferred tax asset)
Current tax
Deferred tax
Definition

Accounting Basis Taxation Basis

企业角度 税务局角度
利润表
税前收入 Profit before tax Taxable income
税 Notional tax charge Actual tax charge
资产负债表
账面价值 Carrying value Tax base

Permanent difference (永久性差异) +

Temporary difference (暂时性差异)
Definition

Tax base
The tax base of an asset or liability is the amount attributed to that
asset or liability for tax purposes.

Temporary differences
Differences between the carrying amount of an asset or liability in
the statement of financial position and its tax bases.
Definition

Taxable temporary differences (requiring a deferred tax

liability) will result in taxable amounts in future when the carrying
amount of an asset is recovered or liability is settled.

Deductible temporary differences (requiring a deferred tax

asset) will result in deductible amounts in future when the carrying
amount of an asset is recovered or a liability is settled.
Tax base of an asset

• Is the amount that will be deductible for tax purposes against

any taxable economic benefits that will flow to the 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.
Tax base of an asset
Tax base of an asset
Tax base of a liability

• Is its carrying amount, less any amount that will be deductible

for tax purposes in respect of the liability in future periods.

负债的计税基础 =
账面价值 - 未来期间按照税法规定可予税前扣除的金额
Tax base of income received in advance

• Is its carrying amount, less any revenue that will not be taxable
in the future.
PPE Revaluation upwards

This changes the carrying amount of the asset but the tax base of the
asset is not adjusted. The differences between the carrying amount
of a revalued asset and its tax base is a temporary difference and
gives rise to a deferred tax liability.

Revaluations will appear under ‘other comprehensive income’ in the

statement of profit or loss and other comprehensive income and the
tax element will be shown separately as ‘income tax relating to
components of other comprehensive income’.
PPE Impairment

If the loss is not tax deductible until later (e.g. until the asset is sold)
a deductible temporary difference arises. Tax base of the asset does
not change and so a deferred tax asset arises based on the loss
multiplied by the tax rate.
 Capitalised research and development cost

Development costs are capitalised under IAS 38 when conditions

are met, but are often tax deductible in the period incurred.

In such cases, the temporary difference is the full carrying amount

of the development expenditure since the tax base is nil (the costs
have already been deducted from taxable profits), generating a
deferred tax liability when multiplied by the tax rate.
Investment property (FV model)

Gain or loss on investment properties held at fair value are

recognised in profit or loss.

If the gain is not taxable until sale, a taxable temporary difference

arises generating a deferred tax liability. Similarly, losses tax
deductible on sale generate a deferred tax asset.
Financial assets

Gain or loss on financial assets held at fair value are either

recognised in profit or loss or in other comprehensive income.

If the gain is not taxable until sale, a taxable temporary difference

arises generating a deferred tax liability. Similarly, losses tax
deductible on sale generate a deferred tax asset.

The deferred tax is recognised in the same section of the statement

of profit or loss and other comprehensive income as the gain/loss.
Unused tax losses and unused tax credits

A deferred tax asset is recognised for an unused tax loss

carryforward or unused tax credit if, and only if, it is considered
probable that there will be sufficient future taxable profit against
which the loss or credit carryforward can be utilised.

The carrying amount of deferred tax assets should be reviewed at

the end of each reporting period and reduced 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.
Unused tax losses and unused tax credits Tax
planning
opportunities
The existence of unused tax losses is strong evidence that future
Sufficient suitable
taxable profit may not be available. taxable profit
available?
Suitable taxable temporary
Deferred tax assets arising from unused tax losses or tax credits difference available? e.g.
are recognised only to the extent that: right timing, right character

• the entity has sufficient taxable temporary differences, or

• there is convincing other evidence that sufficient taxable
profit will be available against which the unused tax losses
or unused tax credits can be utilised by the entity.
2010/6 Q2a Cate (31/5/2010)

Cate is an entity in the software industry. Cate had incurred

substantial losses in the financial years 31 May 2004 to 31 May
2009. In the financial year to 31 May 2010 Cate made a small profit
before tax. This included significant non-operating gains. In 2009,
Cate recognized a material deferred tax asset in respect of carried
forward losses, which will expire during 2012.
2010/6 Q2a Cate (31/5/2010)

Cate again recognized the deferred tax asset in 2010 on the basis of
anticipated performance in the years from 2010 to 2012, based on
budgets prepared in 2010. The budgets included high growth rates
in profitability. Cate argued that the budgets were realistic as there
were positive indications from customers about future orders. Cate
also had plans to expand sales to new markets and to sell new
products whose development would be completed soon. Cate was
taking measures to increase sales, implementing new programs to
improve both productivity and profitability.
2010/6 Q2a Cate (31/5/2010)

Deferred tax assets less deferred tax liabilities represent 25% of

shareholders’ equity at 31 May 2010. There are no tax planning
opportunities available to Cate that would create taxable profit in
the near future. (5 marks)
2010/6 Q2a Cate (31/5/2010)
Suggested answer:
DTA should be recognised for unused tax losses and unused tax credits
to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences can be utilised.

As for Cate, the improved performance in 2010 would not be indicative

of future good performance as:
1) Cate generated non-operating gains
2) Cate’s anticipation of improved future trading is not a strong evidence
due to risk and uncertainties attached to future orders, new market and
new products.
2010/6 Q2a Cate (31/5/2010)
3) Additionally, there are no tax planning opportunities available to Cate
that would create taxable profit in the period in which the unused tax
losses could be offset.

In summary, Cate is not able to provide convincing evidence that

sufficient taxable profit will be generated. As such, no DTA can be
recognised.
2015/12 Q2c Chemclean (30/6/2015)

In the consolidated financial statements for 2015, Chemclean

recognised a net deferred tax asset of $16 million, which
represented 18% of its total equity. This asset was made up of $3
million taxable temporary differences and $19 million relating to
the carry-forward of unused tax losses. The local tax regulation
allows unused tax losses to be carried forward indefinitely.
Chemclean expects that within five years, future taxable profits
before tax would be available against which the unused tax losses
could be offset.
2015/12 Q2c Chemclean (30/6/2015)

This view was based on the budgets for the years 2015-2020. The
budgets were primarily based on general assumptions about the
development of key products and economic improvement indicators.
Additionally, the entity expected a substantial reduction in the
future impairment of trade receivables and property which the entity
had recently suffered and this would result in a substantial increase
in future taxable profit.
2015/12 Q2c Chemclean (30/6/2015)

Chemclean had recognised material losses during the previous five

years, with an average annual loss of $19 million. A comparison of
Chemclean’s budgeted results for the previous two years to its actual
results indicated material differences relating principally to impairment
losses. In the interim financial statements for the first half of the year to
30 June 2015, Chemclean recognised impairment losses equal to
budgeted impairment losses for the whole year. In its financial
statements for the year ended 30 June 2015, Chemclean disclosed a
material uncertainty about its ability to continue as a going concern.
The current tax rate in the jurisdiction is 30%. (9 marks)
2015/12 Q2c Chemclean (30/6/2015)
Suggested answer:
DTA shall be recognised for the unused tax losses to the extent that it is
probable that future taxable profit will be available against which unused
tax losses can be utilised. IAS 12 explains that the existence of unused
tax losses is strong evidence that future taxable profit may not be
available. Therefore, when an entity has a history of recent losses, the
entity recognises a deferred tax asset arising from unused tax losses only
to the extent that the entity has sufficient taxable temporary differences
or when there is convincing other evidence that sufficient taxable profit
will be available against which the unused tax losses can be utilised by
the entity.
2015/12 Q2c Chemclean (30/6/2015)

In order to use the deferred tax asset of $16 million, Chemclean

would have to recognise a profit of $53·3 million at the tax rate of
30%. In comparison, the entity recognised an average loss of $19
million per year during the five previous years. There should be
convincing evidence showing that there would be taxable profits
available in the future in order to recognise a deferred tax asset.
2015/12 Q2c Chemclean (30/6/2015)

A comparison of the budgeted results to its actual results for the

previous two years indicated material differences relating to
impairment losses. In the interim financial statements for the first
half of the financial year to 30 June 2015, Chemclean recognised
impairment losses equal to budgeted impairment losses for the
whole year. The unused tax losses appear to result from identifiable
causes, which are likely to recur.
2015/12 Q2c Chemclean (30/6/2015)

Chemclean had presented future budgets based on general

assumptions about the development of key products and economic
improvement, rather than what was expected to influence the future
income and therefore enable the use of the deferred tax asset.

Finally, Chemclean disclosed a material uncertainty of going

concern in its FS. In is highly unlikely that there would be taxable
profits available in the future in order to recognise a deferred tax
asset.
2015/12 Q2c Chemclean (30/6/2015)

The liability of $3 million relating to temporary differences can be

offset against $3 million of unused tax losses. No further tax losses
should be recognised.
Tax reconciliation
Statement of profit or loss
Revenue 1,000
Cost of sales (600)
Gross profit 400
Entertainment expense (10)
Calculated by taxable profit for
Depreciation expense (20) current year
Other expenses (250) Current tax
Profit before tax 120 Adjustment for over/under
Income tax expense@30% (39) provision from prior year
Profit for the year 81
Deferred tax - Caused by temporary differences

Company cost $100,000 to purchase a PPE which could be used for 5 years. PPE
depreciation is $20,000 for the year, however, the allowance is $25,000 for tax
purpose.
Entertainment expense is not deductible under the jurisdiction which the company
operates.
 Tax reconciliation
A/g profit multiplied by tax rate 36
Entertainment Expense(10*30%) 3
Tax allowance for PPE(5*30%)-CT (1.5)
Tax allowance for PPE(5*30%)-DT 1.5
Income tax expense 39

Account profit 120 Carrying amount of PPE 80

Add back depreciation 20 Tax base of PPE 75
Less capital allowance (25) Temporary tax difference 5
Add back entertainment exps 10 Deferred tax@30% 1.5
Taxable profit 125
Current tax@30% 37.5
2018/12 Q4a Holls Group (30/11/2017)

Holls Group is preparing its financial statements for the year ended
30 November 20X7. The directors of Holls have been asked by an
investor to explain the accounting for taxation in the financial
statements.

The Group operates in several tax jurisdictions and is subject to

annual tax audits which can result in amendments to the amount of
tax to be paid.
2018/12 Q4a Holls Group (30/11/2017)

The profit from continuing operations was $300 million in the year
to 30 November 20X7 and the reported tax charge was $87 million.
The investor was confused as to why the tax charge was not the tax
rate multiplied by the profit from continuing operations. The
directors have prepared a reconciliation of the notional tax charge
on profits as compared with the actual tax charge for the period.
2018/12 Q4a Holls Group (30/11/2017)
2018/12 Q4a Holls Group (30/11/2017)
Suggested answer:
[解释两者的不同] Current tax is based on taxable profit for the year.
Taxable profit is different from accounting profit due to temporary
differences between accounting and tax treatments, and due to items
which are never taxable or tax deductible.

Most companies will reconcile the group’s annual tax expense to the
statutory rate in the country in which the parent is based. Hence the rate
of 22% is used in the tax reconciliation. It is important that the
reconciliation explains the reasons for the differences between the
effective rate and the statutory rate.
2018/12 Q4a Holls Group (30/11/2017)
[ 海 外 子 公 司 与 母 公 司 税 率 不 同 ] As the Group is operating in
multiple countries, the actual tax rates applicable to profits in those
countries are different from the local tax rate. The overseas tax rates are
higher than local rates, hence the increase in the taxation charge of $10m.

[偶发事件] One-off and unusual items can have a significant effect on

the effective tax rate, but financial statements and notes often do not
include a detailed discussion of them. For example, the brand
impairment and disposals of businesses should be explained to investors,
as they are probably material items. The explanation should include any
potential reversal of the treatment.
2018/12 Q4a Holls Group (30/11/2017)
[无需缴税的收入/不可抵扣的费用等] Some profits recognised in the
financial statements are non-taxable such as the tax relating to non-
taxable gains on disposals of businesses and in some jurisdictions,
taxation relief on impairment losses will not be allowable for taxation.
The reasons for these items not being allowed for taxation should be
explained to investors.

[少用“其它”] There should be minimal use of the ‘other’ category.

In this case, the other category is quite significant ($14 million) and
there is no explanation of what ‘other’ constitutes.
Thank You
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