IAS 12 - Deferred Tax...IAS 12 - Income taxes July 2019 Slide 29 • Transition from an ‘off balance sheet’ to ‘on balance sheet’ position may have deferred tax implications,

Data Classification Policy: Restricted use (DC2)

Deferred Tax

July 2019

Introduction

Deferred Tax July 20193

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Introduction

• Accounting for tax expense can provide a number of challenges to the accountancy profession

• The following areas will be addressed in the seminar:⮚basic understanding of both current and deferred tax⮚recognition and measurement of current tax⮚recognition and measurement of deferred tax⮚presentation and disclosure

IAS 12 - Income taxes July 2019Slide 4

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Current tax

Deferred tax+

Tax expense=

Accounting for tax under IFRS and GAPSME


The following standards, or sections, address accounting for an entity’s tax expense:• IFRS:IAS 12• GAPSME: Section 16Both frameworks apply the same conceptual approach to the recognition and measurement of tax balances• Components of tax expense

include deferred tax under both frameworks

Understanding current and deferred tax


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Accounting profit and taxable profit


• Accounting profit - the profit or loss for a period before deducting tax expense• Taxable profit (tax loss) - the profit (loss) for a period, determined in accordance

with the rules established by the taxation authorities, upon which income taxes are payable (recoverable)

Financial statements Tax accounts 400 Gross profit 400

Costs:

(200) - salaries and wages (200)

(100) - general overheads (100)

(20) - donations -

80 Accounting profit / Taxable profit 100

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Current tax

• Current tax - the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period


€

Taxable profit 100

Current tax charge at 35% 35

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Deferred tax


In simple terms:• current tax is the amount of income tax currently due to the tax authorities in respect

of current year’s results• deferred tax is a method of accounting for tax on an accruals basis,

In other words…Deferred tax expense (income) is the amount of tax expense (income) included in the determination of profit or loss for the period in respect of changes in deferred tax assets and deferred tax liabilities during the period.

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Tax expense


Tax expense (tax income) - the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax

€

Tax expense:

- current tax expense 35

- deferred tax expense 7

42

Recognition and measurement of current tax


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Current tax


Current tax expense• Current tax is the amount of tax payable or recoverable in respect of the taxable profit or tax

loss for the current periodCurrent tax assets and liabilities• If the amount already paid to the tax authorities (eg. through provisional tax payments)

exceeds the amounts due for those periods, the excess should be recognised as an asset• Unpaid taxes for current and prior periods should be recognised as a liability and charged to

profit or loss (or equity) as an expense

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Provisional tax payments


Provisional tax payments are a series of advance tax payments in anticipation of the current tax charge for the period• if provisional tax payments exceed the current tax charge for the year, then the

excess will be recognised as an asset in the statement of financial position–a liability will be recognised if the current tax charge for the year exceeds the

provisional tax payments made

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Provisional tax paymentsExample


Provisional tax payments were effected as follows:• April: €200• August: €300• December: €500Current tax charge for the year is assessed at €850• in this example, the company has paid €150 more than the current tax charge for the

year, and as a result will recognise a current tax asset of €150

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Provisional tax paymentsExample: accounting entries


As long as the accounting entries are recorded properly, it makes no difference whether the provisional tax payments are initially recorded in the statement of financial position or in profit of lossTaking the above figures from the example, the accounting entries could be entered as follows:• Recording tax payments in the statement of financial position:

–Dr Current tax asset €1,000– Cr Cash €1,000–Dr Current tax charge €850– Cr Current tax asset €850

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Provisional tax paymentsExample: accounting entries - continued


Recording tax payments in profit or loss:• Dr Current tax charge €1,000• Cr Cash €1,000• Dr Current tax asset €150• Cr Current tax charge €150

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Differences between accounting profit and taxable profit


Differences between accounting profit and taxable profit may give rise to deferred tax implicationsSome common situations giving rise to differences are considered below:

AreaAccounting treatment Tax treatment

Deferred tax implications?

Depreciation of PPE

Depreciated to residual value, over useful life, using a systematic basis

Generally depreciated over pre-defined life using straight-line basis

✓/🗴🗴

Leases of motor vehicles

Recognised as an expense

Expense is capped if the motor vehicle is non-commercial

🗴🗴

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Differences between accounting profit and taxable profit - continued




Provisions for impairment of receivables

Movements recognised in profit or loss

Only deductible for tax purposes if loss is crystallised as unrecoverable

✓

Fair value movements on financial assets at FV through profit or loss

Movements recognised in profit or loss

Unless trading, only chargeable (or deductible) if realised upon a disposal, and may also be exempt

✓/🗴🗴

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Differences between accounting profit and taxable profit - continued




Fair valuation of investment property

Recognised in profit or loss (under IFRS), or reserve (under GAPSME)

Only chargeable to tax upon a disposal

✓

Donations Recognised as an expense

Disallowed for tax purposes 🗴🗴

Rental income from property

Income, and expenses incurred to generate the income, recognised in profit or loss

A maintenance allowance at 20% of rental income is deductible for tax purposes/ 15% FWT

🗴🗴

Recognition and measurement of deferred tax


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Deferred tax assets and liabilities


• Deferred tax liabilities - the amounts of income taxes payable in future periods in respect of taxable temporary differences

⮚eg. entity recognises an unrealised gain of 20 on fair valuation of a financial investment, with the gain only becoming taxable upon an eventual disposal of the investment

• Deferred tax assets - the amounts of income taxes recoverable in future periods in respect of:

⮚ deductible temporary differences,⮚ the carryforward of unused tax losses, and⮚ the carryforward of unused tax credits

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Temporary differences


• Temporary differences - differences between the carrying amount of an asset or liability in the statement of financial position and its tax base, i.e. its value for tax accounting purposes. Temporary differences may be either:

⮚taxable temporary difference, or⮚deductible temporary difference

• For example, for an item of PPE:

Carrying amount Tax base

100 Cost 100

(20) Accumulated depreciation (25)

80 Carrying amount / Tax base 75

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Tax base of an asset


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 assetIf those economic benefits are not taxable, the tax base of the asset is equal to its carrying amountIf no amount can be deductible for tax purposes, the tax base of the asset is zero



Carrying amount

Taxable amount arising from

recovery of the asset

Deductible amount arising from use of the

asset

+-=

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Tax base of a liability


• 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

Tax base of liability

Tax base of a liability

Carrying amount

Deductible amount arising from settlement

of liability

Taxable amount arising from settlement of

liability

+-=

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Tax bases of assets and liabilities“Short-cut” to work out the tax base • A “short-cut” is to ask the following

question:⮚Is the asset/liability treated

differently for tax than it is for accounting purposes?

• If there is no difference in treatment, then the tax base will equal the carrying amount


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Temporary differences


• Where an asset has a higher book value than its tax base, the temporary difference will be “taxable” because the entity will owe additional current tax (as a proportion of accounting profit) when it recovers the asset⮚where the tax base exceeds the carrying amount the temporary difference is

“deductible”• This works the other way round for liabilities in that a carrying amount higher than

the relevant tax base gives rise to a “deductible” temporary difference, and where the carrying amount is below the tax base a “taxable” temporary difference arises

• Deductible temporary differences result in deferred tax assets while taxable temporary differences give rise to deferred tax liabilities

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Accounting entries for deferred taxMovements in the statement of financial position


• Deferred tax assets or liabilities do not represent tax currently due or receivable from the tax authorities⮚it is merely an accruals basis of accounting for future tax consequences of

gains or losses already recognised in the accounting records• In accounting for deferred tax, the deferred tax balance in the statement of financial

position will be:⮚debited (if there is an increase in a deferred tax asset or a decrease in deferred

tax liability), or⮚credited (if there is a decrease in a deferred tax asset or an increase in

deferred tax liability)

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Accounting entries for deferred taxRecognition of the charge or credit for the period


IAS 12 and Section 16 of GAPSME require an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events that gave rise to the tax consequence

Recognition of transaction giving rise to deferred tax Recognition of deferred taxProfit or loss Profit or loss

Directly in equity Directly in equity

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Temporary differencesTax base considerations – right-of-use asset and lease liability


• Transition from an ‘off balance sheet’ to ‘on balance sheet’ position may have deferred tax implications, as per IFRS 16 (effective as from 1 January 2019)

• Right-of-use asset and lease liability – recognised from an accounting perspective upon commencement of lease

Potential deferred tax issues:• Once the asset and lease liability are capitalised, a temporary difference might occur

if the tax treatment (tax base) differs from accounting treatment•Potential current tax issues:

• If depreciation is not tax deductible; and• If there are interest deduction limitations (related to the finance costs)

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Examples of temporary differences with deferred tax implications


• Common examples of temporary differences with deferred tax implications include the following

Provision for

impairment of

receivablesUnutilised

group relief

Unutilised investment tax credits

(BPA)

Fair valuation of investment

property

Property, plant &

equipment

Unabsorbed capital

allowances / unutilised tax losses Fair

valuation of investments

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Examples of temporary differences with deferred tax implicationsProvision for impairment of receivables


Provision for impairment of receivables changes the carrying amount but not the tax base of the receivable• i.e. any movement in the provision is

eliminated when computing current tax

Provision for

impairment of


group relief


(BPA)


property

Property, plant &

equipment

Unabsorbed capital



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Examples of temporary differences with deferred tax implicationsProvision for impairment of receivables - continued


• Bad debts are deductible for current tax purposes when they are actually written off

• This creates a difference in accounting and taxable profits, thus giving rise to a temporary difference

Provision for

impairment of


group relief


(BPA)


property

Property, plant &

equipment

Unabsorbed capital



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Examples of temporary differences with deferred tax implications Provision for impairment of receivables: example


Year 1Company A made an accounting profit of €100,000The accounting profit of €100,000 is stated after the creation of a provision of €10,000 against impairment of an overdue receivableTaxable profit is €110,000• the movement in the provision is disallowed for tax accounting purposesIn the tax computation:• an increase in provision for impairment of receivables is always added back to

accounting profit in order to determine taxable profit• a decrease in provision is deducted from accounting profit

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Examples of temporary differences with deferred tax implications Provision for impairment of receivables: - continued


• Year 2• The overdue debtor has gone into liquidation, and Company X will only receive the

€1,000 of the amount owed to it• Company X therefore releases the provision (credit to profit or loss) of €10,000 that

it created in Year 1 and writes off the bad debt of €9,000 (debit to profit or loss)• Accounting profit in Year 2 is €80,000• Taxable profit is €70,000

⮚the movement in provision is not deductible⮚the bad debt write off is however deductible

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Financial statements Tax accounts Year 1

110,000 Profit before mvmt in provision 110,000(10,000) Mvmt in provision for impairment -100,000 Accounting profit / Taxable profit 110,000

Year 279,000 Profit before mvmt in provision 79,00010,000 Mvmt in provision for impairment -

(9,000) Impairment charge (9,000) 80,000 Accounting profit / Taxable profit 70,000

180,000Aggregate profit 180,000

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The current tax charge will be:

Sheet1

Year 1Year 2Total

€€€

Accounting profit100,00080,000180,000

Movement in provision for impairment10,000(10,000)-

Taxable profit110,00070,000180,000

Current tax charge @ 35%38,50024,50063,000

Current tax charge as a % of accounting profit38.5%30.6%35.0%

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• The provision gives rise to a deductible temporary difference, i.e. a deferred tax asset• The difference is temporary because the provision will be allowed for current tax

purposes at a later stage, i.e. when the loss materialises


Sheet1

Year 1Year 2Total

€€€


Deferred tax (credit)/charge @ 35%(3,500)3,500-

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Examples of temporary differences with deferred tax implicationsProvision for impairment of receivables: - continued


The effect of recognising deferred tax is as follows:

Sheet1

Year 1Year 2Total

€€€


Current tax charge38,50024,50063,000

Deferred tax (credit)/charge(3,500)3,500-

Tax expense35,00028,00063,000

Tax expense as a % of accounting profit35.0%35.0%35.0%

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Deferred tax case study

• In the case study we will consider a fictional company, Company X

• Company X made an accounting profit of €50,000 in each year under consideration


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Deferred tax case studyProvision for impairment of receivables


• Year 1• The accounting profit of €50,000 is stated after the creation of a provision of €1,000

against impairment of an overdue receivable• Year 2• Accounting profit is also €50,000. The overdue debtor has gone into liquidation,

and Company X will not receive the €1,000 owed to it

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Deferred tax case studyProvision for impairment of receivables - continued


• The current tax charge will be:

Sheet1

Year 1Year 2Total

€€€



Taxable profit51,00049,000100,000


Current tax charge as a % of accounting profit35.7%34.3%35.0%

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• The deferred tax charge will be:

Sheet1

Year 1Year 2Total

€€€


Deferred tax (credit)/charge @ 35%(350)350-

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• The effect of recognising deferred tax is as follows:

Sheet1

Year 1Year 2Total

€€€



Deferred tax (credit)/charge(350)350-

Tax expense17,50017,50035,000


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Examples of temporary differences with deferred tax implicationsProperty, plant & equipment


It is important to distinguish between temporary differences that:• give rise to deferred tax

assets/liabilities• do not give rise to deferred

tax assets/liabilities

Provision for

impairment of


group relief


(BPA)


property

Property, plant &

equipment

Unabsorbed capital



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Examples of temporary differences with deferred tax implicationsProperty, plant & equipment - continued


Temporary differences that give rise to deferred tax assets / liabilities:• Depreciation for tax purposes (called “capital allowances”) is calculated at specific

rates as determined by the CIR• These rates may be different from the accounting rates, thus giving rise to a

temporary difference• The difference is temporary because, over the course of the asset’s lifetime, the

aggregate accounting and aggregate tax depreciation charges will converge towards each other until both result in a fully depreciated asset

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• In calculating the current tax charge, the accounting depreciation is added back, and the capital allowances are taken as a charge against profits

• Deferred tax is provided for at 35% on the resultant temporary difference• Similarly, when an item of PPE is disposed:

⮚the accounting profit/loss on disposal is added back to accounting profit⮚tax profit/loss (“balancing charge/allowance”) is taken instead

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Temporary differences that do not give rise to deferred tax assets / liabilities:• Specific criteria must be met for PPE to be allowed by the CIR for tax (eg.

necessarily incurred in income-generation, etc.)• If the IRD recognition criteria is not met, then the depreciation for tax purposes is

NIL. In this case, the difference when compared to accounting depreciation will not reverse over time, and the accounting depreciation is added back to accounting profits with no further consequence

• In the case of non-commercial vehicles, €14,000 of the value is allowed by the IRD for depreciation purposes

Slide 47July 2019IAS 12 - Income taxes

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Examples of temporary differences with deferred tax implicationsProperty, plant & equipment: example 1


• Beginning of Year 1• Company B purchases laptop computers costing €6,000• Accounting depreciation rate is 33.3%• Rate of capital allowances is 25%• Years 1 - 4• Accounting depreciation is €2,000 p.a. with the asset being fully depreciated at the

end of Year 3• Capital allowances are €1,500 p.a. with the asset being fully depreciated at end of

Year 4• Company B made a an accounting profit before tax of €20,000 p.a.

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Examples of temporary differences with deferred tax implications Property, plant & equipment: example 1 - continued


Sheet1

AccountingTaxDiff

€€€

Year 1

Purchase of asset6,0006,000-

Depreciation charge at 33.3% / 25%(2,000)(1,500)(500)

Accounting NBV / tax WDV at end of year4,0004,500(500)

Year 2


Accounting NBV / tax WDV at end of year2,0003,000(1,000)

Year 3


Accounting NBV / tax WDV at end of year-1,500(1,500)

Year 4

Depreciation charge at 0% / 25%-(1,500)1,500

Accounting NBV / tax WDV at end of year---

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The current tax charge will be as follows:

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• The deferred tax (credit)/charge will be as follows:

Sheet1

Year 1Year 2Year 3Year 4Total

€€€€€

Accounting net book value4,0002,000--

Tax written down value4,5003,0001,500-

Temporary difference(500)(1,000)(1,500)-

Mvmt in temporary difference(500)(500)(500)1,500-

Def tax (credit)/charge @ 35%(175)(175)(175)525-

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The effect or recognising deferred tax is as follows:


Sheet1


€€€€€

Accounting profit20,00020,00020,00020,00080,000

Current tax charge7,1757,1757,1756,47528,000

Def tax (credit)/charge(175)(175)(175)525-

Tax expense7,0007,0007,0007,00028,000

Tax as a % of profit35.0%35.0%35.0%35.0%35.0%

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Property, plant & equipment: example 2


• Beginning of Year 1• Company C purchased a non-commercial motor vehicle at a cost of €28,000• Both the accounting depreciation rate and the rate of capital allowances are 20%• Tax base of the vehicle is initially €14,000• Years 1 - 4• Accounting depreciation is €5,600 p.a.• Capital allowances are €2,800 p.a.• The above difference does not give rise to deferred tax assets/liabilities• Company C made an accounting profit before tax of €60,000 p.a.

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Property, plant & equipment: example 2 -continued


Sheet1

AccountingTaxDifference

€€€

Year 1

Purchase of asset28,00014,00014,000

Depreciation charge at 20%(5,600)(2,800)(2,800)

NBV / WDV at end of year22,40011,20011,200

Year 2



Year 3



Year 4



Year 5


NBV / WDV at end of year---

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The above difference does not give rise to a deferred tax asset. Thus, the effective rate of 36.6% is the final effective tax rate

Sheet1

Year 1Year 2Year 3Year 4Year 5Total

€€€€€€

Accounting profit60,00060,00060,00060,00060,000300,000

Add back a/cing dep'n5,6005,6005,6005,6005,60028,000

Less capital allowances(2,800)(2,800)(2,800)(2,800)(2,800)(14,000)

Taxable profit62,80062,80062,80062,80062,800314,000

Current tax @ 35%21,98021,98021,98021,98021,980109,900

Current tax as % of profit36.6%36.6%36.6%36.6%36.6%36.6%

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Property, plant & equipment: example 3


• Beginning of Year 1• Company D purchased electronic equipment at a cost of €8,000• Accounting depreciation rate is 33.3%• Rate of capital allowances is 25%• Year 1• Accounting depreciation is €2,667• Capital allowances are €2,000• Year 2• Company D disposes of the asset at the beginning of the year for proceeds of

€5,000• Company D made an accounting profit before tax of €10,000 p.a.

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Sheet1

AccountingTaxDiff

€€€

Year 1



NBV / WDV at end of year5,3336,000(667)

Year 2

Proceeds5,0005,000-

Loss on disposal / Balancing allowance(333)(1,000)667

Total impact on results

Depreciation charge / Capital allowances(2,667)(2,000)(667)

Loss on disposal / Balancing allowance(333)(1,000)667

Aggregate impact on results(3,000)(3,000)-

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Property, plant & equipment: example 3 - continued



Sheet1

Year 1Year 2Total

€€€


Add back dep'n / loss on disposal2,6673333,000

Less capital allowances / bal allowance(2,000)(1,000)(3,000)

Taxable profit10,6679,33320,000


Current tax as a % of accounting profit37.3%32.7%35.0%

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The deferred tax (credit)/charge will be as follows:

Sheet1

Year 1Year 2Total

€€€

Accounting net book value5,333-

Tax written down value6,000-

Temporary difference(667)-

Movement in temporary difference(667)667-


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Sheet1

Year 1Year 2Total

€€€




Tax expense3,5003,5007,000


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Deferred tax case studyProperty, plant & equipment: scenario 1

• Beginning of Year 1• Company X purchases computer

hardware costing €12,000• Accounting depreciation rate is 33.3%• Rate of capital allowances is 25%


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Deferred tax case studyProperty, plant & equipment: scenario 1 - continued


Sheet1

AccountingTaxDiff

€€€

Year 1


Depreciation charge at 33.3% / 25%(4,000)(3,000)(1,000)


Year 2



Year 3


Accounting NBV / tax WDV at end of year-3,000(3,000)

Year 4

Depreciation charge at 0% / 25%-(3,000)3,000

Accounting NBV / tax WDV at end of year---

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Sheet1


€€€€€


Add back a/cing dep'n4,0004,0004,000-12,000

Less capital allowances(3,000)(3,000)(3,000)(3,000)(12,000)

Taxable profit51,00051,00051,00047,000200,000

Current tax @ 35%17,85017,85017,85016,45070,000

Current tax as a % of profit35.7%35.7%35.7%32.9%35.0%

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Sheet1


€€€€€

Accounting net book value8,0004,000--

Tax written down value9,0006,0003,000-

Temporary difference(1,000)(2,000)(3,000)-

Mvmt in temporary difference(1,000)(1,000)(1,000)3,000-

Def tax (credit)/charge @ 35%(350)(350)(350)1,050-

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The effect or recognising deferred tax is as follows:

Sheet1


€€€€€


Current tax charge17,85017,85017,85016,45070,000

Def tax (credit)/charge(350)(350)(350)1,050-

Tax expense17,50017,50017,50017,50070,000

Tax as a % of profit35.0%35.0%35.0%35.0%35.0%

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Deferred tax case studyProperty, plant & equipment: scenario 2

• Beginning of Year 1• Company X also purchases a non-

commercial motor vehicle at a cost of €21,000

• Both the accounting depreciation rate and the rate of capital allowances are 20%

• Tax base of the vehicle is initially €14,000


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Sheet1

AccountingTaxDifference

€€€

Year 1

Purchase of asset21,00014,0007,000



Year 2



Year 3



Year 4



Year 5


NBV / WDV at end of year---

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Sheet1

Year 1Year 2Year 3Year 4Year 5Total

€€€€€€

Accounting profit50,00050,00050,00050,00050,000250,000

Add back a/cing dep'n4,2004,2004,2004,2004,20021,000

Less capital allowances(2,800)(2,800)(2,800)(2,800)(2,800)(14,000)

Taxable profit51,40051,40051,40051,40051,400257,000

Current tax @ 35%17,99017,99017,99017,99017,99089,950

Current tax as % of profit36.0%36.0%36.0%36.0%36.0%36.0%

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Deferred tax case studyProperty, plant & equipment: scenario 3• Beginning of Year 1• Company X also purchases electronic equipment at a cost of €4,000• Accounting depreciation rate is 33.3%• Rate of capital allowances is 25%• Year 2• Company X disposes of the asset at the beginning of the year for proceeds of

€3,500


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Sheet1

AccountingTaxDiff

€€€

Year 1



NBV / WDV at end of year2,6673,000(333)

Year 2

Proceeds3,5003,500-

Profit on disposal / Balancing charge833500333

Total impact on results

Depreciation charge / Capital allowances(1,333)(1,000)(333)

Profit on disposal / Balancing charge833500333

Aggregate impact on results(500)(500)-

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Sheet1

Year 1Year 2Total

€€€


Add back dep'n / deduct gain on disposal1,333(833)500

Less capital allowances / add bal charge(1,000)500(500)

Taxable profit50,33349,667100,000


Current tax as a % of accounting profit35.2%34.8%35.0%

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Sheet1

Year 1Year 2Total

€€€

Accounting net book value2,667-

Tax written down value3,000-

Temporary difference(333)-

Movement in temporary difference(333)333-


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Sheet1

Year 1Year 2Total

€€€




Tax expense17,50017,50035,000


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Examples of temporary differences with deferred tax implicationsFair valuation of investment property


• When investment property is fair valued, besides taking the movement in fair value of the investment property in profit or loss, we should also adjust for the tax liability that would be incurred on its disposal

• The tax liability may vary, in accordance with the local tax legislation

Provision for

impairment of


group relief


(BPA)


property

Property, plant &

equipment

Unabsorbed capital



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Examples of temporary differences with deferred tax implicationsFair valuation of investment property - continued

The deferred tax liability on investment property follows the way an eventual disposal would be charged to current tax. Current tax would be charged as follows:• if acquired prior to 1 January 2004: 10% of the

proceeds on sale• If acquired on or after 1 January 2004: 8% of the

proceeds on sale


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Examples of temporary differences with deferred tax implicationsFair valuation of investment property: example


• Company G acquired investment property in 2002• Carrying amount at commencement of current year is €240,000, being the value

determined from a valuation carried out in the previous year• At the end of the year, the fair value is established at €260,000

⮚fair value gain, credited to profit or loss, is therefore €20,000• Deferred tax will be charged to profit or loss @ 10% of the fair value gain of €20,000,

i.e. €2,000• The deferred tax liability, which stood at €24,000 at the commencement of the

current year (i.e. 10% of previous fair value of €240,000) will now increase to €26,000

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Examples of temporary differences with deferred tax implications Fair valuation of investment property: example - continued


Movement for the year:Dr Deferred tax charge (P&L) 2,000Cr Deferred tax liability (B/S) 2,000

Sheet1

Property valueDeferred tax

€€

Balance at 1 January240,00024,000

Fair value increase during the year20,0002,000

Balance at 31 December260,00026,000

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Examples of temporary differences with deferred tax implicationsFair valuation of investments


• If investments’ subsequent disposal would be charged to current tax, then deferred tax is to be provided for

• If subsequent disposal would not be charged to current tax, then no timing difference arises and therefore no deferred tax is to be provided for

Provision for

impairment of


group relief


(BPA)


property

Property, plant &

equipment

Unabsorbed capital



Deferred tax asset/liability at 35%, or no deferred tax

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Examples of temporary differences with deferred tax implicationsFair valuation of investments - continued


• Not chargeable/deductible for tax purposes:⮚Gain/loss of a capital nature on investments quoted on the MSE⮚Gain/loss of a capital nature on fixed income debt securities (eg. MGS)

• Chargeable to current tax:⮚Gain of a trading nature on quoted and unquoted investments⮚Gain of a capital nature on unquoted investments

• Deductible against taxable income:⮚Loss of a trading nature on quoted and unquoted investments⮚Loss of a capital nature on unquoted investments

PwC



• Year 1• Company H acquires four securities during the year, each at a cost of €100. The

company does not trade in investments• Security A is a bond that pays fixed rates of interest, Security B is a bond that pays

floating rates of interest, Security C is listed on the Malta Stock Exchange, and Security D is listed on the Frankfurt Stock Exchange

• Company H classifies the securities as Available-for-sale, with fair value movements taken to an equity reserve

• At end of year, the values of the investments have changed as follows:• A: €120; B: €85;• C: €110; D: €115

PwC



The fair value movements will give rise to the following deferred tax:

Deferred tax is recognised directly in the revaluation reserve

Sheet1

BondBondFrankfurt

(fixed)(floating)MSEExchangeTotal

€€€€€

Year 1

Balance at 1 January-----

Cost on date of acquisition100100100100400

FV movement during the year20(15)101530

Balance at 31 December12085110115430

Disposal charged to current tax?OPOP

Def tax (credit)/charge @ 0% / 35%-(5)-5-

PwC

Measurement of deferred tax assets and liabilitiesCan tax assets and liabilities be discounted or offset?• IAS 12 and Section 16 of GAPSME do

not permit:⮚deferred tax assets or liabilities to be

discounted⮚the offsetting of tax assets and

liabilities unless they relate to the same tax authority and satisfy various other conditions


Presentation and disclosure


PwC

Presentation

• The tax expense (income) related to profit or loss from ordinary activities shall be presented on the face of the income statement


PwC

PresentationOffsetting


• An entity shall offset current tax assets and current tax liabilities if, and only if, the entity:⮚has a legally enforceable right to set off the recognised amounts; and⮚intends either to settle on a net basis, or to realise the asset and settle the

liability simultaneously.

PwC

PresentationOffsetting – continued


• An entity shall offset deferred tax assets and deferred tax liabilities if, and only if: ⮚the entity has a legally enforceable right to set off current tax assets against

current tax liabilities; and⮚the deferred tax assets and the deferred tax liabilities relate to income taxes

levied by the same taxation authority on either:othe same taxable entity; orodifferent 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

PwC

DisclosureComponents of tax expense


• The major components of tax expense (income) shall be disclosed separately• Components of tax expense (income) may include, amongst others:

⮚current tax expense (income),⮚any adjustments for current tax of prior periods,⮚the amount of deferred tax expense (income) relating to

othe origination and reversal of temporary differences,ochanges in tax rates or the imposition of new taxes,

⮚the amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference

PwC

DisclosureComponents of tax expense: illustrative examples


PwC

DisclosureTax reconciliation


• The following shall also be disclosed separately: ⮚an explanation of the relationship between tax expense (income) and accounting

profit in either or both of the following forms:oa numerical reconciliation between tax expense (income) and the product of

accounting profit multiplied by the applicable tax rate(s)oa numerical reconciliation between the average effective tax rate and the

applicable tax rate

PwC

DisclosureOther disclosures: illustrative examples - continued


PwC

DisclosureOther disclosures - continued


• The following shall also be disclosed separately: ⮚the aggregate current and deferred tax relating to items that are charged or

credited to equity• The following shall also be disclosed separately in respect of each type of

temporary difference, and in respect of each type of unused tax losses and unused tax credits:⮚the amount of the deferred tax assets and liabilities recognised in the statement

of financial position for each period presented⮚the amount of the deferred tax income or expense recognised in the income

statement, if this is not apparent from the changes in the amounts recognised in the statement of financial position

PwC

DisclosureOther disclosures: illustrative examples


PwC



• The following shall also be disclosed separately: ⮚an explanation of changes in the applicable tax rate(s) compared to the

previous accounting period⮚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 in the statement of financial position⮚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

PwC



PwC



• The following shall also be disclosed separately: ⮚in respect of discontinued operations, the tax expense relating to:

othe gain or loss on discontinuance, andothe profit or loss from the ordinary activities of the discontinued operation for

the period, together with the corresponding amounts for each prior period presented

⮚the amount of income tax consequences of dividends to shareholders of the entity that were proposed or declared before the financial statements were authorised for issue, but are not recognised as a liability in the financial statements

PwC



PwC



• An entity shall disclose the amount of deferred tax asset and the nature of the evidence supporting its recognition, when:⮚the utilisation of the deferred tax asset is dependent on future taxable profits in

excess of the profits arising from the reversal of existing taxable temporary differences, and⮚the entity has suffered a loss in either the current or preceding period in the tax

jurisdiction to which the deferred tax asset relates

PwC

Tax reconciliationExample

It is important to keep in mind that any item that:• features in only one of accounting profit

and tax profit, or• features in both but is taxed at a rate

other than 35%will necessarily feature in the tax reconciliation unless it is charged to deferred tax at 35%


PwC

Tax reconciliationExample - continued


Taking Company X in Year 1:• Accounting profit is €50,000• An increase of €1,000 provision for impairment of receivables was recognised• Depreciation on computer hardware is of €4,000 whereas capital allowances are

€3,000. The temporary difference gives rise to deferred tax implications• Depreciation on motor vehicles is of €4,200 whereas capital allowances are €2,800.

The difference does not give rise to deferred tax implications• Depreciation on electronic equipment is of €1,333 whereas capital allowances are

€1,000

PwC



• Fair value gains on investment property, credited to profit or loss, amounted to €10,000

• Fair value movements on securities, credited to an equity reserve, amounted to €100

• In addition, the following information also relates to Company X:⮚Interest income of €5,000 was subject to final withholding tax @ 15%⮚Charitable donations amounting to €100 were made⮚Disallowed motor vehicle lease expenditure of €300 was incurred⮚Rental income of €5,000 was earned from the investment property (assume

that there is no ground rent payable, or administrative expenses, related to the rental income that was generated)

PwCIAS 12 - Income taxes July 2019

Slide 101

Sheet1

€€Deferred tax?

Accounting profit50,000

Add back

Donations100O

Mvmt in prov for impairment of receivables1,000P

Depreciation on computer hardware4,000P

Depreciation on motor vehicle4,200O

Depreciation on office equipment1,333P

Disallowed lease expenditure300O

Less

Maintenance allowance(1,000)O

Fair value gains on investment property(10,000)P

Capital allowances on computer hardware(3,000)P

Capital allowances on motor vehicle(2,800)O

Capital allowances on office equipment(1,000)P

(6,867)

Tax profit43,133

Chargeable @ 15%: €5,000750O

Chargeable @ 35%: €38,13313,347

Current tax charge14,097

PwC



• The deferred tax charge for the year has been computed as follows:

Sheet1

€€

Deferred tax credits

Provision for impairment of receivables(350)

Computer hardware(350)

Office equipment(117)

Deferred tax charges

Fair value gains on investment property1,000

Deferred tax charge183

PwC



• The tax expense for the year is as follows:

• Through the tax reconciliation we will be explaining the difference between the tax charge of €14,280 and the product of accounting profit of €50,000 * 35% = €17,500

Sheet1

€



Deferred tax charge183

Tax expense14,280

Tax expense as a percentage of accounting profit28.6%

PwC


These reconciling items, although adjusted for in the current tax computation, are charged to deferred tax• as a result they do not feature in the tax reconciliation


Sheet1

€€Deferred tax?


Add back

Donations100O






Less






(6,867)

Tax profit43,133

Chargeable @ 15%: €5,000750O

Chargeable @ 35%: €38,13313,347


PwC


The fair value gains have been charged to deferred tax (since they are only chargeable to current tax upon disposal of property). However, the tax rate is 10%, resulting in a decrease in tax charge of (35% - 10%) * €10,000 = €2,500


Sheet1

€€Deferred tax?


Add back

Donations100O






Less






(6,867)

Tax profit43,133

Chargeable @ 15%: €5,000750O

Chargeable @ 35%: €38,13313,347


PwC


• In this particular instance, we saw earlier that the depreciation rate and the rate of capital allowances are the same, and the above temporary difference does not give rise to deferred tax implications. This results in an additional tax charge of 35% * (€4,200 -€2,800) = €490


Sheet1

€€Deferred tax?


Add back

Donations100O






Less






(6,867)

Tax profit43,133

Chargeable @ 15%: €5,000750O

Chargeable @ 35%: €38,13313,347


PwC


• The above expenditure, in line with tax legislation, is disallowed for tax purposes. This results in an additional tax charge of 35% * (€100 + €300) = €140


Sheet1

€€Deferred tax?


Add back

Donations100O






Less






(6,867)

Tax profit43,133

Chargeable @ 15%: €5,000750O

Chargeable @ 35%: €38,13313,347


PwC


• Local tax legislation allows for 20% maintenance allowance on rental income. This reduces the tax charge by 35% of €1,000 = €350


Sheet1

€€Deferred tax?


Add back

Donations100O






Less






(6,867)

Tax profit43,133

Chargeable @ 15%: €5,000750O

Chargeable @ 35%: €38,13313,347


PwC



• Under local tax legislation, withholding tax (at 15%) on investment income is final

• This reduces the tax charge by (35% - 15%) * €5,000 = €1,000

Sheet1

€€Deferred tax?


Add back

Donations100O






Less






(6,867)

Tax profit43,133

Chargeable @ 15%: €5,000750O

Chargeable @ 35%: €38,13313,347


PwC



• The differences can be summarised as follows:

Sheet1

Fin. stats.@ 35%TaxAppl. taxDiff

€€€€€

Profit before other items45,93316,07745,93316,077-

Mvmt in provision *(1,000)(350)(1,000)(350)-

Depreciation *(9,533)(3,337)(8,133)(2,847)490

Disallowed lease rentals(300)(105)--105

FV gains on inv prop *10,0003,50010,0001,000(2,500)

Maintenance allowance--(1,000)(350)(350)

Interest income5,0001,7505,000750(1,000)

Donations(100)(35)--35

50,00017,50050,80014,280(3,220)

PwC



• The tax reconciliation is now complete:

Sheet1

€


Tax on profit at 35%17,500

Tax effect of:

Income subject to reduced rates of tax(1,000)

Movement in deferred tax determined on the

basis applicable to tax rules(2,500)

Expenses not deductible for tax purposes630

Other movements(350)

Tax charge14,280

PwC



Interest income: (35% - 15%) * €5,000 = €1,000


Sheet1

€



Tax effect of:






Tax charge14,280

PwC




Investment property: (35% - 10%) * €10,000 = €2,500

Sheet1

€



Tax effect of:






Tax charge14,280

PwC




Depreciation on non-qualifying asset: €1,400 * 35% = €490Disallowed expenditure: 35% * (€100 + €300) = €140

Sheet1

€



Tax effect of:






Tax charge14,280

PwC




Maintenance allowance: 35% * €1,000 = €350

Sheet1

€



Tax effect of:






Tax charge14,280

Conclusion


PwC

Current tax recapThe nine-step approach• Current tax can be broken down into a nine-step approach:

⮚Calculate accounting profit⮚Identify reconciling items between accounting profit and taxable profit⮚Identify unabsorbed capital allowances, tax losses, and group relief brought forward⮚Calculate taxable profit⮚Determine tax rates⮚Identify tax credits⮚Recognise current tax⮚Presentation and offsetting⮚Disclosure


PwC

Deferred tax recapThe nine-step approach• Deferred tax can be broken down into a nine-step approach:

⮚Calculate current income tax⮚Determine the tax base⮚Calculate temporary differences⮚Identify exceptions⮚Review deductible temporary differences and tax losses⮚Determine tax rates⮚Recognise deferred tax⮚Presentation and offsetting⮚Disclosure


pwc.com/mt

Thank you

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This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2019 PricewaterhouseCoopers. All rights reserved. PwC refers to the Malta member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

Deferred TaxIntroductionIntroductionAccounting for tax under IFRS and GAPSMEUnderstanding current and deferred taxAccounting profit and taxable profitCurrent taxDeferred taxTax expenseRecognition and measurement of current taxCurrent taxProvisional tax paymentsProvisional tax payments�ExampleProvisional tax payments�Example: accounting entriesProvisional tax payments�Example: accounting entries - continuedDifferences between accounting profit and taxable profitDifferences between accounting profit and taxable profit - continuedDifferences between accounting profit and taxable profit - continuedRecognition and measurement of deferred taxDeferred tax assets and liabilitiesTemporary differencesTax base of an assetTax base of a liabilityTax bases of assets and liabilities�“Short-cut” to work out the tax base Temporary differencesAccounting entries for deferred tax�Movements in the statement of financial positionAccounting entries for deferred tax�Recognition of the charge or credit for the periodTemporary differences�Tax base considerations – right-of-use asset and lease liabilityExamples of temporary differences with deferred tax implicationsExamples of temporary differences with deferred tax implications�Provision for impairment of receivablesExamples of temporary differences with deferred tax implications�Provision for impairment of receivables - continuedExamples of temporary differences with deferred tax implications �Provision for impairment of receivables: exampleExamples of temporary differences with deferred tax implications �Provision for impairment of receivables: - continuedExamples of temporary differences with deferred tax implications �Provision for impairment of receivables: - continuedExamples of temporary differences with deferred tax implications �Provision for impairment of receivables: - continuedExamples of temporary differences with deferred tax implications �Provision for impairment of receivables: - continuedExamples of temporary differences with deferred tax implications�Provision for impairment of receivables: - continuedDeferred tax case studyDeferred tax case study�Provision for impairment of receivablesDeferred tax case study�Provision for impairment of receivables - continuedDeferred tax case study�Provision for impairment of receivables - continuedDeferred tax case study�Provision for impairment of receivables - continuedExamples of temporary differences with deferred tax implications�Property, plant & equipmentExamples of temporary differences with deferred tax implications�Property, plant & equipment - continuedExamples of temporary differences with deferred tax implications�Property, plant & equipment - continuedExamples of temporary differences with deferred tax implications�Property, plant & equipment - continuedExamples of temporary differences with deferred tax implications�Property, plant & equipment: example 1Examples of temporary differences with deferred tax implications �Property, plant & equipment: example 1 - continuedExamples of temporary differences with deferred tax implications �Property, plant & equipment: example 1 - continuedExamples of temporary differences with deferred tax implications �Property, plant & equipment: example 1 - continuedExamples of temporary differences with deferred tax implications �Property, plant & equipment: example 1 - continuedProperty, plant & equipment: example 2�Property, plant & equipment: example 2 - continuedProperty, plant & equipment: example 2 - continuedProperty, plant & equipment: example 3Property, plant & equipment: example 3 - continuedProperty, plant & equipment: example 3 - continuedProperty, plant & equipment: example 3 - continuedProperty, plant & equipment: example 3 - continuedDeferred tax case study�Property, plant & equipment: scenario 1Deferred tax case study�Property, plant & equipment: scenario 1 - continuedDeferred tax case study�Property, plant & equipment: scenario 1 - continuedDeferred tax case study�Property, plant & equipment: scenario 1 - continuedDeferred tax case study�Property, plant & equipment: scenario 1 - continuedDeferred tax case study�Property, plant & equipment: scenario 2Deferred tax case study�Property, plant & equipment: scenario 2 - continuedDeferred tax case study�Property, plant & equipment: scenario 2 - continuedDeferred tax case study�Property, plant & equipment: scenario 3Deferred tax case study�Property, plant & equipment: scenario 3 - continuedDeferred tax case study�Property, plant & equipment: scenario 3 - continuedDeferred tax case study�Property, plant & equipment: scenario 3 - continuedDeferred tax case study�Property, plant & equipment: scenario 3 - continuedExamples of temporary differences with deferred tax implications�Fair valuation of investment propertyExamples of temporary differences with deferred tax implications�Fair valuation of investment property - continuedExamples of temporary differences with deferred tax implications�Fair valuation of investment property: exampleExamples of temporary differences with deferred tax implications �Fair valuation of investment property: example - continuedExamples of temporary differences with deferred tax implications�Fair valuation of investmentsExamples of temporary differences with deferred tax implications�Fair valuation of investments - continuedExamples of temporary differences with deferred tax implications�Fair valuation of investments - continuedExamples of temporary differences with deferred tax implications�Fair valuation of investments - continuedMeasurement of deferred tax assets and liabilities�Can tax assets and liabilities be discounted or offset?�Presentation and disclosurePresentationPresentation�OffsettingPresentation�Offsetting – continuedDisclosure�Components of tax expenseDisclosure�Components of tax expense: illustrative examplesDisclosure�Tax reconciliationDisclosure�Other disclosures: illustrative examples - continuedDisclosure�Other disclosures - continuedDisclosure�Other disclosures: illustrative examplesDisclosure�Other disclosures - continuedDisclosure�Other disclosures: illustrative examplesDisclosure�Other disclosures - continuedDisclosure�Other disclosures: illustrative examplesDisclosure�Other disclosures - continuedTax reconciliation�ExampleTax reconciliation�Example - continuedTax reconciliation�Example - continuedSlide Number 101Tax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedTax reconciliation�Example - continuedConclusionCurrent tax recap�The nine-step approachDeferred tax recap�The nine-step approachThank you

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IAS 12 - Deferred Tax...IAS 12 - Income taxes July 2019 Slide 29 • Transition from an ‘off balance sheet’ to ‘on balance sheet’ position may have deferred tax implications,