Given the uncertainties on taxation, we believe it is appropriate for entities to
continue to apply their current accounting policies, until the position becomes
clearer. However, these uncertainties will require additional disclosure in the
financial statements of entities reporting in the period leading up to 29 March 2019,
to reflect any progress between the parties in defining the terms of the UK’s
withdrawal and in clarifying the position of the UK as a ‘third country’ after its
withdrawal from the EU becomes effective. IAS 1 requires entities to disclose the
significant accounting policies used in preparing the financial statements, including
the judgements that management has made in applying those accounting policies that
have the most significant effect on the amounts recognised in the financial
statements. [IAS 1.122]. IAS 1 also requires entities to disclose information about the
assumptions they make about the future, and other major sources of estimation
uncertainty at the end of the reporting period, that have a significant risk of resulting
in a material adjustment to the carrying amounts of assets and liabilities within the
next financial year. [IAS 1.125]. Therefore, entities will need to carefully consider the
assumptions and estimates made about the future impact of tax positions and
consider whether additional disclosure is needed of the uncertainties arising from
UK withdrawal from the EU.
As the negotiations for withdrawal come to a conclusion, the uncertainties about tax
legislation and the application of IAS 12 will be resolved as each jurisdiction confirms
the appropriate tax treatment. Therefore, entities will need to consider the current
position at each reporting date and may have to revise the accounting treatment and
disclosures that have previously been applied. The recognition and measurement of
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current and deferred taxes will have to reflect the new status of the UK when it becomes
effective and have regard to any related legislation when it is (substantively) enacted
(see 5.1.2 above and 8.1.1 below). [IAS 12.46, 47]. Enactment after the end of the reporting
period but before the date of approval of the financial statements is an example of a
non-adjusting event, [IAS 10.22(h)], requiring entities to disclose the nature of any changes
and provide an estimate of their financial effect if the impact is expected to be
significant (see 5.1.3 above and 8.1.2 below). [IAS 10.21].
5.2
Uncertain tax treatments
In recording the ‘amount expected to be paid or recovered’ as required by IAS 12, the
entity will need to have regard to any uncertain tax treatments. ‘Uncertain tax
treatment’ is defined as a tax treatment over which there is uncertainty concerning its
acceptance under the law by the relevant taxation authority. For example, an entity’s
decision not to submit any tax filing in a particular tax jurisdiction or not to include
specific income in taxable profit would be an uncertain tax treatment, if its acceptability
is unclear under tax law. [IFRIC 23.3]. Entities might also have to address uncertainty in
applying new tax legislation, especially when it is enacted shortly before the end of the
reporting period, as discussed at 5.1.1 above.
Accounting for uncertain tax treatments is a particularly challenging aspect of accounting
for tax. The requirements of IFRIC 23, which was issued in June 2017 and is mandatory
for annual periods beginning on or after 1 January 2019, are discussed at 9 below.
5.3
‘Prior year adjustments’ of previously presented tax balances
and expense (income)
The determination of the tax liability for all but the most straightforward entities is a
complex process. It may be several years after the end of a reporting period before the
tax liability for that period is finally agreed with the tax authorities and settled.
Therefore, the tax liability initially recorded at the end of the reporting period to which
it relates is no more than a best estimate at that time, which will usually require revision
in subsequent periods until the liability is finally settled.
Tax practitioners often refer to such revisions as ‘prior year adjustments’ and regard
them as part of the overall tax charge or credit for the current reporting period whatever
their nature. However, for financial reporting purposes, the normal provisions of IAS 8
(see Chapter 3) apply to tax balances and the related expense (income). Therefore, the
nature of any revision to a previously stated tax balance should be considered to
determine whether the revision represents:
• a correction of a material prior period error (in which case it should be accounted
for retrospectively, with a restatement of comparative amounts and, where
applicable, the opening balance of assets, liabilities and equity at the start of the
earliest period presented); [IAS 8.42] or
• a refinement in the current period of an estimate made in a previous period (in
which case it should be accounted for in the current period). [IAS 8.36].
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In some cases the distinction is clear. If, for example, the entity used an incorrect
substantively enacted tax rate (see 5.1 above) to calculate the liability in a previous period,
the correction of that rate would – subject to materiality – be a prior year adjustment. A
more difficult area is the treatment of accounting changes to reflect the resolution of
uncertain tax treatments (see 5.2 above). These have in practice almost always been
treated as measurement adjustments in the current period. However, a view could be
taken that the eventual denial, or acceptance, by the tax authorities of a position taken by
the taxpayer indicates that one or other party (or both of them) were previously
misinterpreting the tax law. As with other aspects of accounting for uncertain tax
treatments, this is an area where judgement may be required. IFRIC 23 suggests that
entities would reassess judgements and estimates in response to a change in facts and
circumstances, and that the financial effect would be recognised as a change in estimate
under IAS 8, i.e. in the period of change [IFRIC 23.13, 14] (see 9.5 below).
5.4
Discounting of current tax assets and liabilities
In some jurisdictions, entities are permitted to settle current tax liabilities on deferred
terms. Similarly, refunds of current tax might be receivable more than 12 months after the
reporting date. IAS 12 specifically prohibits discounting of deferred tax assets and
liabilities. [IAS 12.53]. However, the Standard is silent on the discounting of current tax assets
and liabilities. In June 2004, the Interpretations Committee decided not to add this issue
to its agenda, but expressed a general view that current taxes payable should be discounted
when the effects were material. However, the Committee also noted a potential conflict
with the requirements of IAS 20, which at the time was intended to be withdrawn.7 This
has led to diversity in practice and it remains that entities are permitted, but not required,
to discount current tax assets and liabilities. Accordingly, entities need to make an
accounting policy choice and apply it c
onsistently to all current taxes in all jurisdictions.
5.5
Intra-period allocation, presentation and disclosure
The allocation of current tax income and expense to components of total comprehensive
income and equity is discussed at 10 below. The presentation and disclosure of current
tax income expense and assets and liabilities are discussed at 13 and 14 below.
6
DEFERRED TAX – TAX BASES AND TEMPORARY
DIFFERENCES
All deferred tax liabilities and many deferred tax assets represent the tax effects of
temporary differences. Therefore, the first step in measuring deferred tax is to
identify all temporary differences. The discussion below addresses only whether a
temporary difference exists. It does not necessarily follow that deferred tax is
recognised in respect of that difference, since there are a number of situations,
discussed at 7 below, in which IAS 12 prohibits the recognition of deferred tax on a
temporary difference.
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Temporary differences are differences between the carrying amount of an asset or
liability in the statement of financial position and its tax base. Temporary differences
may be either:
• taxable temporary differences, which 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
• deductible temporary differences, which 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.
The tax base of an asset or liability is ‘the amount attributed to that asset or liability for
tax purposes’. [IAS 12.5].
In consolidated financial statements, temporary differences are determined by
comparing the carrying amounts of an asset or liability in the consolidated financial
statements with the appropriate tax base. The appropriate tax base is determined:
• in those jurisdictions in which a consolidated tax return is filed, by reference to
that return; and
• in other jurisdictions, by reference to the tax returns of each entity in the group.
[IAS 12.11].
As the definition of tax base is the one on which all the others relating to deferred tax
ultimately depend, understanding it is key to a proper interpretation of IAS 12. A more
detailed discussion follows at 6.1 and 6.2 below. However, the overall effect of IAS 12
can be summarised as follows:
A taxable temporary difference will arise when:
• The carrying amount of an asset is higher than its tax base
For example, an item of PP&E is recorded in the financial statements at €8,000,
but has a tax base of only €7,000. In future periods, tax will be paid on €1,000
more profit than will be recognised in the financial statements (since €1,000 of the
remaining accounting depreciation is not tax-deductible).
• The carrying amount of a liability is lower than its tax base
For example, a loan payable of €100,000 is recorded in the financial statements at
€99,000, net of issue costs of €1,000 which have already been allowed for tax
purposes (so that the loan is regarded as having a tax base of €100,000 – see 6.2.1.B
below). In future periods, tax will be paid on €1,000 more profit than is recognised
in the financial statements (since the €1,000 issue costs will be charged to the
income statement but not be eligible for further tax deductions).
Conversely, a deductible temporary difference will arise when:
• The carrying amount of an asset is lower than its tax base
For example, an item of PP&E is recorded in the financial statements at €7,000,
but has a tax base of €8,000. In future periods, tax will be paid on €1,000 less profit
than is recognised in the financial statements (since tax deductions will be claimed
in respect of €1,000 more depreciation than is charged to the income statement in
those future periods).
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• The carrying amount of a liability is higher than its tax base
For example, the financial statements record a liability for unfunded pension costs
of €2 million. A tax deduction is available only as cash is paid to settle the liability
(so that the liability is regarded as having a tax base of nil – see 6.2.2.A below). In
future periods, tax will be paid on €2 million less profit than is recognised in the
financial statements (since tax deductions will be claimed in respect of €2 million
more expense than is charged to the income statement in those future periods).
This may be summarised in the following table.
Asset/liability Carrying
amount
higher
Nature of temporary
Resulting deferred
or lower than tax base?
difference
tax
(if recognised)
Asset Higher
Taxable
Liability
Asset Lower Deductible
Asset
Liability Higher Deductible
Asset
Liability Lower Taxable
Liability
6.1 Tax
base
6.1.1
Tax base of assets
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. [IAS 12.7].
In some cases the ‘tax base’ of an asset is relatively obvious. In the case of a tax-
deductible item of PP&E, it is the tax-deductible amount of the asset at acquisition less
tax depreciation already claimed (see Example 29.1 at 1.2 above). Other items, however,
require more careful analysis.
For example, an entity may have accrued interest receivable of €1,000 that will be taxed
only on receipt. When the asset is recovered, all the cash received is subject to tax. In
other words, the amount deductible for tax on recovery of the asset, and therefore its
tax base, is nil. Another way of arriving at the same conclusion might be to consider the
amount at which the tax authority would recognise the receivable in notional financial
statements for the entity prepared under tax law. At the end of the reporting period the
receivable would not be recognised in such notional financial statements, since the
interest has not yet been recognised for tax purposes.
Conversely, an entity may have a receivable of €1,000 the recovery of which is not
taxable. In this case, the tax base is €1,000 on the rule above that, where realisation of
an asset will not be taxable, the tax base of the asset is equal to its carrying amount. This
applies irrespective of whether the asset concerned arises from:
• a transaction already recognised in total comprehensive income and already
subject to tax on initial recognition (e.g. in most jurisdictions, a sale);
• a transaction already recognised in total comprehensive income and exempt from
tax (e.g. tax-free dividend income); or
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&nbs
p; • a transaction not affecting total comprehensive income at all (e.g. the principal of
a loan receivable). [IAS 12.7].
The effect of deeming the tax base of the €1,000 receivable to be equal to its carrying
amount will be that the temporary difference associated with it is nil, and that no
deferred tax is recognised in respect of it. This is appropriate given that, in the first case,
the debtor represents a sale that has already been taxed and, in the second and third
cases, the debtors represent items that are outside the scope of tax.
6.1.2
Tax base of liabilities
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. [IAS 12.8].
As in the case of assets, the tax base of some items is relatively obvious. For example,
an entity may have recognised a provision for environmental damage of CHF5 million,
which will be deductible for tax purposes only on payment. The liability has a tax base
of nil. Its carrying amount is CHF5 million, which is also the amount that will be
deductible for tax purposes on settlement in future periods. The difference between
these two (equal) amounts – the tax base – is nil. Another way of arriving at the same
conclusion might be to consider the amount at which the tax authority would recognise
the liability in notional financial statements for the entity prepared under tax law. At
the end of the reporting period the liability would not be recognised in such notional
financial statements, since the expense has not yet been recognised for tax purposes.
Likewise, if the entity records revenue of £1,000 received in advance that was taxed on
receipt, its tax base is nil. Under the definition above, the carrying amount is £1,000,
none of which is taxable in future periods. The tax base is the difference between the
£1,000 carrying amount and the amount not taxed in future periods (£1,000) – i.e. nil.
Again, if we were to consider a notional statement of financial position of the entity
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 471
