authority and the same taxable entity, which will result in taxable amounts against
which the unused tax losses or unused tax credits can be utilised before they expire;
• the entity will have taxable profits before the unused tax losses or unused tax
credits expire;
• whether the unused tax losses result from identifiable causes which are unlikely
to recur; and
• whether tax planning opportunities (see 7.4.4 above) are available to the entity that
will create taxable profit in the period in which the unused tax losses or unused
tax credits can be utilised.
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, a deferred tax asset is not
recognised. [IAS 12.36]. Additional disclosures are required when an entity recognises a
deferred tax asset on the assumption that there will be future taxable profits available
in excess of the amount 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 (see 14.3 below). [IAS 12.35].
Some have suggested that the IASB should set time limits on the foresight period used.
We consider that such generalised guidance would be inappropriate, particularly in the
context of an international standard, which must address the great variety of tax systems
that exist worldwide, and which impose a wide range of restrictions on the
carryforward of tax losses or tax credits. In any event, it may well be the case that a
deferred tax asset recoverable in twenty years from profits from a currently existing
long-term supply contract with a creditworthy customer may be more robust than one
recoverable in one year from expected future trading by a start-up company.
7.4.7
Re-assessment of deferred tax assets
An entity must review its deferred tax assets, both recognised and unrecognised, at each
reporting date.
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7.4.7.A
Previously recognised assets
An entity should 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 enable the asset
to be recovered. Any such reduction should be reversed if it subsequently becomes
probable that sufficient taxable profit will be available. [IAS 12.56].
7.4.7.B Previously
unrecognised
assets
An entity recognises a previously unrecognised deferred tax asset to the extent that it
has become probable that sufficient taxable profit will be available to enable the asset
to be recovered. For example, an improvement in trading conditions 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. Special
considerations apply when an entity re-appraises deferred tax assets of an acquired
business at the date of the business combination or subsequently (see 12.1.2 below).
[IAS 12.37].
7.4.8
Effect of disposals on recoverability of tax losses
In consolidated financial statements, the disposal of a subsidiary may lead to the
derecognition of a deferred tax asset in respect of tax losses because either:
• the entity disposed of had incurred those tax losses itself; or
• the entity disposed of was the source of probable future taxable profits against
which the tax losses of another member of the group could be offset, allowing the
group to recognise a deferred tax asset.
It is clear that, once the disposal has been completed, those tax losses will no longer
appear in the disposing entity’s statement of financial position. What is less clear is
whether those tax losses should be derecognised before the disposal itself is accounted
for – and if so, when. IAS 12 does not give any explicit guidance on this point, beyond
the general requirement to recognise tax losses only to the extent that their
recoverability is probable (see 7.4 above).
In our view, three broad circumstances need to be considered:
• the entity has recognised a deferred tax asset in respect of tax losses of the
subsidiary to be disposed of, the recoverability of which is dependent on future
profits of that subsidiary (see 7.4.8.A below);
• the entity has recognised a deferred tax asset in respect of tax losses of a subsidiary
that is to remain in the group, the recoverability of which is dependent on future
profits of the subsidiary to be disposed of (see 7.4.8.B below); and
• the entity has recognised a deferred tax asset in respect of tax losses of the
subsidiary to be disposed of, the recoverability of which is dependent on future
profits of one or more entities that are to remain in the group (see 7.4.8.C below).
7.4.8.A
Tax losses of subsidiary disposed of recoverable against profits of that
subsidiary
In this situation, we consider that the deferred tax asset for the losses should remain
recognised until the point of disposal, provided that the expected proceeds of the disposal
Income
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are expected at least to be equal to the total consolidated net assets of the entity to be
disposed of, including the deferred tax asset. Whilst the group will no longer recover the
tax losses through a reduction in its future tax liabilities, it will effectively recover their
value through the disposal. Moreover, it would be expected that the disposal price would
reflect the availability of usable tax losses in the disposed of entity, albeit that any price
paid would reflect the fair value of such tax losses, rather than the undiscounted value
required to be recorded by IAS 12 (see 8.6 below).
7.4.8.B
Tax losses of retained entity recoverable against profits of subsidiary
disposed of
In this case, we believe that IAS 12 requires the deferred tax asset to be derecognised
once the disposal of the profitable subsidiary is probable (effectively meaning that the
recoverability of losses by the retained entity is no longer probable). This derecognition
threshold may be reached before the subsidiary to be disposed of is classified as held
for sale under IFRS 5 – Non-current Assets Held for Sale and Discontinued Operations
(see Chapter 4). This is because the threshold for derecognising the deferred tax asset
under IAS 12 (i.e. that the sale of the subsidiary is probable) is lower than the threshold
for accounting for the net assets of the subsidiary under IFRS 5 (i.e. that the subsidiary
is ready for sale, and the sale is highly probable).
7.4.8.C
Tax losses of subsidiary disposed of recoverable against profits of
retained entity
In this situation, we believe that more than one analysis is possible. One view would be
that – as in 7.4.8.A above – a deferred tax asset for the losses should remain recognised
until the point of disposal, provided that the expected proceeds of the disposal are at least
equal to the total consolidated net assets of the entity to be disposed of, including the
deferred tax asset. Another view would
be that the asset should be derecognised. In
contrast to the situation in 7.4.8.A, it is not the case that the losses are of any benefit to
the acquiring entity (since they are recognised by virtue of the expected profits of other
entities in the group which are not being sold. Rather, as in 7.4.8.B, the likely separation
of the subsidiary from the profits available in one or more retained entities means that the
utilisation of those losses by the retained subsidiary is no longer probable. A third view
would be that it is necessary to determine whether or not the losses would be of value to
the acquirer. If so, they should continue to be recognised to the extent that they are being
recovered by the disposing entity through the sales proceeds (as in 7.4.8.A). If not, they
should be derecognised on the grounds that they will not be recovered either through a
reduction in future taxable profits of the disposing entity, or through sale (as in 7.4.8.B).
7.5 ‘Outside’
temporary
differences relating to subsidiaries,
branches, associates and joint arrangements
Investments in subsidiaries, branches and associates or interests in joint arrangements
can give rise to two types of temporary difference:
• Differences between the tax base of the investment or interest and its carrying amount.
‘Tax base’ refers to the amount that will be deductible for tax purposes against any
taxable benefits arising when the carrying value of the asset is recovered. [IAS 12.7]. The
tax base will be determined by the rules set in the relevant tax jurisdiction. It may be
2414 Chapter 29
the original cost of the equity held in that investment or interest or its current fair value
or even an historic amount excluding unremitted earnings. That will be determined by
the local tax laws. ‘Carrying amount’ in this context means:
• in separate financial statements, the carrying amount of the relevant
investment or interest, and
• in financial statements other than separate financial statements, the carrying
amount of the net assets (including goodwill) relating to the relevant investment
or interest, whether accounted for by consolidation or equity accounting.
These differences are generally referred to in practice as ‘outside’ temporary
differences, and normally arise in the tax jurisdiction of the entity that holds the
equity in the investment or interest. Accordingly, in general they directly affect the
taxable profit of the investor entity.
• In financial statements other than separate financial statements, differences
between the tax bases of the individual assets and liabilities of the investment or
interest and the carrying amounts of those assets and liabilities (as included in
those financial statements through consolidation or equity accounting).
These differences are generally referred to in practice as ‘inside’ temporary
differences. They normally arise in the tax jurisdiction of the investment or
interest and affect the taxable profit of the investee entity.
This section is concerned with ‘outside’ temporary differences, the most common
source of which is the undistributed profits of the investee entities, where distribution
to the investor would trigger a tax liability. ‘Outside’ temporary differences may also
arise from a change in the carrying value of an investment due to exchange movements,
provisions, or revaluations; or from a change in the tax base of the investee in the
jurisdiction of the investor.
The reversal of most ‘inside’ temporary differences is essentially inevitable as assets are
recovered or liabilities settled at their carrying amount in the normal course of business.
However, an entity may be able to postpone the reversal of some or all of its ‘outside’
differences more or less permanently. For example, if a distribution of the retained
profits of a subsidiary would be subject to withholding tax, the parent may effectively
be able to avoid such a tax by making the subsidiary reinvest all its profits into the
business. IAS 12 recognises this essential difference in the nature of ‘outside’ and ‘inside’
temporary differences by setting different criteria for the recognition of ‘outside’
temporary differences.
7.5.1
Calculation of ‘outside’ temporary differences
As noted above, ‘outside’ temporary differences arise in both consolidated and separate
financial statements and may well be different, due to the different bases used to
account for subsidiaries, branches and associates or interests in joint arrangements in
consolidated and separate financial statements. [IAS 12.38]. This is illustrated by
Example 29.23 below.
Income
taxes
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Example 29.23: Temporary differences associated with subsidiaries, branches,
associates and joint arrangements
On 1 January 2019 entity H acquired 100% of the shares of entity S, whose functional currency is different
from that of H, for €600m. The tax rate in H’s tax jurisdiction is 30% and the tax rate in S’s tax jurisdiction
is 40%.
The fair value of the identifiable assets and liabilities (excluding deferred tax assets and liabilities) of S
acquired by H is set out in the following table, together with their tax base in S’s tax jurisdiction and the
resulting temporary differences (all figures in € millions).
(Taxable)/
Deductible
temporary
Fair value
Tax base
difference
PP&E 270
155
(115)
Accounts receivable
210
210
–
Inventory 174
124
(50)
Retirement benefit obligations
(30)
–
30
Accounts payable
(120)
(120)
–
Fair value of net assets acquired
excluding deferred tax
504
369
(135)
Deferred tax (135 @ 40%)
(54)
Fair value of identifiable assets
acquired and liabilities assumed
450
Goodwill (balancing figure)
150
Carrying amount
600
No deferred tax is recognised on the goodwill, in accordance with the requirements of IAS 12 as discussed
at 7.2.2.A above.
At the date of combination, the tax base, in H’s tax jurisdiction, of H’s investment in S is €600 million.
Therefore, in H’s jurisdiction, no temporary difference is associated with the investment, either in the
consolidated financial statements of H (where the investment is represented by net assets and goodwill of
€600 million), or in its separate financial statements, if prepared (where the investment is shown as an
investment at cost of €600 million).
During 2019:
• S makes a profit after tax, as reported in H’s consolidated financial statements, of €150 million, of which
€80 million is paid as a dividend (after deduction of withholding tax) before 31 December 2019, leaving
a net retained profit of €70 million.
• In accordance with IAS 21, H’s consolidate
d financial statements record a loss of €15 million on
retranslation to the closing exchange rate of S’s opening net assets and profit for the period.
• In accordance with IAS 36 – Impairment of Assets, H’s consolidated financial statements record an
impairment loss of €10 million in respect of goodwill.
Thus in H’s consolidated financial statements the carrying value of its investment in S is €645 million,
comprising:
€m
Carrying amount at 1.1.2019
600
Retained profit 70
Exchange loss
(15)
Impairment of goodwill
(10)
Carrying amount at 31.12.2019
645
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7.5.1.A
Consolidated financial statements
Assuming that the tax base in H’s jurisdiction remains €600 million, there is a taxable
temporary difference of €45 million (carrying amount €645m less tax base €600m)
associated with S in H’s consolidated financial statements. Whether or not any deferred
tax is required to be provided for on this difference is determined in accordance with
the principles discussed at 7.5.2 below. Any tax provided for would be allocated to profit
or loss, other comprehensive income or equity in accordance with the general
provisions of IAS 12 (see 10 below). In this case, the foreign exchange loss, as a
presentational rather than a functional exchange difference, would be recognised in
other comprehensive income (see Chapter 15 at 6.1), as would any associated tax effect.
The other items, and their associated effects, would be recognised in profit or loss.
Irrespective of whether provision is made for deferred tax, H would be required to
make disclosures in respect of this difference (see 14.2.2 below).
7.5.1.B
Separate financial statements of investor
The amount of any temporary difference in H’s separate financial statements would
depend on the accounting policy adopted in those statements. IAS 27 – Separate
Financial Statements – allows entities the choice of accounting for investments in group
companies at either cost (less impairment), using the equity method or at fair value –
see Chapter 8 at 2. Suppose that, notwithstanding the impairment of goodwill required
to be recognised in the consolidated financial statements, the investment in S taken as
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 481
