In our view, either analysis is acceptable so long as it is applied consistently.
Any income tax relating to a tax-transparent entity accounted for using equity accounting forms part of the
investor’s tax charge. It is therefore included in the income tax line in profit or loss and not shown as part of
the investor’s share of the results of the tax-transparent entity.
7.7
Deferred taxable gains
Some tax regimes mitigate the tax impact of significant asset disposals by allowing some
or all of the tax liability on such transactions to be deferred, usually subject to
conditions, such as a requirement to reinvest the proceeds from the sale of the asset
disposed of in a similar ‘replacement’ asset. The postponement of tax payments
achieved in this way may either be for a fixed period (e.g. the liability must be paid in
any event no later than ten years after the original disposal) or for an indefinite period
(e.g. the liability crystallises when, and only when, the ‘replacement’ asset is
subsequently disposed of).
As noted at 7.3 above, IAS 12 makes it clear that the ability to postpone payment of the
tax liability arising on disposal of an asset – even for a considerable period – does not
extinguish the liability. In many cases, the effect of such deferral provisions in tax
legislation is to reduce the tax base of the ‘replacement’ asset. This will increase any
taxable temporary difference, or reduce any deductible temporary difference,
associated with the asset.
8
DEFERRED TAX – MEASUREMENT
8.1
Legislation at the end of the reporting period
Deferred tax should be measured by reference to the tax rates and laws, as enacted or
substantively enacted by the end of the reporting period, that are expected to apply in
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the periods in which the assets and liabilities to which the deferred tax relates are
realised or settled. [IAS 12.47].
When different tax rates apply to different levels of taxable income, deferred tax assets
and liabilities are measured using the average rates that are expected to apply to the
taxable profit (tax loss) of the periods in which the temporary differences are expected
to reverse. [IAS 12.49].
IAS 12 comments that, in some jurisdictions, announcements of tax rates (and tax laws)
by the government have the substantive effect of actual enactment, which may follow
the announcement by a period of several months. In these circumstances, tax assets and
liabilities are measured using the announced tax rate (and tax laws). [IAS 12.48].
IAS 12 gives no guidance as to how this requirement is to be interpreted in different
jurisdictions. In most jurisdictions, however, a consensus has emerged as to the meaning
of ‘substantive enactment’ for that jurisdiction. Nevertheless, in practice apparently
similar legislative processes in different jurisdictions may give rise to different
treatments under IAS 12. For example, in most jurisdictions, tax legislation requires the
formal approval of the head of state in order to become law. However, in some
jurisdictions the head of state has real executive power (and could potentially not
approve the legislation), whereas in others head of state has a more ceremonial role
(and cannot practically fail to approve the legislation).
The general principle tends to be that, in those jurisdictions where the head of state has
executive power, legislation is not substantively enacted until actually approved by the
head of state. Where, however, the head of state’s powers are more ceremonial,
substantive enactment is generally regarded as occurring at the stage of the legislative
process where no further amendment is possible.
Some examples of the interpretation of ‘substantive enactment’ in particular
jurisdictions are given at 5.1.1 above.
8.1.1
Changes to tax rates and laws enacted before the reporting date
Deferred tax should be measured by reference to the tax rates and laws, as enacted or
substantively enacted by the end of the reporting period. [IAS 12.47]. This requirement
for substantive enactment is clear. Changes that have not been enacted by the end of
the reporting period are ignored, but changes that are enacted before the reporting date
must be applied, even in circumstances when complex legislation is substantively
enacted shortly before the end of an annual or interim reporting period.
In cases where the effective date of any enacted changes is after the end of the reporting
period, deferred tax should still be calculated by applying the new rates and laws to the
deductible and taxable temporary differences that are expected to reverse in those later
periods. [IAS 12.47]. When the effective date of any rate changes is not the first day of the
entity’s annual reporting period, deferred tax would be calculated by applying a blended
rate to the taxable profits for each year.
In implementing any amendment to enacted tax rates and laws there will be matters to
consider that are specific to the actual changes being made to the tax legislation.
However, the following principles from IAS 12 and other standards are relevant in all
cases where new tax legislation has been enacted before the end of the reporting period.
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8.1.1.A
Managing uncertainty in determining the effect of new tax legislation
Where complex legislation is enacted, especially if enactment is shortly before the end
of the reporting period, entities might encounter two distinct sources of uncertainty:
• uncertainty about the requirements of the new law, which may give rise to
uncertain tax treatments as defined by IFRIC 23 and discussed at 8.2 and 9 below;
• incomplete information because entities may not have all the data required to
process the effects of the changes in tax laws.
It is not necessary for entities to have a complete understanding of every aspect of the
new tax law to arrive at reasonable estimates, and provided that entities make every
effort to obtain and take into account all the information they could reasonably be
expected to obtain up to the date when the financial statements for the period are
authorised for issue, subsequent changes to those estimates would not be regarded as a
prior period error under IAS 8. [IAS 8.5]. Only in rare circumstances would it not be
possible to determine a reasonable estimate. However, these uncertainties may require
additional disclosure in the financial statements. IAS 1 requires entities to disclose
information about 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 (see Chapter 3 at 5.2.1).
[IAS 1.125-129].
Whilst the effect of changes in tax laws enacted after the end of the reporting period
are not taken into account (see 8.1.2 below), information and events that occur between
the end of the reporting period and the date when the financial statements are
authorised for issue are adjusting events after the reporting period if they provide
evidence of conditions that existed as at
the reporting date. [IAS 10.3]. Updated tax
calculations, collection of additional data, clarifications issued by the tax authorities and
gaining more experience with the tax legislation before the authorisation of the
financial statements should be treated as adjusting events if they pertain to the position
at the balance sheet date. Events that are indicative of conditions that arose after the
reporting period should be treated as non-adjusting events. Judgement needs to be
applied in determining whether technical corrections and regulatory guidance issued
after year-end are to be considered adjusting events.
Where the effect of changes in the applicable tax rates compared to the previous
accounting period are material, an explanation of those effects is required to be
provided in the notes to the financial statements (see 14.1 below). [IAS 12.81(d)].
8.1.1.B
Backward tracing of changes in deferred taxation
IAS 12 requires tax relating to items not accounted for in profit or loss, whether in the
same period or a different period, to be recognised:
(a) in other comprehensive income, if it relates to an item accounted for in other
comprehensive income; or
(b) directly in equity, if it relates to an item accounted for directly in equity. [IAS 12.61A].
If current and deferred taxes change as a result of new tax legislation, IAS 12 requires
the impact to be attributed to the items in profit or loss, other comprehensive income
2424 Chapter 29
and equity that gave rise to the tax in the first place. The requirement to have regard to
the previous history of a transaction in accounting for its tax effects is commonly
referred to as ‘backward tracing’ and is discussed at 10 below. The backward tracing
requirements also apply to any subsequent changes in accounting estimates.
8.1.1.C
Disclosures relating to changes in enacted tax rates and laws
In addition to the disclosures noted at 8.1.1.A above concerning major sources of
estimation uncertainty at the end of the reporting period, the following disclosures are
required by IAS 12 (see 14 below):
• the amount of deferred tax expense (or income) relating to changes in tax rates or
the imposition of new taxes; [IAS 12.80(d)]
• an explanation of changes in the applicable tax rate(s) compared to the previous
accounting period; [IAS 12.81(d)] and
• information about tax-related contingent liabilities and contingent assets in
accordance with the requirements of IAS 37 (see 9.6 below and Chapter 27 at 7).
[IAS 12.88].
8.1.2
Changes to tax rates and laws enacted after the reporting date
The requirement for substantive enactment as at the end of the reporting period is
clear. IAS 10 identifies the enactment or announcement of a change in tax rates and
laws after the end of the reporting period as an example of a non-adjusting event.
[IAS 10.22(h)]. For example, an entity with a reporting period ending on 31 December
issuing its financial statements on 20 April the following year would measure its tax
assets and liabilities by reference to tax rates and laws enacted or substantively
enacted as at 31 December even if these had changed significantly before 20 April and
even if those changes have retrospective effect. However, in these circumstances
the entity would have to disclose the nature of those changes and provide an estimate
of the financial effect of those changes if the impact is expected to be significant
(see 14.2 below). [IAS 10.21].
8.2
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].
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, are mandatory for
annual reporting periods beginning on or after 1 January 2019 and are discussed at 9 below.
8.3
‘Prior year adjustments’ of previously presented tax balances
and expense (income)
This is discussed in the context of current tax at 5.3 above. The comments there apply
equally to adjustments to deferred tax balances and expense (income). Accordingly, for
accounting purposes, the normal provisions of IAS 8 apply, which require an entity to
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determine whether the revision represents a correction of a material prior period error
or a refinement in the current period of an earlier estimate.
8.4
Expected manner of recovery of assets or settlement of liabilities
Deferred tax should be measured by reference to the tax consequences that would follow
from the manner in which the entity expects, at the end of the reporting period, to recover
or settle the carrying amount of the asset or liability to which it relates. [IAS 12.51].
8.4.1
Tax planning strategies to reduce liabilities are not anticipated
As discussed at 7.4.4 above, IAS 12 allows tax planning strategies to be taken into account
in determining whether a deductible temporary difference as at the reporting date can be
recognised as a deferred tax asset, provided that the entity will create taxable profit in
appropriate periods. [IAS 12.29(b)]. This raises the question of the extent to which tax
planning strategies may be taken into account more generally in applying IAS 12.
For example, some jurisdictions may offer incentives in the form of a significantly
reduced tax rate for entities that undertake particular activities, or invest in particular
plant, property and equipment, or create a certain level of employment.
Some have argued that, where an entity has the ability and intention to undertake
transactions in the future that will lead to its being taxed at a lower rate, it may take this into
account in measuring deferred tax liabilities relating to temporary differences that exist at
the reporting date and will reverse in future periods when the lower rate is expected to apply.
We believe that this is not appropriate. IAS 12 only allows entities to consider tax planning
opportunities available to the entity that will create taxable profits in appropriate periods
for the purpose of determining whether deferred tax assets qualify for recognition.
[IAS 12.29(b)]. However, entities are not permitted to take into account future tax planning
opportunities in relation to the measurement of deferred tax liabilities as at the reporting
date, nor are entities allowed to anticipate future tax deductions that are expected to
become available. Such opportunities do not impact on the measurement of deferred tax
until the entity has undertaken them, or is at least irrevocably committed to doing so.
8.4.2 Carrying
amount
IAS 12 requires an entity to account for the tax consequences of recovering an asset or settling
a liability at its carrying amount, and not, for example, the tax that might arise
on a disposal at
the current estimated fair value of the asset. This is illustrated by the example below.
Example 29.26: Measurement of deferred tax based on carrying amount of asset
During 2012 an entity, which has an accounting date of 31 December and pays tax at 40%, purchased a
business and assigned €3 million of the purchase consideration to goodwill. The goodwill originally had a
tax base of €3 million, deductible only on disposal of the goodwill. Thus there was no temporary difference
on initial recognition of the goodwill (and, even if there had been, no deferred tax would have been recognised
under the initial recognition exception – see 7.2.2 above). During 2013 the entity disposed of another business
giving rise to a taxable gain of €500,000. The tax law of the relevant jurisdiction allowed the gain to be
deferred by deducting it from the tax base of the goodwill, which therefore became €2.5 million.
Since IFRS prohibits the amortisation of goodwill, but instead requires it to be measured at cost less
impairment, in our view IAS 12 effectively requires any deferred tax to be measured at the amount that would
arise if the goodwill were sold at its carrying amount. At the end of 2013, the goodwill was still carried at
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€3 million. The decrease in the tax base during the period through deferral of the taxable gain gave rise to a
taxable temporary difference of €500,000 (€3 million carrying amount less €2.5 million tax base), which,
since it arose after the initial recognition of the goodwill (see 7.2.4 above), gave rise to the recognition of a
deferred tax liability of €200,000 (€500,000 @ 40%).
During 2014, the acquired business suffered a severe downturn in trading, such that the goodwill of €3 million
was written off in its entirety. This gave rise to a deductible temporary difference of €2.5 million (carrying
amount of zero less €2.5 million tax base). The deferred tax liability of €200,000 recognised at the end of
2013 was released. However, no deferred tax asset was recognised since it did not meet the criteria in IAS 12
for recognition of deferred tax assets, since there was no expectation of suitable taxable profits sufficient to
enable recovery of the asset (see 7.4 above).
During 2019, a new trading opportunity arises in the acquired business, with the result that, at the end of
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 483
