International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
Page 496
€m
€m
Brand name
60
–
Other net assets
20
15
This will give rise to the following consolidation journal:
€m
€m
Goodwill (balance)
46
Brand name
60
Other net assets
20
Deferred tax1 26
Cost of investment 100
1
40% of (€[60m + 20m] – €15m)
The fair value of the consolidated assets of the subsidiary (excluding deferred tax) and
goodwill is now €126m, but the cost of the subsidiary is only €100m. Clearly €26m of the
goodwill arises solely from the recognition of deferred tax. However, IAS 36,
paragraph 50, explicitly requires tax to be excluded from the estimate of future cash flows
used to calculate any impairment. This raises the question of whether there should be an
immediate impairment write-down of the assets to €100m. In our view, this cannot have
been the intention of IAS 36 (see the further discussion in Chapter 20 at 8.3.1).
12.4 Tax deductions for acquisition costs
Under IFRS 3 transaction costs are required to be expensed. However, in a number of
jurisdictions, transaction costs are regarded as forming part of the cost of the investment
for tax purposes, with the effect that a tax deduction for them is given only when the
investment is subsequently sold or otherwise disposed of, rather than at the time that
the costs are charged to profit or loss.
In such jurisdictions, there will be a deductible ‘outside’ temporary difference (see 7.5
above) between the carrying value of the net assets and goodwill of the acquired entity
in the consolidated financial statements (which will exclude transaction costs) and tax
base of the investment in the entity (which will include transaction costs). Whether or
not a deferred tax asset is recognised in respect of such a deductible temporary
difference will be determined in accordance with the general provisions of IAS 12 for
deductible temporary differences (see 7.5.3 above).
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In the separate financial statements of the acquirer, there may be no temporary difference
where the transaction costs are, under IAS 27, included in the cost of the investment.
12.5 Temporary differences arising from the acquisition of a group of
assets that is not a business
Although the acquisition of an asset or a group of assets that do not constitute a business
is not within the scope of IFRS 3, in such cases the acquirer has to identify and recognise
the individual identifiable assets acquired (including intangible assets) and liabilities
assumed. The cost of the group is allocated to the individual identifiable assets and
liabilities on the basis of their relative fair values at the date of purchase. These
transactions or events do not give rise to goodwill. [IFRS 3.2(b)]. Temporary differences
may therefore arise because the new carrying value of each acquired asset and liability
could be changed without any equivalent adjustment for tax purposes.
However, in these circumstances no deferred tax is recognised by the acquirer in
respect of these temporary differences. Since the acquisition does not constitute a
business combination, the initial recognition exception applies as discussed at 7.2
above. Indeed, the application of the IRE would mean that no deferred tax is recognised
by an acquiring entity for any temporary differences related to the ‘tax history’ of the
related assets and liabilities (i.e. in relation to differences between their carrying values
before their transfer and their tax base).
The requirements of IFRS 3 in relation to the acquisition of an asset or a group of assets
that does not constitute a business is discussed in Chapter 9 at 2.2.2.
13 PRESENTATION
13.1 Statement of financial position
Tax assets and liabilities should be shown separately from other assets and liabilities and
current tax should be shown separately from deferred tax on the face of the statement of
financial position. Where an entity presents current and non-current assets and liabilities
separately, deferred tax should not be shown as part of current assets or liabilities. [IAS 1.54-56].
13.1.1 Offset
13.1.1.A Current
tax
Current tax assets and liabilities should be offset if, and only if, the entity:
• has a legally enforceable right to set off the recognised amounts; and
• intends either to settle them net or simultaneously. [IAS 12.71].
These restrictions are based on the offset criteria in IAS 32. Accordingly, while entities in
many jurisdictions have a right to offset current tax assets and liabilities, and the tax authority
permits the entity to make or receive a single net payment, IAS 12 permits offset in financial
statements only where there is a positive intention for simultaneous net settlement. [IAS 12.72].
The offset restrictions also have the effect that, in consolidated financial statements, a
current tax asset of one member of the group may be offset against a current tax liability
of another only if the two group members have a legally enforceable right to make or
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receive a single net payment and a positive intention to recover the asset or settle the
liability simultaneously. [IAS 12.73].
13.1.1.B Deferred
tax
Deferred tax assets and liabilities should be offset if, and only if:
• the entity has a legally enforceable right to set off current tax assets and liabilities;
and
• the deferred tax assets and liabilities concerned relate to income taxes raised by
the same taxation authority on either:
• the same taxable entity; or
• different taxable entities which intend, in each future period in which
significant amounts of deferred tax are expected to be settled or recovered,
to settle their current tax assets and liabilities either on a net basis or
simultaneously. [IAS 12.74].
The offset criteria for deferred tax are less clear than those for current tax. The position
is broadly that, where in a particular jurisdiction current tax assets and liabilities relating
to future periods will be offset, deferred tax assets and liabilities relating to that
jurisdiction and those periods must be offset (even if the deferred tax balances actually
recognised in the statement of financial position would not satisfy the criteria for the
offset of current tax).
IAS 12 suggests that this slightly more pragmatic approach was adopted in order to avoid
the detailed scheduling of the reversal of temporary differences that would be
necessary to apply the same criteria as for current tax. [IAS 12.75].
However, IAS 12 notes that, in rare circumstances, an entity may have a legally
enforceable right of set-off, and an intention to settle net, for some periods but not for
others. In such circumstances, detailed scheduling may be required to establish reliably
whether the deferred tax liability of one taxable entity in the group will result in increased
tax payments in the same period in which a deferred tax asset of a second taxable entity
in the group will result in decreased payments by that second taxable entity. [IAS 12.76].
13.1.1.C
No offset of current and deferred tax
IAS 12 contains no provisions allowing or requiring the offset of current tax and
deferred tax. Also, as noted at 13.1 above, IAS 1 requires tax assets and liabilities to be
shown separately from other assets and liabilities and current tax to be shown
separately from deferred tax on the face of the statement of financial position.
[IAS 1.54(n), 54(o)]. Accordingly, in our view, current and deferred tax may not be offset
against each other and should always be presented gross.
13.2 Statement of comprehensive income
The tax expense (or income) related to profit or loss from ordinary activities should be
presented as a component of profit or loss in the statement of comprehensive income.
[IAS 12.77].
The results of discontinued operations should be presented on a post-tax basis.
[IFRS 5.33].
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The results of equity-accounted entities should be presented on a post-tax basis.
[IAS 1.IG6]. Any income tax relating to a ‘tax-transparent’ equity-accounted entity (see 7.6
above) 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.
Components of other comprehensive income may be presented either:
• net of related tax effects; or
• before related tax effects with one amount shown for the total income tax effects
relating to the items that might be reclassified subsequently to profit and loss and
another amount shown for the total income tax effects relating to those items that
will not be subsequently reclassified to profit and loss. [IAS 1.91].
IAS 12 notes that, whilst IAS 21 requires certain exchange differences to be recognised
within income or expense, it does not specify where exactly in the statement of
comprehensive income they should be presented. Accordingly, exchange differences
relating to deferred tax assets and liabilities may be classified as deferred tax expense (or
income), if that presentation is considered to be the most useful to users of the financial
statements. [IAS 12.78]. IAS 12 makes no reference to the treatment of exchange differences
on current tax assets and liabilities but, presumably, the same considerations apply.
13.3 Statement of cash flows
Cash flows arising from taxes on income are separately disclosed and classified as cash
flows from operating activities, unless they can be specifically identified with financing
and investing activities. [IAS 7.35].
IAS 7 – Statement of Cash Flows – notes that, whilst it is relatively easy to identify the
expense relating to investing or financing activities, the related tax cash flows are often
impracticable to identify. Therefore, taxes paid are usually classified as cash flows from
operating activities. However, when it is practicable to identify the tax cash flow with
an individual transaction that gives rise to cash flows that are classified as investing or
financing activities, the tax cash flow is classified as an investing or financing activity as
appropriate. When tax cash flows are allocated over more than one class of activity, the
total amount of taxes paid is disclosed. [IAS 7.36].
14 DISCLOSURE
IAS 12 imposes extensive disclosure requirements as follows.
14.1 Components of tax expense
The major components of tax expense (or income) should be disclosed separately.
These may include:
(a) current tax expense (or income);
(b) any adjustments recognised in the period for current tax of prior periods;
(c) the amount of deferred tax expense (or income) relating to the origination and
reversal of temporary differences;
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(d) the amount of deferred tax expense (or income) relating to changes in tax rates or
the imposition of new taxes;
(e) the amount of the benefit arising from a previously unrecognised tax loss, tax
credit or temporary difference of a prior period that is used to reduce current
tax expense;
(f) the amount of the benefit from a previously unrecognised tax loss, tax credit or
temporary difference of a prior period that is used to reduce deferred tax expense;
(g) deferred tax expense arising from the write-down, or reversal of a previous write-
down, of a deferred tax asset; and
(h) the amount of tax expense (or income) relating to those changes in accounting
policies and errors which are included in the profit or loss in accordance with
IAS 8 because they cannot be accounted for retrospectively (see Chapter 3 at 4.7).
[IAS 12.79-80].
14.2 Other
disclosures
The following should also be disclosed separately: [IAS 12.81]
(a) the aggregate current and deferred tax relating to items that are charged or
credited to equity;
(b) the amount of income tax relating to each component of other comprehensive income;
(c) an explanation of the relationship between tax expense (or income) and
accounting profit in either or both of the following forms:
(i) a numerical reconciliation between tax expense (or income) and the product
of accounting profit multiplied by the applicable tax rate(s), disclosing also
the basis on which the applicable tax rate(s) is (are) computed; or
(ii) a numerical reconciliation between the average effective tax rate (i.e. tax
expense (or income) divided by accounting profit), [IAS 12.86], and the applicable
tax rate, disclosing also the basis on which the applicable tax rate is computed;
This requirement is discussed further at 14.2.1 below.
(d) an explanation of changes in the applicable tax rate(s) compared to the previous
accounting period;
(e) 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;
(f) the aggregate amount of temporary differences associated with investments in
subsidiaries, branches and associates and interests in joint arrangements, for which
deferred tax liabilities have not been recognised;
This is discussed further at 14.2.2 below.
(g) in respect of each type of temporary difference, and in respect of each type of
unused tax losses and unused tax credits:
(i) the amount of the deferred tax assets and liabilities recognised in the
statement of financial position for each period presented; and
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(ii) the amount of the deferred tax income or expense recognised in profit or
loss, if this is not apparent from the changes in the amounts recognised in the
statement of financial position;
The analysis in (ii) will be required, for example, by any entity with acquisitions and
disposals, or deferred tax accounted for in other comprehensive income or equity,
since this will have the effect that the year-on-year movement in the statement of
financial position is not solely due to items recognised in profit or loss;
(h) in respect of
discontinued operations, the tax expense relating to:
(i) the gain or loss on discontinuance; and
(ii) the profit or loss from the ordinary activities of the discontinued operation
for the period, together with the corresponding amounts for each prior
period presented;
(i)
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.
Further disclosures are required in respect of the tax consequences of distributing
retained earnings, which are discussed at 14.4 below;
(j)
if a business combination in which the entity is the acquirer causes a change in the
amount of a deferred tax asset of the entity (see 12.1.2 above), the amount of that
change; and
(k) if the deferred tax benefits acquired in a business combination are not recognised
at the acquisition date, but are recognised after the acquisition date (see 12.1.2
above), a description of the event or change in circumstances that caused the
deferred tax benefits to be recognised.
Tax-related contingent liabilities and contingent assets (such as those arising from
unresolved disputes with taxation authorities) are disclosed in accordance with IAS 37
(see 9.6 above and Chapter 27 at 7). [IAS 12.88].
Significant effects of changes in tax rates or tax laws enacted or announced after the
reporting period on current and deferred tax assets and liabilities are disclosed in
accordance with IAS 10 (see Chapter 34 at 2). [IAS 12.88].
14.2.1
Tax (or tax rate) reconciliation
IAS 12 explains that the purpose of the tax reconciliation required by (c) above is to
enable users of financial statements to understand whether the relationship between
tax expense (or income) and accounting profit is unusual and to understand the
significant factors that could affect that relationship in the future. The relationship may
be affected by the effects of such factors as:
• revenue and expenses that are outside the scope of taxation;
• tax losses; and
• foreign tax rates. [IAS 12.84].
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Accordingly, in explaining the relationship between tax expense (or income) and