Fourth quarter 10,000
40,000
30%
12,000
3,000
Annual 40,000
12,000
† As previously reported from Example 37.10 using an effective tax rate of 25%.
The increase in the tax rate means that 12,000 of tax is expected to be payable for the full year on 40,000 of
pre-tax income (20,000 @ 20% + 20,000 @ 40%), implying an average annual effective income tax rate of
30% (12,000 / 40,000). With cumulative pre-tax earnings of 30,000 as at the end of the third quarter, the
estimated tax liability is 9,000, requiring a tax expense of 4,000 (9,000 – 2,500 – 2,500) to be recognised
during that quarter. In the final quarter, earnings of 10,000 results in a tax charge of 3,000 using the revised
effective rate of 30%.
9.5.2.C
Enacted changes applying only to subsequent years
In many jurisdictions, tax legislation is enacted that takes effect not only after the
interim reporting date but also after year-end. Such circumstances are not addressed
explicitly in the standard. As IAS 34 does not clearly distinguish between current
income tax and deferred tax, combined with the different approaches taken in
determining the expense recognised in profit or loss compared to the statement of
financial position, these issues can lead to confusion in this situation.
On the one hand, the standard states that the estimated income tax rate for the interim
period includes enacted or substantively enacted changes scheduled to take effect later
in the year. [IAS 34.B13]. This implies that the effect of changes that do not take effect in
the current year is ignored in determining the appropriate rate for current tax. On the
other hand, IAS 34 also requires that the principles for recognising assets, liabilities,
income, and expenses for interim periods are the same as in the annual financial
statements. [IAS 34.29]. In annual financial statements, deferred tax is measured at the tax
rates expected to apply to the period when the asset is realised or the liability is settled,
based on tax rates (and tax laws) enacted or substantively enacted by the end of the
reporting period, as required by IAS 12. [IAS 12.47]. Therefore, an entity should recognise
the effect of a change applying to future periods if enacted by the end of the interim
reporting period.
These two requirements seem to be mutually incompatible. IAS 34 makes sense only in
the context of calculating the effective current tax rate on income earned in the period.
Once a deferred tax asset or liability is recognised, it should be measured under IAS 12.
Therefore, an entity should recognise an enacted change applying to future years in
measuring deferred tax assets and liabilities as at the end of the interim reporting period.
One way to treat the cumulative effect to date of this remeasurement is to recognise it
Interim financial reporting 3111
in full, by a credit to profit or loss or to other comprehensive income, depending on the
nature of the temporary difference being remeasured, in the period during which the
tax legislation is enacted, in a similar way to the treatment shown in Example 37.13
above, and as illustrated in Example 37.14 below.
Example 37.14: Enacted changes to tax rates applying after the current year
An entity reporting half-yearly operates in a jurisdiction subject to a tax rate of 30%. Legislation is enacted
during the first half of the current year, which reduces the tax rate to 28% on income earned from the
beginning of the entity’s next financial year. Based on a gross temporary difference of 1,000, the entity
reported a deferred tax liability in its most recent annual financial statements of 300 (1,000 @ 30%). Of this
temporary difference, 200 is expected to reverse in the second half of the current year and 800 in the next
financial year. Assuming that no new temporary differences arise in the current period, what is the deferred
tax balance at the interim reporting date?
Whilst the entity uses an effective tax rate of 30% to determine the tax expense relating to income
earned in the period, it should use a rate of 28% to measure those temporary differences expected to
reverse in the next financial year. Accordingly, the deferred tax liability at the half-year reporting date
is 284 (200 @ 30% + 800 @ 28%).
Alternatively, if the effective current tax rate is not distinguished from the measurement
of deferred tax, it could be argued that IAS 34 allows the reduction in the deferred tax
liability of 16 (300 – 284) to be included in the estimate of the effective income tax rate
for the year. Approach 2 in Example 37.17 below applies this argument. In our view,
because IAS 34 does not distinguish between current and deferred taxes, either
approach would be acceptable provided that is applied consistently.
9.5.3
Difference in financial year and tax year
If an entity’s financial year and the income tax year differ, the income tax expense for
the interim periods of that financial year should be measured using separate weighted-
average estimated effective tax rates for each of the income tax years applied to the
portion of pre-tax income earned in each of those income tax years. [IAS 34.B17]. In other
words, an entity should compute a weighted-average estimated effective tax rate for
each income tax year, rather than for its financial year.
Example 37.15: Difference in financial year and tax year [IAS 34.B18]
An entity’s financial year ends 30 June and it reports quarterly. Its taxable year ends 31 December. For the
financial year that begins 1 July 2018 and ends 30 June 2019, the entity earns 10,000 pre-tax each quarter.
The estimated average annual income tax rate is 30% in the income tax year to 31 December 2018 and 40%
in the year to 31 December 2019.
Pre-tax
Effective
Tax
Quarter ending
earnings
tax rate
expense
30 September 2018
10,000
30%
3,000
31 December 2018
10,000
30%
3,000
31 March 2019
10,000
40%
4,000
30 June 2019
10,000
40%
4,000
Annual 40,000
14,000
3112 Chapter 37
9.5.4
Tax loss and tax credit carrybacks and carryforwards
Appendix B to IAS 34 repeats the requirement in IAS 12 that for carryforwards of
unused tax losses and tax credits, a deferred tax asset should be recognised to the extent
that it is probable that future taxable profit will be available against which the unused
tax losses and unused tax credits can be utilised. In assessing whether future taxable
profit is available, the criteria in IAS 12 are applied at the interim date. If these criteria
are met as at the end of the interim period, the effect of the tax loss carryforwards is
included in the estimated average annual effective income tax rate. [IAS 34.B21].
Example 37.16: Tax loss carryforwards expected to be recovered in the current
year [IAS 34.B22]
An entity that reports quarterly has unutilised operating losses of 10,000 for income tax purposes at the start
>
of the current financial year for which a deferred tax asset has not been recognised. The entity earns 10,000
in the first quarter of the current year and expects to earn 10,000 in each of the three remaining quarters.
Excluding the effect of utilising losses carried forward, the estimated average annual income tax rate is 40%.
Including the carryforward, the estimated average annual income tax rate is 30%. Accordingly, tax expense
is determined by applying the 30% rate to earnings each quarter as follows:
Pre-tax
Effective
Tax
earnings
tax rate
expense
First quarter 10,000
30%
3,000
Second quarter 10,000
30%
3,000
Third quarter 10,000
30%
3,000
Fourth quarter 10,000
30%
3,000
Annual 40,000
12,000
This result is consistent with the general approach for measuring income tax expense
in the interim report, in that any entitlement for relief from current tax due to carried
forward losses is determined on an annual basis. Accordingly, its effect is included in
the estimate of the average annual income tax rate and not, for example, by allocating
all of the unutilised losses against the earnings of the first quarter to give an income tax
expense of zero in the first quarter and 4,000 thereafter.
In contrast, the year-to-date approach of IAS 34 means that the benefits of a tax loss
carryback are recognised in the interim period in which the related tax loss occurs,
[IAS 34.B20], and are not included in the assessment of the estimated average annual tax rate,
as shown in Example 37.11 above. This approach is consistent with IAS 12, which requires
the benefit of a tax loss that can be carried back to recover current tax already incurred in
a previous period to be recognised as an asset. [IAS 12.13]. Therefore, a corresponding
reduction of tax expense or increase of tax income is also recognised. [IAS 34.B20].
Where previously unrecognised tax losses are expected to be utilised in full in the
current year, it seems intuitive to recognise the recovery of those carried forward losses
in the estimate of the average annual tax rate, as shown in Example 37.15 above. Where
the level of previously unrecognised tax losses exceeds expected taxable profits for the
current year, a deferred tax asset should be recognised for the carried forward losses
that are now expected to be utilised, albeit in future years.
Interim financial reporting 3113
The examples in IAS 34 do not show how such a deferred tax asset is created in the
interim financial report. In our view, two approaches are acceptable, as shown in
Example 37.17 below.
Example 37.17: Tax loss carryforwards in excess of current year expected profits
An entity that reports half-yearly has unutilised operating losses of 75,000 for income tax purposes at the
start of the current financial year for which no deferred tax asset has been recognised. At the end of its
first interim period, the entity reports a profit before tax of 25,000 and expects to earn a profit of 20,000
before tax in the second half of the year. The entity reassesses the likelihood of generating sufficient
profits to utilise its carried forward tax losses and determines that the IAS 12 recognition criteria for a
deferred tax asset are satisfied for the full amount of 75,000. Excluding the effect of utilising losses carried
forward, the estimated average annual income tax rate is the same as the enacted or substantially enacted
rate of 40%.
As at the end of the current financial year the entity expects to have unutilised losses of 30,000 (75,000
carried forward less current year pre-tax profits of 45,000). Using the enacted rate of 40%, a deferred tax
asset of 12,000 is recognised at year-end. How is this deferred tax asset recognised in the interim
reporting periods?
Approach 1
Under the first approach, the estimate of the average annual effective tax rate includes only those carried
forward losses expected to be utilised in the current financial year and a separate deferred tax asset is
recognised for those carried forward losses now expected to be utilised in future annual reporting periods.
In the fact pattern above, using 45,000 of the carried forward tax losses gives an average effective annual tax
rate of nil, as follows:
Estimation of the annual effective tax rate – Approach 1
Expected annual tax expense before utilising losses carried forward (45,000 @ 40%)
18,000
Tax benefit of utilising carried forward tax losses (45,000 @ 40%)
(18,000)
Expected annual tax expense before the effect of losses carried forward to future
annual periods
0
Expected annual effective tax rate
0%
Effect of tax losses carried forward to future periods (75,000 – 45,000 @ 40%)
(12,000)
Tax income to be recognised in the interim period
(12,000)
The remaining tax losses give rise to a deferred tax asset of 12,000, which is recognised in full at the half-
year, to give reported profits after tax as follows:
First half-year
Second half-year
Annual
Profit before income tax
25,000
20,000
45,000
Income tax (expense)/credit
– at expected annual effective rate
0
0
0
– recognition of deferred tax asset
12,000
0 12,000
Net profit after tax
37,000
20,000
57,000
3114 Chapter 37
Approach 2
Under the second approach, the estimate of the average annual effective tax rate reflects the expected
recovery of all the previously unutilised tax losses from the beginning of the period in which the assessment
of recoverability changed. In the fact pattern above, recognition of the unutilised tax losses gives an average
effective annual tax rate of –26.67%, as follows:
Estimation of the annual effective tax rate – Approach 2
Expected annual tax expense before utilising losses carried forward (45,000 @ 40%)
18,000
Tax benefit of recognising unutilised tax losses (75,000 @ 40%)
(30,000)
Expected annual tax credit after recognising unutilised tax losses
(12,000)
Expected annual effective tax rate (–12,000 ÷ 45,000)
–26.67%
This approach results in reported profits after tax as follows:
First half-year
Second half-year
Annual
Profit before income tax
25,000
20,000
45,000
Income tax (expense)/credit
– at expected annual effective rate
6,667
5,333
12,000
Net profit after tax
31,667
25,333
57,000
Approach 1 is consistent with the requirements of IAS 12 as it results in recognising
the full expected deferred tax asset as soon as it becomes ‘probable that taxable
profit will be available against which the deducti
ble temporary difference can be
utilised’. [IAS 12.24]. However, given that IAS 34 does not specifically address this
situation, and is unclear about whether the effective tax rate reflects changes in the
assessment of the recoverability of carried forward tax losses, we also believe that
Approach 2 is acceptable.
9.5.5 Tax
credits
IAS 34 also discusses in more detail the treatment of tax credits, which may for example
be based on amounts of capital expenditures, exports, or research and development
expenditures. Such benefits are usually granted and calculated on an annual basis under
tax laws and regulations and therefore are reflected in the estimated annual effective
income tax rate used in the interim report. However, if tax benefits relate to a one-time
event, they should be excluded from the estimate of the annual rate and deducted
separately from income tax expense in that interim period. Occasionally, some tax
credits are more akin to a government grant, which are recognised in the interim period
in which they arise. [IAS 34.B19].
In Extract 37.32 below, Inmarsat explains the reasons for a decrease in the effective tax
rate in the interim period and the effect of related one-off tax credits.
Interim financial reporting 3115
Extract 37.32: Inmarsat plc (interim ended June 2015)
Interim Management Report [extract]
Income tax expense
The tax charge for the first half 2015 was $34.3m, an increase of $2.7m, compared with the first half 2014. Included
within the tax charge are non-recurring adjustments which, for the half year ended 30 June 2015, resulted in a tax
charge of $0.2m compared to a tax credit of $0.6m for the half year ended 30 June 2014. If the effects of the above
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 616
