11. Income tax accounting
Most taxes do not pose accounting issues as
they are recognized as expense
Income tax is different as
this tax is levied on income, a notion that financial reporting is trying to determine from an accounting perspective
Since accounting is all about allocation to the right period, income tax should be allocated to
the period in which the income is generated that led to the income tax.
Temporary differences: arise when
the period in which revenues and expenses are recognized for accounting purposes is different from the period in which such revenues and expenses are treated as taxable income and allowable deductions for tax purposes.
Permanent differences (not an IFRS term): arise when
amounts recognized as part of accounting profit are not recognized as part of taxable profit
IAS 12 temporary difference definition:
differences between the carrying amount of an asset or liability and its tax base so balance sheet orientation.
Tax base of an asset definition:
the amount that will be deductible for tax purpose against 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, then...
the tax base of the asset is equal to its carrying amount.
A deferred tax liability is recognized for ...
all taxable temporary differences.
A deferred tax asset is recognized for ...
all deductible temporary differences
A deferred tax liability should be recognized for all taxable temporary differences, unless the deferred tax liability arises from:
(a) The initial recognition of goodwill;
(b) The initial recognition of an asset or liability in a transaction which: (i) Is not a BC; and (ii) At the time of the transaction, affects neither accounting profit nor taxable profit
Carrying amount of investments can deviate from tax base due to:
Undistributed reserves of subsidiaries, joint ventures and associates; FX translation differences.
Tax losses are created when
allowable deductions exceed taxable income.
Tax law may require three possible treatments for tax losses:
1) Carried back, 2) Carried forward , 3) Lost.
Effective tax rate (ETR) is the ...
tax expense (income) as percentage of pre-tax profit (loss).
Reasons for effective tax rate deviating from nominal rate:
Non-temporary differences; Differences between tax rates in different countries; Tax loss carry forward which the company doesnt expect to recover