IAS 12 Tax Accounting – the process 1

6 Tax Accounting – the process

Tax accounting comprises the following steps:

i) calculate and record current income tax payable (or receivable);

ii) determine the tax base of assets and liabilities;

iii) calculate the differences between (the accounting) carrying amount of assets and liabilities and their tax base to determine temporary differences;

iv) identify temporary differences that are not recorded due to specific exceptions in IFRS;

v) calculate the net temporary differences;

vi) review net deductible temporary differences and unused tax losses to decide if recording deferred tax assets is correct;

vii) calculate deferred tax assets and liabilities by applying the appropriate tax rates to the temporary differences;

viii) determine the movement between opening and closing deferred tax balances;

ix) decide whether offset of deferred tax assets and liabilities between different group undertakings is appropriate in the consolidated financial statements; and

x) record deferred tax assets and liabilities, with the net change recorded in income or equity as appropriate.

The current tax expense (or income) is the amount payable (or receivable) as calculated in the tax return, plus any adjustment to deferred tax.

The current tax expense is recorded in the income statement, except any tax relates to a transaction that is recorded in equity rather than the income statement.

For example, any tax related to the revaluation of property, plant and equipment should be recognised in equity.

EXAMPLE- Tax expense split between the income statement and equity. Your tax computation shows an expense of $87m for the year, of which $3m relates to a property revaluation under IAS 16.
	I/B	DR	CR
Tax expense – income statement	I	84m
Tax expense-revaluation reserve	B	3m
Tax accrual	B		87m
Tax expense split between the income statement and equity

If the tax already paid exceeds the tax due for the period, the excess will be recorded as an asset, assuming it is recoverable.

EXAMPLE- Tax expense: Prepayment You have paid $100m as a tax prepayment. Your tax computation shows an expense of $87m for the year, of which $3m relates to a property revaluation.
	I/B	DR	CR
Tax prepayment	B	100m
Cash	B		100m
Recording tax prepayment
Tax expense – income statement	I	84m
Tax expense-revaluation reserve	B	3m
Tax prepayment	B		87m
Tax expense split between the income statement and equity, matched against the tax prepayment

A tax loss, that can be carried back to recover tax of a previous period, should be recorded as an asset in the period in which the tax loss occurs.

EXAMPLE- Tax loss: asset Your tax computation shows a loss of $6m for the year, which can be carried back to recover tax of a previous tax period.
	I/B	DR	CR
Tax recoverable	B	6m
Tax income	I		6m
Recording recoverable tax loss

The tax base of an asset or liability is the amount attributed to it for tax purposes.

The depreciation for an item of property plant or equipment on an accounting basis may differ from the calculation on a tax basis.

EXAMPLE- Different depreciation rates for accounting and tax

Your building is to be depreciated over 20 years for accounting purposes, but the tax authorities insist on a minimum life of 30 years for this type of building.

Whilst the accounting records will reflect the 20-year depreciation period, the tax base will use the 30-year depreciation model.

i) Revenue received in advance

Special rules apply to liabilities that represent revenue received in advance.

The tax base is equivalent to:

-the liability's carrying amount, if the revenue is taxable in a subsequent period;

EXAMPLE- Revenue received in advance Revenue is taxed in a later period. In year 1, it has a tax base of 100.
	I/B	DR	CR
Cash	B	100
Deferred revenue	B		100
Receipt of cash-period 1
Deferred revenue	B	100
Revenue	I		100
Tax expense @ 24%	I	24
Current tax liability	B		24
Revenue recognition and tax expense-period 2

-nil if the revenue is taxed in the period received.

EXAMPLE- Revenue received in advance Revenue is taxed in the same period. In year 1, it has a tax base of 0. There is a timing difference as the revenue is recognised for tax before it is recognised for accounting.
	I/B	DR	CR
Cash	B	100
Deferred revenue	B		100
Deferred tax asset @ 24%	B	24
Current tax liability	B		24
Receipt of cash and tax payment -period 1
Deferred revenue	B	100
Revenue	I		100
Tax expense @ 24%	I	24
Deferred tax asset	B		24
Revenue and tax expense recognition -period 2

ii) Amounts not reflected in the balance sheet

Deductible or taxable amounts may arise from items that are not recorded in the balance sheet.

Research and development costs may be expensed in the current period, but deductible for tax purposes over subsequent periods. The tax base reflects the amount of the deduction that can be claimed in future periods.

EXAMPLE-Research and development costs You spend $20m on research in the current period, and it is treated as an expense. Tax authorities only allow the expense to be deducted over a 4-year period. Only $5m is allowed in this period. The remaining $15m is the tax base at the end of year 1, and will be allowed over the next 3 years.
	I/B	DR	CR
Research cost	I	20m
Cash	B		20m
Tax credit @ 24%	I		4,8m
Current tax liability (reduction)	B	1,2m
Deferred tax asset	B	3,6m
Research cost and tax income -period 1
Current tax liability (reduction)	B	1,2m
Deferred tax asset	B		1,2m
Tax income -period 2 (and the same for periods 3 & 4)

iii) Investments within groups

The acquisition of an investment in a subsidiary, associate, branch or joint venture will give rise to a tax base for the investment in the parent undertaking's financial statements. The tax base is often the cost paid.

Differences between the tax base and the carrying amount will arise in the periods after acquisition due to changes in the carrying amount.

The carrying amount will change, for example, if the investment is accounted for using the equity method, or if an impairment charge is recorded.

EXAMPLE- Investment in subsidiary and impairment You buy a subsidiary for $70m. Trading is poor, and you book an impairment charge of $10m. The tax base is $70m, representing the cost. It is not adjusted for the impairment charge, creating a difference between the tax base and the carrying amount of $10m.
	I/B	DR	CR
Investment in subsidiary	B	70m
Cash	B		70m
Recording purchase of subsidiary
Impairment of subsidiary	I	10m
Investment in subsidiary	B		10m
Tax income (deferred tax) @ 24%	I		2,4m
Deferred tax asset	B	2,4m
Recording impairment charge and (deferred) tax charge. The deferred tax asset will be released when the investment is finally liquidated and the loss is allowed for tax.

iv) Expected manner of liquidating assets and liabilities

The measurement of deferred tax liabilities and assets should reflect the way in which management expects to liquidate the underlying asset or liability.

For example, in some countries a different tax rate may apply depending on whether management decides to sell or use the asset.

However, the deferred tax liabilities or assets associated with non-depreciable assets (such as land) can only reflect the tax consequences that would follow from the sale of that asset.

This is because the asset is not depreciated. Therefore, for tax purposes, the carrying amount (or tax base) of the non-depreciable asset reflects the value recoverable from the sale of the asset.