Tuesday 22 February 2022
Several enquiries have come in over the past week, specifically for IAS 12 related training. It’s not unusual. For an accounting standard that’s been around, in some form or other, for over forty years, it’s an area of financial reporting that continues to present various challenges. The guidance itself has not significantly changed. Yet, that’s not stopped the Interpretations Committee having plenty of questions to answer as to how aspects of the guidance should be applied. Some of those questions have centred on variations of “what is an income tax?”. It appears then, the potential challenges to be faced are there, right from the start. Of course, many aspects of the guidance are straightforward and logical. However, if there’s two words that the reporting team might not want to hear, but will hear and will hear often, its these two... Deferred Tax.
The UK’s tax authority suggested for many years that “Tax Doesn’t have to be Taxing”. Clearly, it can be. The myriad of income tax related laws is not just a feature of the UK though. It’s everywhere. But of course, it’s not just tax law itself that’s complex. It’s the fact that tax rules and IFRS are, to put it mildly, different; more often than not, very, very different. So, presumably, if tax laws were more aligned with IFRS we wouldn’t have to be so concerned – and I’m sure the tax accountants would say the reverse is true too – yet, I don’t think any of us are foreseeing simplification or convergence any time soon. And, on a positive note, let’s not forget, it does provide one more challenge that makes the job of the financial reporter so interesting!
It’s not just that the guidance, for what is a relatively short standard, is so detailed, it’s more that the fingers of IAS 12 extend far and wide – it’s everywhere.
- Revalue P.P.E. – deferred tax needs to be considered.
- Impair an intangible – deferred tax...
- Write down inventory – deferred tax...
- Retranslate a forex liability – deferred tax...
The list goes on. And that’s before we even consider the consolidation side of things. It was the whole consol issue that prompted this blog piece. I was asked how many standards that potentially link to IAS 12 might be involved over the lifetime of a business combination; got me thinking. So here we go, for starters...
- Once control has been established, IFRS 3 Business Combinations requires the calculation of the goodwill at updated IFRS 13 Fair Value Measurement fair values. Those values are likely to change but the tax value (the tax base) remain unaltered = deferred tax.
- IFRS 10 Consolidated Financial Statements will require the use of aligned accounting policies – for example re depreciation. This policy alignment will require adjustment to the subsidiary’s own carrying amounts, post-acquisition (regardless of whether the policy changes are ‘pushed down’ or not) - deferred tax.
- Any profits / losses on intergroup transfers of assets will need to be eliminated on consolidation, whilst the tax base to the receiving entity won’t change = deferred tax.
- Post-acquisition, the carrying amount of the net assets acquired will change compared to acquisition date values, based on the acquired entity’s performance. Inevitably, the tax base of that subsidiary will remain as it was at acquisition - deferred tax.
- IAS 36 Impairment of Assets requires the annual impairment assessment. Goodwill and other assets will be reduced to their recoverable amount if impairment has occurred. Even excluding the whole issue of goodwill and deferred tax, an impairment of the other net assets will have an impact on those so-called temporary differences - deferred tax.
- And then the parent decides to dispose of the subsidiary. IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations will require the disposal group to be measured at the maximum of the fair value less costs to sell. That could lead to a write-down the year classification as held for sale occurs. Yes = deferred tax.
- And then there’s the foreign subsidiaries to consider. Of course, IAS 21 The Effects of Changes in Foreign Exchange Rates requires subsidiary’s net assets to be translated and retranslated to closing rate each reporting date. That means changing values. That means deferred tax.
- Oh, and then there’s the separate financial statements as well. These are the ones we always tend to push to one side, because maybe there’re not as interesting as the consol. But, they are there, and IAS 27 Separate Financial Statements allows a policy choice as to how we measure the carrying amount of the investment in those statements. It might be based on cost, or equity accounted, or it might be measured at fair value in accordance with IFRS 9 Financial Instruments, thus being restated to fair value each reporting date. Of course, if that value changes, but the tax base doesn’t, or doesn’t change to the same degree, there are two words that come to mind - deferred tax.
And that’s not all. The list above doesn’t consider the various issues the subsidiary will have to deal with, like any other business, at the legal entity level. Further, those issues above could apply, or apply in a similar manner, to investments in associates, and joint ventures. Deferred tax – it’s everywhere!
- When to recognise deferred tax balances?
- How to measure those balances?
- Where to present the deferred tax movements?
- What must be disclosed?
Many, many considerations – far and wide.
These issues, and others, will be introduced and discussed in our Virtual Classroom when we deliver our live, online course: IFRS Accounting for Income Taxes – IAS12.
The course runs 28-29 March and booking is open now. For more information or to book, please click here.
I hope to see you there.