Deferred tax icmap kbc

ICMAP – Karachi Branch CouncilICMAP – Karachi Branch Council

Seminar OnSeminar OnDeferred Taxation under IAS Deferred Taxation under IAS

Saturday May 12th, 2012

By Muhammad Asif Jaffer FCMA, ACCA

Deferred Taxation under IAS 12Deferred Taxation under IAS 12

Cautions:� Topic demands comprehensive workshop to master

� Perfection is therefore not an objective of this seminar

� Confidential: I am your fellow professional, so please do not ask difficult questions

Cautions:� We might not be able to entertain complex practical questions that need thorough consideration.

� Do email me your questions at m.asif@khi.iba.edu.pk and I will try to respond, insha Allah

Outline� Some Definitions & Basic Concepts� Deferred Tax Recognitions� Presentations & Disclosures

� Questions

� I assume that the audience is reasonably aware with the basic idea of deferred tax

Definitions / ConceptsDefinitions / Concepts

1. Accounting Profit (Loss)2. Taxable Profit (Loss)3. Current Tax (expense)

(Income Tax @ Tax Profits)4. Tax Expense

(Income tax @ Accounting Profits)5. The difference b/w 3 & 4 is basically

deferred tax (with a few exceptions)

6. Temporary DifferencesIf we have a parallel accounting for tax,

a. B/S values in FR = Carrying Valuesb. B/S values in Tax = 7. Tax Basea-b = Temporary Differences

Must be reversing in future in order to be temporary.

The whole complexity (if there’s any) around deferred tax understanding is because of the understanding and working of tax base!

Temporary Differences (Closer Look)If

Assets: Carrying Values > Tax BasesLiab.: Carrying Values < Tax Bases

Then the differences are taxable temporary differences

Why: Because Asset will convert to expense more in FR then in Tax, so tax profits will be more means more future income tax

Temporary Differences (Closer Look)Assets: Carrying Values > Tax BasesLiab.: Carrying Values < Tax Bases

Then the differences are taxable temporary differences

Why: One of the logic to understand is that:Asset expense less in Tax then in FRLiab. revenue more in Tax then in FRso tax profits will be more means more tax

Temporary Differences (Closer Look)Assets: Carrying Values < Tax BasesLiab.: Carrying Values > Tax Bases

Then the differences are deductible temporary differences

Why: One of the logic to understand is that:Asset expense more in Tax then in FRLiab. revenue less in Tax then in FRso tax profits will be less means less tax

Tax Base & (Closer Look) Taxable Temporary Differences

IMP:The systematic way to find tax base of an

asset or liability in a scenario is to think of underlying accounting entry(ies) from Tax perspective

Let’s see all how it works

Tax Base & (Closer Look)Temporary Differences

An asset purchased for Rs.100 CashFR Tax __

Asset Dr. Cash Cr. Asset Dr. Cash Cr.

Carrying Value = Tax Baseof Asset of Asset

No Temporary Difference

An Expense accrued

FR Tax __Exp. Dr. P/A Cr. Exp. Dr. P/A Cr.

Carrying Value = Tax Base of Liability of Liability

Gratuity Expense recorded on actuarial basis Rs.100 but allowed in tax to the extent of actual paid Rs.25

FR Tax __Exp. Dr. 100 Exp. Dr. 25P/A Cr. 100 P/A Cr. 25

CV 100 (L) > TB 25 (L)

Deductible Temp. Difference

Dep. Exp recorded, with initial allowance being allowed in tax on asset of Rs.100

FR Tax __Exp. Dr. 10 Exp. Dr. 20Asset Cr. 10 Asset Cr. 20

CV 90 (A) > TB 80 (A)

Taxable Temporary Difference

Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a cash basis (12.7.2)

FR Tax __Asset. Dr. 10Income Cr. 10 -

CV 10 (A) > TB 0 (A)

Taxable Temporary Difference

Trade receivables have a carrying amount of 100. The related revenue The related revenue has already been included in taxable profit (tax loss) (12.7.3)

FR Tax __R/A Dr. 100 R/A Dr. 100 Income Cr. 100 Income Cr. 100

CV 100 (A) = TB 100 (A)

Definitions / ConceptsDefinitions / ConceptsTax Base & (Closer Look)

Temporary Differences

Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not taxable.(12.7.4)

FR Tax __R/A Dr. 100 R/A Dr.

100 Income Cr. 100 Equity Cr. 100

(a permanent difference so will not be recorded in tax even in future, that’s why credited to equity directly now)

CV 100 (A) = TB 100 (A)

A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax consequences.(12.7.5)

FR Tax __Loan R/A Dr. 100 R/A Dr.

100 Cash Cr. 100 Cash Cr. 100

CV 100 (A) = TB 100 (A)

Current liabilities include accrued expenses with a carrying amount of 100. The related expense will be deducted for tax purposes on a cash basis..(12.8.1)

FR Tax __Expense Dr. 100 Payable Cr. 100 -

CV 100 (L) > TB 0 (L)

Deductible Temporary Difference

Current liabilities include interest revenue received in advance, with a carrying amount of 100. The related interest revenue was taxed on a cash basis.(12.8.2)

FR Tax __Cash Dr. 100 Cash Dr. 100Unearned Cr. 100 Revenue Cr.

CV 100 (L) > TB 0 (L)

Current liabilities include accrued fines and penalties with a carrying amount of 100. Fines and penalties are not deductible for tax purposes.(12.8.4)

FR Tax __Exp. Dr. 100 Equity Dr. 100 Payable Cr. 100 Payable Cr. 100

(a permanent difference so will not be recorded in tax even in future, that’s why charged to equity directly now

CV 100 (L) = TB 100 (L)

It’s easy to go through Carrying values in the balance sheet one by one and consider temporary differences implications. But is not exhaustive

Research costs may have zero carrying value but positive tax base (12.9)

FR Tax __Exp. Dr. 100 Prepaid Dr. 100 Cash Cr. 100 Cash Cr. 100

CV 0 (A) < TB 100 (A)

Other issues:

Consolidated Return of Income Tax Base

Before Moving Forward, Let’s see deferred tax calculations and consequences and accounting in all previous scenarios discussed

Definitions / ConceptsDefinitions / ConceptsDeferred Tax Implications

of Scenarios Discussed

Before Moving Forward, Let’s see deferred tax calculations and consequences and accounting in all previous scenarios discussed. Assume Tax rate of 33.33 %

When Temp. Differences are nil, no def. tax implications

Deferred Tax Implications of Scenarios Discussed

Gratuity Expense recorded on actuarial basis Rs.100 but allowed in tax to the extent of actual paid Rs.25

FR Tax __Exp.Dr. 100 Exp. Dr. 25P/A Cr. 100 P/A Cr. 25

CV 100 (L) > TB 25 (L)Deductible Temp. Difference = 75

Deferred Tax Asset Dr. 25Deferred Tax Cr. 25

The later will be closed to P/L Current Tax Expense higher in P/L so deferred tax will compensate to make tax expense match revenues

In future, current tax expense will be lower in P/L so differed tax asset will liquidate (reverse) giving rise to expense to increase overall tax expense

Revisit

of Scenarios Discussed

Dep. Exp recorded, with initial allowance being allowed in tax on asset of Rs.100

FR Tax __Exp. Dr. 10 Exp. Dr. 20Asset Cr. 10 Asset Cr. 20

CV 90 (A) > TB 80 (A)

Taxable Temporary Difference =10

Deferred Tax Dr. 3.33Deferred Tax Liability Cr. Cr. 3.33

The former will be closed to P/L Current Tax Expense lower in P/L so deferred tax will compensate to make tax expense match net income

In future, current tax expense will be higher in P/L so differed tax liability will liquidate (reverse) giving rise to decrease overall tax expense

Revisit

Deferred Tax Implications of Scenarios Discussed

Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a cash basis (12.7.2)

FR Tax __Asset. Dr. 100Income Cr. 100 -

CV 100 (A) > TB 0 (A)

Taxable Temporary Difference = 10

Deferred Tax Dr. 33Deferred Tax Liability Cr. 33

The former will be closed to P/L Current Tax Expense lower in P/L so deferred tax will compensate to make tax expense match net income

In future, current tax expense will be higher in P/L so differed tax liability will liquidate (reverse) giving rise to decrease overall tax expense

Revisit

of Scenarios Discussed Current liabilities include accrued expenses with a carrying amount of 100.

The related expense will be deducted for tax purposes on a cash basis..(12.8.1)

FR Tax __Expense Dr. 100 Payable Cr. 100 -

CV 100 (L) > TB 0 (L)

Deductible Temporary DifferenceDeferred Tax Asset Dr. 33Deferred Tax Cr. 33

The later will be closed to P/L Current Tax Expense higher in P/L so deferred tax will compensate to make tax expense match net income

In future, current tax expense will be lower in P/L so differed tax asset will liquidate (reverse) giving rise to increase overall tax expense

Revisit

of Scenarios DiscussedCurrent liabilities include interest revenue received in advance, with a carrying amount of 100. The related interest revenue was taxed on a cash basis.(12.8.2)

FR Tax __Cash Dr. 100 Cash Dr.

100Unearned Cr. 100 Revenue Cr. 100

CV 100 (L) > TB 0 (L)

The later will be closed to P/L Current Tax Expense higher in P/L so deferred tax will compensate to make tax expense match net incomeIn future, current tax expense will be lower in P/L so differed tax asset will liquidate (reverse) giving rise to increase overall tax expense

Revisit

of Scenarios DiscussedResearch costs may have zero carrying value but positive tax base (12.9)

FR Tax __Exp. Dr. 100 Prepaid Dr.

100 Cash Cr. 100 Cash Cr. 100

CV 0 (A) < TB 100 (A)

The later will be closed to P/L Current Tax Expense higher in P/L so deferred tax will compensate to make tax expense match net income

In future, current tax expense will be lower in P/L so differed tax asset will liquidate (reverse) giving rise to increase overall tax expense

Revisit

In all previous examples, we were closing ‘deferred tax’ to P/L. This was so because the corresponding impact of the temporary difference was in P/L.

See for example the immediate preceding slide example.FR Tax __

Exp. Dr. 100 Prepaid Dr. 100

Cash Cr. 100 Cash Cr. 100

CV 0 (A) < TB 100 (A)

There’s corresponding difference in current year P/L as well!

Remember this point for now.

A deferred tax liability shall be recognized for all taxable temporary differences, except to the extent that the deferred tax liability arises from:

(a) the initial recognition of goodwill; or(b) the initial recognition of an asset or liability

in a transaction which:(i) is not a business combination; and(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)

Let’s see logic of these exemptions

Recognition:Recognition:

Except:(a) the initial recognition of goodwill

IFRS 3 requires Business Combinations to be recorded at Fair Value of Assets and Liabilities.

B/S A: Asset 100 Equity 100B/S B: Asset 10 Equity 10

Let’s assume A is taking over B by paying B’s shareholders sum of Rs.15. The fair values of B’s assets at the time are equal to the carrying values

B/S A: Asset 100 Equity 100B/S B: Asset 10 Equity 10

Let’s assume A is taking over B by paying B’s shareholders sum of Rs.15. The fair values of B’s assets at the time is 12.

Entry to record the combination in books of A will be

FR TaxAsset Dr. 10 Asset Dr. 10Goodwill Dr. 5 Equity Dr. 5Cash Cr. 15 Cash Cr. 15

CV 5 (A) < TB 0 (A)

Taxable Temporary Difference 5

FR TaxAsset Dr. 10 Asset Dr. 10Goodwill Dr. 5 Equity Dr. 5Cash Cr. 15 Cash Cr. 15

CV 5 (A) < TB 0 (A)

Taxable Temporary Difference 5

If we record deferred tax for this (@ say 40%), the entry could be

Deferred Tax Dr. 2 Deferred Tax Liability Cr. 2

Except:(a) the initial recognition of goodwillTaxable Temporary Difference 5

If we record deferred tax for this (@ say 40%), the entry could be

Deferred Tax Dr. 2 Deferred Tax Liability Cr. 2

The resultant deferred tax could not be closed to P/L as there’s no current tax consequences of this entry.

Further, the timing of the goodwill reversal is not known (impairment). It means although this is a temporary difference, the reversal timing is uncertain.

IAS therefore prohibits booking deferred tax for this.

Let’s now see the second exemption:

Except:(b) the initial recognition of an asset or

liability in a transaction which:(i) is not a business combination; and(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)

It is hard to imagine any transaction which satisfies above criteria in our context. See for example

Except: (b) the initial recognition of an asset or liability in a transaction

which:(i) is not a business combination; and(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss)

Normally, at the time of initial recognition of an asset or a liability, there are no deferred tax consequences.

See for example:

Asset purchased on Cash, Asset purchased on liability,Cash received from a liability,

continue to next slide…

See following examples where in initial recognition, there are temporary differences but affect either accounting or tax profits

Research costs capitalized in Tax but expensed out in FR

The resultant R&D asset is initial recognition in tax but it affects P/L too.. So no problem,

Although this example relates to deductible differences, it will clarify the concept at hand.Assume one receives exempt income in advance

_______FR TaxCash Dr. 10 Cash Dr. 10Unearned Cr. 10 Equity Cr.. 10

Although there’s a temporary difference, yet there are no P/L consequences for the time being. If we record deferred tax

Deferred Tax Asset Dr. 3.33Deferred Tax Cr. 3.33

Assume I prepay fines and penalties

_______FR TaxCash Dr. 10 Cash Dr. 10Unearned Cr. 10 Equity Cr.. 10

Deferred Tax Asset Dr. 3.33 Deferred Tax Cr. 3.33

This entry will disturb current matching (how…!)

If we omit recording DT for this, it will enable current matching; future matching is not required as the expense will be disallowed.

That’s why IAS does not permit this

Just a tip for your understandingAs for unearned exempt income, the Same logic applies to disallowed prepaid expenses

Example (12.22) An entity intends to use an asset which cost 1,000 throughout

its useful life of five years and then dispose of it for a residual value of nil. The tax rate is 40%. Depreciation of the asset is not deductible for tax purposes. On disposal, any capital gain would not be taxable and any capital loss would not be deductible.

(12.18) Temporary differences also arise when:(a) the identifiable assets acquired and liabilities

assumed in a business combination are recognized at their fair values

(b) assets are revalued and no equivalent adjustment is made for tax purposes

Let’s see the second one first

(12.18) Temporary differences also arise when: (b) FR revaluations

Let CV=TB=100, Revaluation under IAS16 to 120._______FR TaxAsset Dr.20 Equity Cr.20 -

CV(A)>TB(A) by 20 so taxable temp. diff.Def. Tax Dr. 6 Def. Tax Liability Cr.6

Note that there’re no P/L accounts involved in either side so adjusting DT a/c against P/L will disturb matching.(revaluation increases current equity and decreases future income)

The DT /ac will therefore be adjusted against equity and liquidated against future income.

This will enable current matching and will not disturb future matching.

(12.18) Temporary differences also arise when: (a) the identifiable assets acquired and liabilities assumed in a

business combination are recognized at their fair values

Note that under revaluation, the corresponding credit (or debit) goes to equity so DT a/c is also adjusted to equity.

Under business combination, the debit may go to goodwill or credit may go to equity (some sort of bargain surplus).

Here also there are no P/L consequences in the originating period, so DT a/c is adjusted accordingly to Goodwill or equity

‘The resulting deferred tax liability affects goodwill’ (12.19) should be clear now (for taxable temporary differences)

This is one of the reason DT on goodwill is not recognized (iterative affect on goodwill)

Unused Tax Losses

Net loss of Rs.100 is recordedFR Tax

Equity Dr. P/L Cr. Asset Dr. P/L Cr.

So its is clear that there’s a deductible temporary difference CV(A)0<TB(A)100

So DT asset is there which should be recorded. This will give a tax credit a current year’s income statement which is consistent with matching principle, being in loss

Deferred Tax Asset:Important Provisions

- Recognized only to the extent that future profits are probable to cover the liquidation (absorb) the deferred tax assets

- Both recognized and unrecognized DTA reassessed periodically

Investments in subsidiaries, branches and associates and interests in joint ventures:

Left for some other day

Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period

When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using the average rates that are expected to apply

Measurement:Measurement:

@ measured at the tax rates that are expected to apply, based on tax rates (and tax laws) that have been enacted

average rates that are expected to apply when progressive or regressive rates

@tax rate that are consistent with the expected manner of recovery or settlement

No discounting (weak arguments)

When Tax is a function of distributionLeft for some other day

Share Based PaymentsLeft for some other day

Business Combinations (in detail)Left for some other day

Net asset or liability is presented usually as the two are legally offset when relates to same taxing authority

Same applied for group when one entity has asset and other liability when consolidated tax return and adjustments are allowed

Presentation:Presentation:

On income statement, Tax Expense from ordinary activities shall be shown.

(Have to see IAS 1 regarding other activities)

Next slide clarifies this but is taken from a ready made presentation and I am not sure about it from IFRS perspective

Presentation:Presentation:

•As we learned in our initial discussion about the income statement, companies report operating income, then adjust this amount for profit (losses) from discontinued operations, extraordinary items and/or changed in accounting principles.

•Each of these “below the line” categories must be reported net of tax. That means that the total tax expense is allocated to each of income from continuing operations, discontinued operations, extraordinary items, and changes in accounting principles separately.

Intraperiod tax allocation: Borrowed

DisclosuresDisclosures

Left for some other day

QuestionsRemember initial slide

Deferred tax icmap kbc

Business

Transcript of Deferred tax icmap kbc

KBC INSURANCE · 2020-03-05 · ‘KBC Insurance NV’ refers solely to the non-consolidated entity. Difference between KBC Insurance and KBC Group ... Consolidated balance sheet

Introduction to Management Accounting JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP.

Product Costing Systems. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA- ECONOMICS, B.COM. ECONOMICS OF ICMAP, ICAP, MA- ECONOMICS, B.COM. FINANCIAL ACCOUNTING.

Activity-Based Costing and Management. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA- ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP.

Abdul Salam - ICMAP Final Certificate

ICMAP-Shakeel 1 Infrastructure and Operations. ICMAP-Shakeel 2 Performance Variable for IT Functional capabilities and limitations Price-performance ratio.

ICMAP Exclusiveiew - Pakistan Business Council

ACCOUNTING FOR PARTNERSHIPS. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA- ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B,

Gateway for ICMAP Students

Accounting Information Systems. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE.

why i join ICMAP

Interactive Concept Mapping in ActiveMath (iCMap)

KBC Group - KBC.com · KBC Group 4Q and FY 2016 results Press presentation Johan Thijs, KBC Group CEO ... KBC Group Consolidated results 4Q 2016 performance. 5 KBC Group: Strong business

Inventory Costing and Capacity Analysis JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP.

Ubi And Kbc Karel Heyndrickx Kbc Asset Management

International presence of the KBC Group · International Factors KBC Asset Management KBC Bank KBC Financial Products Brussels KBC Investco KBC Lease KBC Securities ... Explanatory

ICMAP Career Pack

Syllabus ICMAP 2006

Map of IDP & Refugee Camps N - Kachinland · PDF fileShwe Zet KBC 342 Ziun KBC 328 Belehem KBC 134 Maliyang KBC 290 Maisak wang KBC 102 Manhkring KBC 272 Du mare Qta ... IDP and Refugee

ICMAP 2014