IAS 12 Deferred Tax - E

MATERIALS FOR THIS TRAINING.
PLEASE REFER TO ACCA-MOF SOURCE IF FURTHER USE
IAS 12
Differred
Income Tax
Ms Eunice Chu
Head of Policy
ACCA Hong Kong
Mr Daniel De Aal
Director
Grant Thornton Vietnam
Hanoi, 13 September 2019

Agenda
 Differences in accounting profits vs taxable profits.
 What is deferred tax liabilities (DTL) and deferred tax
assets (DTA)?
 Summary of deferred tax
 Definitions and concepts
 Principles of IAS 12
 Sources (Examples) of DTL and DTA
 Recognition criteria of deferred tax assets – amendment
on 19 January 2016
 Exemption to provide deferred tax
 Disclosure : reconciliation
 Deferred tax at group level
 Offsetting
2 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA
Which party guide the following?
How the financial

records are compiled
&
How to produce the
PROFIT?
How much tax to pay

to the government?

Income statement vs Tax computation
A computer costs $30,000 was used for 3 years. Depreciation $10,000 p.a.
Tax authority allows full deduction when purchase.
Income Add back Dep

statement depreciation allowance Tax P/L
Income 100,000 100,000
Costs
Rental (11,500) (11,500)
Salary (18,000) (18,000)
Depreciation (10,000) 10,000 (30,000) (30,000)
Others (500) (500)
Operating costs (40,000) (60,000)
Net profit 60,000 40,000
Tax thereon - 10% 4,000

Tax computation
Tax computation
Profits before tax 60,000
Add: depreciation 10,000
Less: computer cost (30,000)
Assessable profits 40,000
10%
Tax payable - 10% 4,000

Financial statements
Profits before tax a 60,000

Less: tax b (4,000)
Profits after tax 56,000
Save 3% tax
now. But will
Effective tax rate b/a -7%
pay back in
future
To reflect the delay

payment of tax, we
have to provide
deferred tax.

Two types of taxation
Income statement : Tax charge consists of two components
1. Current tax – amount actually payable to tax authority

2. Deferred tax – accounting adjustments that match
a. accounting base vs tax base of assets or liabilities; OR
b. tax charge vs profit before tax
Balance sheet:
1. Unpaid tax  liabilities

2. Overpaid tax  prepayment
3. Deferred tax liabilities (DTL) or deferred tax assets (DTA)
Deferred tax
liabilities
What is deferred tax liabilities (DTL) ?
• A computer at $30,000 and depreciates it over 3 years.
• Tax authority allows full deduction in the year of acquisition.
Year 1 Year 2 Year 3 Total

Accounting profit 60,000 60,000 60,000 180,000
Depreciation 10,000 10,000 10,000 30,000
Less: Computer addition (30,000) (30,000)
Taxable profit 40,000 70,000 70,000 180,000
Tax rate 10% 10% 10% 10%
Current tax payable 4,000 7,000 7,000 18,000

Profit before tax 60,000 60,000 60,000 180,000
Tax (4,000) (7,000) (7,000) (18,000)
Profit after tax 56,000 53,000 53,000 162,000
Effective tax rate -7% -12% -12% -10%

Profit or loss account approach

Accounting Taxable Tax effect
Difference Remark
expense expenses (change)
Year 1 10,000 30,000 (20,000) (2,000) DTL created
Year 2 10,000 - 10,000 1,000 DTL reduced
Year 3 10,000 - 10,000 1,000 DTL reduced
Total 30,000 30,000 - - or reversed
Balance Sheet approach

Accounting Tax base
Difference DTL Remark
base asset asset
Year 1 20,000 - 20,000 2,000 DTL balance
Year 2 10,000 - 10,000 1,000 DTL balance
Year 3 - - - -

Year 1 Year 2 Year 3 Year 4
Tax (4,000) (7,000) (7,000) (18,000)
Deferred tax (2,000) 1,000 1,000 -
Profit after tax 54,000 54,000 54,000 162,000
Effective tax rate (normalized) -10% -10% -10% -10%
Year 1 Dr. P/L – Taxation $2,000

Deferred tax (DT) is
Cr. Deferred tax liabilities ($2,000)
an accounting
measure used to
match the tax effects
Year 2 Dr. Deferred tax liabilities $1,000
of transactions with
Cr. P/L – Taxation ($1,000) their accounting
impact
Year 3 Dr. Deferred tax liabilities $1,000
Cr. P/L – Taxation ($1,000)

Deferred tax summary
Accounting Tax Base Tax Deferred tax
Base Asset Asset % liabilities
Account Base Tax Base Tax

Asset 0 DTL
Taxable timing difference  deferred tax liabilities

Recap
• Deferred tax (DT) is an accounting measure used to match

the tax effects of transactions with their accounting impact.
• DT is not an amount currently payable to tax authorities.
• It is simply an accounting adjustment

Deferred tax
assets
Income statement vs Tax computation
An entity accrued $30,000 pension per year for 3 years.
But only paid up the total amount of $90,000 in year 3 to a reliable pension provider.
Income Add back

Year 3 statement expense Deduction Tax
Income 160,000 160,000
Costs
Rental (11,500) (11,500)
Salary (18,000) (18,000)
Accrued pension (30,000) 30,000 (90,000) (90,000)
Others (500) (500)
Operating costs (60,000) (120,000)
Net profit 100,000 40,000
Tax thereon - 10% 4,000

What is deferred tax assets (DTA) ?
• A company accrued a pension cost of $30,000 per year.
• It only paid out the accrued amount in Year 3 when it found a reliable pension house
• Tax authority allows deduction when payment is made.

Accounting profit 100,000 100,000 100,000 300,000
Accrued pension cost 30,000 30,000 30,000 90,000
Less: actual incurred pension cost - - (90,000) (90,000)
Taxable profit 130,000 130,000 40,000 300,000
Tax rate 10% 10% 10% 10%
Current tax payable 13,000 13,000 4,000 30,000

Tax (13,000) (13,000) (4,000) (30,000)
Profit after tax 87,000 87,000 96,000 270,000
Effective tax rate -13% -13% -4% -10%
Accounting Taxable Tax effect
Difference Remark
expense expenses (change)
Year 1 30,000 - 30,000 3,000 DTA created
Year 2 30,000 - 30,000 3,000 DTA increased
Year 3 30,000 90,000 (60,000) (6,000) DTA reduced
Total 90,000 90,000 - -

Accounting Tax base
Difference DTL Remark
base liability asset
Year 1 30,000 - 30,000 3,000 DTA balance
Year 2 60,000 - 60,000 6,000 DTA balance
Year 3 90,000 90,000 - -

Tax (13,000) (13,000) (4,000) (30,000)
Deferred tax 3,000 3,000 (6,000) -
Profit after tax 90,000 90,000 90,000 270,000
Effective tax rate (normalized) -10% -10% -10% -10%
Year 1 Dr. Deferred tax assets $3,000
Year 2 Dr. Deferred tax assets $3,000
Year 3 Dr. P/L – Taxation $6,000
Cr. Deferred tax assets ($6,000)

Deferred tax summary
Base Asset Asset % liabilities

Base Liabilities % assets
Liabilities
Account Base Tax Base Tax

Asset 0 DTL
Liabilities 0 DTA
Taxable timing difference  deferred tax liabilities

Deductible timing difference  deferred tax assets
Definitions &
Concepts
Definition of Tax Base
Tax base of an asset or liability = amount attributed to that asset or
liability for tax purposes.
In above example:
tax base of computer is zero because tax authority allows full
deduction
Official definition:
Tax base of asset = Carrying amount – taxable amount + deductible amount

Official definition of tax base
Official definition:
Tax base of asset = Carrying amount – taxable amount + deductible amount
Carrying amount Taxable amount Deductible Tax base

amount
Year 1 Computer at end of Future dep add back Future depreciation
Year 1 allowance
$20,000 $20,000 0 0
Year 1 Accrued pension at Taxable amount Deductible amount

end of Year 1 (add back) (Cash paid in Yr 1)
$30,000 $30,000 0 0

Definition of Temporary differences
Temporary differences (TD): differences between the carrying

amount of an asset or liability vs its tax base.
Q: Why there would be temporary differences?

A: If an entity has a liability and tax relief is provided when payment is
actually made to settle the liability rather than when liability is recognized
for accounting purposes.
e.g. Accrue $30,000 pension cost in Year 1, 2 and 3. Tax grants deduction
in Year 3 when payment is made.  DTA
A: If an entity has an asset and tax becomes payable when money is

received.
e.g. Interest receivable booked in Year 1  only got taxed when actual
cash is received in Year 2  DTL.
No temporary difference
Is there temporary difference for EVERY balance sheet item?
A. Yes B. NO
Year
Also got tax in
1 Dr. Account receivable 1,000 Year 1. Then no
Cr. Sales (1,000) timing difference
Deferred tax calculation

Accounting Tax Base Diff Tax rate DTL / DTA
Base
Account 1,000 1,000 0 10% 0
receivable

No temporary difference
Year
No tax
1 Dr. Bank 3,000
implication.
Cr. Loan payable (3,000)

Accounting Tax Base Diff Tax rate DTL / DTA
Base
Loan 3,000 3,000 0 10% 0
payable

‘Permanent’ difference
What happen if some incomes are NEVER tax or some expenses are NEVER tax deductible?
Year
1 Dr. Bank 7,,000 Capital gain. If
Cr. Land \ asset (3,000) not subject to
Cr. P/L – capital gain on disposal 4,000 tax at all
Year Non deductible

expenses
1 Dr. P/L – penalty for illegal parking 2,500
Cr. Bank (2,500)
Accounting base = tax base when

1. When expenses will never be deducible for tax purposes Permanent
2. When income will never be taxable for tax purpose difference
(old term)

Exercise : Find the tax base
Tax base
1 Interest receivable $3,000. It is not taxable $3,000 P. Difference
2 Dividend receivable $9,000. Dividends are not taxable $9,000 P. Difference
3 Machine cost $10,000. Depreciated for $4,000 for

$6,000 No difference
current year. Depreciation ($4,000) is tax deducted
expense.
Future depreciation will also be tax deductible
4 Trade receivable $750 which has been taxed $750 No difference
5 Loan payable $3m. No tax implication in loan

$3 m No difference
repayment.

Definitions of taxable vs deductible temporary differences
a) taxable temporary differences : TD that will become taxable

profit (tax loss) of future periods when the carrying amount of
the asset or liability is recovered or settled;
• (e.g. add back depreciation of computer in year 2 &3)
• (e.g. tax the interest income recognized when received in year 2)
or
a) deductible temporary differences, TD will become deductible in

determining taxable profit (tax loss) of future periods when the
carrying amount of the asset or liability is recovered or settled.
(E.g. general bad debt provision)

Definition of DTL vs DTA
Deferred tax liabilities (DTL) : amounts of income taxes payable in

future periods in respect of taxable temporary differences.
(e.g. add back depreciation charges in year 2 & 3)
Deferred tax assets (DTA) are the amounts of income taxes

recoverable in future periods in respect of:
(a) deductible temporary differences; (e.g. deduct pension when

pay out)
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.

Principles of IAS 12
Full Provision Base : all temporary timing differences between tax base and accounting
base will be fully provided.
Liability method: to provide the potential tax liabilities that ultimately will become payable.
A company has $1,000 income receivable booked in 20x7 when the tax rate is 25%.
Tax will be payable when actual cash is received in 20x8 when tax rate is 30%.
20x7 20x8 20x7

Tax rate 25% 30% 25%
Income \ Profit $1,000 $0 $1,000
Tax $0 ($300) ($300)
Profit after tax $1,000 ($300) $700
Conclusion :
• use future year tax rate to calculate deferred tax

Tax rate
• use future year tax rate to calculate deferred tax
• at tax rates expected to be apply in the period when the asset is realized or
liability settled, based on the tax rate and laws enacted.
• Different tax rates to different levels of taxable income  Average rate rates.
• Some countries, tax rate for on-going use of an asset may differ from the tax
rate chargeable gain on its sale.
• Rule of thumb : An appropriate tax rate and tax base

Tax rate
• A company has a machine with carrying value of $100,000.
• Tax base $40,000
• If sold  tax rate is 40%
• General tax rate is 17% on operating income
Deferred tax calculation - Machine

Accounting Tax Base Diff Tax rate DTL
Base
If sold 100,000 40,000 60,000 40% 24,000
If use 100,000 40,000 60,000 17% 10,200

Discounting
As DT will be paid in future,

do we need to DISCOUNT
the amount when recognize
in book ?
IAS 12 dose not allow

DTA / DTL to be
discounted, as too
complex !

Source of
deferred tax
Source of deferred tax
Deferred tax liabilities Deferred tax assets
1. Depreciation of assets 1. Tax losses

2. Revaluation of PPE 2. General provision
3. Investment properties 3. Unrealized loss on fair value
4. Development cost (IA) measurement of debt
instruments (updates in Jan
5. Transaction costs of loans 2016)
6. Convertible bonds

Depreciation of assets - DTL
1. A company buy a car $10,000 and depreciate over 5 years , with annual depreciation
of $2,000
2. For tax purpose, initial allowance of 60% is granted in first year, and annual allowance
of 30% at reducing balancing basis
Tax Computation
Tax Base
30% Year 1
pool Accounting profit 60,000
Cost 10,000 Depreciation 2,000
Initial allowance – 60% (6,000) Less: dep allowance (IA+AA) (7,200)
4,000
Taxable profit 54,800
Annual allowance - 30% (1,200) Tax rate 10%
Current tax payable 5,480
Tax written down value 2,800

Depreciation of assets - DTL
Base
Vehicle 8,000 2,800 5,200 10% 520
Dr. P/L – Taxation $520

Cr. Deferred tax liabilities ($520)
Year 1 Year 1
Profit before tax 60,000 60,000
Tax (5,480) (5,480)
Deferred tax - (520)
Profit after tax 54,520 54,000
Effective tax rate -9% -10%
Revaluation of PPE – DTL to revaluation reserve
1. A building purchased at $1,000m and depreciation 50 years (no residual value).
2. Tax depreciation is 4% per year.
3. After first year, the building revalued to $1,200m
4. Revaluation gain is recognized in the revaluation reserve
Accounting Tax Deferred

Tax base Difference
base rate tax
Cost 1,000 1,000 -
Depreciation (20) (40)
Net book value 980 960 20 10% 2 DTL
Revaluate to $1,200 220 - 220 10% 22 DTL
Revalued amount 1,200 960 240
Dr. P/L – Taxation $2

Dr. Revaluation reserve $22
Cr. Deferred tax liabilities ($24)
Para 12.61A : Deferred tax shall be recognized outside P/L if the tax relates to items
that are recognized outside profit or loss.
Investment properties (IAS12.51C) – DTL
1. A investment property purchased at $100m and measure at fair value (no depreciation)
according to IAS 40.
2. Tax depreciation is 4% per year.
3. After first year, the investment property is revalued to $150m
4. There is NO capital gain tax
• Since the investment property is stated at fair value, there is a rebuttable

presumption that the investment property would be recovered through sales
• i.e. the revalued gain would be realized through sales and so would not be taxable.
No deferred tax would be provided.
• Deferred tax is limited to the CLAW BACK of depreciation allowance claimed.

• Since the investment property is stated at fair value, there is a rebuttable

presumption that the investment property would be recovered through sales
• i.e. the revalued gain would be realized through sales and so would not be taxable.
No deferred tax would be provided.
• Deferred tax is limited to the CLAW BACK of depreciation allowance claimed.

base
Tax base Difference
rate tax
Cost 100 100 -
Depreciation - (4)
Net book value 100 96 4 10% 0.4 DTL
Revaluate to $150 50 - 50 0% - DTL
Revalued amount 150 96
Dr. P/L – Taxation $0.4

Cr. Deferred tax liabilities ($0.4)

• If the presumption that the investment property would be recovered through sales is
rebutted, then the value of the investment property is recovered through USE.
• The investment property will generate higher rental income when its value
appreciated.
• Since its value is recovered through use, that translate into higher rental income
which would be taxable.
• So deferred tax is provided on the revaluation surplus (which is equivalent to future
rental income)

base
Tax base Difference
rate tax
Cost 100 100 -
Depreciation - (4)
Net book value 100 96 4 10% 0.4 DTL
Revaluate to $150 50 - 50 10% 5 DTL
Revalued amount 150 96 5.4 DTL
Dr. P/L – Taxation $5.4

Cr. Deferred tax liabilities ($5.4)
Deferred Tax for
Investment Properties
No capital gain tax With capital gain tax
IP stated at FV model & IP stated at cost \ FV

presume recover through model but recover
SALE through USE
DTL is limited to claw DTL is calculated on all temporary timing

back on sales of any difference, including depreciation and
depreciation allowance appreciation gain
previously granted
Development cost – DTL
1. A company spent and capitalized $60m development cost on developing software
apps and amortize it over 4 years
2. For tax purpose, the amount was fully deductible when it was incurred
Tax computation Year 1

DT calculation –
Accounting profit 100,000 Software development cost
Amortization $60m / 4 years 15,000
Less: software development Accounting Tax Diff Tax DTL
(60,000) Base Base Rate
cost
Taxable profit 55,000 45,000 0 45,000 10% 4,500
Tax rate 10%
Year 1 Year 1
Tax (5,500) (5,500)
Deferred tax - (4,500)
43 Effective
06/09/2019 taxPUBLIC
rate IAS 12 - Deferred Tax -5.5% -10% ©ACCA
Development cost – DTL
1. A company paid $60m to acquire a patent on certain technology, which was
capitalized and amortize it over 4 years
2. For tax purpose, the amortization was not deductible as it is capital in nature
Tax computation Year 1

DT calculation – Patent cost
Accounting profit 100,000
Accounting Tax Diff Tax DTL
Amortization $60m / 4 years 15,000 Base Base rate
Less: Patent acq cost -
45,000 45,000 0 10% 0
Tax rate 10%
Permanent
Year 1 difference
Profit before tax 100,000 (old term)
Tax (11,500)
Deferred tax -
Profit after tax 88,500
Shown as reconciling items in the notes to accounts.
Effective
44
tax rate
06/09/2019
-11.5% ©ACCA
Transaction costs of loans - DTL
1. A company issued $30m 3-year debenture at 5% p.a.
2. Annual interest payment is 5% x $30m = $1.5m
3. Transaction cost is $2m is deducted from the net proceed and amortized to P/L.
4. Transaction cost is deductible for calculating taxable profit when it is paid
5. Effective interest rate is 7.57%
6. Only actual interest expenses and transaction cost paid are tax deductible
Accounting Base
Tax Computation
Closing
Effective Year 1
Beginning Payment amortized
interest rate Accounting profit 60,000
cost
Interest expense 2,120
7.57% $30m x 5% Less : interest paid (1,500)
Year 1 28,000 2,119 (1,500) 28,619 Less : transaction cost paid (2,000)
Year 2 28,619 2,166 (1,500) 29,284 Taxable profit 58,620
Year 3 29,284 2,216 (1,500) 30,000 Tax rate 10%
6,500 Current tax payable 5,862

Transaction costs of loans - DTL
Base 10%
Loan 28,620 30,000 1,380 10% 138
Year 1 Year 1
Tax (5,862) (5,862)
Deferred tax - (138)
Effective tax rate -9.8% -10%

Convertible Bonds – DTL
1. A company issued $100m 3-year convertible bonds at 5% p.a.
2. Annual interest payment is 5% x $100m = $5m
3. Bonds without conversion right is 7%.
4. Transaction cost is deductible for calculating taxable profit when it is paid
5. Tax rate 10%
Cash Effectiv Discounted Deferred tax – convertible bonds

Year
outflow e rate cash flow Accounting Tax Base Diff DTL
Base
1 5,000 /1.07 4,673
2
2 5,000 /1.07 4,367 94,751 100,000 5,249 525
3
3 105,000 /1.07 85,711
94,751
Dr. Bank $100,000 Dr. Equity $525

Cr. Liability – convertible bonds ($94,751) Cr. Deferred tax liability ($525)
Cr. Equity ($5,249)

Convertible Bonds – DTL
Accounting Base
Closing
Effective
Beginning Payment amortized
interest rate
cost
7.00% $100m x 5%
Year 1 94,751 6,633 (5,000) 96,384
Year 2 96,384 6,747 (5,000) 98,130
Year 3 98,130 6,869 (105,000) (0)
Tax Computation
Year 1
Interest expense 6,633
Less : interest paid (5,000)
Tax rate 10%
Convertible Bonds – DTL reverse
Base
Loan 96,384 100,000 3,616 10% 362
Less : previously DTL on b/s 525
DTL reduced 163
Dr. Deferred tax liability $163

Year 1 Year 1
Cr. P/L – tax ($163)
Tax (6,163) (6,163)
Deferred tax - 163
Effective tax rate -10.3% -10.0%
Source of deferred tax
Deferred tax liabilities Deferred tax assets
1. Depreciation of assets 1. General provision

2. Revaluation of PPE 2. Tax losses
3. Investment properties 3. Unrealized loss on fair value
4. Development cost (IA) measurement of debt
instruments (updates in Jan
5. Transaction costs of loans 2016)
6. Convertible bonds

General Provision – for bad debts / inventories / Pension
General provision for bad debts recognized $200,000
Do not benefit from tax relief until proved to be irrecoverable
This year one debtor owed $30,000 became bankrupted.
Tax Computation
Year 1
General provision 200,000
Less : bad debt (30,000)

Tax rate 10%

General Provision – for bad debts / inventories / Pension

Base 10%
Provision 200,000 30,000 170,000 10% 17,000
Year 1 Year 1
Tax (23,000) (23,000)
Deferred tax - 17,000
Effective tax rate -38.3% -10%
Dr. Deferred tax asset $17,000

Cr. P/L – tax ($17,000)

Tax Losses – DTA
IAS 12: Recognizes deferred tax assets on tax losses only when it is probable that
taxable profits will be available to offset \ utilized such tax losses in the same taxation
authority & same taxable entity.
Y1 Y2 Y3 Y4 Total
$ $ $ $ $
(Loss) \Profit before tax (100) 80 200 150 330
Tax - 10% - - (18) (15) (33)
(Loss) \ Profit after tax (100) 80 182 135 297
Effective tax rate 0% 0% -9% -10% -10%
Deferred tax considered

Y1 Y2 Y3 Y4 Total
$ $ $ $ $
(Loss) \ Profit before tax (100) 80 200 150 330
Tax - 10% 10 (8) (20) (15) (33)
(Loss) \ Profit after tax (90) 72 180 135 297
Effective tax rate -10% -10% -10% -10% -10%

Tax Losses – DTA
20x3 20x4 20x5
20x1 20x2 Total forecast forecast forecast
Tax loss  DTA restricted to the utilized
Tax loss (1,000) (800) (1,800) 600 300 0
tax loss
900 x 10% = $90 DTA
20x3 20x4 20x5

If the company’s loss can only carry
forward for 2 years. 20x1 20x2 Total forecast forecast forecast
Tax loss (1,000) (800) (1,800) 1500 1600 0
Tax base of the loss = 2 year tax loss, but
restricted to the amount that is offset by $1,800 x 10% = $180 DTA
future profits.
Classification: Public SBR Mar / Jun 2019 ©ACCA

Tax Losses – DTA
In determining whether it is probable that taxable profit, one should consider:
1. the company will have sufficient estimated taxable profits in future;
2. tax planning opportunities in future;
3. whether there are sufficient deferred tax liabilities, which are expected to
reverse in the same period as the deferred tax asset is expected to
reverse.

Tax Losses – DTA
How much DTA to be provided for $30,000 tax loss when Company
Cici is unsure how much profit it can generate in future and there is
no tax planning opportunity?
Cici has $10,000 car with 5 years useful life and has been used for 1
year. The car NBV is $8,000 and tax w.d.v. is $2,800

Base
Vehicle 8,000 2,800 5,200 10% 520

Tax Losses – DTA
Tax Computaion
10% tax
Estimate accounting P/L (for all future years) $0
Add : Depreciation (all future depreciation) $8,000
Less : All future depreciation allowance ($2,800)
Assessable profit (that can utilize the tax losses) $5,200 $520 DTL
$520 DTA
Tax losses b/f ($30,000) ???
($24,800)
Assume Cici is not able to make any profit, at least we can provide DTA
= DTL which represent :
The amount of timing difference expected to reverse in the same

period as the deferred tax asset is expected to reverse.
Tax Losses – DTA
How much DTA to provide for the tax loss $30,000 brought forwards, if Cici in future,
instead of making zero profit, is making :
Case A : Loss of $7,000
Case B : Profit of $1,000
Case C : Loss of $4,000
Tax Computaion Case A Case B Case C
Accounting P/L (for all future years) ($7,000) $1,000 ($4,000)

Add : Depreciation (all future depreciation) $8,000
Less : All future depreciation allowance ($2,800) $5,200 $5,200 $5,200
Assessable profit (that can utilize the tax losses) ($1,800) $6,200 $1,200
Tax losses brought forward ($30,000) ($30,000) ($30,000)

Tax losses carry forward ($31,800) ($23,800) ($28,800)
DTA – 100% $0 $620 $120

Amendment on
19 Jan 2016
Unrealized loss on debt instruments
– amendment on 19 Jan 2016
Company Cici holds debt instruments that were measured at FVTPL as follows:
Debt FV \ Cost \ Temporary Tax 10%

Accounting Tax base timing
base difference
A 20,000 30,000 (10,000) 1,000 DTA
B 34,000 30,000 4,000 (400) DTL
• Cici does not intend to sell them.

• It will hold them until maturity to collect back the principal + interest.
• Hence it will NOT experience the unrealized gain or loss.
• Should Company Cici provide DTA or DTL?

base difference
A 20,000 30,000 (10,000) 1,000 DTA
B 34,000 30,000 4,000 (400) DTL
Yes !
IASB amendments on 19 January 2016 clarify that
• the existence of deductible temporary difference (DTA on
unrealized loss) depends solely on a comparison of the
carrying amount of an asset and its tax base.
• It is NOT affected by possible future changes in the
carrying amount or expected manner of recovery of the
asset.
• effective on 1 January 2017
Company Cici holds debt instruments as follows:
• 2-year high quality corporation bond of RMB50,000 at 5% p.a.

• Interest to be paid at maturity date
• At end of Year 1, the fair value of bonds was RMB44,500.
• Cici chooses to measure the bonds at FVTPL.
• But Cici expect the bond issuer will pay up principal and interest by
maturity date. So there would not be any loss suffer
• Cici also intends to hold the bonds until maturity to collect the amount
due.
• Should Cici provide DTA or DTL?

Accounting base
Effective Closing
Beginnin
interest amortized Cost or Fair Fair
g
rate cost Tax base Value Value Devalued
5.00%
RMB RMB RMB HKD RMB HKD HKD
Year 1 50,000 2,500 52,500 65,625 44,500 55,625 (10,000)
Year 2 52,500 2,625 55,125

base difference
A 55,625 65,625 (10,000) 1,000 DTA
Yes, Cici should recognize DTA $1,000 provided that it can utilize it.

Should Cici provide DTA for its unrealized loss of $10,000 in below situation ?
Tax Computaion Case A Case B Case C
Future accounting profit \ (loss) $0 $3,000 ($7,000)

Add : Dep (all future dep) $8,000
Less : All future dep allowance ($2,800) $5,200 $5,200 $5,200
Future assessable profit before FV loss $5,200 $8,200 ($1,800)
Less : FV loss on financial assets ($10,000) ($10,000) ($10,000)
Future assessable profit per tax return ($4,800) ($1,800) ($11,800)
DTA - 10%
A - on future accounting profit $0 $300 $0
B - on future assessable profit before FV loss $520 $820 $180
C - on total future assessable profit $480 $180 $1,180
Exemption
to provide deferred tax

Exemption to provide deferred tax
(1)Temporary differences arising on initial recognition
Temporary differences arising on initial recognition where:

• The underlying transaction is not a business combination; and
• At the time of the transaction, it affects neither accounting profit nor taxable
profit (that means only affect balance sheet items). No recognition of the
resulting deferred tax.
• Initial recognition Exemption
• Land \ Building \ PPE – when it was Dr. Machine \ Building \ PPE $XXX
first acquired. Cr. Bank ($XXX)
• But when these assets subsequently Initial recognition
depreciate or revaluate or devaluate, it
creates temporary timing difference
and give rise to DT.

(1)Temporary differences arising on initial recognition
Temporary differences arising on initial recognition where:

• The underlying transaction is not a business combination; and
• At the time of the transaction, it affects neither accounting profit nor taxable
profit (that means only affect balance sheet items). No recognition of the
resulting deferred tax.
• Initial recognition Exemption Dr. Intangible asset \ inventory \ $XXX
Prepayment
Cr. Cr. Bank ($XXX)
Initial recognition
• Intangible assets \ Dr. Bank $XXX

inventories \ prepayment
Cr. Cr. Loan ($XXX)
\ deposits \ loans
Initial recognition

(2) Goodwill
• In accounting base, goodwill will be a asset. But in tax base, it is Nil.  timing
difference arise.
• However under IAS 12.21, goodwill is explicitly excluded from providing

deferred tax.
• Because goodwill is measured as a residual and the recognition of the
deferred tax liability would increase the carrying amount of goodwill.

(2) Goodwill (continued)
Question:
Is there a similar exemption to provide deferred tax on goodwill under
Vietnamese accounting standards?
Answer:
Yes, Circular 202/2014/TT-BTC requires the parent company NOT to recognize
deferred tax liability arisen from goodwill in a business combination.
However both Vietnamese accounting standards as well as current tax

regulations allow goodwill to be amortised (max. 10 years). If applied on the
same basis there will be no deferred tax liabilities applicable.

IFRS 3 : Goodwill
Partial Goodwill – NCI Proportionate share acquiree’s identified NAV
GW $15 - Acquirer's 60% portion
FV of (a) Acquirer's consideration $75

$60
acquiree's
NAV
$100
(b) NCI $40 ($100 x 40%)

Proportionate share of acquiree's FV of NAV

Disclosure:
Reconciliation
Tax computation
$
1 Depreciation of PPE 2,000
Depreciation allowance of PPE (7,200)
2 Amortization of software 15,000
Tax deduction of software cost (60,000)
3 Amortization of patent (non tax deductible) 15,000
4 Interest expenses on debt instruments 2,120
Interest paid (cash outflow) on debt instrument (1,500)
Transaction cost of issuing debts (2,000)
5 General provision for bad debts 200,000
Specific bad debts (30,000)
Tax rate 10%
Tax thereon 19,342
$
Accounting profit 60,000 32%
Tax charge (tax bill) (19,342) effective tax

Calculate deferred tax
$
1 Depreciation of PPE 2,000 ($520) DTL
Depreciation allowance of PPE (7,200)
2 Amortization of software 15,000 ($4,500) DTL
Tax deduction of software cost (60,000)
3 Amortization of patent (non tax deductible) 15,000
4 Interest expenses on debt instruments 2,120
($138) DTL
Interest paid (cash outflow) on debt instrument (1,500)
Transaction cost of issuing debts (2,000)
5 General provision for bad debts 200,000 $17,000 DTA
Specific bad debts (30,000)
Tax rate 10% ____________
Tax thereon 19,342 $11,842 DTA

Provide for deferred tax
Dr. Deferred tax asset $11,842

Cr. Cr. P/L - Tax ($11,842)
Provision for net DTA
$
Tax charge (tax bill) (19,342) 12.5%
Deferred tax assets 11,842 effective tax
(7,500)

Tax reconciliation – disclose in notes to account
$
10%
Tax thereon ($60,000 x 10%) 6,000

Amortization of patent (non tax deductible) 1,500
Tax charge in profit or loss account 7,500
Conclusion:
• Reconciling items are those permanent differences  non taxable income or non
deductible expenses.

Tax reconciliation – disclose in notes to account
Summary of key disclosure requirements as per IAS 12:
1. Separate presentation of current and deferred taxes
2. explanation of the relationship between tax expense (income) and

accounting profit
3. unrecognised temporary differences
4. significant judgments made with respect to income taxes

(for example deferred tax assets on losses carried forward)

Deferred tax at
group level
Deferred tax at group level
1. Fair value adjustments arise from business combination

(para 12.19);
2. Deferred tax asset arise from tax losses of the acquired subsidiary
(para 12.26c);
3. Unrealized profit from intercompany transactions;
4. Undistributed profit of overseas associate or joint venture

companies.

2. DTA on acquired tax losses
• Parent acquired 80% of a subsidiary at $15m when subsidiary’s

share capital and accumulated losses is $10m and ($4m)
respectively.
• NCI’s fair value at the date of acquisition is $3m.
• The book value of the assets of the subsidiary approximately their

fair value, except an office building whose fair value is $7m higher
than its book value
• Tax rate is 10%.

2. DTA on acquired tax losses
Net assets acquired

Share capital $10m
Retained earning ($ 4m)
DTA - on loss $0.4m Consideration transferred $15m
Bldg increase in FV $7m NCI $ 3m
DTL – on FV of bldg ($0.7m)
NAV $12.7 Total $18m
Goodwill $5.3

$ $
Dr. Share capital 10
Dr. Building 7
Dr. DTA 0.4
Cr. Accumulated losses (4)
Cr. Deferred tax liability (0.7)
Dr. Goodwill (balancing figure) 5.3
Cr. Investment in subsidiary (15)
Cr. NCI (3)
It is a business combination, therefore the initial recognition exemption

does not apply. DTL has to provide on the fair value change of
building $7m x 10% = $0.7m
The subsidiary has tax losses. If the parent can utilize it, then it can
recognize DTA $4 x 10% = $0.4m
Deferred tax at group level – Unrealized profit
• A sold inventory cost $100 to B at $120 and pay 10% tax.
• B did not sell the inventory.
• A’s tax rate is 10% and B’s tax rate is 10%
Dr. / (Cr)
A B Elim sales URP Total
$ $ $ $ $
Sales (120) - 120 -
Cost of sales
Dr. P/L – COS (URP)100 - 20 (120) 20 -
Gross profit
Cr. Stocks (20) - 20 -
Tax - 10% 2 - 2 ??
Profit after tax (18) - 2
Inventory 120 (20)
Dr. Sales $120 Dr. Cost of sales $20

82 Cr. Cost of
06/09/2019 sales
PUBLIC ($120)
IAS 12 - Deferred Tax
Cr. Inventory ©ACCA
($20)
• Unrealized profit  give rise to deferred tax asset

Dr. / (Cr)
A B Elim sales URP Total DTA Total
$ $ $ $ $ $ $
Sales (120) - 120 - -
Cost of sales
Dr. P/L – COS (URP)100 - 20 (120) 20 - -
Gross profit
Cr. Stocks (20) - 20 - -
Tax - 10% 2 - 2 (2) ??-
Profit after tax (18) - 2 -
Inventory 120 (20)
Dr. Deferred tax asset $2

83 Cr. P/LPUBLIC
06/09/2019 - taxationIAS 12 - Deferred Tax ($2) ©ACCA
• Unrealized profit  give rise to deferred tax asset

Asset Accounting Cost \ Tax Temporary timing Tax 10%
base base difference
Stock 100 120 (20) 2 DTA
After eliminate Tax authority Company
unrealized profit looks at holding the
at group level individual asset has to
company calculate DTA
account
Dr. Deferred tax asset $2 Use the tax

rate of
Cr. P/L - taxation ($2)
company
holding the
Use the tax rate of the buying company which holds the inventory asset
84(assets). This is
06/09/2019 because balance
PUBLIC sheet approach,
IAS 12 - Deferred Tax although it may ©ACCA
not fully eliminate the P/L tax charge
Undistributed profit of overseas associate or joint
venture companies.
• Parent invested $50,000 to acquire a 30% associate located in Taiwan
and exercise significant influence.
• After one year, the Taiwan makes a profit of $10,000.
• Significant influence  equity accounting
• If Taiwan associate remit dividends to the Parent, it is subject to
Taiwan’s withholding tax of 10%
Dr. Investment in Associate $3,000
Cr. P/L – share of associate’s profit ($3,000)
Equity accounting - $10,000 x 30%
Dr. P/L – share of associate’s profit $300

Cr. DTL - $3,000 x 10% ($300)

Offsetting
Can the DTA offset the DTL and show a net balance on the
statement of financial position?
Can be offset only if:

• legally enforceable right to set off DTA against DTL
• Relate to the same tax authority of the same taxable entity

Offsetting
• Parent has a DTL ($3,000)

• Subsidiary has DTA $600.
• Both of them are located in the same country
What will be shown in the consolidated financial statements?

a. Net DTL $2,400
b. DTL $3,000 and DTA $600.
c. Only show DTL $3,000
06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

You are welcometo contact me
for questions !
Eunice.chu@accaglobal.com
Thank you

IAS 12 Deferred Tax - E

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

IAS 12 Deferred Tax - E

Încărcat de

Drepturi de autor:

Formate disponibile

MATERIALS FOR THIS TRAINING.

PLEASE REFER TO ACCA-MOF SOURCE IF FURTHER USE

Hanoi, 13 September 2019

How the financial

How much tax to pay

3 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Income Add back Dep

Net profit 60,000 40,000

Tax thereon - 10% 4,000

4 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Tax payable - 10% 4,000

5 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Profits before tax a 60,000

To reflect the delay

6 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

1. Current tax – amount actually payable to tax authority

1. Unpaid tax  liabilities

Year 1 Year 2 Year 3 Total

Year 1 Year 2 Year 3 Total

Effective tax rate -7% -12% -12% -10%

Profit or loss account approach

Balance Sheet approach

10 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Year 1 Dr. P/L – Taxation $2,000

Year 3 Dr. Deferred tax liabilities $1,000

Cr. P/L – Taxation ($1,000)

Account Base Tax Base Tax

Taxable timing difference  deferred tax liabilities

• Deferred tax (DT) is an accounting measure used to match

13 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Income Add back

Net profit 100,000 40,000

Tax thereon - 10% 4,000

15 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Year 1 Year 2 Year 3 Total

Year 1 Year 2 Year 3 Total

Balance Sheet approach

17 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Year 1 Dr. Deferred tax assets $3,000

Cr. P/L – Taxation ($3,000)

Year 2 Dr. Deferred tax assets $3,000

Cr. P/L – Taxation ($3,000)

Year 3 Dr. P/L – Taxation $6,000

Cr. Deferred tax assets ($6,000)

Accounting Tax Base Tax Deferred tax

Account Base Tax Base Tax

Taxable timing difference  deferred tax liabilities

21 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Carrying amount Taxable amount Deductible Tax base

Year 1 Accrued pension at Taxable amount Deductible amount

22 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Temporary differences (TD): differences between the carrying

Q: Why there would be temporary differences?

A: If an entity has an asset and tax becomes payable when money is

Deferred tax calculation

24 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Deferred tax calculation

25 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

Year Non deductible

Accounting base = tax base when

26 06/09/2019 PUBLIC IAS 12 - Deferred Tax ©ACCA

2 Dividend receivable $9,000. Dividends are not taxable $9,000 P. Difference

3 Machine cost $10,000. Depreciated for $4,000 for