Disclosures

An entity discloses tax-related contingent liabilities and contingent assets in accordance with IAS 37. IAS 37’s disclosure requirements for contingent liabilities and contingent assets apply to uncertain tax positions if IAS 12’s recognition threshold is not met. In addition, IFRIC 23 highlights and refers to the existing disclosure requirement in IAS 1, for the judgements and estimates made in determining the uncertain tax treatment.

Presentation

Tax expense

The tax expense or income related to profit or loss from ordinary activities should be presented as part of profit or loss in the statement(s) of profit or loss and other comprehensive income.

IAS 12 notes that, although IAS 21 requires certain exchange differences to be recognised as income or expense, that Standard does not specify where such differences should be presented in the statement of comprehensive income.

Therefore, IAS 12 states that when exchange differences on deferred foreign tax liabilities or assets are recognised in the statement of comprehensive income, such differences may be classified as deferred tax expense (income) if that presentation is considered to be the most useful to financial statement users.

An entity may incur expenses that are linked to the income tax expense, for example, fees payable to tax consultants for their tax advice and to accountants who assist the entity in preparing its tax returns.

Amounts paid other than to the tax authority in connection with an entity’s tax expense do not represent income taxes.

Therefore, such amounts should be treated as either an administrative or other expense in the entity’s statement of comprehensive income depending on the format adopted, i.e. classification of expenses either by function or by nature.

When a payment is made between group entities in consideration for the transfer of tax losses, it is necessary to exercise judgement to determine the substance of the transaction.

Presentation of payments of non-income taxes that can be claimed as an allowance against taxable profit – example Entity A is required to make production-based royalty payments to Taxing Authority 1. These payments can be claimed as an allowance against taxable profit for the computation of income taxes payable to Taxing Authority 2. The production-based royalty payments do not, in themselves, meet the definition of income tax and, therefore, are outside the scope of IAS 12, whereas the income tax payable to Taxing Authority 2 is within the scope of IAS 12. The production-based royalty payments to Taxing Authority 1 should not be presented as a tax expense in Entity A’s statement of comprehensive income. The ‘tax expense‘ line item required to be presented under IAS 1 is intended to require an entity to present taxes that meet the definition of income taxes under IAS 12. Because the production-based royalty payments are not income taxes, they should not be presented within that line item. The conclusions above were confirmed by the IFRS Interpretations Committee in the July 2012 IFRIC Update.

Presentation of gains and losses relating to designated tax hedging derivatives It is possible for an entity to designate a derivative as a cash flow hedge of the cash flow variability of a tax liability arising on the foreign exchange gain or loss on a foreign currency borrowing. Provided that such a hedge has been appropriately designated and documented, the hedge is a qualifying cash flow hedge of a non-financial liability (the tax liability) under IFRS 9 (or, for entities that have not yet adopted IFRS 9, IAS 39). Both IFRS 9 and IAS 39, the Standards which prescribe the hedge accounting rules in terms of recognition and measurement, are silent on where the gains and losses on derivatives designated as hedging derivatives should be presented within profit or loss. It has become customary, and is useful to the users of the financial statements, for the hedging effects of derivatives to be presented in the statement of comprehensive income in the same line as the item that they hedge. Therefore, although the hedging gain or loss is clearly not an income tax as defined by IAS 12, an argument can be made for including the effects of the derivatives, which an entity has entered into as hedges of its tax liability, in the tax line in the statement of comprehensive income. When an entity chooses to present derivative gains/losses relating to designated tax hedging derivatives within the tax line, this accounting policy choice should be applied consistently from period to period. Furthermore, appropriate separate disclosure should be made of the amount of the tax expense/income attributable to hedging gains/losses.

Presentation of the release of a deferred tax liability on disposal of an asset – example Entity X owns an asset and has recognised a deferred tax liability resulting from accelerated tax depreciation on that asset. Entity Y purchases the asset from Entity X and, as permitted by local tax law, elects to retain the tax base of the asset as it was when held by Entity X. As a result of this election, Entity X pays no tax on the disposal of the asset, but the proceeds of disposal received from Entity Y are lower than would otherwise be expected to reflect the reduced tax allowance available to Entity Y. When Entity X derecognises the related deferred tax liability on disposal of the asset, the reversal of the deferred tax liability should be presented as part of Entity X’s tax expense (tax income) (and not as part of the gain or loss on disposal of the asset) because it falls within the definition of tax expense (tax income) in IAS 12 (“the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax”). The deferred tax expense previously recognised reflected the expected tax consequences with regards to the recovery of the asset. Actual recovery of the value of the asset has been achieved with no tax payable. Therefore, from Entity X’s perspective, the temporary difference has reversed and the effect of that reversal should be reflected as part of tax expense (tax income).

Statement of financial position

The presentation of both current and deferred tax in the statement of financial position is addressed in IAS 1 (and not in IAS 12) as follows:

• liabilities and assets for current tax should be presented in the statement of financial position;
• deferred tax liabilities and deferred tax assets should be presented in the statement of financial position; and
• when an entity presents current and non-current assets, and current and non-current liabilities, as separate classifications in its statement of financial position, it should not classify deferred tax assets (liabilities) as current assets (liabilities).

Accounting policies

There is no specific requirement in IAS 12 to disclose accounting policies in respect of current and deferred tax. However, IAS 1 requires disclosure of significant accounting policies that are relevant to an understanding of the entity’s financial statements. The policy note should state the measurement basis on which deferred tax has been recognised.

IAS 1 also requires disclosure in the financial statements of judgements (apart from those involving estimations) that management has made in the process of applying the accounting policies and that have the most significant effect on the amounts recognised in those financial statements.

Balance sheet presentation

Liabilities and assets for current tax should be presented separately on the face of the balance sheet. Similarly, deferred tax liabilities and deferred tax assets should be presented separately on the face of the balance sheet.

If an entity presents a classified balance sheet, deferred tax assets and liabilities are always presented as non-current. IFRIC 23 requires an entity to reflect uncertainty over income tax treatments in current and deferred tax assets or liabilities, applying the requirements in IAS 12.

Apportionment of deferred tax credit An entity was unable to recognise a deferred tax asset of C5 million (of which C1 million relates to items charged to other comprehensive income). This is because it was not probable that sufficient taxable profits would be available against which the deductible temporary difference could be utilised. Circumstances have changed, and the entity expects to recover at least C3 million of the unrecognised deferred tax asset. Unless the entity can analyse the particular categories of deductible temporary differences (which will be rare in practice), some form of apportionment is needed. For example, the entity could allocate part of the C3 million (for instance, 1/5 × 3 = C0.6 million) to other comprehensive income and the balance of C2.4 million to profit or loss.

Backwards-tracing of property revaluations An entity has a policy of revaluing property under IAS 16. As a result of revaluation gains, a taxable temporary difference has arisen between the property’s carrying amount and its tax base. This has led to recognition of a deferred tax liability at the period end. The revaluation gains were recognised in other comprehensive income under IAS 16; and the related deferred tax liability was also recognised in other comprehensive income. The corporation tax rate has changed from 40% to 35% with an effective date of 31 May 20X8. This change has been substantively enacted at the balance sheet date, and it will impact the reversal of the temporary difference from 31 May 20X8 onwards; so the deferred tax liability will be reduced. Any adjustment to deferred tax resulting from the tax rate change should be traced back to the original transaction recognised in other comprehensive income. As such, the impact of any adjustment to this deferred tax liability would be recognised in other comprehensive income. This differs from the accounting for reversals of the deferred tax liability resulting from depreciation charged; in that case, the reversal is recognised in profit or loss.

Backwards-tracing of defined benefit liabilities An entity has a defined benefit pension scheme that is in deficit at the period end. A deferred tax asset has been recognised for the deductible temporary difference in relation to the pension deficit. The corporation tax rate has changed from 40% to 35% with an effective date of 31 May 20X8. This change has been substantively enacted at the balance sheet date, and it will impact the reversal of the temporary difference from 31 May 20X8 onwards; so the deferred tax asset will be reduced. Management has identified the transactions that gave rise to the temporary difference, and it will need to trace the impact of the tax rate change to the same place. The pension deficit might have arisen as a result of service costs or other income statement charges and/or actuarial losses recognised in other comprehensive income. The reduction in the deferred tax asset will be recognised in profit or loss or in other comprehensive income, or it will be split between the two, depending on how the pension deficit arose (and, thus, how the deferred tax asset was originally recognised). The backwards-tracing for the tax rate change should be consistent with the approach used for allocating tax deductions. The deferred tax asset (which is impacted by the tax rate change) represents the tax on amounts against which tax deductions have not yet been allocated. No deferred tax arises where amounts in the performance statements are covered by deductions received on contributions. The deferred tax arises on any excess amounts in the performance statements, and the backwards-tracing should be carried out on that basis. If the deferred tax relates to a pension liability recognised on transition to IFRS, management needs to determine where the pension items on which the original deferred tax arose would have been recognised if IFRS had been applied in the prior periods. If this is not possible, the deferred tax would generally be recognised in profit or loss.

Deferred tax asset or liability recognised on first-time adoption of IFRS In some cases, a deferred tax asset or liability might have been recognised on the initial adoption of IFRS. In our view, the fact that deferred tax was charged to equity (as part of the transition adjustment) does not mean that subsequent changes in the deferred tax asset or liability will also be recognised in equity. Instead, management needs to determine (using the entity’s current accounting policies) where the items on which the original deferred tax arose would have been recognised if IFRS had applied in the earlier periods. If it is not possible to assess where those items would have been recognised, the deferred tax changes would generally be recognised in profit or loss. The implications of any transitional rules in IFRS 1 for the underlying items will need to be considered where deferred tax arose on the initial adoption of IFRS. This is for the purpose of backwards-tracing when accounting for deferred tax changes. For instance, if an asset is recognised at ‘deemed cost’ on the initial adoption of IFRS (with related deferred tax on the transition adjustment), any changes in that deferred tax should be recognised in profit or loss. Similarly, where an item or an adjustment is deemed to be nil (for accounting purposes) under the transitional rules in IFRS 1, any subsequent changes in related deferred tax should not be backwards-traced to other comprehensive income or retained earnings, but should instead be recognised in profit or loss. For example, if an entity applies the exemption in IFRS 1, cumulative translation differences for all foreign operations are deemed to be nil at the date of transition to IFRS. A different situation arises where an exemption in IFRS 1 applies for disclosure purposes only. For example, some defined benefit scheme disclosures can be made prospectively, from the date of transition to IFRS. Our view is that backwards-tracing to other comprehensive income should be applied for changes in deferred tax, unless it is not possible to assess where the items on which the original deferred tax arose would have been recognised. This is because the exemption does not apply to the underlying accounting.

Deferred tax asset or liability recognised following change in accounting policy In some cases, a deferred tax asset or liability might have been recognised following a change in accounting policy. In our view, the fact that deferred tax was charged to the component of opening equity affected does not mean that subsequent changes in the deferred tax asset or liability (for example, as a result of changes in tax rates) will also be recognised in equity. Instead, management needs to determine (using the entity’s new accounting policy) where the items on which the deferred tax arose would have been recognised if the new policy had applied in the earlier periods (backwards tracing). If it is not possible to assess where those items would have been recognised, the deferred tax changes would generally be recognised in profit or loss.

Disclosure for entities with significant amount of foreign tax C’000 C’000 Domestic tax Current tax on income for the period Adjustments in respect of prior periods X X X Double tax relief X X Foreign tax Current tax on income for the period Adjustments in respect of prior periods X X X Current tax expense X Deferred tax expense X Tax on profit on ordinary activities X A non-mandatory format is given in example 2 of Appendix B to IAS 12.

Discontinued operations

The amount of tax attributable to discontinued operations should be disclosed; and it should be analysed between the tax expense relating to:

• The gain or loss on discontinuance.
• The profit or loss from the ordinary activities of the discontinued operation for the period, together with the corresponding amounts for each prior period presented.

Explanation of the relationship between tax expense and accounting profit

The standard requires an explanation of the relationship between tax expense and accounting profit. This relationship can be affected by factors including significant tax-free income and significant disallowable items, unrecognised tax losses utilised, different tax rates in the locations of foreign-based operations, adjustments related to prior years, changes in unrecognised deferred tax, and tax rate changes. The explanation should be in either or both of the following numerical forms:

• A reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s); the basis for computing the applicable tax rate(s) should also be disclosed.
• A reconciliation between the average effective tax rate (tax expense divided by the accounting profit) and the applicable tax rate; the basis for computing the applicable tax rate should also be disclosed.

The total tax charge (current and deferred), rather than the current tax charge, should be reconciled to the theoretical tax on accounting profit. The starting point for preparing the numerical reconciliation (whether in absolute or in percentage terms) is to determine an applicable tax rate.

A group should use an applicable tax rate that provides the most meaningful information to financial statement users. The most relevant rate is often the rate applicable in the reporting entity’s country, even if some of the group operates in other countries. The impact of different tax rates applied to profits earned in other countries would appear as a reconciling item.

The basis for computing the applicable tax rate should be disclosed (as well as an explanation of changes in the applicable tax rate(s) compared to the previous accounting period). It might not be possible to determine a meaningful single applicable tax rate (particularly for multi-national groups).

Another method is to aggregate separate reconciliations, prepared using the applicable tax rate in each individual jurisdiction; and then provide a reconciliation from the aggregation to a single applicable tax rate.

Reconciliation of tax expense Entity L is a non-operating holding entity incorporated in Luxembourg. It has subsidiaries in Italy, Finland and Brazil. The following table provides information on the statutory tax rate and profit before tax for each member of the group: The tax charge in the consolidated financial statements is C520. Country Statutory tax rate Profit before tax Tax at statutory tax rate Tax at difference between Luxembourg rate and statutory rate (A) (B) (A × B) (A − 25%) × (B) Luxembourg 25% 20 5 – Finland 37% 700 259 84 Italy 29% 400 116 16 Brazil 33% 500 165 40 Total 1,620 545 140 Management would prefer to present a reconciliation of monetary amounts rather than a reconciliation of the tax rates. Management could choose to reconcile the tax charge to the tax rate of the parent (entity L), or to reconcile to an aggregate of separate reconciliations for each country. The following illustrates the two methods: Reconciliation of tax expense Tax rate of parent Average tax rate C C Profit before tax 1,620 1,620 Tax at the domestic rate of 25% 405 n/a Tax calculated at the domestic rates applicable to profits in the country concerned n/a 545 Income not subject to tax (50) (50) Expenses not deductible for tax purposes 25 25 Effect of different tax rates in countries in which the group operates 140 n/a Tax charge 520 520

A group that operates mainly outside its local territory might use an average tax rate (weighted in proportion to accounting profits earned in each geographical territory) as the applicable tax rate. This method is not included in the standard, but it could be used – provided that the basis for computing the applicable tax rate is disclosed.

Determination of ‘applicable rate’ for a group with significant overseas subsidiaries Country Profit Tax rate Weighted average UK 100 30% 100/2,030 × 30% = 1.48 US 600 40% 600/2,030 × 40% = 11.82 France 500 35% 500/2,030 × 35% = 8.62 Germany 450 38% 450/2,030 × 38% = 8.42 Australia 380 33% 380/2,030 × 33% = 6.18 Total 2,030 Average rate = 36.52 The average rate of 36.52% should be used in the tax reconciliation. The basis for calculating the rate should also be disclosed.

Use of weighted average tax method It might be appropriate to use a weighted average tax rate method where all of the group entities have made a profit; but this method might not provide a meaningful tax rate where some entities within a group have profits and others have losses. For example, the entity might calculate the weighted average tax rate based on absolute values (that is, making all values positive); in that case, the tax rate obtained might appear meaningful, but there will be a reconciling item in the tax reconciliation. An entity might also calculate the weighted average rate based on actual values; even though the theoretical tax expense will be the correct amount, the weighted average tax rate might not be meaningful, because it might be higher than any individual rate. So it might not be appropriate to use the weighted average tax rate method in this situation.

Analysis of deferred tax assets and liabilities (balance sheet)

Deferred tax assets and liabilities (of the current and previous periods) should be analysed by each type of temporary difference and each type of unused tax losses and tax credits.

The significant types of temporary difference, that generally need to be disclosed separately, include: accelerated capital allowances; revaluation of assets; other shortterm taxable temporary differences that affect accounting or taxable profit; provisions; and tax losses carried forward.

A format for disclosure is given in IAS 12. The amount of deferred tax income or expense recognised in profit or loss should be similarly analysed

Analysis of temporary difference for a net position Deferred tax assets and liabilities should be analysed by each type of temporary difference. Entity A has property, plant and equipment (PPE) at year end, with carrying amounts, tax bases and temporary differences outlined below. The differences arise because the assets are deductible for tax purposes in a way that differs from the depreciation recognised for accounting purposes. Class of PPE Carrying amount Tax base Temporary difference Deferred tax asset/(liability) @ 30% C’000 C’000 C’000 C’000 Property 100 75 25 (7.5) Cars 50 65 (15) 4.5 Office equipment 20 10 10 (3.0) Total 170 150 20 (6.0) The property and office equipment give rise to a deferred tax liability of C10,500, and the cars give rise to a deferred tax asset of C4,500 (at an effective tax rate of 30%). Entity A can use the deferred tax asset to offset the deferred tax liabilities; so the entity discloses the net deferred tax liability position of C6,000 on the face of the balance sheet. We do not believe that IAS 12 requires a gross presentation of the above amounts. This is because the deferred tax, noted in the table above, relates to the same type of temporary difference (that is, differences between depreciation for tax and accounting purposes). Entity A has the right to offset the deferred tax asset and liability (and thus presents the net position in the balance sheet). The amount of the net position relating to the difference between the carrying amount and tax base of PPE is C6,000; that amount should be disclosed as a component of the total deferred tax liability recognised.vered by the IRE, so a deferred tax asset is recognised (subject to IAS 12’s recognition criteria).

Unrecognised temporary differences

Disclosures are also required in respect of unrecognised temporary differences, such as:

• The amount (and expiry date, if any) of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax has been provided. Although not required by the standard, it might be helpful to explain the circumstances in which the deferred tax asset would be recovered.
• The total amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures for which deferred tax liabilities have not been recognised.

Disclosure is required of the total amount of temporary differences for investments in subsidiaries, branches, associates and interests in joint ventures (rather than the deferred tax assets and liabilities associated with such temporary differences). Disclosure of the deferred tax amounts is also encouraged.

Tax consequences of dividends

An entity generally recognises any tax consequences of the payment of a dividend at the time when the dividend is recognised as a liability in the financial statements.

The amount of income tax arising on dividends that were proposed or declared before the financial statements were authorised for issue, but are not recognised as a liability in the financial statements, should be disclosed.

If tax rates vary between distributed and undistributed profits, the nature of the potential tax consequences (that would result from the payment of dividends to shareholders) should also be disclosed. In making this disclosure, an entity should also disclose:

• The important features of the tax systems and the factors that will affect the amount of the potential income tax consequences of dividends.
• The amount of the potential tax consequences arising from the payment of dividends to shareholders (if it is practical to determine such amounts). For example, in a consolidated group, a parent and some of its subsidiaries might have paid income taxes at a higher rate on undistributed profits; but they are aware of the amount of the tax refund that would arise if future dividends are paid at the lower rate. In that situation, the refundable amount should be disclosed.
• Whether there are any potential tax consequences that it is not practical to determine. This could arise where the entity operates a large number of foreign subsidiaries and it would not be practicable to compute the tax consequences arising from the payment of dividends to shareholders. In that situation, an entity simply discloses that fact (as stated above). In the parent’s separate financial statements (if any), the disclosure of the potential tax consequences should relate to the parent’s retained earnings.

Deferred tax asset of loss-making entities

The amount of the deferred tax asset and the nature of the evidence supporting its recognition should be disclosed if an entity has incurred a loss in the current or a preceding period, and the recovery of the deferred tax asset depends on future taxable profits in excess of those arising from the reversals of existing taxable temporary differences.

Recognition of the deferred tax asset should be supported by evidence showing why future profits are likely be available against which the deferred tax assets can be recovered. The evidence might also include tax-planning strategies.

Estimation uncertainty

“An entity shall disclose information about the assumptions it makes about the future, and other major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the next financial year. In respect of those assets and liabilities, the notes shall include details of:

(a) their nature, and

(b) their carrying amount as at the end of the reporting period.”

Areas that could require disclosure in respect of estimation uncertainty are:

• Status of negotiations with tax authorities in relation to uncertain tax positions.
• Assessing the probabilities that sufficient future taxable profits will be available to enable deferred tax assets resulting from deductible temporary differences and tax losses to be recognised.
• Other assumptions about the recoverability of deferred tax assets.

Tax-related contingencies

An entity will often have tax assessments of earlier years still open and disputed by the tax authorities, giving rise to contingent liabilities and assets not recognised on the balance sheet. The entity should disclose the following information on these tax-related contingencies:

• the nature of the contingency;
• an indication of the uncertainty affecting whether the further tax will become payable; and
• an estimate of the financial effect.

Post balance sheet changes in tax rates

IAS 12 requires the use of tax rates and laws that have been substantively enacted by the balance sheet date (rather than by the date when the financial statements are authorised for issue).

Information received after the year-end about changes in tax rates and laws is not an adjusting post balance sheet event. Changes in tax rates or laws enacted or announced after the balance sheet date, however, that have a significant effect on current and deferred tax assets and liabilities should be disclosed under IAS 10.

Cash flows relating to taxes on income

Cash flows from taxes on income should be separately disclosed and classified as cash flows from operating activities (unless they can be specifically identified with financing and investing activities).

Offset of tax assets and liabilities

Offset of tax assets and liabilities – general

In a similar approach to that taken in IAS 1, IAS 12 takes a strong line on the extent to which tax assets and liabilities can be offset against one another to present only a net figure in the statement of financial position.

Offset of current tax assets and liabilities

An entity should offset current tax assets and current tax liabilities if, and only if, the entity:

• has a legally enforceable right to set off the recognised amounts; and
• intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

IAS 12 explains that an entity normally has a legally enforceable right to set off current tax assets against current tax liabilities when they relate to income taxes levied by the same tax authority, and that authority permits the entity to make or receive a single net payment.

When an entity is preparing consolidated financial statements, current tax assets and liabilities arising from different group entities should not be offset unless:

• the entities concerned have a legally enforceable right to make or receive a single net payment; and
• the entities intend to make or receive such a net payment or to recover the asset and settle the liability simultaneously.

Offset of deferred tax assets and liabilities

An entity should offset deferred tax assets and deferred tax liabilities if, and only if:

• the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
• the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same tax authority on either:
  • the same taxable entity; or
  • different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

Under the above rules, deferred tax assets and liabilities arising in the same legal entity (which is also a single taxable entity) can generally be offset. However, when, for example, the taxable entity has capital losses carried forward that can only be used to reduce future capital gains, those losses can only be offset against deferred tax liabilities to the extent that recognised deferred tax liabilities arise from unrealised capital gains.

In a consolidation situation, the first condition to overcome is the requirement for the balances to be levied by the same tax authority. This effectively prohibits the offset of deferred tax assets and liabilities arising in different jurisdictions.

Even for entities operating within the same jurisdiction, except when there are formal group relief or consolidated taxation arrangements, it will be unusual for the tax authority to permit net settlement between different taxable entities.

Therefore, in preparing consolidated financial statements, the deferred tax balances of the separate entities will generally be aggregated without further setting off the deferred tax balances of one entity against those of another.

The above rules mean that, for disclosure purposes, there is no need for detailed scheduling of the timing of reversals of each temporary difference.

In rare circumstances, an entity may have a legally enforceable right of set-off, and an intention to settle net, for some periods but not for others.

In such situations, detailed scheduling may be required to establish reliably whether the deferred tax liability of one taxable entity will result in increased tax payments in the same period in which a deferred tax asset of another taxable entity will result in decreased payments by that second taxable entity.

Offsetting deferred tax income and expense When an entity is required to offset deferred tax assets and deferred tax liabilities in its statement of financial position because it meets the conditions in IAS 12, the entity is not necessarily entitled to offset the related deferred tax income and deferred tax expense. IAS 12 requires the individual components of tax expense or tax benefit to be allocated to profit or loss for the period except to the extent that the tax arises from a transaction or event which is recognised in the same or a different period outside of profit and loss, either in other comprehensive income or directly in equity. The ability to offset the amounts in the statement of financial position does not override the requirement for the income and expense to be appropriately classified. For example, Company A revalues an item of property, plant and equipment upward by CU1,000 to CU21,000, recognising the increase in other comprehensive income. The tax base of the property, plant and equipment is CU20,000. At the same time, Company A incurs an operating tax loss of CU800 during the period which, under the relevant tax legislation, can be carried forward indefinitely. The requirements for recognition of the deferred tax asset arising from the tax loss carried forward are satisfied. In addition, the requirements for offsetting deferred tax assets and liabilities in IAS 12 are met. The tax rate is 30 per cent. Company A recognises a deferred tax liability of CU300 (CU1,000 temporary difference × 30%) and a deferred tax asset of CU240 (CU800 loss × 30%). The two amounts are set off in the statement of financial position so that a net deferred tax liability of CU60 (CU300 – CU240) is recognised. However, the deferred tax arising on the revaluation is recognised in other comprehensive income and the effect of the current year’s loss is recognised in profit or loss.

Disclosure

Statement of comprehensive income

Major components of tax expense (income)

The major components of tax expense (income) should be disclosed separately, including:

• current tax expense (income);
• any adjustments recognised in the period for current tax of prior periods;
• the amount of deferred tax expense (income) relating to the origination and reversal of temporary differences;
• the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes;
• the amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce current tax expense;
• the amount of the benefit from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce deferred tax expense;
• deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset in accordance with IAS 12; and
• the amount of tax expense (income) relating to those changes in accounting policies and errors that are included in profit or loss in accordance with IAS 8, because they cannot be accounted for retrospectively.

In respect of discontinued operations, the financial statements should disclose separately the tax expense relating to:

• the gain or loss on discontinuance; and
• the profit or loss from the ordinary activities of the discontinued operation for the period, together with the corresponding amounts for each prior period presented.

For each type of temporary difference, and each type of unused tax losses and unused tax credits, the financial statements should disclose the amount of the deferred tax income or expense recognised in profit or loss, if this is not apparent from the changes in the amounts recognised in the statement of financial position.

Reconciliation of tax expense or income

IAS 12 requires the presentation of an explanation of the relationship between the tax expense (income) and accounting profit in either or both of the following forms:

• a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or
• a numerical reconciliation between the average effective tax rate (being the tax expense (income) divided by the accounting profit) and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed.

An explanation is required of changes in the applicable tax rate(s) compared to the previous accounting period.

Statement of financial position

For each type of temporary difference, and each type of unused tax losses and unused tax credits, the financial statements should disclose the amount of the deferred tax assets and liabilities recognised in the statement of financial position for each period presented.

The amount of deferred tax income or expense recognised in profit or loss in respect of each temporary difference must also be disclosed where it is not apparent from the changes in the amounts recognised in the statement of financial position.

The following should also be disclosed:

• the amount (and expiry date, if any) of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised in the statement of financial position; and
• the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint arrangements, for which deferred tax liabilities have not been recognised.

It would often be impracticable to compute the amount of unrecognised deferred tax liabilities arising from investments in subsidiaries, branches and associates and interests in joint arrangements, so IAS 12 requires an entity to disclose the aggregate amount of the underlying temporary differences but does not require disclosure of the deferred tax liabilities.

Nevertheless, when practicable, entities are encouraged to disclose the amounts of the unrecognised deferred tax liabilities because financial statement users may find such information useful.

An entity should disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when:

• the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and
• the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred tax asset relates.

When current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits, but the net income taxes payable will be affected if part of the retained earnings is paid out as a dividend to shareholders, the entity should disclose:

• the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders. This includes the important features of the income tax systems and the factors that will affect the amount of the potential income tax consequences of dividends;
• the amounts of the potential income tax consequences that are practicably determinable; and
• whether any potential income tax consequences are not practicably determinable.

It is not always practicable to compute the total amount of the potential income tax consequences that would result from the payment of dividends to shareholders (e.g. when an entity has a lot of overseas subsidiaries).

However, even in such circumstances, usually some consequences may be easily determinable, and these should be disclosed.

IAS 12 cites the example of a consolidated group, when the parent and some of its subsidiaries may have paid income taxes at a higher rate on undistributed profits and are aware of the amount that would be refunded on the payment of future dividends to shareholders from consolidated retained earnings. In this case, the refundable amount is disclosed.

When some or all potential income tax consequences cannot be determined, the entity should disclose that there are additional potential income tax consequences not practicably determinable. In the parent’s separate financial statements, the disclosure of the potential income tax consequences relates to the parent’s retained earnings.

When current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits, but the net income taxes payable will be affected if part of the retained earnings is paid out as a dividend to shareholders, an entity required to provide the disclosures listed above may also be required to provide disclosures related to temporary differences associated with investments in subsidiaries, branches and associates or interests in joint arrangements.

For example, an entity may be required to disclose the aggregate amount of temporary differences associated with investments in subsidiaries for which no deferred tax liabilities have been recognised. If it is impracticable to compute the amounts of unrecognised deferred tax liabilities there may be amounts of potential income tax consequences of dividends not practicably determinable related to these subsidiaries.

Other disclosure requirements

Other disclosure requirements include:

• the aggregate current and deferred tax relating to items that are charged or credited directly to equity;
• the amount of income tax relating to each component of other comprehensive income (revaluation surplus, foreign exchange reserve etc.);
• the amount of income tax consequences of dividends to shareholders of the entity that were proposed or declared before the financial statements were authorised for issue, but are not recognised as a liability in the financial statements;
• if a business combination in which the entity is the acquirer causes a change in the amount recognised for its pre-acquisition deferred tax asset (under IAS 12), the amount of that change;
• if the deferred tax benefits acquired in a business combination are not recognised at the acquisition date but are recognised after the acquisition date (under IAS 12), a description of the event or change in circumstances that caused the deferred tax benefits to be recognised;
• any tax-related contingent liabilities and contingent assets in accordance with IAS 37 (e.g. from unresolved disputes with the tax authorities); and
• when changes in tax rates or tax laws are enacted or announced after the reporting period, any significant impact on the entity’s current and deferred tax assets and liabilities.