CBIZ & MHM Executive Education Series™ IFRS: Accounting for Income Taxes

Presented by: Marco Pulido, Shareholder

November 20, 2014

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Before We Get Started…

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The information in this Executive Education Series course is a brief summary and may not include all

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Disclaimer

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Today’s Presenters

Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has 15 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards in the U.S., Europe and Latin America with Big 4 accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution & Manufacturing - Technology - Consumer Services - Construction/Real Estate - Agriculture.

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Today’s Agenda

Scope of IAS 12

1

2

3

4

5

Effects of Business Combinations

Calculating Deferred Income Taxes

Treatment of Uncertain Tax Positions

6 Differences between U.S. GAAP and IFRS

Investments

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Scope

IAS 12 is the standard for all issues related to income taxes under IFRS.

Income tax expense includes: Effects of income taxes payable

Taxes based on concepts other than pre-tax income, should not be recorded as “income tax expense” in the income statement.

All changes to deferred tax assets and liabilities Changes in liabilities associated to uncertainties in income

tax positions

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Amount payable to or refundable by the tax authorities in respect of the current and previous periods

The future tax consequences of recovering or settling the carrying amount of an asset or liability

Current tax

Deferred tax

The amount of income taxes recoverable in future periods due to (i) deductible temporary differences, (ii) unused tax loss carryforwards, and (iii) unused tax credit carryfowards

Deferred tax asset (DTA)

The amount of income taxes payable in future periods due to taxable temporary differences

Deferred tax liability (DTL)

Key Definitions

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Recognition and measurement of deferred taxes

Calculate the tax base of each asset and liability

Calculate the temporary difference between the carrying amount and tax base

Identify which temporary differences will give rise to deferred taxes using the recognition criteria and exceptions in IAS 12

Calculate the deferred tax attributable using the appropriate tax rate

Step 1

Step 2

Step 3

Step 4

Basic steps:

P&L: Recognize DTA or DTL effect as an income tax expense item, or through OCI (other comprehensive income) when the deferred tax effect was generated via an OCI concept. B/S: Recognize as non-current asset or liability.

Step 5

Calculating Deferred Taxes

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Deferred taxes arising from temporary differences

Temporary difference

Tax rate

Deferred tax asset/liability

(DTA/DTL) X =

Carrying amount

Tax base

Temporary difference – =

Unused tax losses/credits

Tax rate

Deferred tax asset X =

Deferred tax asset arising from carried forward tax losses/tax credits

Deferred Tax Formulas

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Question: When should an entity assess the carrying amount of a deferred tax asset and liability?

A) only on initial recognition

B) on a continuous basis

C) at the end of each reporting period

Example – Carrying Amount of Deferred Tax

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Question: When should an entity assess the carrying amount of a deferred tax asset and liability?

A) only on initial recognition

B) on a continuous basis

C) at the end of each reporting period

Example – Carrying Amount of Deferred Tax

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Question: When should an entity assess the carrying amount of a deferred tax asset and liability?

A) only on initial recognition

B) on a continuous basis

C) at the end of each reporting period

Response:

C) IAS 12 requires an entity to review the carrying amount of a deferred tax asset at the end of each reporting period and adjust it by reference to the probability of sufficient taxable profits being available against which the deferred tax asset may be utilized.

Example – Carrying Amount of Deferred Tax

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Question: Company A has a taxable temporary difference of 100,000 in relation to its plant and equipment at the end of 2014. The tax rate is 30% for 2014 and 25% from 2015 onwards (these rates were substantively enacted prior to 2014). After the end of 2014, the government announces a change in rate to 20% from 2016 onwards, which is substantively enacted during 2015. At what amount is the deferred tax liability measured at the end of 2014?

A) 30,000 (100,000 x 30%)

B) 25,000 (100,000 x 25%)

C) 20,000 (100,000 x 20%)

Example – Substantively Enacted Tax Rate

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Question: Company A has a taxable temporary difference of 100,000 in relation to its plant and equipment at the end of 2014. The tax rate is 30% for 2014 and 25% from 2015 onwards (these rates were substantively enacted prior to 2014). After the end of 2014, the government announces a change in rate to 20% from 2016 onwards, which is substantively enacted during 2015. At what amount is the deferred tax liability measured at the end of 2014?

A) 30,000 (100,000 x 30%)

B) 25,000 (100,000 x 25%)

C) 20,000 (100,000 x 20%)

Response: B) 25% rate substantively enacted at the end of 2014 (IAS 12.46-47).

Example – Substantively Enacted Tax Rate

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Deferred tax asset (DTA) Deferred tax liability (DTL)

Asset

Book < Tax Book > Tax

Liability

Book > Tax Book < Tax

Carried forward tax

losses/tax credits

Can only create an asset, if considered probable that future taxable profits will be available

Temporary Difference- DTA or DTL?

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A DTL must be recognized for all taxable temporary differences, unless the temporary difference arises from: The initial recognition of goodwill The initial recognition of an asset or liability in a

transaction which: Is not a business combination At the time of the transaction, affects neither accounting profit nor

taxable profit (tax loss) (IAS 12.15) For taxable temp differences for investments in subsidiaries,

branches, and associates, and interests in joint arrangements DTLs are recognized unless (IAS 12.39): Parent is able to control reversal of the temp difference; and It is probable that the temp difference will not reverse in

foreseeable future

DTL: Initial Recognition Exceptions

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DTAs must, subject to certain limited exceptions, be recognized for all deductible temporary differences to the extent that is probable that taxable profits will be available against which the deductible temporary differences can be utilized, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that (IAS 12.24): Is not a business combination At the time of the transaction, affects neither accounting profit nor

taxable profit (tax loss) For taxable temp differences for investments in subsidiaries,

branches, and associates, and interests in joint arrangements DTAs are recognized to the extent that (IAS 12.44): Temp difference will reverse in foreseeable future; and Taxable profit will be available against which temp difference may be

utilized.

DTA: Initial Recognition Exceptions

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Using the asset will generate

economic benefits that are subject to tax.

Future tax deductions from the asset reduce the taxable amount.

Temporary Difference: Net future tax

consequences on which deferred tax is

recognized

Example: Plant and equipment used in a manufacturing process

$2,000

(carrying amount, i.e. book value, that will be depreciated)

$1,500

(tax basis that will be depreciated as an expense in the

tax return)

$500

(net taxable profits in the future)

Example - Calculating Deferred Tax

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Carrying amount: $2,000

Tax basis: $1,500

Questions:

1) What is the temporary difference?

2) Assuming a tax rate of 30%, what is the deferred tax effect?

3) Is this a deferred tax asset or liability?

4) What is the journal entry?

Example: Plant and equipment used in a manufacturing process

Example - Calculating Deferred Tax

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Carrying amount: $2,000

Tax basis: $1,500

Questions:

1) What is the temporary difference? $500

2) Assuming a tax rate of 30%, what is the deferred tax effect? $500 x 30% = $150

3) Is this a deferred tax asset or liability? DTL

4) What is the journal entry?

Dr. Income Tax Expense 150

Cr. DTL 150

Example: Plant and equipment used in a manufacturing process

Example - Calculating Deferred Tax

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Determined under IFRS 3

Often the amount paid

May be nil at acquisition date

Tax base of investment

Temporary difference

Carrying amount of investment

= –

There may be temporary differences in carrying amount of an investment in subsidiaries, associates or joint arrangements (“outside basis differences”) related to:

- the existence of undistributed profits of subsidiaries, branches, associates and joint arrangements;

- changes in foreign exchange rates when a parent and its subsidiary are based in different countries; and

- a reduction in the carrying amount of an investment in an associate to its recoverable amount.

Deferred Taxes and Investments

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Consideration transferred

Asset 1

Assets, liabilities and contingencies recognized in accordance with IFRS 3

Liability 3

Asset 2

Asset 3

Liability 1

Liability 2

Tax base 1

Tax base 2

Tax base 3

Tax base 1

Tax base 2

At fair value

From combined group’s perspective (tax values may change as a result of the business combination)

–

–

–

–

–

–

=

=

=

=

=

=

Temp diff

Temp diff

Temp diff

Temp diff

Temp diff

Temp diff

X

X

X

X

X

X

Rate

Rate

Rate

Rate

Rate

Rate

=

=

=

=

=

=

DTA/DTL

DTL/DTA

DTA/DTL

DTA/DTL

DTA/DTL

DTA/DTL

TOTAL DTA/DTL

Goodwill

Tax base 3

A DTL may not be recognized upon initial GW balance. However, a DTA may be recognized when tax GW > carrying amount of GW.

Deferred Taxes and Business Combinations

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Uncertainty under tax law*

Current and deferred tax amounts Penalties and interest

Measure under IAS 12 (using IAS 37 principles as relevant)

Recognize and measure under IAS 37 as liability or contingent liability/asset

Impacts

* Must assume that the tax authority will detect the tax uncertainty

Uncertain Tax Positions

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Differing approaches to accounting for uncertain tax positions • Scenario: entity claims a tax deduction of $100,000 in its tax return ($30,000 tax effected)

•> 50% that the position will be sustained, but a number of outcomes are possible

55%

Possible estimated outcome

Individual probability

Cumulative probability

Weighted probability outcome

$30,000 30% 30% $9,000 $25,000 25% 55% $6,250 $20,000 20% 75% $4,000 $15,000 15% 90% $2,250 $10,000 10% 100% $1,000

$22,500

Uncertain Tax Positions

Under an ‘all or nothing’ approach, tax benefit of $30,000 recognized.

Under a probability weighted approach, $22,500 is the weighted amount. Record a liability of $7,500 + penalties and interest?

Under a US-GAAP approach, $25,000 is the largest amount with >50% probability of being realised. Record a liability of $5,000 + penalties and interest.

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IFRS vs. U.S. GAAP – Key Differences

IFRS U.S. GAAP Classification of deferred tax assets and liabilities in balance sheet

All amounts classified as non-current in the balance sheet.

Current or non-current classification, based on the nature of the related asset or liability, is required.

Uncertain tax positions

IFRS does not include specific guidance. IAS 37 is generally used to determine amount of liability to record.

The amount of benefit to be recognized is based on the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement.

Initial recognition exemption

Deferred tax effects arising from the initial recognition of an asset or liability are not recognized when: (1) the amounts did not arise from a business combination, and (2) upon occurrence, the transaction affects neither accounting nor taxable profit (e.g., acquisition of non-deductible assets).

Does not include an exemption like that under IFRS for non-recognition of deferred tax effects for certain assets or liabilities.

Recognition of deferred tax assets

Amounts are recognized only to the extent it is probable (similar to “more likely than not” under US GAAP) that they will be realized.

Recognized in full (except for certain outside basis differences), but valuation allowance reduces asset to the amount that is more likely than not to be realized.

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IFRS vs. U.S. GAAP – Key Differences

IFRS U.S. GAAP Calculation of deferred tax asset or liability

Enacted or “substantively enacted” tax rates as of the balance sheet date must be used.

Enacted tax rates must be used.

Taxes on intercompany transfers of assets that remain within a consolidated group

Requires taxes paid on intercompany profits to be recognized as incurred and requires the recognition of deferred taxes on temporary differences between the tax bases of assets transferred between entities/tax jurisdictions that remain within the consolidated group.

Requires taxes paid on intercompany profits to be deferred and prohibits the recognition of deferred taxes on temporary differences between the tax bases of assets transferred between entities/tax jurisdictions that remain within the consolidated group.

Recognition of deferred tax liabilities from investments in subsidiaries or joint ventures (JVs) (often referred to as “outside basis differences”)

Recognition required unless the reporting entity has control over the timing of the reversal of the temporary difference and it is probable (“more likely than not”) that the difference will not reverse in the foreseeable future.

Recognition not required for investment in a foreign subsidiary or corporate JV that is essentially permanent in duration, unless it becomes apparent that the difference will reverse in the foreseeable future.

Convergence: FASB and IASB have abandoned joint convergence project in short term.

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Questions?

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Other upcoming webinars: Dec. 3: Individual Year-End Tax Planning for 2014 and

Beyond

We want your input on IFRS topics

to consider for 2015!

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