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CR Common PracticesDeferred Tax under IFRS

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Published on 8 February 2012. For more information, please email [email protected]

Introduction

Under International Financial Reporting Standards, the accounting of Deferred Tax is governed by IAS 12 “Income taxes”. Focusing on a sample of 21 large listed European companies that report under IFRS, supplemented by Company Reporting data and comment, this report analyses companies’ disclosures of deferred tax balances including an investigation into whether they choose to present a reconciliation showing movements during the year. Under IAS 12 companies are required to present for each type of temporary difference and each type of unused tax losses and unused tax credits: the amount of the deferred tax assets and liabilities recognised in the statement of financial position for each period presented (para 81(g)(i)). While there is no requirement to reconcile movements in these balances from year to year, IAS 12 states that 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, shall be disclosed (para 81(g)(ii)).

Considered also are disclosures presented in respect of the expiry of both recognised and unrecognised deferred tax. Under IAS 12 companies shall disclose 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 (para 81(e)). There is no requirement to present an expiry analysis of recognised deferred tax assets. Lastly this report covers an analysis of the significance of recognised deferred tax assets and liabilities in relation to total assets and liabilities respectively.

Key observations include the following. When disclosing deferred tax balances 43% of companies follow best practice by disclosing gross amounts before offsetting. When disclosing the expiry of unrecognised deferred tax assets 14% of companies follow best practice by presenting a full maturity analysis table showing the expiry of all amounts. Deferred tax assets or liabilities are significant to the balance sheets of 43% of companies.

Companies under examination

Our sample consists of 21 listed European companies, which feature in the Standard & Poor’s Europe 350 dataset with period ends of between 31 March 2011 and 31 December 2011 and have published recently their annual reports. The sample contains a spread of companies from different countries and industry classes. The companies of which the accounts have been analysed are as follows:

Company Period End Auditors Country Industry Classification

Air France ‐ KLM 31 March 2011 KPMG France Airline

Alstom 31 March 2011 PricewaterhouseCoopers and Mazars

France Industrial Machinery

Associated British Foods 17 September 2011 KPMG UK Food Products

British Sky Broadcasting 30 June 2011 Deloitte UK Broadcasting & Entertainment

Colruyt 31 March 2011 KPMG Belgium Food Retailers & Wholesalers

Compass 30 September 2011 Deloitte UK Restaurants & Bars

Daily Mail and General Trust 2 October 2011 Deloitte UK Publishing

Imperial Tobacco 30 September 2011 PricewaterhouseCoopers UK Tobacco

Infineon Technologies 30 September 2011 KPMG Germany Semiconductors

Lonmin 30 September 2011 KPMG UK Platinum & Precious Metals





Novartis 31 December 2011 PricewaterhouseCoopers Switzerland Pharmaceuticals

Novozymes 31 December 2011 PricewaterhouseCoopers Denmark Biotechnology

Pernod Ricard 30 June 2011 Deloitte and Mazars France Distillers & Vintners

Ryanair 31 March 2011 KPMG Ireland Airline

Sage 30 September 2011 PricewaterhouseCoopers UK Software

Siemens 30 September 2011 Ernst & Young Germany Electrical Components & Equipment

Sodexo 31 August 2011 PricewaterhouseCoopers and KPMG

France Restaurants and Bars

Thyssenkrupp 30 September 2011 KPMG Germany Iron & Steel

TUI 30 September 2011 PricewaterhouseCoopers Germany Travel & Tourism

Voestalpine 31 March 2011 Grant Thornton Austria Iron & Steel

Wolseley 31 July 2011 PricewaterhouseCoopers UK Industrial Supplies





Analysis

Disclosure of Deferred Tax Balances

The companies in our sample interpret IAS 12 in one of three ways either disclosing gross amounts before offsetting, gross amounts reflected in the balance sheet or net liability/asset amounts for each type of temporary difference, each type of unused tax losses and credits. The best practice in our view is for the gross amounts before offsetting to be disclosed. We find that this is the most popular method as it is favoured by nine companies including Thyssenkrupp (Extract 1). A less transparent method is for companies to present the gross amounts as reflected in the balance sheet with such an approach followed by five companies including Pernod Ricard (Extract 2). The least transparent method is for the net amounts to be presented. This approach is followed by seven companies including Sodexo (Extract 3).

Best to worst practice from left to right

Company Gross Amounts before

offsetting Gross Amounts reflected

in the balance sheet Net Amount Infineon Technologies

Novartis

TUI

Thyssenkrupp

Siemens

Novozymes

Alstom

Voestalpine

Colruyt

Lonmin

Imperial Tobacco

Sage

Daily Mail and General Trust

Pernod Ricard

Associated British Foods

Sodexo

Compass

Air France‐KLM

British Sky Broadcasting

Wolseley

Ryanair





Reconciliation of Movements in Deferred Tax Balances

Of the sample companies 15 elect to present a reconciliation showing movements in deferred tax balances over the course of the financial year. Of these companies two reconcile movements in individual temporary differences showing balance sheet liability and asset amounts discretely. Companies to follow such an approach are Sage and Imperial Tobacco (Extract 4). A further nine companies including Associated British Foods (Extract 5) also reconcile movements in individual temporary differences but follow a less transparent approach by netting asset and liability amounts. Such a format is, however, clearer than that followed by companies such as Infineon Technologies, Novozymes, Colruyt and Ryanair (Extract 6) each of which reconciles its deferred tax balance in aggregate only. The remaining six sample companies including Siemens, Sodexo and Voestalpine do not reconcile the deferred tax balance at the beginning and end of the year.


Company

For each temporary difference on a gross

basis

For each temporary difference on a net

basis

Temporary differences in aggregate only

No reconciliation presented

Imperial Tobacco

Sage

Novartis


Lonmin

Compass


Air France‐KLM


Wolseley

Alstom

Infineon Technologies

Novozymes

Ryanair

Colruyt

Sodexo

TUI

Thyssenkrupp

Siemens

Pernod Ricard

Voestalpine





Deferred Tax Assets – Expiry Analysis

When disclosing the expiry of unrecognised deferred tax assets under IAS 12 companies either do so in a full maturity analysis table or make reference to the expiry of specific assets in a narrative format. Novartis, TUI and Pernod Ricard adopt the most transparent practice by presenting full maturity analysis tables (Extract 7). A further four companies including Wolseley and British Sky Broadcasting make a narrative statement about the expiry of all unrecognised deferred tax assets (Extract 8). Seven companies including Siemens, Air France-KLM, Imperial Tobacco and Daily Mail and General Trust make a narrative statement in respect of the expiry of only some unrecognised deferred tax assets. Air France KLM makes reference to unrecognised deferred tax assets in some tax locations but not others (Extract 9). In the case of Daily Mail and General Trust the type of unused tax loss is the deciding factor as to whether reference is made to expiry. Reference is made to the expiry of unrecognised deferred tax assets relating to revenue losses but not those relating to capital losses (Extract 10). Four companies including Sodexo and Lonmin make no disclosure in relation to expiry identifying only unrecognised amounts. The practice followed by Infineon Technologies is even less transparent as it fails to even identify an amount.

In contrast, four companies go beyond IAS 12 requirements by making reference to the expiry of recognised deferred tax assets. Novartis and Pernod Ricard both present a full maturity analysis for such assets alongside the analysis given for unrecognised amounts (Extract 11 & 12).


Company Unrecognised Deferred Tax Assets Recognised Deferred Tax

Assets

Full maturity analysis table

Expiry disclosed for all

Expiry disclosed some only

Amount only disclosed

Expiry disclosed for all

Expiry disclosed some only

Novartis

Pernod Ricard

TUI

Thyssenkrupp

Wolseley


Colruyt


Voestalpine

Siemens

Air France‐ KLM

Alstom

Imperial Tobacco

Compass


Sodexo





Lonmin

Novozymes

Infineon Technologies (1)

Sage (2)

Ryanair (2) (1) Infineon Technologies does not identify its unrecognised deferred tax assets.(2) Sage and Ryanair do not have any evidence of unrecognised deferred tax assets.

Deferred Tax Assets/Liabilities: Significance Examined

Our analysis shows that either deferred tax assets or liabilities are significant for some 43% of companies. Taking 5% of total assets as a significance threshold, only Pernod Ricard and Daily Mail and General Trust have material deferred tax assets with such assets amounting to 6% and 9% of total assets respectively. In terms of deferred tax liabilities, taking 5% of total liabilities as a significance threshold, eight companies have material deferred tax liabilities. The companies where deferred tax liabilities are of the greatest significance are Pernod Ricard, Novozymes and Lonmin with such liabilities amounting to 16%, 18% and 51% of total liabilities respectively.

Company Deferred tax assets as a percentage of total assets

Less than 5% Greater than 5%

Imperial Tobacco 0.33%

Ryanair 0.37%

Colruyt 0.73%

Sage 0.75%

Lonmin 1.17%

TUI 1.21%

Sodexo 1.34%

Associated British Foods 1.47%

British Sky Broadcasting 1.48%

Novozymes 1.99%

Thyssenkrupp 2.16%

Compass 2.55%

Voestalpine 2.93%

Wolseley 3.06%

Siemens 3.08%

Air France‐KLM 3.22%





Alstom 4.34%

Infineon Technologies 4.46%

Novartis 4.98%

Pernod Ricard 5.68% Daily Mail and General Trust 8.66%

Company Deferred tax liabilities as a percentage of total liabilities

Less than 5% Greater than 5%

British Sky Broadcasting 0.23%

Infineon Technologies 0.28%

Alstom 0.35%

Compass 0.59%

Siemens 0.83%

Thyssenkrupp 0.98%

Daily Mail and General Trust 1.14%

TUI 1.34%

Sage 1.42%

Sodexo 1.70%

Air France‐KLM 2.32%

Voestalpine 2.83%

Wolseley 3.69%

Colruyt 5.91% Ryanair 6.34% Imperial Tobacco 9.00% Associated British Foods 10.03% Novartis 13.11% Pernod Ricard 16.38% Novozymes 18.04% Lonmin 50.82%





Summary - Conclusion

Our principal conclusions are that:

• When disclosing deferred tax balances nine (43%) companies adopt best practice by disclosing gross amounts before offsetting. A further five companies disclose gross amounts as reflected in the balance sheet and seven disclose net amounts only.

• When reconciling movements in deferred tax balances two (10%) companies adopt best practice by reconciling balance sheet amounts on a gross basis for each temporary difference. A further nine companies reconcile movements in each temporary difference on a net basis and four present an aggregate reconciliation for all temporary differences. The remaining six companies do not present a reconciliation.

• When disclosing the expiry of unrecognised deferred tax assets three (14%) companies follow best practice by presenting a full maturity analysis table showing expiry of all amounts. A further 11 companies make reference to expiry of all or some differences but not in a tabular format. Another four companies identify an amount only without any expiry analysis.

• Only four companies make reference to the expiry timescales for recognised deferred tax assets. • Deferred tax assets or liabilities amount to greater than 5% of total assets or total liabilities respectively for

nine companies thus meaning deferred tax is significant to the balance sheet.





Extracts

Thyssenkrupp: Deferred tax balances expressed gross before offsetting (Extract 1)

Pernod Ricard: Deferred tax balances as reflected in the balance sheet (Extract 2)





Sodexo: Deferred tax balances expressed on a net basis (Extract 3)





Imperial Tobacco: A reconciliation of individual balance sheet amounts (Extract 4)





Associated British Foods: Reconciliation of individual temporary differences on a net basis (Extract 5)

Ryanair: Temporary differences reconciled on an aggregate basis (Extract 6)





TUI: Expiry analysis of unrecognised tax loss carry forwards (Extract 7)





British Sky Broadcasting: Narrative statements in relation to expiry of all unrecognised deferred tax assets (Extract 8)





Air France-KLM: Disclosure made in relation to the expiry of unrecognised deferred tax assets in some locations but not others (Extract 9)

Daily Mail and General Trust: Disclosure made in relation to the expiry of unrecognised deferred tax assets relating to revenue losses but not capital losses (Extract 10)





Novartis: Expiry analysis of both recognised and unrecognised tax loss carry forwards (Extract 11)





Pernod Ricard: Analysis of deferred tax loss carry forwards that identifies those with no expiry (Extract 12)

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