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IAS 12 INCOME TAXES

Made by Renáta Makula

28 September 2017

Contents

Importance of IFRS

IFRS in Hungary

IAS 12 standard

Examples

Summary

Importance of IFRS

Importance of

IFRS IFRS in Hungary IAS 12 standard Summary

Accounting harmonisation

A process which results higher comparability of accounting practices

Globalisation of international capital market

Company relationships

International accounting trend

„uniform accounting language”

Importance of


• Easier entrance into the international capital markets for companies

from different countries.

• The process of consolidated report preparing will be simplier and more

accurate.

• The financial reports will be more clear for investors, creditors and for

other users.

• Provide clearer and internationally comparable information.

Advantages of harmonization

Importance of


International Financial Reporting Standards (IFRS)

What is IFRS?

• Language of international financial reporting main aim is providing

useful information to extarnal and internal users

• Included

• IAS (International Accounting Standards)

• IFRS (International Financial Reporting Standards), which replace IAS

• SIC (International Issues Committee)

• IFRIC (International Financial Reporting Issues Committee), which replace

SIC

• Based on common law Business view significant differences

between HAS (Hungarian Accounting System) and IFRSDeferred

taxes

IFRS in Hungary

Importance of

IFRS IAS 12 standard Summary IFRS in Hungary

1. 1606/2002 (EK) IAS decree

• Consolidated financial statements can be/must be prepared in accordance

with IFRS standards (1 January 2005)

• Compulsory for companies listed on stock exchange

• Option for groups are not listed on stock exchange (in this case the consolidated

IFRS FS replace the HAS statements)

2. 1387/2015 Government decree

• Standalone primary financial statements can be/must be prepared under

IFRS (2016/2017)

• Compulsory for companies listed on stock exchange and financial institutions

• Option for companies are obliged to audit

Milestones of IFRS regulation in Hungary

IAS 12 Income taxes standard

Importance of


IAS 12 Income taxes standard

• was issued in 1996 by International Accounting Standards Borad

• is effective for accounting periods beggining on or after 1 January 1998

The objective of this standard is to prescibe the accounting treatment for income

taxes.

How to account the tax consequences of transactions are recognised in an

entity’s financial statements.

According to IAS 12.1 és IAS 12.2 this standard must be applied for all domestic

and foreign income taxes which based on taxable profit.

Current and future taxes are also recognised in financial statements which

harmonising with IFRS requirements

Deferred tax assets / liabilities must be presented depend on nature

Importance of


Definitions

Deferedd tax assets are the amount of income taxes recoverable in

future periods respect of

• deductible temporary differences

• the carryforward of unused tax losses (deductive loss)

Deferred tax liabilities are the amounts of income taxes payable in

future periods in respect of temporary differences.

Tax expense (tax income) is the accumulated amount of current tax and

deferred tax.

Importance of


Statement of financial position at the end of 31 December 2016 Note Standard

ASSETS

Fixed assets

Property, plant and equipment IAS 16, 17

Intangible assets IAS 38

Goodwill IFRS 3

Deferred tax asset IAS 12

Other investments IFRS 7

Total fixed assets

Current assets

Inventories, net IAS 2

Trade receivables, net IFRS 7

Other receivables and other current assets IFRS 7

Advance payment on capital project

Income tax receivables IAS 12

Trapped cash IAS 7

Cash and cash equivalents IAS 7

Total current assets

TOTAL ASSETS

LIABILITIES AND SHAREHOLDER'S EQUITY

Equity attributable to equity holders of the parent

Share capital IAS 1

Share premium IAS 1

Hedging reserve IAS 1

Retained earnings IAS 1

Cumulated translation adjustment

Total equity attributable to equity holders of the parent

Non-controlling interest

Total equity

Long term liabilities

Long term debt IFRS 7

Deferred tax IAS 12

Obligations under finance lease IFRS 7

Provision IAS 37

Total non-current liabilities

Current liabilities

Trade accounts payable IFRS 7

Other liabilities and accruals IFRS 7

Accrued interest on debt

Short term borrowings IFRS 7

Short term portion of long term debts IFRS 7

Taxation IAS 12

Financial liabilities IFRS 7

Provision IAS 37

Total current liabilities

Net sales

Direct cost of sales

Gross profit

Distribution cost

General and administrative costs

Other operating costs

Operating income

Financial and operational restructuring costs

Interest income

Interest costs

Loss from associated parties

Gain / loss on derivatives

Foreign exchange gain

Pre-tax profit

Income tax

Profit for the period

Of which:

Attributable to the parent

Non-controlling interest

Consolidated Income Statement for the year ended 31

December 2016

Aggregated amount of current

and deferred tax

Importance of


Concept of deferred taxes

Accounting profit

Is a profit or loss for a period

before deducting tax expense

Taxable profit

Is a profit or loss for a period

determined in accordance

with rules established by tax

authorities

Regulated by accounting law Determined by tax regulations

• The starting point of current income tax calculation is the accounting

profit.

Importance of


• The accounting profit must be modified to fulfill the requirements of tax regulation

and to calculate the assets and liabilities tax base.

• Tax base of an asset or liability is the amount attributed to that asset or liability

for tax purposes.

• For example,

• 1. You have 100 EUR interest receivable and interest revenue. Is taxed on a cash basis,

thats why the tax base of interest receivable is 0 and the accounting base is 100 EUR.

• 2. When you receive the cash and eliminate the interest receivable from your books, you will

need to include full amount of cash received into your tax return. The receivable’s tax base

will be also 100 EUR.Temporary difference beetween tax base and accounting base

• Two type of tax base modifications can be occured:

a) temporary differences DEFERRED TAX RECOGNITION

b) final differences

Income tax calculation

Importance of


Temporary differences are differences between the carrying amount of

an asset or liability in the statement of financial position (BS) and its tax

base.

• Arising from timing differences, for example provisons, amortisation,

deductive loss

• The related adjusment will be affected more than one period

Temporary differences will be recoveredFuture tax

consequenseDeferred tax must be recognised

Final differences are arising from such differeneces than penalty,

recognized expenses - in accounting profit - are not connected to the

business activity.

• It will be accured just in one period It will not be recoveredThere

is no future tax consequense

Importance of


Current vs deferred taxes

Income tax

Current tax Deferred tax

Substance - Payable to the tax

authorities - Accountig measure

Basis - Taxable profit (loss) - Temporay differences

Timing - Current period - Future period

• Deferred tax asset aim is to present the future tax benefits

• Deferred tax liability aim is to present the future tax payables

Importance of


Calculation of deferred taxes

Temporary

difference =

Carrying

amount - Tax base

Deferred tax

asset or liability =

Temporary

difference x Tax rate

Deferred tax

asset

= Unused tax loss

or unused tax

credits

x Tax rate

Deferred tax assets and deferred tax liabilities can be calculated using the following

formulae:

The following formula can be used in the calculation of deferred taxes arising from

unused tax losses or unused tax credits:

Importance of


In case of assets

Deferred tax assets Carrying amount < Tax base

Deferred tax liability Carrying amount > Tax base

In case of liabilities

Deferred tax assets Carrying amount > Tax base

Deferred tax liability Carrying amount < Tax base


Importance of


In case of assets

Deferred tax assets Carrying amount < Tax base

Deferred tax liability Carrying amount > Tax base


Example:

At the end of 2016 the machinary carrying amount is EUR 100,000 and it’s tax

base is EUR 70, 000. It is a temporary difference because the carrying amount

and tax base will be also zero, just not at the same time.

Topic Carrying

amount

Tax base Temporary

difference

Tax rate % DTA(+) /

DTL (-)

PPE 100,000 EUR 70,000 EUR 30,000 EUR 9% -2,700 EUR

(C) Deferred tax liability / (D)Deferred tax expense 2,700 EUR

Importance of


In case of liabilities Deferred tax assets Carrying amount > Tax base

Deferred tax liability Carrying amount < Tax base


Example:

At the end of 2016 provision was created amounted to EUR 2,500. Under tax

regulation the amount of created provison must be eliminated, added back. It is non

deductibale for tax purposes at the time of creation.

It will be deductible in tax calculation when the provison will be removed from FS.

Topic Carrying

amount

Tax base Temporary

difference

Tax rate % DTA(+) / DTL (-)

Provision

created 2,500 EUR 0 2,500 EUR 9% +225 EUR

Provision

released 0 2,500 EUR 2,500 EUR 9% - 225 EUR

(D) Deferred tax assets / (C)Deferred tax revenue 225 EUR

(C) Deferred tax assets / (D)Deferred tax revenue 225 EUR

Importance of


Recognition and measurement of deferred taxes

• The general principle in IAS 12 is that a deferred tax liability is

recognised for all taxable temporary differences.

• A deferred tax asset is recognised for deductible temporary differences,

unused tax losses and unused tax credits to the extent that it is

probable that taxable profit will be available against which the

deductible temporary differences can be utilised. [IAS 12.24]

• Deductive loss related deferred tax assettax regulationimpairment

loss!

In 2017 the ITC rate uniformly is 9%

In the year of 2016 the rate was 9% under 500 million HUF and 19% was

above Impairment loss of tax assets

(C) Deferred tax assets /(D)Deferred tax expense

Importance of


• The carrying amount of deferred tax assets are reviewed at the end

of each reporting period and reduced to the extent that it is no longer

probable that sufficient taxable profit will be available to allow the

benefit of part or all of that deferred tax asset to be utilised. [IAS 12.37]

• Deferred tax assets and liabilities are measured at the tax rates that

are expected to apply to the period when the asset is realised or

the liability is settled, based on tax rates/laws that have been

enacted or substantively enacted by the end of the reporting

period. [IAS 12.47] The measurement reflects the entity's expectations,

at the end of the reporting period, as to the manner in which the

carrying amount of its assets and liabilities will be recovered or settled.

[IAS 12.51]

Importance of


Temporary differences can be occured at next levels:

1. Difference between accounting profit and taxable profit (tax base related

modifications). For example: amortization, provision, impairment loss of trade

receivables, deductive loss

2. IFRS modifications

• IAS 23 Borrowing cost (general purpose loan related cost activation)

• IAS 16 PPE (activated maintance cost)

• IAS 17 Leasing

• IAS 19 Employee benefits (provisons)

• IAS 37 Provisions (discounting long term provisons)

3. Consolidation related modifications, elimination of internal transactions

• intercompany PPE sold

• intercompany inventory sold

Importance of


Deferred tax effect of financial statements

Elements of FS Deferred tax recognition, effect

Financial position Deferred tax asset should be presented within fixed assets, deferred tax

liability should bepresented as long term liability. (IAS 1.70)

Deferred tax asset/liability must be presented in separate line (IAS 1.68)

Discounting is not permitted which is declared in explicit way by standard. (IAS

12.35)

Total comprehensive

income Consistent with the principles underlying IAS 12, the tax consequences of

transactions and other events are recognised in the same way as the items

giving rise to those tax consequences. Accordingly, current and deferred tax

is recognised as income or expense and included in profit or loss for the

period, except to the extent that the tax arises from: [IAS 12.58]

transactions or events that are recognised outside of profit or loss (other

comprehensive income) - in which case the related tax amount is also

recognised outside of profit or loss [IAS 12.61A]

Cash flow There is no cash flow effect. It is a theoretical tax.

Importance of


Thank you for your

attention!

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