Income Taxes

Prepared by: Michael Wells

Date: June 13-17, 2016
Addis Ababa
Aims

»Understand the concepts, principles and rules for:

» Identifying and Accounting for income taxes
» Accounting for deferred income tax

2
Scope of IAS 12 Income Taxes
the requirements

»Includes all taxes that are based on taxable income

» “Taxable Income" shall mean the amount of income subject to tax after
deduction of all expenses and other deductible items allowed under
Income Tax Proclamation No. 286/2002, its amendments, regulations,
directives and related circulars.
»Excludes taxes that are not based on income tax

3
Current tax
definition

»Current tax = the amount of income tax payable (recoverable) in

respect of the taxable profit (tax loss) for the current period or
past periods.

4
Current tax
overview of the recognition and measurement
requirements

»Recognise a current tax liability for

» tax payable on taxable profit for the current and past periods (current
tax)
»Recognise a current tax asset for
» the extent to which the amount paid exceeds the amount payable
» the benefit of a tax loss that can be carried back to recover tax paid in a
previous period
»Measure current tax liability (asset) at
» The amount the entity expects to pay (recover) using substantively
enacted tax rates

5
Current tax: permanent differences and tax
loss carried back
test your understanding

» Government A specifies that:

» entities must each year pay a tax = 30% of taxable profit for the year
» taxable profit is determined in accordance with IFRS adjusted for specified
expenses that are excluded from the calculation of taxable income (ie
donations and entertainment)
» If the determination of taxable business income results in a loss in a tax
period, that loss may be set off against taxable income in the next five (5) tax
periods, earlier losses being set off before later losses.
» Entity A determines, accounting profit in accordance with IFRS:
» profit for 2014 to be $900,000 (donation expense = $100,000)
» loss for 2015 to be $400,000 (entertainment expense = $100,000)
Continued…
6
Current tax: permanent differences and tax
loss carried back
test your understanding

»Entity A’s current tax expense for 2014 is? (choose one of):
1) $1,000,000; 2) $900,000; 3) $800,000; 4) $300,000; 5) $230,000; or
6) $200,000.

»Entity A’s current tax income for 2015 is? (choose one of):
1) $500,000; 2) $400,000; 3) $300,000; 4) $130,000; 5) $100,000;
6) $90,000; or 7) nil.

7
Current tax: uncertain tax position
test your understanding

» Corporate tax rate is 30%

» Entity A determines for the year ended 31 December 2015:
» taxable income before uncertain item to be $1,000,000
» 60% probability that a further $100,000 gain is taxable
» Entity A’s current tax expense for 2015 is? (choose one of):
1) $300,000 (most favorable outcome);
2) $308,000;
3) $318,000 (probability weighted outcome);
4) $330,000 (most likely outcome); or
5) it depends on Entity A’s accounting policy.

8
Current tax: uncertain tax position
test your understanding

»Same as previous question except Entity A uses the IFRS for

SMEs (2009)
»Entity A’s current tax expense for 2015 is? (choose one of):
1) $300,000 (most favourable outcome);
2) $308,000;
3) $318,000 (probability weighted outcome);
4) $330,000 (most likely outcome); or
5) it depends on Entity A’s accounting policy.

9
Current tax: penalties and interest on unpaid
taxes
test your understanding

On 30/12/2015 Entity A pays $330,000 to the tax authorities in

respect of taxes payable for 2014 arising due to management’s
misunderstanding of the tax law:
»additional taxable income $1,000,000:
»tax = $300,000;
»penalty = $20,000; and
»interest = $10,000
Entity A presents the amounts in its 31/12/2015 financial
statements as? (choose one of):
10
 Current tax: penalties and interest on unpaid
taxes
test your understanding

1) $330,000 current tax expense in tax for 2015 (description: prior period
underprovision);
2) $330,000 current tax expense in tax for 2014 (description: restatement, correction
of prior period error);
3) $300,000 current tax expense in tax for 2014 (description: restatement. correction
of prior period error) and $30,000 restatement of other expenses (before tax) for
2014 tax penalties and finance cost;
4) $300,000 current tax expense in tax for 2014 (description: restatement, correction
of prior period error) and $30,000 other expenses (before tax) for 2015 tax
penalties and interest; or
5) $300,000 additional current tax expense in tax for 2014 (description: restatement
correction of prior period error); additional $20,000 penalty expense (before tax) in
2014 and $10,000 additional finance cost (before tax) for 2015. 11
Deferred tax
Deferred tax
definitions

»Deferred tax = income tax payable (recoverable) in respect of

the taxable profit (tax loss) for future periods as a result of past
transactions or events.
»Temporary differences = differences between the carrying
amount of an asset or liability in the statement of financial
position and its tax base.
»Tax base = the tax base of an asset or a liability is the amount
attributed to the asset or liability for tax purposes.

13
Deferred tax
example: definitions

» On 31 December 2013 a company buys a machine for $500,000.

» Accounting:
» depreciate machine on straight-line method over 5 years to nil residual value
» accounting profit = $300,000 per year (ie $400,000 less $100,000 machine
depreciation)
» Tax information:
» corporate tax rates: 30% on taxable profit (accounting profit less tax
depreciation)
» depreciate machine on straight-line method over 24 months to nil residual
value
Continued…

14
Deferred tax
example: definitions

Tax base (ie Deferred Deferred

Carrying future tax Temporary tax liability tax expense
Date amount deductions) difference (30%) (income)
31/12/2013 500,000 500,000 - - -
31/12/2014 400,000 250,000 150,000 45,000 45,000
31/12/2015 300,000 - 300,000 90,000 45,000
31/12/2016 200,000 - 200,000 60,000 (30,000)
31/12/2017 100,000 - 100,000 30,000 (30,000)
31/12/2018 - - - - (30,000)

15
Deferred tax, current tax and tax expense
example

Deferred
Deferred tax expense Taxable Current tax Tax
Date tax liability (income)1 profit2 expense3 expense4
31/12/2014 45,000 45,000 150,000 45,000 90,000
31/12/2015 90,000 45,000 150,000 45,000 90,000
31/12/2016 60,000 (30,000) 400,000 120,000 90,000
31/12/2017 30,000 (30,000) 400,000 120,000 90,000
31/12/2018 - (30,000) 400,000 120,000 90,000
1 change in the deferred tax liability in the year (increase in liability = expense; decrease in liability = income)
2 $400,000 accounting profit before accounting depreciation minus tax depreciation of $250,000 in 2014 & 2015)
3 30% of taxable profit
4 current tax expense + deferred tax expense (absent permanent differences etc = 30% of $300,000 accounting profit)
16
Deferred tax
overview of the recognition requirements

» Recognise a deferred tax asset (liability) for tax recoverable

(payable) in future periods as a result of past transactions or events.
» for example, when it is probable that recovery of the carrying amount of an
asset will make future tax payments larger than they would be if such
recovery were to have no tax consequences.
» By exception, deferred tax is not recognised:
» on the initial recognition of goodwill (unless goodwill amortisation is deducted
when calculating taxable income); and
» outside of a business combination, when the initial recognition of an asset or
a liability affects neither taxable profit nor accounting income.
» Deferred tax assets also arise from the carry forward of unused tax
losses and tax credits.

17
Deferred tax
example: business combination

»On 31 December 2013 Entity A pays $1,000,000 to acquire all

of the issued share capital of Entity Z when Z’s machine is
worth $750,000 (ie $250,000 more than its $500,000 carrying
amount).
» Tax and accounting: depreciate the machine on the straight-line
method; over remaining useful life of 5 years; to nil residual value.
» $100,000 goodwill recognised from the business combination.
»Corporate tax rates:
» 30% on taxable profit (Z’s taxable profit = Z’s accounting profit);

18
 Deferred tax
example: machine consolidated financial
statements

Group
deferred
Group Entity Z Tax base (ie Group Group tax
carrying carrying future tax temporary deferred expense
Date amount amount deductions) difference tax liability (income)
31/12/2013 750,000 500,000 500,000 250,000 75,000 -
31/12/2014 600,000 400,000 400,000 200,000 60,000 (15,000)
31/12/2015 450,000 300,000 300,000 150,000 45,000 (15,000)
31/12/2016 300,000 200,000 200,000 100,000 30,000 (15,000)
31/12/2017 150,000 100,000 100,000 50,000 15,000 (15,000)
31/12/2018 - - - - - (15,000)
19
 Deferred tax
example: consolidated financial statements
when goodwill expense is deducted evenly over
5 years in calculating taxable income
Exemption
Group Entity Z Tax base (ie Group from Group
carrying carrying future tax temporary deferred deferred
Date amount amount deductions) difference tax tax liability
31/12/2013 100,000 - 100,000 - - -
31/12/2014 100,000 - 80,000 20,000 - 6,000
31/12/2015 100,000 - 60,000 40,000 - 12,000
31/12/2016 100,000 - 40,000 60,000 - 18,000
31/12/2017 100,000 - 20,000 80,000 - 24,000
31/12/2018 100,000 - - 100,000 - 30,000
20
 Deferred tax
example: consolidated financial statements
when goodwill expense is NOT deducted in
calculating taxable income.
Exemption
Group Entity Z Tax base (ie Group from Group
carrying carrying future tax temporary deferred deferred
Date amount amount deductions) difference tax tax liability
31/12/2013 100,000 - - 100,000 100,000 -
31/12/2014 100,000 - - 100,000 100,000 -
31/12/2015 100,000 - - 100,000 100,000 -
31/12/2016 100,000 - - 100,000 100,000 -
31/12/2017 100,000 - - 100,000 100,000 -
31/12/2018 100,000 - - 100,000 100,000 -
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Deferred tax assets
recoverability recognition requirements

» Deferred tax asset is recognised only to the extent that its recovery
is probable
» tax planning opportunities are available to create taxable profit for the entity in
the appropriate future periods; or
» it is probable that the entity will have sufficient taxable profit relating to the
same taxation authority and the same taxable entity and in the same
period as the reversal of the deductible temporary difference (or tax loss
carryback or carryforward)
» in making this assessment ignore any deductible temporary differences originating in
a period after the reporting date because they will themselves require future taxable
income in order to be utilised.
» The existence of tax losses is strong evidence that future taxable
profit may not be available
» convincing evidence of probable recovery is needed

22
Deferred tax assets
recoverability recognition requirements:
application guidance

» Deferred tax asset is recognised only to the extent that its recovery
is probable
» KPMG observe that (p779 and p782 of Insights into IFRS 2015/16):
» probable is not defined in IAS 12
» consistently with IAS 37 entities often take probable to mean ‘more likely than not’
» however, IAS 12 does not prohibit a higher threshold
» a ‘virtually certain’ threshold should not be used
» portions of unused tax losses should be used when applying the probability threshold
» Deloitte observe that (p830 iGAAP 2015)
» probable is not defined in IAS 12
» probable is generally agreed to mean ‘at least more likely than not (ie a probability of
greater than 50%)’

23
Deferred tax asset recognition
test your understanding: example 1 (four
scenarios follow)

»In 2015 a manufacturer incurs a tax loss of $100 million.

»In the jurisdiction in which the manufacturer is based
» income tax is levied at 30% on taxable profits
» taxable profit (or loss) = accounting profit (or loss) determined in
accordance with the IFRS
» tax losses are carried forward for only one year (after which any
unutilised tax loss is forfeited)
Continued…

24
Deferred tax asset recognition
test your understanding: example 1 scenario 1

» Scenario 1: in 2015 the manufacturer incurred a $200 million

impairment expense when a meteorite strike obliterated one of its
factories. The manufacturer’s other factories are unaffected and all
operate profitably generating millions of profit each year for decades
past, and there is nothing to suggest that they will not continue doing
so for the foreseeable future.
» The manufacturer’s deferred tax asset at 31 December 2015 is?
(choose one of):
1) $100 million;
2) $30 million;
3) nil; or
4) another amount.

25
Deferred tax asset recognition
test your understanding: example 1 scenario 2

» Scenario 2: in 2015 the manufacturer incurred a trading loss for the

first time following a steep decline in its profitability due to the
elimination of import tariffs resulting in a flood of cheaper imports
cannibalising the manufacturer’s domestic market. There is little
prospect of the manufacturer generating a profit in 2016.
» The manufacturer’s deferred tax asset at 31 December 2015 is?
(choose one of):
1) $100 million;
2) $30 million;
3) nil; or
4) another amount.
26
Deferred tax asset recognition
test your understanding: example 1 scenario 3

» Scenario 3: in 2015 the manufacturer incurred a trading loss for the

first time following disappointing orders for its 2015 clothing range.
On the basis of its experience of launching new clothing ranges, the
manufacturer estimates that there is an 50% probability that it will
generate profit in 2016. If a profit is generated it will be hundreds of
millions. If a loss is incurred it will be hundreds of millions.
» The manufacturer’s deferred tax asset at 31 December 2015 is?
(choose one of):
1) $100 million; 2) $50 million; 3) $30 million; 4) $25 million;
5) $15 million; or 6) nil; or 7) another amount.

27
Deferred tax asset recognition
test your understanding: example 1 scenario 4

»Scenario 4: at 31 December 2015 on the basis of its experience

the manufacturer of bespoke luxury yachts reliably forecasts the
profit in 2016 as follows:
Probability Cumulative probability Forecast cumulative profit before tax
40% 40% $100 million profit (2 new orders)
20% 60% $40 million profit (1 new orders)
40% 100% break-even (no new orders)

28
Deferred tax asset recognition
test your understanding: example 1 scenario 4
continued

»The manufacturer’s deferred tax asset at 31 December 2015

is? (choose one of):
Amount Calculation
1) $30 million 30% tax rate x $100 million profit (ie profit with 40% probability)
2) $12 million 30% tax rate x $40 million profit (ie profit with 60% probability)
3) nil 30% tax rate x nil profit (ie profit with 100% probability)
4) $14.4 million Expected value: 30% tax rate x [(40% x $100 million) + (20% x $40 million)
+ (40% x nil)]
5) another specify

29
Deferred tax asset recognition
test your understanding: example 2

»In 2015 a manufacturer reconciled its accounting profit with its

tax profit for the period as follows
» accounting profit = $100 million
» add $10 million accounting depreciation in excess of tax depreciation
» equals taxable profit of $110 million
»In the jurisdiction in which the manufacturer is based
» income tax is levied at 30% on taxable profits
» taxable profit (or loss) = accounting profit (or loss) determined in
accordance with the IFRS except that tax depreciation is over 10 years
(whereas accounting depreciation is straight-line over 5 years)

30
Deferred tax asset recognition
test your understanding: example 2

»On 1 January 2015 the manufacturer brought new equipment

with a cost of $100 million into use for the first time.
»The carrying amount of the manufacturer’s deferred tax asset at
31/12/2015 (due to accounting depreciation to date exceeding
tax depreciation to date by $10 million) is? Choose one of:
1) $3 million;
2) $10 million;
3) nil;
4) another amount.

31
Deferred tax asset recognition
test your understanding: example 3

» In 2015 a manufacturer reconciled its accounting profit with its tax

loss for the period as follows
» accounting profit of $80 million
» less $100 million accelerated depreciation tax allowance
» tax loss of $20 million
» In the jurisdiction in which the manufacturer is based
» income tax is levied at 30% on taxable profits
» taxable profit (or loss) = accounting profit (or loss) determined in accordance
with the IFRS except that for income tax purposes expenditure on new
manufacturing capacity is expensed in full (as depreciation expense) in
the year in which the plant is first brought into use
» tax losses are carried forward indefinitely

32
Deferred tax asset recognition
test your understanding: example 3

» On 31 December 2015 the manufacturer brought plant with a cost of $100 million
into use for the first time.
» it depreciates plant on the straight-line method to nil residual value over 10 years.
» For the foreseeable future the manufacturer realistically expects to achieve:
» about break-even accounting profit (before tax) per year
» about $10 million tax profit per year (due to the reversal of the temporary difference that
arose in 2015) before utilising tax losses brought forward
» The carrying amount of the manufacturer’s deferred tax at 31 December 2015 is?
(choose one of):
1) $6 million asset (30% x $20 million tax loss carried forward);
2) $30 million liability (30% x $100 million accelerated tax depreciation);
3) $6 million asset (tax loss) and $30 million liability (accelerated tax depreciation);
4) $24 million liability (ie offset $30 million liability against $6 million asset); or
5) another amount.

33
Deferred tax asset recognition
test your understanding: example 4

» In 2015 a manufacturer incurs a $100 million tax loss.

» In the jurisdiction in which the manufacturer is based
» income tax is levied at 30% on taxable profits
» taxable profit (or loss) = accounting profit (or loss) determined in accordance
with the IFRS
» tax losses are carried forward for 5 years
» only half of the tax loss carried forward can be utilsed to reduce income tax
payable in the ensuing year
» The manufacturer realistically forecasts its accounting profit before
tax: 2016 = $200 million and 2017 to 2020 = $10 million per year.

34
Deferred tax asset recognition
test your understanding: example 4 continued

»The carrying amount of the manufacturer’s deferred tax at 31

December 2015 is? (choose one of):
1) $30 million asset (30% x $100 million tax loss carried forward);
2) $27 million asset (30% x $90 million recoverable tax loss carried
forward);
3) $15 million asset (30% x $50 million recoverable tax loss carried
forward); or
4) another amount.

35
Deferred tax
overview of the measurement requirements

»Measure deferred tax liability (asset) using

» undiscounted amounts the entity expects to pay (recover)
» substantively enacted tax rates that apply to undistributed profits
reflecting the tax consequences that would follow from the manner in
which the entity expects, at the reporting date, to recover the carrying
amount of the asset/settle the liability
» recovery of revalued non-depreciable items of PPE is through sale (a principle)
» rebuttable presumption that investment property carried at fair value is
recoverable through sale (rebutted if the depreciable and objective is to recover
substantially all of its carrying amount through use) (a rebuttable ‘rule’)
» (when differential tax rates apply) the average substantively enacted
rate that is expected to apply to its taxable profits of the relevant future
periods (for example, when the taxable temporary differences reverse)
36
 Building
test your understanding
37
» 31/12/2000 Entity A buys a factory building for $1 million
» 31/12/2010 fair value of building is $1.2 million
» Depreciation
» accounting (when relevant): straight-line to nil residual value over 40 years
» tax: straight-line to nil residual value over 20 years
» Tax rates
» 30% on taxable income (including recoupment of past depreciation on sale of
an asset but excluding capital gains)
» 15% on capital gains (for example, proceeds from sale of PPE less its original
cost)
© Michael JC Wells 37
Fair value model investment property:
presumption recover through sale (Scenario A:
is inconsistent with nil residual value)
test your understanding
The carrying amount of deferred tax at 31/12/2010 is?
Choose one of:
Tax base (ie
Carrying future tax Temporary Deferred tax
amount deductions) difference Applicable tax rate liability
1) 1,200,000 1,000,000 200,000 30% 60,000
2) 1,200,000 1,000,000 200,000 15% 30,000
30% on $300,000;
3) 1,200,000 500,000 700,000 120,000
15% on $400,000
30% on $500,000;
4) 1,200,000 500,000 700,000 180,000
15% on $200,000
38
Fair value model investment property: rebutted
presumption, ie intend to recover through use
(Scenario B)
test your understanding
The carrying amount of deferred tax at 31/12/2010 is?
Choose one of:
Tax base (ie
Carrying future tax Temporary Deferred tax
amount deductions) difference Applicable tax rate liability
1) 1,200,000 500,000 700,000 30% 210,000
2) 1,200,000 500,000 700,000 15% 105,000
30% on $300,000;
3) 1,200,000 500,000 700,000 150,000
15% on $400,000
30% on $500,000;
4) 1,200,000 500,000 700,000 180,000
15% on $200,000
39
Cost model (investment property and PPE)
(Scenario C)
test your understanding (carrying amount and
tax base) 40

1,000,000

800,000

600,000

500,000
400,000

200,000

31/12/2010 31/12/2020 31/12/2030 31/12/2040 31/12/205040

Cost model (investment property and PPE)
(Scenario C)
test your understanding

The carrying amount of deferred tax at 31/12/2010 is?

Choose one of:
Tax base (ie
Carrying future tax Temporary Deferred tax
amount deductions) difference Applicable tax rate liability
1) 800,000 500,000 300,000 30% 90,000
2) 800,000 500,000 300,000 15% 45,000
30% on $300,000;
3) 1,200,000 500,000 700,000 150,000
15% on $400,000
30% on $500,000;
4) 1,200,000 500,000 700,000 180,000
15% on $200,000
41
Example: debt instrument held (an asset)
test your understanding

» 1 January 2015 Entity A purchases a debt instrument for $100,000 with the
following contractual cash flow:
» on 1 January 2018: $106,121 (redemption capital and interest)
» In the jurisdiction in which Entity A is based
» income tax is levied at 30% on taxable profits
» taxable profits (losses) = all realised gains (losses)
» Changes in market interest rates result in fair value changes
01/01/2015 31/12/2015 31/12/2016 31/12/2017
Market interest rate 2% 10% 1% irrelevant
Fair value $100,000 $87,703 $105,070 $106,121
42
Example: debt instrument held (an asset)
carried at fair value (Scenario A)
accounting for deferred tax
Taxable/ Deferred Deferred
Carrying Tax base (deductible) tax tax
amount (ie future tax Temporary liability/ expense
Date of asset deductions) difference (asset) (income)
01/01/2015 100,000 100,000 - -
fair value change (12,297) - (12,297) (3,690) (3,690)
31/12/2015 87,703 100,000 (12,297) (3,690)
fair value change 17,367 - 17,367 5,211 5,211
31/12/2016 105,070 100,000 5,070 1,521
fair value change 1,051 - 1,051 315 315
31/12/2017 106,121 100,000 6,121 1,836
43
Example: debt instrument held (an asset)
carried at amortised cost (Scenario B)
accounting for deferred tax
Taxable/ Deferred Deferred
Carrying Tax base (deductible) tax tax
amount (ie future tax Temporary liability/ expense
Date of asset deductions) difference (asset) (income)
01/01/2015 100,000 100,000 - -
accreted interest 2,000 - 2,000 600 600
31/12/2015 102,000 100,000 2,000 600
accreted interest 2,040 - 2,040 612 612
31/12/2016 104,040 100,000 4,040 1212
accreted interest 2,081 - 2,081 624 624
31/12/2017 106,121 100,000 6,121 1836
44
Example: debt instrument issued (a liability)
test your understanding

» 1 January 2015 Entity Z issues a debt instrument for $100,000 with the
following contractual cash flow:
» on 1 January 2018: $106,121 (redemption capital and interest)
» In the jurisdiction in which Entity A is based
» income tax is levied at 30% on taxable profits
» taxable profits (losses) = all realised gains (losses)
» Changes in market interest rates result in fair value changes
01/01/2015 31/12/2015 31/12/2016 31/12/2017
Market interest rate 2% 10% 1% irrelevant
Fair value $100,000 $87,703 $105,070 $106,121
45
Example: debt instrument issued (a liability)
carried at fair value (Scenario A)
accounting for deferred tax
Tax base
Carrying (ie carrying Taxable/ Deferred Deferred
amount amount less (deductible) tax tax
of future tax Temporary liability/ expense
Date liability deductions) difference (asset) (income)
01/01/2015 100,000 100,000 - -
fair value change (12,297) - 12,297 3,690 3,690
31/12/2015 87,703 100,000 12,297 3,690
fair value change 17,367 - (17,367) (5,211) (5,211)
31/12/2016 105,070 100,000 (5,070) (1521)
fair value change 1,051 - (1,051) (315) (315)
31/12/2017 106,121 100,000 (6,121) (1836) 46
Example: debt instrument issued (a liability)
carried at amortised cost (Scenario B)
accounting for deferred tax
Tax base
Carrying (ie carrying Taxable/ Deferred Deferred
amount amount less (deductible) tax tax
of future tax Temporary liability/ expense
Date liability deductions) difference (asset) (income)
01/01/2015 100,000 100,000 - -
accreted interest 2,000 - (2,000) (600) (600)
31/12/2015 102,000 100,000 (2,000) (600)
accreted interest 2,040 - (2,040) (612) (612)
31/12/2016 104,040 100,000 (4,040) (1212)
accreted interest 2,081 - (2,081) (612) (612)
31/12/2017 106,121 100,000 (6,121) (1836) 47
Deferred tax
overview of the presentation requirements

» Present tax expense (current and deferred) in the same component

of comprehensive income (continuing operations, discontinued
operations or other comprehensive income) or equity as the
transaction or other event that resulted in the tax expense
» Do not classify any deferred tax as a current asset/current liability
» Offset tax assets and liabilities (current v current and deferred v
deferred) only when the entity:
» has a legally enforceable right to offset; and
» it plans either to settle on a net basis or simultaneously.

48
Income Taxes
Mini-case studies
Prepared by: Michael Wells
Date: June 13-17, 2016
Addis Ababa
Objectives

Understand the judgements made to:

»classify tax assets and liabilities
»account for current and deferred tax assets and liabilities
»present and disclose income taxes in consolidated financial
statements

50
Case study 1:
PPE revaluation model
 Case study: revaluation model, depreciable
machine
the facts 52
31 December 2010 Entity A buys a machine for $1 million
»Accounting
» depreciation: straight-line to nil residual value over 10 years
» revaluation model:
» 31/12/2012: fair value = $1.2 million
» 31/12/2014: recoverable amount (fair value less costs to sell) =
$300,000
» 31/12/2016: fair value = $800,000

© Michael JC Wells 52
 Case study: revaluation model, depreciable
machine
the facts 53
»Tax
» depreciation: straight-line to nil residual value over 5 years
» tax rates
» 30% on taxable income (including recoupment of past depreciation
on sale of an asset but excluding capital gains)
» 15% on capital gains (for example, proceeds from sale of PPE less
its original cost)

© Michael JC Wells 53
Case study: revaluation model, depreciable
machine
the accounting and tax 54
1,200,000

1,000,000 900,000
800,000
800,000

600,000 600,000

400,000
300,000
200,000 200,000

2 years 4 years 6 years 10 years 54

Case study: revaluation model, depreciable
machine
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2010 1,000,000 1,000,000 - - -
depreciation (100,000) (200,000) 100,000 30,000 30,000
31/12/2011 900,000 800,000 100,000 30,000
depreciation (100,000) (200,000) 100,000 30,000 30,000
revaluation 400,000 OCI - 400,000 120,000 120,000 OCI
31/12/2012 1,200,000 600,000 600,000 180,000
depreciation (150,000) (200,000) 50,000 15,000 15,000
31/12/2013 1,050,000 400,000 650,000 195,000 55
Case study: revaluation model, depreciable
machine
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2013 1,050,000 400,000 650,000 195,000
depreciation (150,000) (200,000) 50,000 15,000 15,000
revaluation (300,000)
decrease OCI (300,000) (90,000) (90,000) OCI
impairment (300,000) (300,000) (90,000) (90,000)
31/12/2014 300,000 200,000 100,000 30,000
depreciation (50,000) (200,000) 150,000 45,000 45,000
31/12/2015 250,000 - 250,000 75,000
56
Case study: revaluation model, depreciable
machine
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2015 250,000 - 250,000 75,000
depreciation (50,000) - (50,000) (15,000) (15,000)
reverse
impairment 200,000 - 200,000 60,000 60,000
revaluation 400,000 OCI - 400,000 120,000 120,000 OCI
31/12/2016 800,000 - 800,000 240,000
depreciation (200,000) - (200,000) (60,000) (60,000)
31/12/2017 600,000 600,000 180,000 57
Case study: revaluation model, depreciable
machine
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2017 600,000 - 600,000 180,000
depreciation (200,000) - (200,000) (60,000) (60,000)
31/12/2018 400,000 - 400,000 120,000
depreciation (200,000) - (200,000) (60,000) (60,000)
31/12/2019 200,000 - 200,000 60,000
depreciation (200,000) - (200,000) (60,000) (60,000)
31/12/2020 - - - -
58
Case study 2: investment
property and goodwill
Scenario 1: cost model
 Case study: investment property
the facts
60
»31/12/2010 Entity A buys an investment property (and other
operations and businesses)
» buildings cost = $1,000,000
» goodwill = $100,000
»on 31/12/2014 impairment event
»on 31/12/2016 the condition that gave rise to the impairment
reverses

© Michael JC Wells 60
 Case study: investment property
the facts
61
»Tax
» depreciation buildings: straight-line to nil residual value over 5 years
» amortisation goodwill: straight-line to nil residual value over 5 years
» tax rates
» 30% on taxable income (including recoupment of past depreciation
on sale of an asset but excluding capital gains)
» 15% on capital gains (for example, proceeds from sale of land less
its original cost)

© Michael JC Wells 61
 Case study: investment property
the facts
62
»Accounting
» cost model for buildings
» depreciation buildings: straight-line; nil residual value; 10 years
»on 31/12/2014 recoverable amount:
» buildings = $300,000; goodwill = nil

© Michael JC Wells 62
Case study: goodwill
the accounting and tax
63

100,000 100,000

80,000

60,000

40,000
20,000

31/12/2011 31/12/2012 31/12/2013 31/12/2014 31/12/2015 63

Case study: goodwill
accounting for deferred tax

Taxable/
Tax base (ie (deductible) Deferred Deferred
Carrying future tax temporary tax liability/ tax expense
Date amount deductions) difference (asset) (income)
31/12/2010 100,000 100,000 - - -
amortisation - (20,000) 20,000 6,000 6,000
31/12/2011 100,000 80,000 20,000 6,000
amortisation - (20,000) 20,000 6,000 6,000
31/12/2012 100,000 60,000 40,000 12,000
amortisation - (20,000) 20,000 6,000 6,000
31/12/2013 100,000 40,000 60,000 15,000 64
Case study: goodwill
accounting for deferred tax

Taxable/
Tax base (ie (deductible) Deferred Deferred
Carrying future tax temporary tax liability/ tax expense
Date amount deductions) difference (asset) (income)
31/12/2013 100,000 40,000 60,000 18,000
amortisation - (20,000) 20,000 6,000 6,000
impairment (100,000) - (100,000) (30,000) (30,000)
31/12/2014 - 20,000 20,000 (6,000)
amortisation - (20,000) 20,000 6,000 6,000
31/12/2015
onwards - - - -
65
Case study: investment property building cost
model
the accounting and tax 66

1,000,000

800,000

600,000 600,000

400,000
300,000
200,000 200,000

2 years 4 years 6 years 10 years 66

Case study: investment property building cost
model
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2010 1,000,000 1,000,000 - - -
depreciation (100,000) (200,000) 100,000 30,000 30,000
31/12/2011 900,000 800,000 100,000 30,000
depreciation (100,000) (200,000) 100,000 30,000 30,000
31/12/2012 800,000 600,000 200,000 60,000
depreciation (100,000) (200,000) 100,000 30,000 30,000
31/12/2013 700,000 400,000 300,000 90,000
67
Case study: investment property building cost
model
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2013 700,000 400,000 300,000 90,000
depreciation (100,000) (200,000) 100,000 30,000 30,000
impairment (300,000) (300,000) (90,000) (90,000)
31/12/2014 300,000 200,000 100,000 30,000
depreciation (50,000) (200,000) 150,000 45,000 45,000
31/12/2015 250,000 - 250,000 75,000

68
Case study: investment property building cost
model
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2015 250,000 - 250,000 75,000
depreciation (50,000) - (50,000) (15,000) (15,000)
reverse
impairment 200,000 - 200,000 60,000 60,000
31/12/2016 400,000 - 400,000 120,000
depreciation (100,000) - (100,000) (30,000) (30,000)
31/12/2017 300,000 300,000 90,000
69
Case study: investment property building cost
model
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2017 300,000 - 300,000 90,000
depreciation (100,000) - (100,000) (30,000) (30,000)
31/12/2018 200,000 - 200,000 60,000
depreciation (100,000) - (100,000) (30,000) (30,000)
31/12/2019 100,000 - 100,000 30,000
depreciation (100,000) - (100,000) (30,000) (30,000)
31/12/2020 - - - -
70
Case study 2: investment
property
Scenario 2: fair value
 Case study: investment property
the facts
72
»31/12/2010 Entity A buys an investment property (and other
operations and businesses)
» buildings cost = $1,000,000
» goodwill = $100,000
»on 31/12/2014 impairment event
»on 31/12/2016 the condition that gave rise to the impairment
reverses

© Michael JC Wells 72
 Case study: investment property
the facts
73
»Tax
» depreciation buildings: straight-line to nil residual value over 5 years
» amortisation goodwill: straight-line to nil residual value over 5 years
» tax rates
» 30% on taxable income (including recoupment of past depreciation
on sale of an asset but excluding capital gains)
» 15% on capital gains

© Michael JC Wells 73
 Case study: investment property
the facts
74
»Accounting
» fair value model for the building
» cost model goodwill
»on 31/12/2014 recoverable amount of goodwill = nil

© Michael JC Wells 74
 Case study: investment property
additional information
75
»Fair value
Date building Date building
31/12/2010 1,000,000 31/12/2016 800,000
31/12/2011 900,000 31/12/2017 600,000
31/12/2012 1,200,000 31/12/2018 400,000
31/12/2013 1,050,000 31/12/2019 200,000
31/12/2014 300,000 31/12/2020 -
31/12/2015 250,000

© Michael JC Wells 75
Case study: investment property building fair
value model
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2010 1,000,000 1,000,000 - - -
2011 (100,000) (200,000) 100,000 30,000 30,000
31/12/2011 900,000 800,000 100,000 30,000
depreciation (200,000) 200,000 60,000 60,000
fair value 300,000 - 300,000 90,000 90,000
31/12/2012 1,200,000 600,000 600,000 180,000
2013 (150,000) (200,000) 50,000 15,000 15,000
31/12/2013 1,050,000 400,000 650,000 195,000 76
Case study: investment property building fair
value model
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2013 1,050,000 400,000 650,000 195,000
depreciation (200,000) 200,000 60,000 60,000
fair value (750,000) (750,000) (225,000) (225,000)
31/12/2014 300,000 200,000 100,000 30,000
2015 (50,000) (200,000) 150,000 45,000 45,000
31/12/2015 250,000 - 250,000 75,000

77
Case study: investment property building fair
value model
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2015 250,000 - 250,000 75,000
fair value 550,000 - 500,000 150,000 150,000
31/12/2016 800,000 - 800,000 240,000
fair value (200,000) - (200,000) (60,000) (50,000)
31/12/2017 600,000 600,000 180,000

78
Case study: investment property building fair
value model
accounting for deferred tax

Tax base (ie Deferred

Carrying future tax Temporary Deferred tax expense
Date amount deductions) difference tax liability (income)
31/12/2017 600,000 - 600,000 180,000
fair value (200,000) - (200,000) (60,000) (50,000)
31/12/2018 400,000 - 400,000 120,000
fair value (200,000) - (200,000) (60,000) (60,000)
31/12/2019 200,000 - 200,000 60,000
fair value (200,000) - (200,000) (60,000) (60,000)
31/12/2020 - - - -
79
Case study: goodwill (cost model is specified,
ie cannot use fair value model)
accounting for deferred tax

Taxable/
Tax base (ie (deductible) Deferred Deferred
Carrying future tax temporary tax liability/ tax expense
Date amount deductions) difference (asset) (income)
31/12/2010 100,000 100,000 - - -
amortisation - (20,000) 20,000 6,000 6,000
31/12/2011 100,000 80,000 20,000 6,000
amortisation - (20,000) 20,000 6,000 6,000
31/12/2012 100,000 60,000 40,000 12,000
amortisation - (20,000) 20,000 6,000 6,000
31/12/2013 100,000 40,000 60,000 18,000 80
Case study: goodwill
accounting for deferred tax

Taxable/
Tax base (ie (deductible) Deferred Deferred
Carrying future tax temporary tax liability/ tax expense
Date amount deductions) difference (asset) (income)
31/12/2013 100,000 40,000 60,000 18,000
amortisation - (20,000) 20,000 6,000 6,000
impairment (100,000) - (100,000) (30,000) (30,000)
31/12/2014 - 20,000 20,000 (6,000)
amortisation - (20,000) 20,000 6,000 6,000
31/12/2015
onwards - - - -
81