finding your way around deferred taxation

PwC’s Tax Academy

February 2011

Finding your way aroundDeferred Taxation

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Synopsis

The amount of tax payable in any particular period does not necessarilybear a direct relationship to the amount of profit or loss shown on theincome statement.

This is due to the fact that the tax laws provide for the computation oftaxable income for a period based on rules different from the generallyaccepted accounting principles followed while preparing the financialstatements. In order to properly account for the tax effects of alltransactions occurring within a period, a deferred tax provision isnecessary.

In this session we will examine the technical issue of deferred taxcomputation and accounting with particular focus on IFRS tax reportingrequirements, practical issues and impending changes.

Slide 2Deferred Taxation February 2011

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Learning outcome

At the end of this course, participants will be able to:

• Understand deferred taxation from both accounting and taxperspectives and the relationship between the two

• Prepare deferred tax computation, presentation and key disclosurerequirements

• Identify practical issues and challenges regarding deferred taxaccounting


Contents

• Introduction & definition of deferred tax terminologies• Accounting for deferred tax• Fair value adjustments and non-depreciable assets• Initial recognition exceptions• Applicable tax rates and manner of recovery• Analysis and classification of deferred tax• Presentation & disclosure requirements• Differences between SAS and IFRS/IAS• Group deferred tax consolidation• Practical issues and expected changes• Conclusion / Discussions / Workshop1 hour 30 minutes

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Introduction & definition of deferredtax terminologies

5

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Introduction

The amount of tax payable in any particular period does not necessarilybear a direct relationship to the amount of profit or loss shown on theincome statement.

This is because the tax laws provide for the computation of taxableincome for a period based on rules different from the generally acceptedaccounting principles followed while preparing the income statement.

In order to properly account for the tax effects of all transactionsoccurring within a period, a deferred tax provision is necessary so as tocomply with matching concept.

The relevant accounting standards on the subject are SAS 19 and IAS 12both titled Income Taxes.


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IntroductionDeferred taxation – inspired by matching concept


Date DescriptionAmount

(N'm)Revaluation

surplusCapitalgains

Tax peraccount Comments

2005 Land @ cost 20

2009 Revalued to 80 60 0 0 No tax due

2011 Sold for 80 0 60 6 CGT payable

Date DescriptionAmount

(N'm)Acct

surplusCapitalgains

Tax peraccount Comments

2005 Land @ cost 20

2009 Revalued to 80 60 0 6 Def tax charge

2011 Sold for 80 0 60 0 CGT covered by DT

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DefinitionsWhat is Deferred Tax?

SAS 19

Deferred tax is the tax (liability or asset) attributable to timingdifferences.

IAS 12

Deferred tax is the tax consequences of the future recovery/settlementof the carrying amount of assets/liabilities in a company’s balance sheetif it is probable that recovery or settlement of that carrying amount willmake future tax payments larger/smaller than they would be if suchrecovery or settlement were to have no tax consequences.

In simple terms

Deferred tax is the future tax effects of differences between items in thefinancial statements and their equivalent values for tax purposes.


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Definitions

Accounting profit is the net profit or loss for a period before deductingtax expense.

Taxable profit (tax loss) is the profit (loss) for a period, determined inaccordance with the rules established by the taxation authorities, uponwhich income taxes are payable (recoverable).

Tax expense (tax income) is the aggregate amount included in thedetermination of net profit or loss for the period in respect of currenttax and deferred tax.

Current tax is the amount of income taxes payable (recoverable) inrespect of the taxable profit (tax loss) for a period.


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Definitions

Temporary differences are differences between the carrying amount ofan asset or liability in the balance sheet and its tax base. Temporarydifferences may be either:

(a) taxable temporary differences, which are temporary differencesthat will result in taxable amounts in determining taxable profit(tax loss) of future periods when the carrying amount of the assetor liability is recovered or settled; or

(b) deductible temporary differences, which are temporary differencesthat will result in amounts that are deductible in determiningtaxable profit (tax loss) of future periods when the carrying amountof the asset or liability is recovered or settled.


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Definitions

(a) Example of taxable difference – Higher NBV for fixed assetscompared to TWDV as a result of accelerated capital allowance.

(b) Example of deductible difference - Provisions disallowed for taxpurposes until payment is made e.g. gratuity provision.


For assets For liabilities

If carryingamount

>Tax Base

Taxable temporarydifference = Deferred tax

liability (DTL)

Deductible temporarydifference = Deferred tax

asset (DTA)

If carryingamount

<Tax Base

Deductible temporarydifference = Deferred tax

asset (DTA)

Taxable temporarydifference = Deferred tax

liability (DTL)

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Definitions

IAS 12 - Timing differences are differences between taxable profit andaccounting profit that originate in one period and reverse in one ormore subsequent periods.

SAS 19 - Timing Differences are differences between the accountingincome and taxable income which arise because the periods in whichsome items of revenue and expense are included in accounting incomediffer from the periods in which they are included in taxable income.Such differences originate in one period and are expected to reverse inone or more subsequent periods. While all timing differences aretemporary differences, not all temporary differences are timingdifferences.

SAS 19 - Permanent differences are differences between taxable andaccounting items, for a period, that are not expected to reverse insubsequent periods.


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Definitions

Deferred tax liabilities are the amounts of income taxes payable infuture periods in respect of taxable temporary differences.

Deferred tax assets are the amounts of income taxes recoverable infuture periods in respect of:

(a) deductible temporary differences;

(b) the carry forward of unused tax losses; and

(c) the carry forward of unused tax credits.

The tax base of an asset or liability is the amount attributed to that assetor liability for tax purposes.


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DefinitionsTax base of an asset

The tax base of an asset is the amount that will be deductiblefor tax purposes in future periods.

Example

A machine cost 100. For tax purposes, capital allowance of 30 hasalready been granted in the current and prior periods and theremaining cost will be deductible in future periods, either as annualallowances or through a balancing allowance on disposal. What is thetax base of the machine?

The tax base of the machine is 70.


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DefinitionsTax base of income receivable

In the case of income receivable, the tax base is the amountof the related income already taxed.

Examples:

1. Interest receivable has a carrying amount of 100. The relatedinterest revenue will be taxed on a cash basis. What is the tax base ofthe interest receivable?

The tax base of the interest receivable is nil.

2. Trade receivables have a carrying amount of 100. The relatedrevenue has already been included in taxable profit. What is the taxbase of the trade receivable?

The tax base of the trade receivables is 100.


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DefinitionsTax base of a non taxable asset

If the economic benefits relating to an asset will not be taxable,the tax base of the asset is equal to its carrying amount.

Example

Dividends receivable from a subsidiary have a carrying amount of 100.The dividends are not taxable. What is the tax base?

The tax base of the dividends receivable is 100.*

*Under this analysis, there is no taxable temporary difference. Analternative analysis is that dividends receivable have a tax base of niland that a tax rate of nil is applied to the resulting temporary differenceof 100. Under both analyses, there is no deferred tax liability.


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DefinitionsTax base of liabilities and provisions

The tax base of a liability or provision is its carrying amount,less any amount that will be deductible for tax purposes inrespect of that liability in future periods.

Examples

1. Current liabilities include accrued expenses with a carrying amountof 100. The related expense will be deducted for tax purposes infuture on a cash basis.

The tax base of the accrued expenses is nil.

2. Provision for retirement benefit has a carrying amount of 100.Retirement benefit is only allowable for tax purposes when paid.

The tax base of the retirement benefit provision is nil.


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DefinitionsTax base of unearned revenue

In the case of revenue received in advance, the tax base of theresulting liability is its carrying amount, less the amount ofthe revenue already taxed.

Example

Current liabilities include interest revenue received in advance, with acarrying amount of 100. The related interest revenue was taxed on acash basis.

The tax base of the interest received in advance is nil.


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DefinitionsTax base of a non deductible liability

If the expense relating to a liability will not be tax deductible,the tax base of the liability is equal to its carrying amount.

Example

Current liabilities include accrued fines and penalties with a carryingamount of 100. Fines and penalties are not deductible for tax purposes.

The tax base of the accrued fines and penalties is 100.*

*Under this analysis, there is no taxable temporary difference. Analternative analysis is that the liability has a tax base of nil and that atax rate of nil is applied to the resulting temporary difference of 100.Under both analyses, there is no deferred tax liability.


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Accounting for deferred tax

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Accounting for deferred taxWhy provide for deferred tax?

Deferred tax accounting seeks to equalise the tax expense determined bythe tax laws which often bear no direct relationship with revenue earned.

The objective is to recognise the appropriate tax expense/incomerelating to the items recognised in the financial statement.

Most deferred tax liabilities and deferred tax assets arise where incomeor expense is included in accounting profit in one period, but is includedin taxable profit in a different period.

e.g. Costs of intangible assets capitalised and are being amortised in theincome statement, but deductible in full for tax purposes when incurred.


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Accounting for deferred taxIllustration – Why provide for deferred tax?


Cost of Equipment (N'000) 1,200

Depreciation rate (Straight Line) 20%

Company income tax rate 30%

Annual profit before depreciation (N’000) 800

Capital Allowance:

- Initial Allowance 50%

- Annual Allowance 25%

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Accounting 2006 2007 2008 2009 2010 Total

N'000 N'000 N'000 N'000 N'000 N'000

Profit before depr & tax 800 800 800 800 800 4,000

Depreciation [a] (240) (240) (240) (240) (240) (1,200)

Profit before tax 560 560 560 560 560 2,800

Tax @ 30% [b] (168) (168) (168) (168) (168) (840)

Profit after tax 392 392 392 392 392 1,960

Based on Tax Laws 2006 2007 2008 2009 2010 Total

N'000 N'000 N'000 N'000 N'000 N'000

Profit before depr & tax 800 800 800 800 800 4,000

Capital allowance [c] (750) (150) (150) (150) - (1,200)

Profit before tax 50 650 650 650 800 2,800

Tax @ 30% [d] (15) (195) (195) (195) (240) (840)

Profit after tax 35 455 455 455 560 1,960

Timing difference [a-c] (510) 90 90 90 240 -

Def tax @30% [d-b] (153) 27 27 27 72 -

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2006N’000

2007N’000

2008N’000

2009N’000

2010N’000

TotalN’000

Current tax charge only (15) (195) (195) (195) (240) (840)Deferred tax (153) 27 27 27 72 -Tax charge including def tax 168) (168) (168) (168) (168) (840)

(300)

(250)

(200)

(150)

(100)

(50)

-2006 2007 2008 2009 2010

Tax chargewithout Def Tax

Tax Charge withDef Tax

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Accounting for deferred taxWhen do you provide for deferred tax?

• Generally, you should provide for deferred tax if the accountingtreatment of an item defers from the tax treatment; and

• The difference will result in a higher or lower amount of income taxpayable in the future. Otherwise no deferred tax is required.

• The above general rule is however subject to initial recognitionexception (to be considered later).


Accountingtreatment

Taxtreatment

Deferred taxrequired

Temporarydifference

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Accounting for deferred taxRecognition

• An enterprise should account for the tax consequences of transactionsand other events in the same way that it accounts for the transactionsand other events themselves.

• Thus, for transactions and other events recognised in the incomestatement, any related tax effects are also recognised in the incomestatement.

• For transactions and other events recognised directly in equity, anyrelated tax effects are also recognised directly in equity.


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Accounting for deferred taxRecognition (cont.)

• IAS 12 (revised) requires that deferred tax assets be recognised whenit is probable that taxable profits will be available against which thedeferred tax asset can be utilised.

• Where an enterprise has a history of tax losses, the enterpriserecognises a deferred tax asset only:

- to the extent that the enterprise has sufficient taxable temporarydifferences; or

- there is convincing other evidence that sufficient taxable profit willbe available.


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Accounting for deferred taxBasis of provision

In providing for deferred taxes, there are three major bases. These are:

• nil provision basis;

• partial provision basis; and

• full provision basis.

The only basis allowed by SAS & IFRA is the full provision basis.


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Accounting for deferred taxMethods of computation

Deferral Method

• Under this method, deferred taxes are determined on the basis of theprevailing tax rates when the timing differences originate.

• No adjustments are made later to recognise subsequent changes intax rates.

• Reversals of the tax effects of timing differences are accounted forusing the tax rates current at the time the differences arose.

This method is not permitted by SAS and IFRS.


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Accounting for deferred taxMethods of computation

Liability method

• Under this method, the amount of deferred tax is computed using thetax rate expected to be in force during the period in which the timingdifferences reverse.

• Usually, the current tax rate is used as a reasonable estimate of thefuture tax rates, unless changes in tax rates are known in advance. Asa result, the deferred tax provision represents the best estimate of theamount which would be payable or recoverable when the relevanttiming differences reverse.

This is the method required by SAS & IFRS.


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Accounting for deferred taxSummary of requirements

• Deferred taxes should be computed using the liability method

• Only the temporary differences that are expected to reverse duringthe period allowed by the tax law should be considered in computingdeferred taxes for treatment either as an asset or as a charge to thedeferred tax account.

• Full provision should be made for deferred taxes (i.e. full basis).


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Accounting for deferred taxExamples of items requiring deferred tax recognition

• Accelerated capital allowance [DTL]• Unutilised capital allowance [DTA]• Unutilised tax losses [DTA]• Unrealised exchange gain [DTL]• Unrealised exchange loss [DTA]• General provision for bad and doubtful debts [DTA]• Provision for stock obsolescence [DTA]• Retirement benefit provision [DTA]

*DTA = Deferred tax asset; DTL = Deferred tax liability


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Accounting for deferred taxExamples of items requiring deferred tax recognition

• Revaluation surplus on fixed assets [DTL]• Impairment of assets [DTA]• Revaluation deficit on investment (diminution in value) [DTA]• Immaterial addition to fixed assets expensed [DTA]• Profit on disposal [DTL]• Loss on disposal [DTA]

*DTA = Deferred tax asset; DTL = Deferred tax liability


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Accounting for deferred taxHow to calculate deferred tax: the 9-step approach


Determinetax base

3

Review deductibilityof differencese.g. tax losses

6

Presentation &disclosure

9Recognise

deferred tax

8

Compute currentincome tax

2

Identifyexceptions

5

Determinecarrying value

1

Calculatetemporarydifferences

4

Apply relevanttax rates

7

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Fair value adjustment and non-depreciable assets

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Fair value adjustment and non-depreciableassets

Revaluations of property, plant and equipment increase the carryingamount of an asset without affecting the tax base. They therefore createadditional temporary differences.

The tax effect relating to the increase in the carrying value of a revaluedasset should be determined and charged or credited directly to equity.

IAS 12/SIC 21 - the revaluation of an asset does not always affecttaxable profit (or loss) in the period of the revaluation and the tax baseof the asset may not be adjusted as a result of the revaluation.

If the future recovery of the carrying amount will be taxable, anydifference between the carrying amount of the revalued asset and its taxbase is a temporary difference and gives rise to a deferred tax liability orasset.


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Fair value adjustment and non-depreciableassets

Non-depreciable assets

SIC 21

The deferred tax liability or asset that arises from the revaluation of anon-depreciable asset should be measured based on the taxconsequences that would follow from recovery of the carrying amountof that asset through sale, regardless of the basis of measuring thecarrying amount of that asset.

Accordingly, if the tax law specifies a tax rate applicable to the taxableamount derived from the sale of an asset that differs from the tax rateapplicable to the taxable amount derived from using an asset, theformer rate is applied in measuring the deferred tax liability or assetrelated to a non-depreciable asset.


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Initial recognition exceptions

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Initial recognition exceptions

Initial recognition refers to the first time an item is recorded in thefinancial statements.

Deferred tax is not required for temporary differences arising from:

• the initial recognition of goodwill; or goodwill for whichamortisation is not deductible for tax purposes; or

• the initial recognition of an asset/liability which at the time of thetransaction does not affect accounting or taxable profit (except in abusiness combination.), for example, cost of non depreciable land.


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Applicable tax rate and manner ofrecovery

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Applicable tax rate and manner of recoveryMeasurement and applicable tax rate

Deferred tax assets and liabilities should be measured using the taxrates that are expected to apply to the period when the asset is realisedor the liability is settled, based on tax rates (and tax laws) that havebeen enacted or substantively enacted by the balance sheet date.

Exercise: The income tax rate in Country A for 2010 is 30%. At 31October 2010, the parliament of Country A approved a tax cut whichwill result in an income tax rate of 25%. The new tax rate will beeffective for years beginning 1 January 2011.

When the company prepares its financial statements for the year ended31 December 2010, which tax rate should be used for deferred tax?


Answer: 25%

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Applicable tax rate and manner of recoveryManner of recovery

The measurement of deferred tax liabilities and deferred tax assetsshould reflect the tax consequences that would follow from the mannerin which the entity expects, at the balance sheet date, to recover or settlethe carrying amount of its assets and liabilities.

Example A

An asset has a carrying amount of 100 and a tax base of 60. A tax rate of20% would apply if the asset is sold while income tax rate is 30% willapply to recovery through use.

The temporary difference is 40. Hence, the entity recognises a deferredtax liability of 8 (40 @ 20%) if it expects to sell the asset without furtheruse and a deferred tax liability of 12 (40 @ 30%) if it expects to retainthe asset and recover its carrying amount through use.


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Example B

An asset with a cost of 100 and a carrying amount of 80 is revalued to150. No equivalent adjustment is made for tax purposes. Cumulativecapital allowance is 30 and the tax rate is 30%. If the asset is sold formore than cost, the cumulative capital allowance of 30 will be taxed asbalancing charge while sale proceeds in excess of cost will be taxable asCGT at 10%

The tax base of the asset is 70, taxable temporary difference is 80. If theentity expects to recover the carrying amount by using the asset thenthere is a deferred tax liability of 24 (80 at 30%).

If the entity expects to recover the carrying amount by selling the assetimmediately for proceeds of 150, the deferred tax liability will be asfollows:


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Example B (cont.)


TemporaryDifference

Taxrate

DeferredTax

Cumulative capital allowance taxable asbalancing charge

30 30% 9

Excess of proceed over original cost taxableas capital gain 50 10% 5

Total 80 14

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Analysis and classification ofdeferred tax

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Analysis and classification of deferred tax

SAS 19 requires deferred tax to be classified under long term andcurrent portions (for deferred tax liability) or fixed and current assets(for deferred tax assets).

IAS 12 (revised) requires that an entity which makes the current/non-current distinction should not classify deferred tax assets and liabilitiesas current assets and liabilities.

NOTE:IAS 12 prohibits the discounting of deferred tax assets and liabilitiesbut SAS 19 is silent on this.

Slide 46February 2011Deferred Taxation

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Analysis and classification of deferred tax

Offsetting

An enterprise should offset deferred tax assets and deferred taxliabilities if, and only if:

• the enterprise has a legally enforceable right to set off current taxassets against current tax liabilities; and

• the deferred tax assets and the deferred tax liabilities relate toincome taxes levied by the same taxation authority.


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Presentation & disclosure

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Presentation & Disclosure

Presentation

• Tax assets and tax liabilities should be presented separately fromother assets and liabilities in the balance sheet.

• Deferred tax assets and liabilities should be distinguished fromcurrent tax assets and liabilities.

• There are two major methods of presenting tax effects of timingdifferences in the financial statements:

- net-of-tax method

- separate line item method


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Disclosure requirements

In respect of each type of temporary difference, and in respect of eachtype of unused tax losses and unused tax credits, an entity shoulddisclose:

• the amount of the deferred tax assets and liabilities recognised in thebalance sheet for each period presented;

• the amount of the deferred tax income or expense recognised in theincome statement, if this is not apparent from the changes in theamounts recognised in the balance sheet.


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Presentation & DisclosureExample of deferred tax analysis note


Deferred Tax Analysis 2011 2010N'million N'million

Accrued interest (19) -Assets on lease 260 133Depreciation 350 420Derivatives 3,862 3,216Fair value adjustments of financial instruments (18) 128Impairment charges on loans and advances (1,330) (823)Post-employment benefits (408) (428)Share-based payments (96) (82)Other differences (309) 209Deferred tax closing balance 2,292 2,773Deferred taxation liability 3,128 3,201

Deferred taxation asset (836) (428)

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

• the utilisation of the deferred tax asset is dependent on futuretaxable profits in excess of the profits arising from the reversal ofexisting taxable temporary differences; and

• the entity has suffered a loss in either the current or preceding periodin the tax jurisdiction to which the deferred tax asset relates.


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Below is an example of disclosure where deferred tax asset is notrecognised in the accounts:

Deferred tax asset has not been recognised in thefinancial statements, as, in the view of the directors, thereis uncertainty as to the timing of inflows of future taxableprofits against which the tax asset may be offset.


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An enterprise should disclose an explanation of the relationshipbetween tax expense (or income) and accounting profit in either or bothof the following forms:

• a numerical reconciliation between tax expense and the product ofaccounting profit multiplied by the applicable tax rate, or

• a numerical reconciliation between the average effective tax rate andthe applicable tax rate.

Note: The average effective tax rate is the tax expense (or income)divided by the accounting profit before tax.


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Presentation & DisclosureExample of deferred tax reconciliation


Deferred tax reconciliation 2011 2010N'million N'million

Deferred tax balance at beginning of the year 2,117 2,919Change in company tax rate - (100)

Temporary differences for the year: 175 (46)Accrued interest (19) (17)Assets on lease 132 (134)Capital gains tax 8 -Depreciation 16 15Derivatives 1,274 875Fair value adjustments of financial instruments (142) (175)Impairment charges on loans and advances (535) (214)Post-employment benefits (32) (40)Share-based payments (17) (60)Other differences (510) (296)

Deferred tax balance at end of the year 2,292 2,773

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Presentation & DisclosureEffective to statutory tax rate reconciliation


N'million RateProfit before tax 5,000 100%Tax charge / Effective tax rate: 1,400 28%Company income tax 850 17%Education tax 190 4%NITDA Levy (IT Tax) 50 1%Deferred tax 310 6%

Reconciliation:Effect of change in tax rates - 0%Education tax (190) -4%NITDA Levy (IT Tax) (50) -1%Tax effect of permanent differences 317 6%

Penalty and interest 210 4%Disallowed donation 130 3%Subscription disallowed 78 2%Investment allowance (56) -1%Non taxable income (45) -1%

Expected tax charge / statutory tax rate 1,477 30%

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Differences between SAS andIFRS/IAS

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Differences between SAS and IFRS/IASComputation of deferred taxes


IFRS• Balance sheet liability method which focuses on

temporary differences. The standard prohibits the useof the income statement liability method.

SAS• Income statement liability method which focuses on

timing differences. However the standard does notprohibit the use of the balance sheet method.

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Differences between SAS and IFRS/IASExtra-Ordinary Items


IFRS• Extra ordinary items are not permitted by IFRS.

However deferred tax must be accounted for in linewith the treatment of the temporary difference.

SAS• Deferred taxes relating to extraordinary items should

be shown as part of the tax on extraordinary items.

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Differences between SAS and IFRS/IASRecognition of deferred tax asset


IFRS

• A deferred tax asset is recognised if it is probable(more likely than not) that sufficient taxable profit willbe available against which the temporary differencecan be utilised.

SAS• Only timing differences that are expected to reverse

during the period allowed by the tax law areconsidered in computing deferred tax assets.

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Differences between SAS and IFRS/IASDisclosures


IFRS

• An entity must reconcile its effective to statutory tax andanalyse the components of deferred tax assets/liabilities.

• Disclose amount of deferred tax assets recognised & theevidence supporting recognition and amount & expiry oftemporary differences for which no deferred tax assetsare recognised.

SAS• Reconciliation of effective to statutory rate not required.• Not required but deferred tax assets are recognised to

the extent of their recoverability.

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Differences between SAS and IFRS/IASUndistributed profits in subsidiaries, JVs & associates


IFRS

• Deferred tax is recognised except when theparent/investor is able to control the distribution ofprofit and it is probable that the temporary differencewill not reverse in the foreseeable future.

SAS• No specific requirements regarding deferred tax

treatment of undistributed profits of subsidiaries, jointventures and associates.

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Differences between SAS and IFRS/IASTax rates


IFRS• Tax rates and tax laws that have been enacted or

substantively enacted.

SAS• Current tax rate is used as a reasonable estimate of the

future tax rates, unless changes in tax rates are known inadvance.

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Differences between SAS and IFRS/IASPresentation – Current vs Non Current


IFRS

• Deferred tax assets and liabilities are classified as non-current on the balance sheet, with supplemental notedisclosure for: (1) the components of the temporarydifferences, and (2) amounts expected to be recoveredwithin 12 months and more than 12 months of thebalance sheet date.

SAS

• Deferred tax balance should be presented in the balancesheet separately in the case of liability, between longterm and current liabilities and in case of assetsbetween fixed and current assets.

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Group deferred tax consolidation

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• Similar principles as applicable to stand-alone entities with slightmodifications for group peculiarities.

• Golden rule is to compare the group carrying values with the tax baseof the consolidated entities.

• Deferred tax should not be provided on investments in subsidiaries,joint ventures and associates where the group controls the timing ofthe reversal of temporary differences and it is probable that thesedifferences will not reverse in the foreseeable future.

• Group temporary differences may be affected by:- Elimination of inter-company items- Fair value adjustments – e.g. on acquisition of a subsidiary- Unification of accounting policies.


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B&B Bank Group based in Dubai has a subsidiary bank in Nigeria, BBNPlc. BBN owns substantial landed property which are being carried athistorical cost for local reporting purposes. However, the group decided torevalue the assets of BBN for consolidation purposes. There are no capitalgain and income taxes in the UAE but if BBN disposes of the asset, anycapital gains will be liable to tax at 10% in Nigeria. The income tax rate inNigeria is 30%.

Questions: Should any deferred tax be recognised in respect of theabove? If so by which entity(ies)? You may use the information below foryour analysis assuming the property will be sold in the near future:


N million Land Building Total

Cost 200 300 500

NBV 200 180 380

Fair value 500 400 900Capital allowance Nil 220 220

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N million Land Building Total

Cost 200 300 500

NBV 200 180 380

Fair value 500 400 900Capital allowance Nil 220 220

Solution: Deferred Tax Computation - B&B Group

N'millionCarrying

ValueTaxbase

TempDiff

Taxrate

DefTax

Land 500 200 300 10% 30

Building 400 80 320

Balancing charge portion (cost - TWDV) 220 30% 66Capital gain portion (Fair value - cost) 100 10% 10

Total def tax liability 106

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Practical issues and expected changes

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Practical issues

These include:• Commencement of business• Cessation of business• Pioneer and post pioneer deferred

tax accounting• Change of accounting date• Group consolidation (especially

where there is different accountingtreatments, different reporting datesetc)

• Local GAAP to IFRS conversion andtransition adjustment


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Practical issues

ABC Bank Plc has a significant investment in shares. Based on thecapital gains tax legislation, capital gains on the sale of shares are nottaxable and capital losses are not deductible. In line with ABC’sunderstanding of the law, past gains have always been excluded fromtaxation.However, in the past couple of years the stock market has almostcollapsed forcing ABC to recognise impairment provisions for thediminution of value of its investment in shares. ABC is howeveroptimistic that the shares will recover in the near future.Questions:1) Is the impairment provision deductible for tax purposes?2) Should deferred tax be recognised for the impairment provision? Whyor why not?


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Expected changes

• No change to prohibition of discounting

• Removal of initial recognition exemption

• Recognition of deferred tax assets in full, less, a valuation allowance.

• Presentation of deferred tax assets and liabilities as current or non-current based on the classification of the asset or liability to whichthe temporary difference relates.


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Conclusion

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Conclusion

• Deferred tax is fun!

• Principal GAAP is IAS 12, substantially a rule based standard. SAS 19is the local GAAP equivalent but not as robust as IAS 12.

• Golden rule is Deferred tax = (carrying amount - tax base) xapplicable tax rate.

• Exceptions apply in certain cases such as goodwill and initialrecognition.

• Major challenges are around practical application and dealing withunusual situations such as commencement rules.

• To find your way around deferred tax easily, you must study IAS 12and build on your learning in today’s session.


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Questions / Discussions / Workshop

75

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Eric Hoffer, U.S. philosopher.

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Profile – Paper Presenter

Taiwo OyedeleTax Partner, PwC

Contactinformation

Phone: +234 (1)2711700 Ext 3100

email:[email protected]

Qualifications

Fellow of theAssociation ofCertified CharteredAccountants (FCCA).

Fellow of theInstitute of CharteredAccountants ofNigeria (FCA).

Fellow of theChartered Institute ofTaxation of Nigeria(FCTI).

Certified InformationSystems Auditor(CISA).

Professional Experience

Taiwo is a Partner in the Tax and Corporate Advisory Unit ofPwC. He has many years of tax, accounting and consultingexperience across different sectors. He has provided tax servicescovering areas such as mergers and acquisitions, tax strategies,international tax planning, group structuring, businesscombination and tax function effectiveness.

Taiwo has substantial experience about the Nigerian economyand the tax environment. He is widely acknowledged andrespected by tax professionals and administrators as a thoughtleader on topical tax issues. He is regularly involved in taxdebates, reforms and tax policy discussions. Taiwo writes articleson technical issues in national newspapers and professionaljournals. He is a regular paper presenter at conferences (local andinternational), the CITN seminars, ICAN MCPE and ACCAcontinuous professional development programme. He is thecurrent Dean of the Direct Taxation Faculty of CITN and amember of the Taxation and Fiscal Policy Management FacultyBoard of ICAN. Taiwo is a contributor to the annual “DoingBusiness” report of the World Bank and PwC “Paying Taxes”publication. In his role on these projects, Taiwo examines thevarious areas requiring reforms in tax practice andadministration, tax legislation and tax policy in Nigeria comparedto over 180 other countries around the globe.

finding your way around deferred taxation

Documents