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Implication of deferred tax under IAS 12 and revised SOCPA zakat standard
ICAP KSA members
28 December 2016
Page 2 Implication of deferred tax and revised zakat standard
Agenda
► Overall understanding of deferred tax under IAS 12
► Accounting gaps between SOCPA and IFRS
► Requirements of IFRS 1 pertaining to reporting of deferred
tax and zakat for first time adoption
► IAS 12 disclosure challenges
► Basis of revision of SOCPA Standard on zakat
Page 3 Implication of deferred tax and revised zakat standard
Current status
Page 4 Implication of deferred tax and revised zakat standard
Standards in place
► SOCPA had separate standards for zakat and income tax
accounting
► Under IFRS there is an accounting standard for income
tax but none for Zakat
► SOCPA has amended its zakat accounting standard in
September 2016 to bring it in line with the IFRS
requirements. Applicable from 1 January 2017
► SOCPA has also issued an opinion to disclose the impact
of zakat and income tax on individual owners’ equity
Page 5 Implication of deferred tax and revised zakat standard
Accounting for zakat and income tax under SOCPA
Zakat is an obligatory payment made by Muslims annually under Islamic law on certain
kinds of assets and for charitable purposes. It is considered a religious obligation.
► For fully zakatable entities (Saudi + GCC) in the statement of income
► For Mixed entities (Saudi + foreign partner) in the statement of changes in
equity
Income tax as computed under Income tax law of Saudi Arabia
► For fully income tax entities (foreign partners) in the statement of income
► For Mixed entities in the statement of changes in equity
Deferred tax► Standard require the accounting in line with income tax accounting
Variety of accounting treatment
Deferred zakat► No requirement to account for deferred zakat
Page 6 Implication of deferred tax and revised zakat standard
Concepts of IAS 12
Page 7 Implication of deferred tax and revised zakat standard
Key concepts of IAS 12Current tax
Accounting profit/(loss) = Revenue - cost
Taxable profit (tax loss) = Accounting profit +/- Tax
adjustments
Current tax (Tax liability) = (Taxable profit * % of tax)
Page 8 Implication of deferred tax and revised zakat standard
Recognizing current tax liabilities and assets
1) Income tax provision- 31 December
Dr Tax Expense (I/S)
Cr Tax Provision (B/S)
2) Tax adjustment (prior period adjustment) – 30 April next year
- Under provided
Dr Tax Expense (I/S)
Cr Tax Provision (B/S)
- Over provided
Dr Tax Expense (B/S)
Cr Tax Provision (I/S)
3) Tax payment
Dr Tax Provision (B/S)
Cr Cash (B/S)
Exception to the normal treatment
Any current tax on items recognized either in other
comprehensive income or directly in equity shall be
recognized in other comprehensive income and
equity
Page 9 Implication of deferred tax and revised zakat standard
Key concepts of IAS 12Deferred tax
Permanent difference
Differences between tax and accounting that never reverse
Eg: Entertainment; fines and penalties
Temporary difference
Differences between the carrying amount of an asset or a liability and its
tax base.
Equation: carrying amount – tax base = temporary difference
In contrast with permanent differences, temporary differences do
reverse.
Eg: Tax and book depreciation, certain income or expense is taxed on a
cash basis, provisions for doubtful debt; provision for end of service
benefit
Page 10 Implication of deferred tax and revised zakat standard
Key concepts of IAS 12Tax base
Tax base is the amount attributed to that asset or liability for
tax purposes
For an asset
► Amount that will be deductible for tax purposes against
the taxable economic benefits that will flow to the entity
when it recovers the carrying amount of the asset.
► If economic benefits will not be taxable, then the tax base
of an asset is equal to its carrying amount.
The purpose is to identify the incremental tax effect of liquidating each
asset in the balance sheet at its carrying value.
Page 11 Implication of deferred tax and revised zakat standard
Example of Tax base of an asset
A loan receivable is carried at 100. Its principal repayment will have no
tax. What is the tax base of this loan?
Page 12 Implication of deferred tax and revised zakat standard
Knowledge test relating to tax base of an asset
Page 13 Implication of deferred tax and revised zakat standard
Knowledge test – Scenario 1
A machine was acquired for 100. Tax depreciation of 30 has already been
deducted in the current and prior periods and the remaining cost of 70 will be
deductible in future periods. Revenue generated by using the machine is taxable
and it is the company’s intention to use the machine, not to sell it. Decide what is
the tax base is for this scenario
A. 0
B. 30
C. 70
D. 100
Page 14 Implication of deferred tax and revised zakat standard
Knowledge test – Scenario 2
Accrued interest receivable has a carrying amount of 100, and it will be taxed on
receipt. Out of this amount, 30 is expected to be received in the next accounting
period and 70 in the year thereafter. Decide what the tax base is for this
scenario?
A. 0
B. 30
C. 70
D. 100
Page 15 Implication of deferred tax and revised zakat standard
Knowledge test – Scenario 3
A research expenditure of 100 is expensed in the period, but this will be allowed
as a tax deduction next year. The income tax rate is 30%. Decide what the tax
base is for this scenario
A. 0
B. 30
C. 70
D. 100
Page 16 Implication of deferred tax and revised zakat standard
Determining the tax base of a liability
► The tax base of a liability is its carrying
amount, minus any amount that will be
deductible for tax purposes in respect of that
liability in future periods.
► In the case of revenue received in advance,
the tax base is its carrying amount, minus
any amount of revenue that will not be
taxable in future periods.
The aim is to identify any incremental tax effect of settling every liability at its carrying value, and if there is no such tax effect, the tax base value is the same as the carrying value.
Two key rules apply when determining the tax base of a liability.
Page 17 Implication of deferred tax and revised zakat standard
Calculating the tax base of a liability: case 1
The following example illustrates how the tax base of a liability is calculated.
Details: Expenses of 100 have been accrued — 80 already have given rise to a
tax deduction and 20 will be deductible for tax purposes when paid.
What is the tax base of the accrued expenses?
Carrying amount 100
Tax Deduction (past) 80
Tax Deduction (future) 20
Tax base 80
Page 18 Implication of deferred tax and revised zakat standard
Calculating the tax base of a liability: case 2
This second example illustrates how another tax base of a liability is calculated.
Details: Revenue of 100 has been received in advance and is shown as a
liability, but it already has been taxed.
What is the tax base of the revenue received in advance?
Carrying amount 100
Tax Deduction (past) 100
Tax Deduction (future) 0
Tax base 0
Page 19 Implication of deferred tax and revised zakat standard
Temporary differences
1) Taxable temporary differences
The recognized tax effect of future taxable temporary differences.
Give rise to a deferred tax liability.
► The carrying amount of an asset is higher than its tax base
► The carrying amount of a liability is lower than its tax base
2) Deductible temporary differences
The recognised tax effect of future deductible temporary differences.
Give rise to a deferred tax assets
► The carrying amount of an asset is lower than its tax base
► The carrying amount of a liability is higher than its tax base
If it is probable that recovery of an asset or settlement of a liability will make
future tax payments larger or smaller than they otherwise would be, then
deferred tax should be recognized as a liability or asset in respect of this
difference
Page 20 Implication of deferred tax and revised zakat standard
Recognizing deferred tax
1) Deferred Tax Liability
Debit to: Tax expense (I/S)
Credit to: Deferred tax liability (B/S)
2) Deferred Tax Assets
Debit to: Deferred Tax Assets (B/S)
Credit to:Tax expense (I/S)
There are two exceptions to this normal treatment
of the deferred income tax and expense rules:
1. any deferred tax on items recognized either in
other comprehensive income or directly in
equity shall be recognized in other
comprehensive income and equity
respectively.
2. temporary differences created as a result of
the fair value allocation following a business
combination
Page 21 Implication of deferred tax and revised zakat standard
Knowledge test – Current and deferred tax
Page 22 Implication of deferred tax and revised zakat standard
Knowledge test – Question 1
An entity reported net profit before tax for the year of 5,600 in its financial
statements prepared under IFRS. Profit for the year, determined in accordance
with local tax legislation and upon which income tax is payable, amounts to
6,000. Considering the key definitions you have learned in this lesson, reconcile
the amounts in this scenario with the appropriate terms under IAS 12.
A. 5,600 – accounting profit; 6,000 – deferred tax liabilities
B. 5,600 – deferred tax assets; 6,000 – taxable profit
C. 5,600 – accounting profit; 6,000 – taxable profit
D. 5,600 – taxable profit; 6,000 – accounting profit
Page 23 Implication of deferred tax and revised zakat standard
Knowledge test – Question 2
An entity has a tax loss for the current period that can be used to recover tax paid
in respect of profits of an earlier period. How should this amount be reported in
the financial statements, prepared under IFRS?
A. As a current tax asset
B. As a current tax liability
C. As a deferred tax asset
D. As a deferred tax liability
Page 24 Implication of deferred tax and revised zakat standard
Knowledge test – Question 3
Which of the following represent taxable temporary difference(s)? A. Expenses were accrued in the accounts in the amount of 40, but will be taxed on a cash basis.
B. A loan receivable has a carrying amount of 80. The repayment of the loan will have no tax
consequences.
C. A machine was revalued for book purposes but not for tax purposes, so that the carrying value
of the machine exceeds its tax base by 150.
► A
► B
► C
► B and C
Page 25 Implication of deferred tax and revised zakat standard
Case Study – Current and Deferred tax
Page 26 Implication of deferred tax and revised zakat standard
Calculating current and deferred tax
Scenario:Production machinery acquisition cost: SR 100,000
Depreciation method: Straight-line
Accounting depreciation rate: 25%
Tax depreciation rate: 20%
Accounting profit: SR 30,000 for each year
Corporate tax rate: 20%
Non-Saudi Shareholding: 100%
Required:
1. Calculate the taxable profit and current tax expense.
Current tax, Year 1 - 5
Year1 2 3 4 5 Total
Accounting profit 30,000 30,000 30,000 30,000 30,000 150,000
Add: Accounting depreciation 25,000 25,000 25,000 25,000 - 100,000
Less: Depreciation for tax purposes 20,000 20,000 20,000 20,000 20,000 100,000
Taxable profit (tax loss) 35,000 35,000 35,000 35,000 10,000 150,000
Current tax expense (income) @ 20 %
7,000 7,000 7,000 7,000 2,000 30,000
Page 27 Implication of deferred tax and revised zakat standard
Calculating current and deferred tax
Accounting depreciation schedule
Tax depreciation schedule
Required:
Calculate deferred tax for year 1 to 5
Year 1 Year 2 Year 3 Year 4
Cost 100,000 100,000 100,000 100,000
Accumulated
depreciation
25,000 50,000 75,000 100,000
Book value 75,000 50,000 25,000 -
Year 1 Year 2 Year 3 Year 4 Year 5
Cost 100,000 100,000 100,000 100,000 100,000
Accumulated
depreciation
20,000 40,000 60,000 80,000 100,000
Book value 80,000 60,000 40,000 20,000 -
Page 28 Implication of deferred tax and revised zakat standard
Calculating current and deferred tax
Deferred tax computation
Year 1 Year 2 Year 3 Year 4 Year 5
Accounting base 75,000 50,000 25,000 - -
Tax base 80,000 60,000 40,000 20,000 -
Temporary difference 5,000 10,000 15,000 20,000 -
Deferred tax asset 1,000 2,000 3,000 4,000 -
Year 1 Year 2 Year 3 Year 4 Year 5
At the beginning of the year
- 1,000 2,000 3,000 4,000
Deferred tax movement
1,000 1,000 1,000 1,000 (4,000)
At the end of the year
1,000 2,000 3,000 4,000 -
Page 29 Implication of deferred tax and revised zakat standard
Calculating current and deferred tax
Required:
1. Journal entries to record current and deferred tax for Year 1 to 4.
Corporate tax expense 7,000
Corporate tax payable 7,000
Deferred tax asset 1,000
Deferred tax income 1,000
2. Journal entries for Year 5
Corporate tax expense 2,000
Corporate tax payable 2,000
Deferred tax expense 4,000
Deferred tax asset 4,000
Year 1 Year 2 Year 3 Year 4 Year 5
Current tax expense
7,000 7,000 7,000 7,000 2,000
Deferred tax expense
(1,000) (1,000) (1,000) (1,000) 4,000
Total tax expense 6,000 6,000 6,000 6,000 6,000
Page 30 Implication of deferred tax and revised zakat standard
Recognition of deferred tax
Page 31 Implication of deferred tax and revised zakat standard
Recognising deferred tax assets and liabilities
► Deferred tax liability is recognized in respect of all taxable
temporary differences.
► A deferred tax asset is recognized for:
► all deductible temporary differences.
► the carry-forward of unused tax losses and tax credits
to the extent that it is probable that taxable profit will be available
against which the deductible temporary difference can be utilized
Key points to consider:
Easy to demonstrate they will be created by the reversal of taxable
temporary differences for which a provision has been made.
These must relate to the same taxable authority and the same
taxable entity, and they must arise when they will allow the deferred
tax asset to be recovered.
It is not possible to consider future deductible temporary differences
that are forecast to arise, because they must be recovered as well.
Page 32 Implication of deferred tax and revised zakat standard
Deferred tax arising from unused tax losses or credits
► Four criteria to be considered before a deferred tax asset can be
recognized in respect of unused losses or credits
1. Enough taxable differences to create taxable amounts against which the
losses or credits can be used.
2. It is otherwise probable that the entity will have taxable profits.
3. Whether the unused tax losses result from identifiable causes that are
unlikely to recur.
4. Are tax-planning opportunities available to allow taxable profits to be
created in the period in which the losses or credits can be used?
► The availability of future taxable profits must be reassessed at each balance
sheet date, and the amount of deferred tax assets must be adjusted, if
necessary.
Page 33 Implication of deferred tax and revised zakat standard
Deferred tax recognition rules: The two exceptions!
► Deferred tax liabilities are not recognised on temporary
differences that arise from the initial recognition of
goodwill.
► Deferred tax assets and liabilities are not recognised on
temporary differences that arise from the initial recognition
of an asset or liability in a transaction that:
► is not a business combination; and
► at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).
Example:
An entity acquires an asset for 1,000 which it intends to use for five years and
then scrap (i.e. the residual value is nil). The tax rate is 40%. Depreciation of the
asset is not deductible for tax purposes. On disposal, any capital gain would not
be taxable and any capital loss would not be deductible.
Page 34 Implication of deferred tax and revised zakat standard
Cheat sheet!
Asset/liability Carrying
amount higher
or lower than
tax base?
Nature of
temporary
difference
Resulting
deferred tax
(if
recognised)
Asset Higher Taxable Liability
Asset Lower Deductible Asset
Liability Higher Deductible Asset
Liability Lower Taxable Liability
Page 35 Implication of deferred tax and revised zakat standard
Special case – Deferred tax on investment in other entities
Page 36 Implication of deferred tax and revised zakat standard
Recognizing deferred taxes related to investments in other entities (IOE)
► IAS 12 has special rules for the recognition of deferred tax on
temporary differences that are associated with investments in certain
entities.
► These special rules apply to investments in subsidiaries, branches,
associates and joint arrangements.
► Temporary differences arise when the carrying amount of investments
becomes different from its tax base of investment
► Such differences may arise due to:
► Existence of undistributed profits
► Changes in foreign exchange rates and etc.
Page 37 Implication of deferred tax and revised zakat standard
Special rules for recognizing deferred taxes liabilities related to IOE
An entity shall recognize a deferred tax liability for all taxable temporary
differences associated with investments in subsidiaries, branches and
associates, and interests in joint arrangements, except to the extent that
both of the following conditions are satisfied:
► The parent, investor, joint venturer or joint operator is able to control
the timing of the reversal of the temporary difference
And
► It is probable that the temporary difference will not reverse in the
foreseeable future
Page 38 Implication of deferred tax and revised zakat standard
Special rules for recognizing deferred taxes assets related to IOE
An entity shall recognize a deferred tax asset for all deductible
temporary differences arising from investments in subsidiaries, branches
and associates, and interests in joint arrangements, to the extent that,
and only to the extent that, it is probable that:
► The temporary difference will reverse in the foreseeable future
And
► Taxable profit will be available against which the temporary difference
can be utilized
Page 39 Implication of deferred tax and revised zakat standard
Measuring deferred tax
► Deferred tax is calculated at the tax rates that are expected to apply in
the period when the deferred tax asset is realized or the liability is
settled
► The tax must be based on tax rates and laws that have been enacted,
or substantively enacted, by the end of the reporting period
► It should be based on how the entity expects to recover or settle the
asset or liability.
► It cannot be discounted.
Example of “expects to recover or settle”
IAS 12 clarifies that where a non-depreciable asset is revalued, any
deferred tax on the revaluation should be calculated by reference to the
tax consequences that would arise if the asset was sold, on the basis
that the absence of any depreciation charge implies that the asset will
not be recovered through use.
Page 40 Implication of deferred tax and revised zakat standard
Differences between SOCPA and IFRS
Page 41 Implication of deferred tax and revised zakat standard
Differences between SOCPA and IFRS
► Difference in accounting
treatment depending on
nature of entities
► Deferred tax based on
income statement
approach
► Definition of temporary
differences only
► No elaborated rules on
deferred tax assets and
liability
► Consistent accounting
treatment of statement of
income
► Deferred tax based on
balance sheet approach
► Temporary differences are
further elaborated as
taxable and deductible
differences
► Separate rules for deferred
tax assets and liability
SOCPA IFRS
Page 42 Implication of deferred tax and revised zakat standard
First time adoption IFRS 1 requirements
Page 43 Implication of deferred tax and revised zakat standard
First time adoption issues
► The basic principle - financial statements should be restated as if IAS
12 had always been in force.
► In practice, it might be difficult to simulate the judgments that would
have been made at these earlier dates.
► Retrospective application is required.
► Deferred tax should be restated, based on conditions as they were
perceived at the time of the earlier financial statements
► Subsequent changes in tax rates should not be considered; only rates
that had been enacted at the time can be used.
► Estimates should be consistent with those that were made at the time
under previous GAAP, unless it can be shown that they were wrong at
the time.
Page 44 Implication of deferred tax and revised zakat standard
IAS 12 disclosures
Page 45 Implication of deferred tax and revised zakat standard
Disclosure requirements
Ordinary activites - The tax expense (or income) related to profit or loss from
ordinary activities (should be presented on the face of the income statement).
Equity related taxes - The aggregate current and deferred tax relating to items
charged or credited to equity.
Other comprehensive income - The amount of income tax relating to each
component of other comprehensive income.
Discontinued operations - The tax expense related to the gain or loss on
discontinuance and the results from ordinary activities of the discontinued
operation in each year presented
Tax expense and adjustments - The major components of tax expense, such
as current tax expense and adjustments to current tax of prior periods.
Temporary differences reversals - The deferred tax expense relating to the
origination or reversal of temporary differences and changes in tax rates or to the
imposition of new taxes
Page 46 Implication of deferred tax and revised zakat standard
Disclosure requirements (continued)
► Analyse each of the major components of tax expense. The list is not
comprehensive but just example for the sake of training:
Reduction of taxes - The amount of benefit from a previously unrecognized tax loss, tax
credit or temporary difference of a prior period that is used to reduce either current or
deferred tax expense.
Write-down - The write-down (or its reversal) of a deferred tax asset.
Explanation of changes - A description of changes in the applicable tax rates compared to
the previous accounting period
Reconciliation - A numerical reconciliation between tax expense and the product of
accounting profit multiplied by the applicable tax rate(s); or a numerical reconciliation
between the average effective tax rate and the applicable tax rate(s).
Deductible temporary differences - 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
Specific investments - The aggregate amount of temporary differences associated with
investments in subsidiaries, branches, associates, and joint arrangements, for which no
deferred tax liabilities have been recognised
Page 47 Implication of deferred tax and revised zakat standard
More disclosures
Charged/credited to equity - The current and deferred tax relating to items that are
charged or credited to equity and the amount of income tax relating to each component of
other comprehensive income.
Statement of financial position - For each type of temporary difference, the amount of
the deferred tax assets and liabilities recognised in the statement of financial position (this
disclosure is also required for each type of unused tax losses and unused tax credits)
Statement of income - For each type of temporary difference, the amount of the deferred
tax income or expense recognized in profit or loss, if this information is not evident from the
movement in the statement of financial position amounts (this disclosure is also required for
each type of unused tax losses and unused tax credits)
Future taxable profits - The amount of a deferred tax asset and the nature of the
evidence supporting its recognition, when its utilization depends on future taxable profits
exceeding those arising from the reversal of existing taxable temporary differences, and the
entity has made a taxable loss in either the current or preceding period in the relevant tax
jurisdiction (this disclosure is required when deferred tax assets are recognized in reliance
on future accounting profits, despite the existence of recent losses).
Dividends - Any tax consequences of dividends proposed after the reporting date but not
provided for
Page 48 Implication of deferred tax and revised zakat standard
More disclosures (continued)
Business combination – If a business combination in which the entity is the acquirer
causes a change in the amount recognized for its pre-acquisition deferred tax asset, the
amount of that change; and if the deferred tax benefits acquired in a business combination
are not recognized at the acquisition date but are recognized after the acquisition date, a
description of the event or change in circumstances that caused the deferred tax benefits to
be recognized.
Retained/distributed profits - When there are different tax consequences if profits are
retained or distributed, the nature of the potential tax consequences that would arise from a
payment of dividends to shareholders (this should quantify the amounts, when the
consequences are practicably determinable, or otherwise disclose whether there are any
consequences that are not practicably determinable).
Illustrative disclosures:
Page 49 Implication of deferred tax and revised zakat standard
Amendment in SOCPA standard for zakat
Page 50 Implication of deferred tax and revised zakat standard
Why change?!
► Saudi Arabia’s move towards IFRS reporting framework
from 2017
► 2017 for Listed entities and 2018 for others
► Under IFRS there is a Tax accounting standard (IAS 12)
but no Zakat standard
► SOCPA has amended its existing Zakat accounting
standard and formally adopted it on 19 September 2016
Page 51 Implication of deferred tax and revised zakat standard
What’s new?
► Zakat expense for pertinent period shall be presented as a
separate item in the income statement
► Previously:
► 100% GCC owned entities – Zakat expense presented in the
statement of income
► Mixed entities – Zakat and income tax expense presented in the
statement of changes in equity
► The amended standard is applicable for financial periods
beginning from 1 January 2017
Page 52 Implication of deferred tax and revised zakat standard
Basis of change
► SOCPA found difference in presentation of zakat, between
the 100% GCC owned entities and the mixed entities as
inconsistent with the legitimate Islamic advisories (Fatwa),
government directives and accounting principles, on the
following basis:
► A lot of Islamic advisories consider Zakat as an expense for the
entity.
► Some technical studies and related standards, conducted by
specialised boards, consider Zakat as an expense for the entity.
Quoted studies are of AAOIFI, Malaysian Accounting board and
IASB.
► In terms of regulations, the MCI has issued directives to
emphasize that zakat shall be taken from costs deductible from
gross profit to attain net profit rather than dividends.
Page 53 Implication of deferred tax and revised zakat standard
SOCPA OPINION ON IMPACT OF ZAKAT AND INCOME TAX ON OWNERS’ EQUITY
Page 54 Implication of deferred tax and revised zakat standard
Why opinion was issued
► For mixed entities, the owners may have the right to
decide internally to borne zakat or tax on individual basis
► Some of the owners in are not obligated to settle zakat.
Quoted examples are endowments and non-GCC
partners
► The question was raised to SOCPA, how to present the
impact of zakat and tax on owners’ equity.
Page 55 Implication of deferred tax and revised zakat standard
Opinion
► An entity shall present the impact of zakat and income tax
on individual owners in the statement of changes in equity
► The entity shall disclose the following in the notes to the
financial statements:
Page 56 Implication of deferred tax and revised zakat standard
Illustration of opinion
Example 1: Presentation and disclosure when Owners internally decide to
bear Zakat and Income tax expense
Assumptions:
Capital: SR 10 Million
Ownership: 50:50
Income before zakat and income tax: SR 1Million
Zakat on Saudi share: SR 80,000
Income tax on non-Saudi share: SR 100,000
10% of net profit is retained while 5% is distributed as dividends.
Statement of income
Saudi Riyals
Income before zakat and income tax 1,000,000
Zakat and income tax (note X) (180,000)
Net income for the period 820,000
Page 57 Implication of deferred tax and revised zakat standard
Illustration of opinion (continued)
Example 1: Presentation and disclosure when Owners internally decide to
bear Zakat and Income tax expense (continued)
Note X to the financial statements
Statement of changes in equity
Elements of owners’ equity shall be classified into two categories according to
zakat or income tax as applicable. Net income, provisions and dividends of each
category shall be reflected in the proper fields of the table. The following is an
example of how to present statement of changes in equity for a mixed company
(format is variable according to elements of owners’ equity).
Total Saudi Foreigners
Income before Zakat and Income tax 1,000,000 500,000 500,000
Zakat (80,000) (80,000)
Income tax (100,000) (100,000)
Income after Zakat and Income tax 820,000 420,000 400,000
Page 58 Implication of deferred tax and revised zakat standard
Illustration of opinion (continued)
Example 1: Presentation and disclosure when Owners internally decide to
bear Zakat and Income tax expense (continued)
CapitalIncome Before Zakat and
Income tax
Zakat and
Income taxNet Income
Statutory Reserve (% of net
profit of each category of
owners)
Retained earnings
TotalSaudi
Share
Foreign
Share
Saudi
Share
Foreign
ShareTotal
Saudi
Share
Foreign
ShareTotal
Saudi
Portion
Foreign
PortionTotal
Saudi
Portion
Foreign
Portion
Balance
on 1
January
2015
10,000,000
Income
Before
Zakat/Tax
1,000,000 500,000 500,000 80,000 100,000 820,000 420,000 400,000 82,000 42,000 40,000 738,000 378,000 360,000
Dividends (500,000) (250,000) (250,000)
Balance
on 31 Dec
2015
10,000,000 82,000 42,000 40,000 238,000 128,000 110,000
Page 59 Implication of deferred tax and revised zakat standard
Illustration of opinion (continued)
Example 2: Presentation and disclosure when Owners do not internally
decide to bear Zakat and Income tax expense (i.e. mutually dividing net
profit after zakat/tax according to their ownership share)
Assumptions:
Capital: SR 10 Million
Ownership: 50:50
Income before zakat and income tax: SR 1Million
Zakat on Saudi share: SR 80,000
Income tax on non-Saudi share: SR 100,000
10% of net profit is retained while 5% is distributed as dividends.
Statement of income Saudi Riyals
Income before zakat and income tax 1,000,000
Zakat and income tax (note X) (180,000)
Net income for the period 820,000
Page 60 Implication of deferred tax and revised zakat standard
Illustration of opinion (continued)
Example 2: Presentation and disclosure when Owners do not internally
decide to bear Zakat and Income tax expense (i.e. mutually dividing net
profit after zakat/tax according to their ownership share) (Continued)
Note X to the financial statements
Statement of changes in equity
In this case, presentation of the statement is same as if the company is subject to
zakat only or income tax only. As such, no mutual decision by partners to bear
zakat or income tax. Therefore, the presentation is of a routine format as set out
below (format is variable according to elements of owners’ equity).
Total
Income before Zakat and Income tax 1,000,000
Zakat (80,000)
Income tax (100,000)
Income after Zakat and Income tax 820,000
Page 61 Implication of deferred tax and revised zakat standard
Illustration of opinion (continued)
Example 2: Presentation and disclosure when Owners do not internally
decide to bear Zakat and Income tax expense (i.e. mutually dividing net
profit after zakat/tax according to their ownership share) (Continued)
Capital
Statutory Reserve
(% of net profit)
Retained
earnings
Balance on 1 January 2015 10,000,000
Net income for the year 82,000 738,000
Dividends (500,000)
Balance on 31 December 2015 10,000,000 82,000 238,000
Page 62 Implication of deferred tax and revised zakat standard
Questions?
Page 63 Implication of deferred tax and revised zakat standard
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DisclaimerThe views expressed in this presentation are those of
the presenter. Official positions of the EY are determined only after extensive due process and deliberation.