of €35,000 (€100,000 @ 35%).
The analysis if the land had been impaired would be rather more complicated. The general issue of the
treatment of assets that are tax-deductible, but for less than their cost, is discussed at 7.2.6 below.
Example 29.14: Tax-deductible goodwill
On 1 January 2019 an entity with a tax rate of 35% acquires goodwill in a business combination with a cost
of €1 million, which is deductible for tax purposes at a rate of 20% per year, starting in the year of acquisition.
During 2019 the entity claims the full 20% tax deduction and writes off €120,000 of the goodwill as
the result of an impairment test. Thus at the end of 2019 the goodwill has a carrying amount of €880,000
and a tax base of €800,000. This gives rise to a taxable temporary difference of €80,000 that does not
relate to the initial recognition of goodwill, and accordingly the entity recognises a deferred tax liability
at 35% of €28,000.
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If, during 2019, there had been no impairment of the goodwill, but the full tax deduction had nevertheless
been claimed, at the end of the year the entity would have had goodwill with a carrying amount of €1 million
and a tax base of €800,000. This would have given rise to a taxable temporary difference of €200,000 that
does not relate to the initial recognition of goodwill, and accordingly the entity would have recognised a
deferred tax liability at 35% of €70,000.
7.2.4.D
Temporary difference altered by legislative change
Any change to the basis on which an item is treated for tax purposes alters the tax base
of the item concerned. For example, if the government decides that an item of PP&E
that was previously tax-deductible is no longer eligible for tax deductions, the tax base
of the PP&E is reduced to zero. Under IAS 12, any change in tax base normally results
in an immediate adjustment of any associated deferred tax asset or liability, and the
recognition of a corresponding amount of deferred tax income or expense.
However, where such an adjustment to the tax base occurs in respect of an asset or
liability for which no deferred tax has previously been recognised because of the initial
recognition exception, the treatment required by IAS 12 is not entirely clear. The issue
is illustrated by Example 29.15 below.
Example 29.15: Asset non-deductible at date of acquisition later becomes
deductible
During the year ended 31 March 2019 an entity acquired an item of PP&E for €1 million which it intends to
use for 20 years, with no anticipated residual value. No tax deductions were available for the asset. In
accordance with IAS 12 no deferred tax liability was recognised on the taxable temporary difference of
€1 million that arose on initial recognition of the PP&E.
During the year ended 31 March 2020, the government announces that it will allow the cost of such
assets to be deducted in arriving at taxable profit. The deductions will be allowed in equal annual
instalments over a 10-year period. As at 31 March 2020, the carrying amount of the asset and its tax base
are both €900,000. The carrying amount is the original cost of €1 million less two years’ depreciation at
€50,000 per year. The tax base is the original cost of €1 million less one year’s tax deduction at €100,000
per year.
Prima facie, therefore, there is no temporary difference associated with the asset.
However, the treatment required by IAS 12 in Examples 29.13 and 29.14 above
would lead to the conclusion that this temporary difference of nil should in fact be
analysed into:
• a taxable temporary difference of €900,000 arising on initial recognition of the
asset (being the €1 million difference arising on initial recognition less the
€100,000 depreciation charged); and
• a deductible temporary difference of €900,000 arising after initial recognition
(representing the fact that, since initial recognition, the government increased the
tax base by €1 million which has been reduced to €900,000 by the €100,000 tax
deduction claimed in the current period).
This analysis indicates that no deferred tax liability should be recognised on the
taxable temporary difference (since this arose on initial recognition), but a deferred
tax asset should be recognised on the deductible temporary difference of €900,000
identified above. A contrary view would be that this is inappropriate, since it is
effectively recognising a gain on the elimination of an income tax liability that was
never previously recognised.
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As far as the tax income and expense in profit or loss is concerned, the difference
between the two approaches is one of timing. Under the analysis that the overall
temporary difference of zero should be ‘bifurcated’ into an amount arising on initial
recognition and an amount arising later, the change in legislation reduces income tax
expense and the effective tax rate in the year of change. Under the analysis that the net
temporary difference of zero is considered as a whole, the reduction in income tax
expense and the effective tax rate is recognised prospectively over the remaining life
of the asset.
In our view, the first approach (‘bifurcation’) is more consistent with the balance sheet
approach of IAS 12, but, in the absence of specific guidance in the standard, the second
approach is acceptable.
7.2.5
Intragroup transfers of assets with no change in tax base
In many tax jurisdictions the tax deductions for an asset are generally related to the cost
of that asset to the legal entity that owns it. However, in some jurisdictions, where an
asset is transferred between members of the same group within that jurisdiction, the tax
base remains unchanged, irrespective of the consideration paid.
Therefore, where the consideration paid for an asset in such a case differs from its tax
base, a temporary difference arises in the acquiring entity’s separate financial
statements on transfer of the asset. The initial recognition exception applies to any such
temporary difference. A further complication is that the acquiring entity acquires an
asset that, rather than conforming to the fiscal norms of being either deductible for its
full cost or not deductible at all, is deductible, but for an amount different from its cost.
The treatment of such assets in the context of the initial recognition exception is
discussed more generally at 7.2.6 below.
In the consolidated financial statements of any parent of the buying entity, however,
there is no change to the amount of deferred tax recognised provided that the tax rate
of the buying and selling entity is the same. Where the tax rate differs, the deferred tax
will be remeasured using the buying entity’s tax rate.
Where an asset is transferred between group entities and the tax base of the asset
changes as a result of the transaction, there will be deferred tax income or expense in
the consolidated financial statements. This is discussed further at 8.7 below.
7.2.6
Partially deductible and super-deductible assets
In many tax jurisdictions the tax deductions for an asset are generally based on the
cost of that asset t
o the legal entity that owns it. However, in some jurisdictions,
certain categories of asset are deductible for tax but for an amount either less than
the cost of the asset (‘partially deductible’) or more than the cost of the asset
(‘super-deductible’).
IAS 12 provides no specific guidance on the treatment of partially deductible and
super-deductible assets acquired in a transaction to which the initial recognition
exception applies. The issues raised by such assets are illustrated in Examples 29.16
and 29.17 below.
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Example 29.16: Partially deductible asset
An entity acquires an asset with a cost of €100,000 and a tax base of €60,000 in a transaction where IAS 12
prohibits recognition of deferred tax on the taxable temporary difference of €40,000 arising on initial
recognition of the asset. The asset is depreciated to a residual value of zero over 10 years, and qualifies for
tax deductions of 20% per year over 5 years. The temporary differences associated with the asset over its life
will therefore be as follows.
Carrying
Tax
Temporary
Year
amount
base
difference
€
€
€
0
100,000
60,000
40,000
1
90,000
48,000
42,000
2
80,000
36,000
44,000
3
70,000
24,000
46,000
4
60,000
12,000
48,000
5
50,000 –
50,000
6
40,000 –
40,000
7
30,000 –
30,000
8
20,000 –
20,000
9
10,000 –
10,000
10
– –
–
These differences are clearly a function both of:
• the €40,000 temporary difference arising on initial recognition relating to the non-deductible element of
the asset; and
• the emergence of temporary differences arising from the claiming of tax deductions for the €60,000
deductible element in advance of its depreciation.
Whilst IAS 12 does not explicitly mandate the treatment to be followed here, the general requirement to
distinguish between these elements of the gross temporary difference (see 7.2.4 above) suggests the
following approach.
If the total carrying amount of the asset is pro-rated into a 60% deductible element and a 40% non-deductible
element, and deferred tax is recognised on the temporary difference between the 60% deductible element and
its tax base, the temporary differences would be calculated as follows:
40% non-
60%
Carrying
deductible
deductible
Temporary
Year
amount
element
element
Tax base
difference
a
b (40% of a)
c (60% of a)
d
c – d
0 100,000
40,000
60,000
60,000
–
1 90,000
36,000
54,000
48,000
6,000
2 80,000
32,000
48,000
36,000
12,000
3 70,000
28,000
42,000
24,000
18,000
4 60,000
24,000
36,000
12,000
24,000
5 50,000
20,000
30,000
–
30,000
6 40,000
16,000
24,000
–
24,000
7 30,000
12,000
18,000
–
18,000
8 20,000
8,000
12,000
–
12,000
9 10,000
4,000
6,000
–
6,000
10 –
–
–
–
–
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Assuming that the entity pays tax at 30%, the amounts recorded for this transaction during year 1 (assuming
that there are sufficient other taxable profits to absorb the tax loss created) would be as follows:
€
Depreciation of asset (10,000)
Current tax income1 3,600
Deferred tax charge2 (1,800)
Net tax credit 1,800
Post tax depreciation
(8,200)
1
€100,000 [cost of asset] × 60% [deductible element] × 20% [tax depreciation rate] × 30% [tax rate]
2
€6,000 [temporary difference] × 30% [tax rate] – brought forward balance [nil]
If this calculation is repeated for all 10 years, the following would be reported in the financial statements.
Deferred tax
Current
(charge)/
Total tax
Effective tax
Year Depreciation
tax credit
credit
credit
rate
a
b
c
d (=b+c)
e (=d/a)
1 (10,000) 3,600
(1,800)
1,800
18%
2 (10,000) 3,600
(1,800)
1,800
18%
3 (10,000) 3,600
(1,800)
1,800
18%
4 (10,000) 3,600
(1,800)
1,800
18%
5 (10,000) 3,600
(1,800)
1,800
18%
6 (10,000)
–
1,800
1,800
18%
7 (10,000)
–
1,800
1,800
18%
8 (10,000)
–
1,800
1,800
18%
9 (10,000)
–
1,800
1,800
18%
10 (10,000)
–
1,800
1,800
18%
This methodology has the result that the effective tax rate in each period corresponds to the effective tax rate
for the transaction as a whole – i.e. cost of €100,000 attracting total tax deductions of €18,000 (€60,000
at 30%), an overall rate of 18%.
However, this approach cannot be said to be required by IAS 12 and other methodologies could well be
appropriate, provided that they are applied consistently in similar circumstances.
Example 29.17: Super-deductible asset
The converse situation to that in Example 29.16 exists in some jurisdictions which seek to encourage certain
types of investment by giving tax allowances for an amount in excess of the expenditure actually incurred.
Suppose that an entity invests $1,000,000 in PP&E with a tax base of $1,
200,000 in circumstances where
IAS 12 prohibits recognition of deferred tax on the deductible temporary difference of $200,000 arising on
initial recognition of the asset. The asset is depreciated to a residual value of zero over 10 years, and qualifies
for five annual tax deductions of 20% of its deemed tax cost of $1,200,000.
The approach adopted in Example 29.16 considered the deductible and non-deductible elements separately
and recognised deferred tax on the temporary difference between the deductible element and its tax base. If
a similar approach is applied to the deductible ‘cost’ element and a ‘super deduction’ element, and deferred
tax is recognised by reference to the deductible ‘cost’ element and its tax base, the temporary differences
would arise as follows.
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‘Super
deduction’
Temporary
Year Book
value Tax
base
element
Cost element
difference
a
b
c (=2/12 of b)
d (=10/12 of b)
a – d
0 1,000,000 1,200,000
200,000
1,000,000
–
1 900,000 960,000
160,000
800,000
100,000
2 800,000 720,000
120,000
600,000
200,000
3 700,000 480,000
80,000
400,000
300,000
4 600,000 240,000
40,000
200,000
400,000
5 500,000
–
–
–
500,000
6 400,000
–
–
–
400,000
7 300,000
–
–
–
300,000
8 200,000
–
–
–
200,000
9 100,000
–
–
–
100,000
10 – –
–
–
–
Assuming that the entity pays tax at 30%, the amounts recognised for this transaction during year 1 (assuming
that there are sufficient other taxable profits to absorb the tax loss created) would be as follows:
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 476