International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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The Example concludes that the difference between the carrying amount of the debt
instrument of $918 and its tax base of $1,000 gives rise to a deductible temporary
difference of $82 at the end of Year 2, [IAS 12.20, 26(d)], irrespective of whether Entity A
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expects to recover the carrying amount of the debt instrument by sale or by use, i.e. by
holding it and collecting contractual cash flows, or a combination of both. Whether the
asset is realised on sale or on maturity (i.e. through use), Entity A will obtain a tax
deduction equivalent to the tax base of $1,000 in determining any resultant taxable profit.
7.4.5.B
Recovering an asset for more than its carrying amount
The Board concluded that the estimate of probable future taxable profit may include
the recovery of some of an entity’s assets for more than their carrying amount, but only
if there is sufficient evidence that it is probable that the entity will achieve this. In the
case of a fixed-rate debt instrument measured at fair value, recovery for more than the
carrying amount is probable if the entity expects to collect the contractual cash flows.
[IAS 12.29A].
The determination of temporary differences and the estimation of probable future
taxable profit are two separate steps, and the IASB concluded that the carrying amount
of an asset is relevant only to determining the temporary differences. [IAS 12.BC49].
Indeed, the Board identified scenarios where an inappropriate outcome can arise if the
possibility of realising a profit in excess of the carrying amount were limited. For
example, a profitable manufacturing company relies on a business model that involves
the sale of inventories and the recovery of property, plant and equipment for amounts
exceeding their cost. Therefore, where such assets are recorded using the cost model,
it would be inconsistent to assume that the entity will only recover these assets for their
carrying amount. [IAS 12.BC50]. Nevertheless, in response to concerns raised by
respondents that the amendment could be applied inappropriately, the Board
acknowledged the need for caution where assets are measured at fair value. The risk of
arbitrary estimates of future taxable profit is reduced where entities rely on evidence,
such as the existence of contractual cash flows and an expectation of their recovery.
[IAS 12.BC53]. For example, it would not be appropriate to assume recovery greater than
an asset’s carrying amount at fair value on the basis of an arbitrary assertion that fair
value will inevitably recover in line with a longer-term improvement in the related
market for the asset in question.
7.4.5.C
Excluding the reversal of existing deductible temporary differences
During its deliberations, the Interpretations Committee observed uncertainty about
how entities should calculate the measure of taxable profit that is used for assessing
the amounts available for the future utilisation of deductible temporary differences.
In particular, there seemed to be diversity of opinion relating to whether entities
should include or exclude deductions that will arise when those deductible temporary
differences reverse. [IAS 12.BC55]. As discussed above at 7.4.3.B, the IASB concluded
that the estimate of future taxable profit used to assess whether deductions can be
utilised is not the same as ‘taxable profit’ (which is the amount determined after the
application of all applicable tax laws that gives rise to an entity’s liability to pay
income tax). [IAS 12.5].
Therefore, entities should exclude the effect of deductions arising from the reversal of
the deductible temporary differences being assessed for recoverability, or they would
be counted twice. [IAS 12.29(a)(i), BC56].
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7.4.5.D
The basis for assessing the recoverability of deductible temporary differences
As noted at 7.4 above, IAS 12 restricts the recognition of deferred tax assets to the extent
that it is probable that taxable profit will be available against which the underlying
deductible temporary differences can be utilised. [IAS 12.27].
The Board noted that this is a matter for tax law; that IAS 12 defines taxable profit by
reference to the application of the rules determined by tax authorities; and that no
deferred tax is recognised if the reversal of the temporary difference will not lead to tax
deductions. [IAS 12.BC58]. Therefore, the assessment of whether a deductible temporary
difference can be utilised considers on a combined basis all deductible temporary
differences relating to the same taxation authority and same taxable entity that are
treated in a similar way under tax law. However, if tax law offsets specific types of losses
against particular categories of income (for example when tax law allows capital losses
to be deducted only against capital gains) such temporary differences are segregated
according to their treatment under the relevant tax law. [IAS 12.BC59].
IAS 12 was amended to clarify that entities making the assessment of the availability of
taxable profits against which a deductible temporary difference can be utilised should do
so in combination with all other deductible temporary differences, unless tax law restricts
the sources of taxable profits against which that deductible temporary difference can be
utilised. Where restrictions exist, the assessment is made together only with deductible
temporary differences recoverable from the same sources. [IAS 12.27A].
The amendments to IAS 12 add an example to illustrate how these requirements are
applied to debt instruments measured at fair value, on which Example 29.22 below is
based. [IAS 12 Example 7].
Example 29.22: Debt instruments measured at fair value
At 31 December 2019 an entity holds a portfolio of three debt instruments, which are measured at fair value
through other comprehensive income:
Debt instrument
Cost
Fair value
Contractual
(All amounts in €)
interest rate
Debt instrument A
2,000,000
1,942,857
2.00%
Debt instrument B
750,000
778,571
9.00%
Debt instrument C
2,000,000
1,961,905
3.00%
All the debt instruments were acquired for their nominal value. All three debt instruments mature on
31 December 2020, on which date repayment of the nominal value is due. Interest is paid at the end of each
year. When the instruments were acquired, the contractually fixed interest rates were equal to the relevant market
rates. However, at 31 December 2019 the market interest rate is 5%, resulting in the fair value of instruments A
and C to be below their cost and the fair value of instrument B to be above its cost. It is probable that the entity
would receive all the contractual cash flows if it continues to hold the debt instruments.
The entity expects to hold instruments A and B to maturity, collecting the cash flows as they fall due, and to
sell instrument C in early 2020 for its fair value of €1,961,905.
The tax base of the debt instruments is cost, which is deductible either on maturity when the princip
al is paid or
against any sale proceeds when the instruments are sold. Tax law specifies that gains (losses) on the debt
instruments are taxable (deductible) only when realised. Tax law distinguishes ordinary gains and losses from
capital gains and losses. Ordinary losses can be offset against both ordinary gains and capital gains. Capital losses
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can only be offset against capital gains. Capital losses can be carried forward for 5 years and ordinary losses can
be carried forward for 20 years.
Ordinary gains are taxed at 30 per cent and capital gains are taxed at 10 per cent.
Tax law classifies interest income from the debt instruments as ‘ordinary’ and gains and losses arising on the
sale of the debt instruments as ‘capital’. Losses that arise if the issuer of the debt instrument fails to pay the
principal on maturity are classified as ordinary by tax law.
In addition to the above, there are other taxable temporary differences of €50,000 and deductible temporary
differences of €430,000 which are expected to reverse in ordinary taxable profit in 2020.
In summary, the following temporary differences are identified at 31 December 2019:
Temporary differences
Carrying
Tax base
Taxable
Deductible
(All amounts in €)
amount
temporary
temporary
differences
differences
Debt instrument A
1,942,857
2,000,000
57,143
Debt instrument B
778,571
750,000
28,571
Debt instrument C
1,961,905
2,000,000
38,095
Other sources (not specified)
50,000
430,000
Total temporary differences
78,571
525.238
Expected to reverse in ordinary gains or losses
78,571
487,143
Expected to reverse as capital losses
38,095
The entity expects to report an ordinary tax loss of €200,000 for the year ending 31 December 2020. The
deductible temporary difference on instrument C is classified as a capital loss because it is expected to be
realised by sale. There are no other capital gains against which the entity could utilise capital losses in the
current or future periods. What is the entity’s deferred tax asset or liability as at 31 December 2019?
The entity assesses the availability of probable future taxable profits in two steps:
• Step 1: Determine the availability of taxable temporary differences at the reporting date. [IAS 12.28].
• Step 2: Determine the availability of probable future taxable profits. [IAS 12.29].
Step 1: Determine the availability of taxable temporary differences at the reporting date
All of the taxable temporary differences are expected to reverse in ordinary gains or losses and should
therefore be compared to the deductible temporary differences of €487,143 that are capable of being
utilised against ordinary gains. Accordingly, a deferred tax asset of €78,571 is justified at this stage, with
€408,572 (487,143 less 78,571) of deductible temporary differences remaining to be utilised against
ordinary gains or losses.
Step 2: Determine the availability of probable future taxable profits
The fact pattern states that the entity expects to report an ordinary tax loss of €200,000 for 2020. As noted
at 7.4.5.C above, this figure is the amount determined after the application of all applicable tax laws that
gives rise to an entity’s liability to pay income tax. In order to calculate the available profits against which
the deductible temporary differences can be utilised, the effect of deductions arising from the reversal of the
deductible temporary differences must be excluded. The gives a probable future taxable profit of €208,572,
as follows:
Excluding the reversal of existing temporary differences
Amount
€
Expected tax loss reported for 2020
(200,000)
Reversal of taxable temporary differences (ordinary gains and losses)
(78,571)
Reversal of deductible temporary differences (ordinary gains and losses)
487,143
Probable taxable profit for 2020 excluding the effect of reversals
208,572
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Accordingly, the entity recognises a deferred tax asset in respect of deductible temporary differences of €287,143,
comprising €78,571 justified by reference to taxable temporary differences existing at the reporting date and
€208,572 expected to be utilised against probable taxable profits in 2020. All of these deductible temporary
differences are expected to reverse in ordinary gains or losses, for which the applicable tax rate is 30%.
Therefore, at 31 December 2019, the entity reports a deferred tax liability of €23,571, a deferred tax asset of
€86,143 and unrecognised deductible temporary differences of €238,095, as follows:
Temporary differences
Amount
Tax rate
Deferred
Deferred
(All amounts in €)
tax liability
tax asset
Taxable temporary differences
78,571
30%
23,571
Total deductible temporary differences
525.238
Less: eligible for recognition
(287,143)
30%
86,143
Unrecognised 238,095
The unrecognised deductible temporary differences comprise €38,095 expected to reverse in capital gains
and losses and €200,000 (487,143 – 287,143) expected to reverse in ordinary gains and losses.
7.4.6
Unused tax losses and unused tax credits
A deferred tax asset should be recognised for the carryforward of unused tax losses and
unused tax credits to the extent that it is probable that future taxable profit will be available
against which the unused tax losses and unused tax credits can be utilised. [IAS 12.34].
The criteria for recognition are essentially the same as those for deductible temporary
differences, as set out in 7.4.1 to 7.4.4 above, in particular that it is ‘probable’ that there
will be sufficient taxable profit against which a deductible temporary difference can be
utilised when there are sufficient taxable temporary differences relating to the same
taxation authority and the same taxable entity which are expected to reverse in the
same period as the asset, or in a period into which a loss arising from the asset may be
carried back or forward. [IAS 12.28].
However, IAS 12 emphasises that the existence of unused tax losses is strong evidence
that taxable profits (other than those represented by deferred tax liabilities) may not be
available. Therefore, an entity with a history of recent losses recognises a deferred tax
asset arising from unused tax losses or tax credits only to the extent that: [IAS 12.35]
• it has sufficient taxable temporary differences; or
• there is other convincing evidence that sufficient taxable profit will be
available against which the unused tax losses or unused tax credits can be
utilised by the entity.
In May 2014, the Interpretations Committee conf
irmed that the consideration of
available reversing taxable temporary differences is made independently of the
assessment of an entity’s expectations of future tax losses. Accordingly, a deferred tax
asset is recognised for the carryforward of unused tax losses to the extent of the existing
taxable temporary differences, of an appropriate type, that reverse in an appropriate
period. The reversal of those taxable temporary differences enables the utilisation of
the unused tax losses and justifies the recognition of deferred tax assets.16
In addition to the question noted above, the Interpretations Committee was asked to
clarify how the guidance in IAS 12 is applied when tax laws limit the extent to which tax
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losses brought forward can be recovered against future taxable profits. In the tax systems
considered for this issue, the amount of tax losses brought forward that can be recovered
in each tax year is limited to a specified percentage of the taxable profits of that year.
In these circumstances, the Committee noted that the amount of deferred tax assets
recognised from unused tax losses as a result of suitable existing taxable temporary
differences should be restricted as specified by the tax law. This is because when the
suitable taxable temporary differences reverse, the amount of tax losses that can be
utilised by that reversal is reduced as specified by the tax law. Also, the Committee
noted that in this case future tax losses are not considered.17
Consequently, the availability of future taxable profits is only required to be considered
if the unused tax losses exceed the amount of suitable existing taxable temporary
differences (after taking into account any restrictions). The Interpretations Committee
also confirmed in May 2014 that an additional deferred tax asset is recognised only if
the following requirements are met:18 [IAS 12.36]
• the entity has sufficient taxable temporary differences relating to the same taxation