International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards
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carrying amount nor the tax base of the asset has changed. However, this determination
can have unwanted consequences as the debt instrument is later revalued and realised,
in particular with respect to variability in the effective tax rate reported in both profit
or loss and in other comprehensive income.
10.5 Gain/loss in profit or loss and loss/gain outside profit or loss
offset for tax purposes
It often happens that a gain or loss accounted for in profit or loss can be offset for tax
purposes against a gain or loss accounted for in other comprehensive income (or an
increase or decrease in equity). This raises the question of how the tax effects of such
transactions should be accounted for, as illustrated by Example 29.43 below.
Income
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Example 29.43: Loss in other comprehensive income and gain in profit or loss
offset for tax purposes
During the year ended 31 December 2019, an entity that pays tax at 35% makes a taxable profit of
€50,000 comprising:
• €80,000 trading profit less finance costs accounted for in profit or loss; and
• €30,000 foreign exchange losses accounted for in other comprehensive income (‘OCI’).
Should the total tax liability of €17,500 (35% of €50,000) be presented as either:
(a) a charge of €17,500 in profit or loss; or
(b) a charge of €28,000 (35% of €80,000) in profit or loss and a credit of €10,500 (35% of €30,000) in OCI?
In our view, (b) is the appropriate treatment, since the amount accounted for in OCI
represents the difference between the tax that would have been paid absent the
exchange loss accounted for in OCI and the amount actually payable. This indicates
that this is the amount that, in the words of paragraph 61A of IAS 12, ‘relates to’ items
that are recognised outside profit or loss.
Similar issues may arise where a transaction accounted for outside profit or loss
generates a suitable taxable profit that allows recognition of a previously unrecognised
tax asset relating to a transaction previously accounted for in profit or loss, as illustrated
by Example 29.44 below.
Example 29.44: Recognition of deferred tax asset in profit or loss on the basis of
tax liability accounted for outside profit or loss
An entity that pays tax at 30% has brought forward unrecognised deferred tax assets (with an indefinite life)
totalling £1 million, relating to trading losses accounted for in profit or loss in prior periods. On 1 January 2019
it invests £100,000 in government bonds, which it holds until they are redeemed for the same amount on maturity
on 31 December 2022. For tax purposes, any gain made by the entity on disposal of the bonds can be offset
against the brought forward tax losses. The tax base of the bonds remains £100,000 at all times.
The entity elects to account for the bonds as fair value through other comprehensive income and therefore
carries them at fair value in the statement of financial position and amortised cost information is presented
in profit or loss (see Chapter 46 at 2.3). Over the period to maturity the fair value of the bonds at the end of
each reporting period (31 December) is as follows:
Fair value
Amortised cost
Movement in OCI
£000
£000
£000
2019 111
101
10
2020 117
102
15
2021 122
102
20
2022 100
100
–
Under IFRS 9 the movements in fair value in excess of the amounts recognised in profit or loss (excluding any
amounts received in cash, e.g. the coupon on a bond) would be accounted for in other comprehensive income
(‘OCI’) – see Chapter 46 at 2.3. Taken in isolation, the valuation gains recorded in OCI in 2019 to 2021 would
give rise to a deferred tax liability (at 30%) of £3,000 (2019), £4,500 (2020) and £6,000 (2021). However, these
liabilities arise from taxable temporary differences that can be offset against the losses brought forward (see 7.4
above), and accordingly the (equal and opposite) deferred tax liability and deferred tax asset are offset in the
statement of financial position (see 13.1.1 below). This raises the question as to whether there should be either:
(a) no tax charge or credit in either profit or loss or OCI in any of the periods affected; or
(b) in each period, a deferred tax charge in OCI (in respect of the taxable temporary difference arising from
valuation gains on the bonds) and deferred tax income in profit or loss (representing the recognition of
the previously unrecognised deferred tax asset).
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In our view, the treatment in (b) should be followed. The fact that no deferred tax is presented in the statement
of financial position arises from the offset of a deferred tax asset and deferred tax liability – it does not imply
that there is no deferred tax. Moreover, although the recognition of the deferred tax asset is possible only as
the result of the recognition of a deferred tax liability arising from a transaction accounted for in OCI, the
asset itself relates to a trading loss previously accounted for in profit or loss. Accordingly, the deferred tax
credit arising from the recognition of the asset is properly accounted for in profit or loss.
10.6 Discontinued
operations
IAS 12 does not explicitly address the allocation of income tax charges and credits
between continuing and discontinued operations. However, that some allocation is
required is implicit in the requirement of paragraph 33(b)(ii) of IFRS 5 to disclose how
much of the single figure post-tax profit or loss of discontinued operations disclosed in
the statement of comprehensive income is comprised of ‘the related income tax expense’
(see Chapter 4). [IFRS 5.33(b)(ii)]. In our view, the provisions of IAS 12 for the allocation of
tax income and expense between profit or loss, other comprehensive income and equity
also form a basis for allocating tax income and expense between continuing and
discontinued operations, as illustrated by Examples 29.45 to 29.47 below.
Example 29.45: Profit in continuing operations and loss in discontinued
operations offset for tax purposes
Entity A, which pays tax at 25%, has identified an operation as discontinued for the purposes of IFRS 5. During
the period the discontinued operation incurred a loss of £2 million and the continuing operations made a profit
of £10 million. The net £8 million profit is fully taxable in the period, and there is no deferred tax income or
expense. In our view, the tax expense should be allocated as follows:
£m
£m
Current tax expense (continuing operations)1
2.5
Current tax income (discontinued operation)2
0.5
Current tax liability3 2.0
1
Continuing operations profit £10m @ 25% = £2.5m
2
Discontinued operations loss £2m @ 25% = £0.5m.
3
Net taxable profit £8m @ 25% = £2.0m
The tax allocated to the discontinued operation represents the difference between the tax that would have
been paid absent the loss accounted for in discontinued operations and the amount actually payable.
/> Example 29.46: Taxable profit on disposal of discontinued operation reduced by
previously unrecognised tax losses
Entity B disposes of a discontinued operation during the current accounting period. The disposal gives rise to a
charge to tax of €4 million. However, this is reduced to zero by offset against brought forward tax losses, which
relate to the continuing operations of the entity, and for which no deferred tax asset has previously been recognised.
In our view, even though there is no overall tax expense, this should be reflected for financial reporting
purposes as follows:
€m
€m
Current tax expense (discontinued operation)
4.0
Current tax income (continuing operations)
4.0
This allocation reflects that fact that, although the transaction that allows recognition of the brought forward tax
losses is accounted for as a discontinued operation, the losses themselves arose from continuing operations. This
is essentially the same analysis as is used in Example 29.44 above (where a deferred tax liability recognised in
other comprehensive income gives rise to an equal deferred tax asset recognised in profit or loss).
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Example 29.47: Taxable profit on disposal of discontinued operation reduced by
previously recognised tax losses
Entity B disposes of a discontinued operation during the current accounting period. The disposal gives rise to a
charge to tax of €4 million. However, this is reduced to zero by offset against brought forward tax losses, which
relate to the entity’s continuing operations, and for which a deferred tax asset has previously been recognised.
In our view, even though there is no overall tax expense, this should be reflected for financial reporting
purposes as follows:
€m
€m
Current tax expense (discontinued operation)
4.0
Deferred tax expense (continuing operations)
4.0
Current tax income (continuing operations)
4.0
Deferred tax asset (statement of financial position)
4.0
This allocation reflects that fact that, although the transaction that allows realisation of the brought forward
tax losses is accounted for as a discontinued operation, the losses themselves arose from continuing
operations. This is essentially the same analysis as is used in Example 29.46 above.
10.7 Defined benefit pension plans
IAS 19 requires an entity, in accounting for a defined benefit post-employment benefit
plan, to recognise actuarial gains and losses relating to the plan in full in other
comprehensive income (‘OCI’). At the same time, a calculated current (and, where
applicable, past) service cost and net interest on the net defined benefit liability or asset
are recognised in profit or loss – see Chapter 31 at 10.
In many jurisdictions, tax deductions for post-employment benefits are given on the basis
of cash contributions paid to the plan fund (or benefits paid when a plan is unfunded).
This significant difference between the way in which defined plans are treated for tax and
financial reporting purposes can make the allocation of tax deductions for them between
profit or loss and OCI somewhat arbitrary, as illustrated by Example 29.48 below.
Example 29.48: Tax deductions for defined benefit pension plans
At 1 January 2019 an entity that pays tax at 40% has a fully-funded defined benefit pension scheme. During
the year ended 31 December 2019 it records a total cost of €1 million, of which €800,000 is allocated to
profit or loss and €200,000 to other comprehensive income (‘OCI’). In January 2020 it makes a funding
payment of €400,000, a tax deduction for which is received through the current tax charge for the year ended
31 December 2020.
Assuming that the entity is able to recognise a deferred tax asset for the entire €1 million charged in 2019, it
will record the following entry for income taxes in 2019.
€
€
Deferred tax asset [€1,000,000 @ 40%]
400,000
Deferred tax income (profit or loss) [€800,000 @ 40%]
320,000
Deferred tax income (OCI) [€200,000 @ 40%]
80,000
When the funding payment is made in January 2020, the accounting deficit on the
fund is reduced by €400,000. This gives rise to deferred tax expense of €160,000
(€400,000 @ 40%), as some of the deferred tax asset as at 31 December 2019 is
released, and current tax income of €160,000 is recorded. The difficulty is how to
allocate this movement in the deferred tax asset between profit or loss and OCI, as it
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is ultimately a matter of arbitrary allocation as to whether the funding payment is
regarded as making good (for example):
• €400,000 of the €800,000 deficit previously accounted for in profit or loss;
• the whole of the €200,000 of the deficit previously accounted for in OCI and
€200,000 of the €800,000 deficit previously accounted for in profit or loss; or
• a pro-rata share of those parts of the total deficit accounted for in profit or loss
and OCI.
In the example above, the split is of relatively minor significance, since the entity was
able to recognise 100% of the potential deferred tax asset associated with the pension
liability. This means that, as the scheme is funded, there will be an equal and opposite
amount of current tax income and deferred tax expense. The only real issue is therefore
one of presentation, namely whether the gross items comprising this net nil charge are
disclosed within the tax charge in profit or loss or in OCI.
In other cases, however, there might be an amount of net tax income or expense that needs
to be allocated. Suppose that, as above, the entity recorded a pension cost of €1 million
in 2019 but determined that the related deferred tax asset did not meet the criteria for
recognition under IAS 12. In 2020, the entity determines that an asset of €50,000 can be
recognised in view of the funding payments and taxable profits anticipated in 2020 and later
years. This results in a total tax credit of €210,000 (€160,000 current tax, €50,000 deferred
tax) in 2020, raising the question of whether it should be allocated to profit or loss, to OCI,
or allocated on a pro-rata basis. This question might also arise if, as the result of newly
enacted tax rates, the existing deferred tax balance were required to be remeasured.
In our view, these are instances of the exceptional circumstances envisaged by IAS 12
when a strict allocation of tax between profit or loss and OCI is not possible (see 10
above). Accordingly, any reasonable method of allocation may be used, provided that it
is applied on a consistent basis.
One approach might be to compare the funding payments made to the scheme in the
previous few years with the charges made to profit or loss under IAS 19 in those periods.
If, for example, it is found that the payments were equal to or greater than the charges to
profit or loss, it might reasonably be concluded that the funding payments have ‘covered’
the charge recognised in profit or loss, so that any surplus or deficit on the statement of
financial position is broadly represen
ted by items that have been accounted for in OCI.
However, a surplus may also arise from funding the scheme to an amount greater than
the liability recognised under IAS 19 (for example under a minimum funding
requirement imposed by local legislation or agreed with the pension fund trustees). In
this case, the asset does not result from previously recognised income but from a
reduction in another asset (i.e. cash). The entity should assess the expected manner of
recovery of any asset implied by the accounting treatment of the surplus – i.e. whether
it has been recognised on the basis that it will be ‘consumed’ (resulting in an accounting
expense) or refunded to the entity in due course. The accounting treatment of refunds
is discussed further in Chapter 31, and at 10.7.1 below.
The entity will account for the tax consequences of the expected manner of recovery
implied by the accounting treatment. Where it is concluded that the asset will be ‘consumed’
Income
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(resulting in accounting expense), the entity will need to determine whether such an
expense is likely to be recognised in profit or loss or in OCI in a future period.
10.7.1
Tax on refund of pension surplus
In some jurisdictions, a pension fund may be permitted or required to make a refund to
the sponsoring employee of any surplus in the fund not required to settle the known or
anticipated liabilities of the fund. It may be that such a refund is subject to tax. IFRIC 14
– IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and
their Interaction – requires any asset recorded in respect of such a refund to be shown
net of any tax other than an income tax (see Chapter 31). In determining whether such
a tax is an income tax of the entity, the general principles at 4.1 above should be applied.
Relevant factors may include:
• whether tax is levied on the pension fund or the sponsoring entity; and
• whether tax is levied on the gross amount of the refund in all cases, or has regard
to the sponsoring entity’s other taxable income, or the amount of tax deductions