Lecture 11 - Taxation in financial statements

Look at the Vodafone case study

What accounting standard governs taxation in financial statements?

IAS 12 Income Taxes

Does IAS 12 calculate the tax liability itself?

No — it assumes the tax calculation has already been done

What does IAS 12 focus on?

Tax recognition and reporting

What is current tax according to IAS 12?

Income taxes payable (recoverable) relating to the taxable profit (tax loss) of a period

What does “income taxes” mean?

Taxes on company profits regardless of the name of the tax

Where is current tax recognised?

As a tax expense in profit or loss

What happens if current tax was overestimated or underestimated in a previous period?

Adjust current tax expense

How is unpaid tax reported?

As a tax liability

How is overpaid tax recognised?

As a tax asset

What tax rates are used for current tax?

Tax rates enacted

or

Substantively enacted by the reporting date

If estimated current tax for the year is £750,000 and last year’s tax was overestimated by £30,000 what is the tax expense in profit or loss?

£720,000

Why does deferred tax arise?

Timing differences

(Accounting income and taxable incomes may be recognised in different periods)

What causes deferred tax?

Temporary differences between accounting and tax treatment

What is a temporary difference?

Carrying amount vs tax base

What happens when taxable profit is higher than accounting profit due to timing differences?

Tax expense decreases through a deferred tax adjustment

Where are deferred taxes shown?

Non-current items

(assets or liabilities)

What are taxable temporary differences?

Differences that will result in taxable amounts in future periods

What do taxable temporary differences create?

Deferred tax liabilities

What are deductible temporary differences?

Differences that will result in deductible amounts in future periods

What do deductible temporary differences create?

Deferred tax assets

Which method does IAS 12 require for deferred tax accounting?

• Liability method

Or

• Temporary difference method

What method is not permitted under IAS 12?

Deferral method

What is tax base?

Value for tax purposes

What identifies a temporary difference?

Carrying amount ≠ tax base

Tax base of an asset?

Future tax deduction

When benefits aren’t taxable what happens to the tax base?

Tax base = carrying amount

What is the tax base of a liability?

Carrying amount minus deductions

Why do liabilities usually not create deferred tax problems?

Settlement doesn’t change profit

When must a deferred tax liability be recognised?

For all taxable temporary differences

When must a deferred tax asset be recognised?

When it is probable that deductible temporary differences will be utilised

What must be done to deferred tax assets at each reporting date?

Review their carrying amount

What tax rate measures deferred tax?

Expected future rate

Can deferred tax be discounted?

No

Where are most deferred tax changes recorded?

Profit or loss

What must tax expense be split into?

Current and deferred tax expense

What must be shown for prior tax errors?

Prior period adjustment

What tax must be shown separately?

OCI tax

What reconciliation must be disclosed?

Accounting profit vs tax

What must be disclosed for each temporary difference?

Amount of deferred tax asset or liability

What deferred tax information must be shown in the income statement?

Deferred tax expense or income

Why is tax transparency useful for governments?

To improve tax policy

Why does tax transparency help investors?

It reveals tax risks and potential tax scandals

How does tax transparency support economic stability?

By increasing predictability and informed investment decisions

Argument against transparency?

Systems are too complex

Business concern about transparency?

Competitive disadvantage

What operational concern exists about tax transparency?

Additional administrative costs and disputes

What is OECD Country-by-Country Reporting?

Tax reporting by country

Which companies must file Country-by-Country Reports?

Multinationals with turnover above €750 million

What information is typically included in Country-by-Country Reports?

• Revenues

• Profits

• Taxes paid

• Number of employees by country

What must large UK companies publish under HMRC rules?

Their UK tax strategy

What must a company’s tax strategy describe?

Tax risk and HMRC relationship