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IAS 12 - voice - 03-30-2007
Dear friends.......can u please help me to understand IAS--12 i'll be very thankful to u....regards
- kamranACA - 03-31-2007
Dear,
I just saw your post. I can help you about IAS 12.
Ask me your questions and concerns about IAS 12 and I will try to provide you the clarifications.
Best regards,
Kamran.
- voice - 03-31-2007
aoa kamaran sb how r u...thank u for your interests ....first of all i want to know little overview of ias and need and purpose ...i will be very thankful to u..
- kamranACA - 03-31-2007
Dear,
The basis of determination of accounting prfit and tax profit are different in almost all countries. Accounting profit is the profit as per profit and loss account for a given period/year and is arrived at under certain reporting framework.
As in Pakistan, every company records its transactions in accordance with the recognition and measurement principles laid down by International Financial Reporting Standards that are applicable in Pakistan as stipulated in section 234 of the Companies Ordinance, 1984 and notified by the Securities and Exchange Commission of Pakistan from time to time. However, local laws (such as Companies Ordinance, 1984) wherever differ from the IFRSs, have to override such IFRSs or their requirements. Currently for listed companies, there is no such major differentiation between the law and IFRSs except for the IFRSs that still have not been adopted by SECP.
When all the transactions for a given period are vouched and recorded in the books of account (ledgers), the entities generate the trial balance for that period which shows all the balances appearing in general ledger at the end of that period. From this Trial Balance, the financial statements are prepared. This also requires gathering of other information that does not appear in trial balance for meeting various disclosure requirements. Profit and loss account is a statement of all revenues, incomes, expenses, gains and losses incurred during the period for which the financial statements are prepared. The balancing figure of profit and loss account (before providing for tax) is the PROFIT BEFORE TAXATION.
The provision/expense to be accrued for taxation in profit and loss account depends upon so many factors. This is not arrived at simply by applying the applicable tax rate to the PROFIT BEFORE TAXATION as per profit and loss account. Rather, tax calculation requires to consider the expenses which are not allowed by tax laws. These expenses are reversed to the profit as per accounts. This also requires to deduct certain expenses/charges from accounting profit which are allowed by tax laws but have not been recognised in profit and loss account. One exmaple could be the depreciation on property, plant and equipment. Depreciation as per accounts is a fix charge as per rate and method decided by the management. But as per tax the calculation of depreciation is different. Tax laws allow more depreciation to be charged against the profit in initial years. Just like section 23 of Income Tax Ordinance 2001 allows to charge 50% depreciation on certain fixed assets as INITIAL ALLOWANCE in first year of construction/errection/acquisition.
This will cause to prepare a reconcliation of accounting profit with the tax profit whereby the depreciation charged in profit and loss account will be added back to the profit before taxation and depreciation determined as per tax rules will be deducted therefrom to arrive at the tax profit. Such adjustments normally reduce the tax profit than the accounting profit.
Further, there are so many other items which also have different basis in accounts and in tax. For example provision for bad debts is charged in accounts as per the accounting estimate of the management keeping in view the recovery of outstanding debtors. But in tax such provision is not allowed to be deducted. Only actual bad debts written off against the provision are normally allowed and that is also as per approval of the taxation authorities.
Therefore in profit reconciliation, the provision for doubtful/bad debts will be added back to accounting profit and actual bad debts written off, if any, will be deducted.
One other example is of retirement benefits. Pensions and gratuity provisions are recognized in profit and loss account as per actuarial valuation / determination of expense for the period (i.e as per accounting estimate of the management) while in tax the retirement benefits are normally allowed only in case of their actual payment to retired employees, if any. Therefore again tax profit will differ from accounting profit.
Therefore, tax profit is arrived at by reconciling the accounting profit to tax profit whereby adding certain items in accounting profit and deducting certain items therefrom to reach the tax profit.
Now it is clear that accounting profit is different from tax profit. For calculating Tax expense/provision the entities calculate the tax profit and then apply tax rate to such profit for determining the tax expense/liability.
There would always be differences between two profits. For understanding the deferred taxation concept one ha sto grasp this area.
The differences between tax profit and accounting profit would be of two types depending upon tax law of each country. One sort of differences would be temporary differences and others would be permanent differences.
Temporary differences are those which arise in one period and reverse in other next period or next periods. I gave example of provision for bad/doubtful debts. In one period accounting profitw ould be lesser than the tax profit as expense is recognised in accounts but not allowed in tax. But in next period, the situation might be reversed when actual bad debts are written off against the provision. The entity will charge nothing to profit and loss account in next period as provision was already created in previous period. It will simply write off actual bad debts against the outstanding provision. But as per tax rules, bad debts will be allowed when actually written off. So in tax it would be treated as an expense resulting in lesser tax profit than the accounting profit in next period ultimately resulting more tax expense in one year and less tax expense in next year.
Similar things could be concluded about depreciation or pension or gratuity etc. If for some years depreciation in tax is more than in accounts, this situation will reverse after some years for any particular asset and after some years the depreciation as per accounts will be more in accounts than tax. Because the outstanding carrying value of asset will be more as per accounts than the tax resulting more depreciation in accounts than tax workings.
All the gratuity provision is disallowed in tax resulting more expense in accounts than tax but one day when all the gratuity will be paid to employees in case of their retirement the total payment will be allowed in tax resulting more expense in tax than accounts.
Therefore, these examples depict the temporary differences. However, temporary differences are of two types
1. taxable temporary differences
2. deductible temporary expenses
As clear from names, taxable temporary differences are those which result in lesser tax profit than the accounting profit causing less tax epense in one year and resulting excessive tax expense in next years i.e. the differences which will give rise to a lesser tax expense in current period but a greater tax expense in subsequent periods. Such as depreciation.
Unlike above, deductible temporary differences are those which result in greater tax expense in current period but lesser tax expense in next periods. Like gratuity provision or provision for bad debts etc.
You must try to understand these differences. I have a scheduled meeting now so have to close this post at the moment.
The impact of these differences on our tax liabilities and the logic to account for deferred tax and how it would be reversed in next years will be discussed in some later post. We will have a detailed discussion on IAS 12 as well.
I made profit and loss account a base here for discussion as it is easy to apprehend. IAS 12 uses tax and accounting base of assets and liabilities for calculating deferred tax. Both things almost lead to same concept. We will also discuss it in detail.
Be in touch.
I will come back after having some further time. Until then you try to concentrate on above to grasp the basic idea behind deferred tax.
Best regards,
Kamran
Likewise
- zurpk - 03-31-2007
AoA to All,
Thank yo Mr. Kamran. you have provided very good informations to all of us. However, i shall request you to please carry on your topic as you write that you want to tell us more about the above topic.
Thanking you.
Zia ur Rahman
Islamabad.
- voice - 04-01-2007
aoa thank you a lot kamaran sab i will INSHA ALLAH consult this one...GOD BLESS YOU
- voice - 04-02-2007
Thank you kamran sab i help me a lot to get the purpose of deferred taxation...i want to get control over ...if u could plz help me to this....i will be very thankful to u
- kamranACA - 04-03-2007
Dears,
I normally appear to be extremely busy due to professional work but I understand that such forums and students like you will contribute to my continued professional development. By sharing my ideas I learn so much from you guys. I have no claim of perfection and may be corrected wherever found incorrect.
I discussed the temporary differences either these are taxable or deductible (as identified by IAS 12).
Grasp one point that whenever taxable temporary difference will arise it will lead to calculation of liabilty and whenever deductible temporary difference will arise it will give rise to deferred tax asset.
Now we discuss why deferred tax is recognised. Without going to detailed recognition criteria for asset/liability/income/expense, I only refer you to go back to paragraphs 82 to 98 of framework to the IFRSs.
At any given point of time (balance sheet date) the tax liability determined for incorporation in profit and loss account is based upon tax laws. So many tax laws cause temporary differences that have to reverse in future. You can also see IAS 10 that what adjusting events should be recognized in books of account.
Concisely, deferred tax should be recognised as a current period's liability/asset (expense/income) due to following factors
As these differences arise due to past events which are known and have taken effect at the balance sheet date.
We know that these will reverse in future and what has been saved now in tax will have to be incurred after sometime when difference will reverse
All the conditions giving rise to such future incurrence are met
An outflow of economic benefits is probable (rather somewhat certain)
We can reliably measure the impact of temporary terms in financial terms
Due to this, deferred tax is calculated by determining all temporary differences and is recognised as liability or asset i.e. as expense or income.
There is a little difference in criteria of IAS 12 for recognising the liability and asset.
I will discuss it shortly.
Regards,
Kamran
- kamranACA - 04-03-2007
*
We can reliably measure the impact of temporary *DIFFERENCES in financial terms
Kamran
- msc286 - 04-03-2007
Kamran Sb. I think the students should also check the IAS Modules developed by Deloitte. They are really useful in understanding the implication of a particular standard. They can by accessed through www.iasplus.com ==> E Learning
- kamranACA - 04-04-2007
Yes,
Mahmood sahib, surely the Deloitte's effort is extremely good for the students. I have seen so many guys using these modules and notes. The special thing is the availability of complete history of development of each standard along with various dates to know the evolution process. Sometimes I have also prepared PowerPoint presentations from these modules/notes for giving presentations. These really work.
Regards,
Kamran.
- kamranACA - 04-04-2007
Dear Voice,
I will discuss more about deferred tax, accounts and tax base of liabilities and assets, choosing balance sheet base instead of profit and loss account base for calculating the defered tax, deferred tax chargeable to profit and loss account and deferred tax required to be directly recognised in equity in certain cases.
I will also discuss why timing differences have been re-named as temporary differences.
Interpretation regarding deferred tax (SIC 21)explaining deferred tax on depreciable asset on the basis of its recoverability through sales etc will also be discussed.
It is a big subject and need concentration. Hope I will do something on sunday.
Regards,
Kamran.
- voice - 04-09-2007
AOA so nice of you sir i m waiting for your post