AASB 112 Income Taxes July 2004 (Cth)

Compiled AASB Standard AASB 112

Income Taxes

This compiled Standard applies to annual reporting periods beginning on or after 1 January 2018.  However, for such periods, this principal Standard has been superseded by AASB 112 (August 2015), but can be applied earlier.  Early application is permitted for annual reporting periods beginning after 24 July 2014 but before 1 January 2018.  It incorporates relevant amendments made up to and including 24 February 2016.

Prepared on 20 March 2017 by the staff of the Australian Accounting Standards Board.

Compilation no. 18

Compilation date:  31 December 2016

Obtaining Copies of Accounting Standards

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COPYRIGHT

© 2016 Commonwealth of Australia

This compiled AASB Standard contains IFRS Foundation copyright material.  Reproduction within Australia in unaltered form (retaining this notice) is permitted for personal and non-commercial use subject to the inclusion of an acknowledgment of the source.  Requests and enquiries concerning reproduction and rights for commercial purposes within Australia should be addressed to The National Director, Australian Accounting Standards Board, PO Box 204, Collins Street West, Victoria 8007.

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COMPILATION DETAILS

COMPARISON WITH IAS 12

ACCOUNTING STANDARD

AASB 112 INCOME TAXES

Paragraphs

Objective

Application   Aus1.1 – Aus1.7

Reduced Disclosure Requirements   Aus1.8 – Aus1.10

Scope   1 – 4

Definitions   5 – 6

Tax Base   7 – 11

Recognition of Current Tax Liabilities and Current Tax Assets   12 – 14

Recognition of Deferred Tax Liabilities and Deferred Tax Assets

Taxable Temporary Differences   15 – 18

Business Combinations   19

Assets Carried at Fair Value   20

Goodwill   21 – 21B

Initial Recognition of an Asset or Liability   22 – 23

Deductible Temporary Differences   24 – 31

Goodwill   32A

Initial Recognition of an Asset or Liability   33 – Aus33.1

Unused Tax Losses and Unused Tax Credits   34 – 36

Reassessment of Unrecognised Deferred Tax Assets   37

Investments in Subsidiaries, Branches and Associates and Interests in Joint Arrangements   38 – 45

Measurement   46 – 56

Recognition of Current and Deferred Tax   57

Items Recognised in Profit or Loss   58 – 60

Items Recognised Outside Profit or Loss   61A – 65A

Deferred Tax Arising from a Business Combination   66 – 68

Current and Deferred Tax Arising from Share-based Payment Transactions   68A – 68C

Presentation

Tax Assets and Tax Liabilities

Offset   71 – 76

Tax Expense

Tax Expense (Income) Related to Profit or Loss from Ordinary Activities   77

Exchange Differences on Deferred Foreign Tax Liabilities or Assets   78

Disclosure   79 – 88

Effective Date   93 – 98H

ILLUSTRATIVE EXAMPLES:

Examples of Temporary Differences   Page 30

Illustrative Computations and Presentation   Page 32

DELETED IAS 12 TEXT   Page 48

Australian Accounting Standard AASB 112 Income Taxes (as amended) is set out in paragraphs Aus1.1 – 98H.  All the paragraphs have equal authority.  Terms defined in this Standard are in italics the first time they appear in the Standard.  AASB 112 is to be read in the context of other Australian Accounting Standards, including AASB 1048 Interpretation of Standards, which identifies the Australian Accounting Interpretations.  In the absence of explicit guidance, AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies.

COMPILATION DETAILS

Accounting Standard AASB 112 Income Taxes as amended

This compiled Standard applies to annual reporting periods beginning on or after 1 January 2018.  However, for such periods, this principal Standard has been superseded by AASB 112 (August 2015), but can be applied earlier.  It takes into account amendments up to and including 24 February 2016 and was prepared on 20 March 2017 by the staff of the Australian Accounting Standards Board (AASB).

This compilation is not a separate Accounting Standard made by the AASB.  Instead, it is a representation of AASB 112 (July 2004) as amended by other Accounting Standards, which are listed in the Table below.

Table of Standards

Standard		Date made	Application date (annual reporting periods … on or after …)	Application, saving or transitional provisions
AASB 112		15 Jul 2004	(beginning) 1 Jan 2005
AASB 2005-11		8 Sep 2005	(ending) 31 Dec 2005	see (a) below
AASB 2007-4		30 Apr 2007	(beginning) 1 Jul 2007	see (b) below
AASB 2007-8		24 Sep 2007	(beginning) 1 Jan 2009	see (c) below
AASB 2007-10		13 Dec 2007	(beginning) 1 Jan 2009	see (c) below
AASB 2008-3		6 Mar 2008	(beginning) 1 Jul 2009	see (d) below
AASB 2009-6		25 Jun 2009	(beginning) 1 Jan 2009 and (ending) 30 Jun 2009	see (e) below
AASB 2009-7		25 Jun 2009	(beginning) 1 Jul 2009	see (f) below
Erratum		5 Oct 2009	(beginning) 1 Jan 2009 and (ending) 30 Jun 2009	see (g) below
AASB 2009-11		7 Dec 2009	(beginning) 1 Jan 2018	see (h) below
AASB 2009-12		15 Dec 2009	(beginning) 1 Jan 2011	see (i) below
AASB 2010-2		30 Jun 2010	(beginning) 1 Jul 2013	see (j) below
AASB 2010-5		27 Oct 2010	(beginning) 1 Jan 2011	see (k) below
AASB 2010-7		6 Dec 2010	(beginning) 1 Jan 2018	see (l) below
AASB 2010-8		31 Dec 2010	(beginning) 1 Jan 2012	see (m) below
AASB 2011-7		29 Aug 2011	(beginning) 1 Jan 2013	see (n) below
AASB 2011-9		5 Sep 2011	(beginning) 1 Jul 2012	see (o) below
AASB 2012-10		18 Dec 2012	(beginning) 1 Jan 2013	see (p) below
AASB 2013-5		14 Aug 2013	(beginning) 1 Jan 2014	see (q) below
AASB 2013-9		20 Dec 2013	Pt B (beginning) 1 Jan 2014	see (r) below
AASB 2014-1		4 Jun 2014	Pt E (beginning) 1 Jan 2018	see (s) below
AASB 2014-5	12 Dec 2014		(beginning) 1 Jan 2018	see (t) below
AASB 2014-7	17 Dec 2014		(beginning) 1 Jan 2018	see (u) below
AASB 2015-8	22 Oct 2015		(beginning) 1 Jan 2018	see (v) below
AASB 16	23 Feb 2016		(beginning) 1 Jan 2019	not compiled*
AASB 2016-1	24 Feb 2016		(beginning) 1 Jan 2017	see (w) below

*         The amendments made by this Standard are not included in this compilation, which presents the principal Standard as applicable to annual reporting periods beginning on or after 1 January 2018.  However, for such periods, this principal Standard has been superseded by AASB 112 (August 2015), but can be applied earlier.

(a)       Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 that end before 31 December 2005.

(b)       Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2007.

(c)       Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009, provided that AASB 101 Presentation of Financial Statements (September 2007) is also applied to such periods.

(d)       Entities may elect to apply this Standard to annual reporting periods beginning on or after 30 June 2007 but before 1 July 2009, provided that AASB 3 Business Combinations (March 2008) and AASB 127 Consolidated and Separate Financial Statements (March 2008) are also applied to such periods.

(e)       Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2009, provided that AASB 101 Presentation of Financial Statements (September 2007) is also applied to such periods, and to annual reporting periods beginning on or after 1 January 2009 that end before 30 June 2009.

(f)       Entities may elect to apply this Standard to annual reporting periods beginning before 1 July 2009 that end on or after 1 July 2008.

(g)       Entities may elect to apply this Erratum to annual reporting periods beginning on or after 1 January 2005, provided that AASB 2009-6 Amendments to Australian Accounting Standards is also applied to such periods.

(h)       AASB 2009-11 has been amended by AASB 2010-10 (made 31 December 2010) and AASB 2012-6 (made 10 September 2012).  Part E of AASB 2014-1 (made 4 June 2014) updated the application date of the amendments in this Standard to 1 January 2018.

Entities may elect to apply the amendments in this Standard to annual reporting periods ending on or after 31 December 2009 that begin before 1 January 2018, provided that AASB 9 (2009) Financial Instruments is also applied to such periods.

(i)        Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2011.

(j)        Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 July 2009 but before 1 July 2013, provided that AASB 1053 Application of Tiers of Australian Accounting Standards is also applied to such periods.

(k)       Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2011.

(l)        AASB 2010-7 has been amended by AASB 2010-10 (made 31 December 2010) and AASB 2012-6 (made 10 September 2012).  Part E of AASB 2014-1 (made 4 June 2014) updated the application date of the amendments in this Standard to 1 January 2018.

Entities may elect to apply the amendments in this Standard as set out in paragraph 6 of AASB 2010-7.

(m)      Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2012.

(n)       AASB 2011-7 has been amended by AASB 2012-6 (made 10 September 2012) and AASB 2012-10 (made 18 December 2012).

For-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013.  The Standard applies for not-for-profit entities to annual reporting periods beginning on or after 1 January 2014.  Not-for-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014.  If an entity elects to apply this Standard to such annual reporting periods, it shall apply AASB 10 Consolidated Financial Statements and associated Standards to such periods.

(o)       Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 July 2012.

(p)       Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2013.

(q)       For-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2014.  Not-for-profit entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2013 but before 1 January 2014.  If an entity elects to apply this Standard to such annual reporting periods, it shall also apply AASB 10 Consolidated Financial Statements and associated Standards to such periods.

(r)       Early application of Part B of this Standard is not permitted.

(s)       Entities may elect to apply Part E of this Standard to annual reporting periods ending on or after 31 December 2009 that begin before 1 January 2018, provided that AASB 9 Financial Instruments (2009) or AASB 9 Financial Instruments (2010) is also applied to such periods.

(t)        Entities may elect to apply this Standard to annual reporting periods beginning on or after 1 January 2005 but before 1 January 2018, provided that AASB 15 Revenue from Contracts with Customers is also applied to such periods.  AASB 2015-8 updated the application date of the amendments in this Standard (and of AASB 15) to 1 January 2018.

(u)       Entities may elect to apply this Standard to annual reporting periods beginning after 24 July 2014 but before 1 January 2018, provided that AASB 9 Financial Instruments (2014) is also applied to such periods.

(v)       The amendments made by AASB 2014-5 are no longer required to apply to annual reporting periods beginning on or after 1 January 2017 but before 1 January 2018, as a consequence of AASB 2015-8 deferring the effective date of AASB 15 (and its consequential amendments in AASB 2014-5) from 1 January 2017 to 1 January 2018.

(w)      Entities may elect to apply this Standard to annual periods beginning before 1 January 2017.

Table of Amendments to Standard

Paragraph affected	How affected	By … [paragraph/page]
Objective	amended amended	AASB 2007-8 [45] AASB 2008-3 [31]
Aus1.4	deleted	AASB 2013-9B [37, 38]
Aus1.5	amended	AASB 2010-8 [6]
Aus1.8-Aus1.10 (and preceding heading)	added	AASB 2010-2 [30]
2	amended	AASB 2011-7 [31]
10	amended	AASB 2010-8 [7]
15	amended amended	AASB 2005-11 [9] AASB 2011-7 [31]
18	amended amended	AASB 2008-3 [32] AASB 2011-7 [31]
19	amended	AASB 2008-3 [32]
20	amended amended	AASB 2009-11 [24] AASB 2010-7 [7, 25]
21-21B	amended	AASB 2008-3 [32]
22	amended amended amended	AASB 2007-4 [43] AASB 2007-8 [46] AASB 2008-3 [32]
23	amended	AASB 2007-8 [47]
24	amended	AASB 2011-7 [31]
26	amended	AASB 2008-3 [32]
26 (example)	added	AASB 2016-1 [page 6]
27A	added	AASB 2016-1 [page 6]
29	amended	AASB 2016-1 [page 7]
29A	added	AASB 2016-1 [page 7]
32A (and preceding heading)	added	AASB 2008-3 [33]
33	amended	AASB 2007-4 [39]
37 (and preceding heading)	amended	AASB 2007-4 [43]
38 (and preceding heading)	amended	AASB 2011-7 [31]
39	amended	AASB 2011-7 [32]
43	amended	AASB 2011-7 [33]
44-45	amended	AASB 2011-7 [31]
51A (examples)	amended	AASB 2010-8 [7]
51B-51E	added	AASB 2010-8 [7]
52	amended amended renumbered as 51A	AASB 2007-8 [48] AASB 2009-6 [40] AASB 2010-8 [7]
52B	amended	AASB 2009-12 [13]
58 (and preceding heading)	amended	AASB 2007-8 [49]
58	amended amended amended	AASB 2013-5 [41] AASB 2012-10 [48] AASB 2013-5 [41]
59	amended amended amended	AASB 2007-4 [43] AASB 2007-8 [46] AASB 2014-5 [28]
60	amended amended	AASB 2007-4 [43] AASB 2007-8 [46, 50]
61 (preceding heading)	amended	AASB 2007-8 [51]
61	deleted	AASB 2007-8 [52]
61A	added	AASB 2007-8 [52]
62	amended amended amended	AASB 2007-4 [43] AASB 2007-8 [53] AASB 2009-6 [41]
62A	added amended	AASB 2007-8 [53] AASB 2009-6 [42]
63	amended	AASB 2007-8 [53]
64	amended	AASB 2009-6 [43]
65	amended	AASB 2007-8 [46, 54]
66-67	amended	AASB 2008-3 [34]
68	amended	AASB 2008-3 [34, 35]
68B	amended	AASB 2007-4 [43]
68C	amended amended	AASB 2007-8 [55] AASB 2013-5 [41]
71	amended	AASB 2012-10 [49]
72	amended amended	AASB 2007-4 [43] AASB 2012-10 [49]
74-75	amended	AASB 2012-10 [49]
77	amended amended	AASB 2007-8 [56] AASB 2011-9 [18]
77A	added deleted	AASB 2007-8 [56] AASB 2011-9 [18]
78	amended amended	AASB 2007-4 [43] AASB 2007-10 [57]
Aus80.1	deleted	AASB 2007-4 [40]
81	amended amended amended amended amended	AASB 2007-4 [41] AASB 2007-8 [46, 57] AASB 2007-10 [58] AASB 2008-3 [36] AASB 2011-7 [31]
RDR81.1	added	AASB 2010-2 [30]
87	amended amended	AASB 2007-10 [57] AASB 2011-7 [31]
87C	amended	AASB 2011-7 [31]
88	amended amended	AASB 2007-8 [6] AASB 2009-12 [13]
89 (preceding heading)	amended	Erratum, Oct 2009 [2]
92	note added	AASB 2007-8 [58]
93-94	added	AASB 2008-3 [37]
95	note added	AASB 2008-3 [37]
96	added deleted	AASB 2009-11 [24] AASB 2010-7 [7, 25]
97	added deleted	AASB 2010-7 [25] AASB 2014-1E [86]
98	added	AASB 2010-8 [7]
98A	added	AASB 2011-7 [34]
98B	added	AASB 2011-9 [18]
98C	added	AASB 2013-5 [42]
98D	added deleted	AASB 2014-1E [86] AASB 2014-7 [39]
98E	added	AASB 2014-5 [28]
98F	added	AASB 2014-7 [39]
98H	added	AASB 2016-1 [page 7]

Table of Amendments to Illustrative Examples

Paragraph affected	How affected	By … [paragraph/page]
Examples of Temporary Differences
A, title, rubric, heading	amended	AASB 2010-5 [26-27]
A, 1 (preceding heading)	amended	AASB 2009-6 [44]
A, 11	amended	AASB 2009-6 [44]
A, 12	amended	AASB 2008-3 [38]
A, 18	amended	AASB 2009-6 [44]
B, 1 (preceding heading)	amended	AASB 2009-6 [44]
B, 5	amended	AASB 2013-9B [51]
B, 9	amended	AASB 2008-3 [39]
Illustrative Computations and Presentation
Heading	deleted	AASB 2010-5 [28]
Rubric	amended amended	AASB 2009-6 [45] AASB 2010-5 [28]
Example 1	amended	AASB 2009-6 [45]
Example 2	amended amended	AASB 2007-4 [42] AASB 2009-6 [45]
Example 3	amended amended	AASB 2009-6 [45] AASB 2008-3 [40]
Example 4	amended	AASB 2009-6 [45]
Example 6	added amended	AASB 2008-3 [41] AASB 2009-7 [12]
Example 7	added	AASB 2016-1 [page 8]

General Terminology Amendments

The following amendments are not shown in the above Tables of Amendments:

References to ‘financial report(s)’ were amended to ‘financial statements’ by AASB 2007-8 and AASB 2007-10, except in relation to specific Corporations Act references.

References to ‘income statement’ and ‘balance sheet’ were amended to ‘statement of comprehensive income’ and ‘statement of financial position’ respectively by AASB 2007-8.

References to ‘reporting date’ and ‘each reporting date’ were amended to ‘end of the reporting period’ and ‘the end of each reporting period’ respectively by AASB 2007-8.

COMPARISON WITH IAS 12

AASB 112 and IAS 12

AASB 112 Income Taxes as amended incorporates IAS 12 Income Taxes as issued and amended by the International Accounting Standards Board (IASB).  Paragraphs that have been added to this Standard (and do not appear in the text of IAS 12) are identified with the prefix “Aus” or “RDR”, followed by the number of the relevant IASB paragraph and decimal numbering.  Paragraphs that apply only to not-for-profit entities begin by identifying their limited applicability.

Compliance with IAS 12

Entities that comply with AASB 112 as amended will simultaneously be in compliance with IAS 12 as amended, with the exception of entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements.

ACCOUNTING STANDARD AASB 112

The Australian Accounting Standards Board made Accounting Standard AASB 112 Income Taxes under section 334 of the Corporations Act 2001 on 15 July 2004.

This compiled version of AASB 112 applies to annual reporting periods beginning on or after 1 January 2018.  However, for such periods, this principal Standard has been superseded by AASB 112 (August 2015), but can be applied earlier.  It incorporates relevant amendments contained in other AASB Standards made by the AASB and other decisions of the AASB up to and including 24 February 2016 (see Compilation Details).

ACCOUNTING STANDARD AASB 112

INCOME TAXES

Objective

The objective of this Standard is to prescribe the accounting treatment for income taxes.  The principal issue in accounting for income taxes is how to account for the current and future tax consequences of:

(a)      the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial position; and

(b)      transactions and other events of the current period that are recognised in an entity’s financial statements.

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of that asset or liability.  If it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, this Standard requires an entity to recognise a deferred tax liability (deferred tax asset), with certain limited exceptions.

This Standard requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves.  Thus, for transactions and other events recognised in profit or loss, any related tax effects are also recognised in profit or loss.  For transactions and other events recognised outside profit or loss (either in other comprehensive income or directly in equity), any related tax effects are also recognised outside profit or loss (either in other comprehensive income or directly in equity, respectively).  Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill arising in that business combination or the amount of the bargain purchase gain recognised.

This Standard also deals with the recognition of deferred tax assets arising from unused tax losses or unused tax credits, the presentation of income taxes in the financial statements and the disclosure of information relating to income taxes.

Application

Aus1.1          This Standard applies to:

(a) each entity that is required to prepare financial reports in accordance with Part 2M.3 of the Corporations Act and that is a reporting entity;

(b)      general purpose financial statements of each other reporting entity; and

(c)       financial statements that are, or are held out to be, general purpose financial statements.

Aus1.2          This Standard applies to annual reporting periods beginning on or after 1 January 2005.
[Note:  For application dates of paragraphs changed or added by an amending Standard, see Compilation Details.]

Aus1.3          This Standard shall not be applied to annual reporting periods beginning before 1 January 2005.

Aus1.4          [Deleted by the AASB]

Aus1.5          When applicable, this Standard supersedes:

(a)      AASB 1020 Accounting for Income Tax (Tax-effect Accounting) as notified in the Commonwealth of Australia Gazette No S 338, 30 October 1989;

(b)      AAS 3 Accounting for Income Tax (Tax-effect Accounting) as issued in November 1989;

(c)       AASB 1020 Income Taxes as notified in the Commonwealth of Australia Gazette No S 595, 9 December 1999, and as amended by AASB 1020B Amendments to Accounting Standard AASB 1020 and Australian Accounting Standard AAS 3, which was notified in the Commonwealth of Australia Gazette No S 436, 19 November 2002;

(d)      AAS 3 Income Taxes as issued in December 1999 and as amended by AASB 1020B Amendments to Accounting Standard AASB 1020 and Australian Accounting Standard AAS 3, which was notified in the Commonwealth of Australia Gazette No S 436, 19 November 2002; and

(e)       Interpretation 121 Income Taxes – Recovery of Revalued Non-Depreciable Assets.

Aus1.6          Until superseded by this Standard, the following Standards remain applicable:

(a)      AASB 1020 and AAS 3 (issued in 1989); or

(b)      AASB 1020 and AAS 3 (issued in 1999, and amended in 2002).

Aus1.7          Notice of this Standard was published in the Commonwealth of Australia Gazette No S 294, 22 July 2004.

Reduced Disclosure Requirements

Aus1.8          The following do not apply to entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements:

(a)      paragraphs 81(ab), 81(f), 81(i)-(k), 82 and 87-87C; and

(b)      the second sentence in paragraph 82A.

Entities applying Australian Accounting Standards – Reduced Disclosure Requirements may elect to comply with some or all of these excluded requirements.

Aus1.9          The requirements that do not apply to entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements are identified in this Standard by shading of the relevant text.

Aus1.10        The RDR paragraph in this Standard applies only to entities preparing general purpose financial statements under Australian Accounting Standards – Reduced Disclosure Requirements.

Scope

1         This Standard shall be applied in accounting for income taxes.

2         For the purposes of this Standard, income taxes include all domestic and foreign taxes which are based on taxable profits.  Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity.

Aus2.1          For public sector entities and for the purposes of this Standard, income taxes also include forms of income tax that may be payable by a public sector entity under their own enabling legislation or other authority.  These forms of income tax are often referred to as “income tax equivalents”. 

3         [Deleted by the IASB]

4         This Standard does not deal with the methods of accounting for government grants (see AASB 120 Accounting for Government Grants and Disclosure of Government Assistance or, for not-for-profit entities, AASB 1004 Contributions) or investment tax credits.  However, this Standard does deal with the accounting for temporary differences that may arise from such grants or investment tax credits.

Definitions

5         The following terms are used in this Standard with the meanings specified.

Accounting profit is profit or loss for a period before deducting tax expense.

Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. 

Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:

(a)      deductible temporary differences;

(b)      the carryforward of unused tax losses; and

(c)       the carryforward of unused tax credits. 

Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. 

Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable). 

The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax. 

Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.  Temporary differences may be either:

(a)      deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or 

(b)      taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. 

6         Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).

Tax Base

7         The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset.  If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.

Examples

1         A machine cost 100.  For tax purposes, depreciation of 30 has already been deducted in the current and prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal.  Revenue generated by using the machine is taxable, any gain on disposal of the machine will be taxable and any loss on disposal will be deductible for tax purposes.  The tax base of the machine is 70.

2         Interest receivable has a carrying amount of 100.  The related interest revenue will be taxed on a cash basis.  The tax base of the interest receivable is nil.

3         Trade receivables have a carrying amount of 100.  The related revenue has already been included in taxable profit (tax loss).  The tax base of the trade receivables is 100.

4         Dividends receivable from a subsidiary have a carrying amount of 100.  The dividends are not taxable.  In substance, the entire carrying amount of the asset is deductible against the economic benefits.  Consequently, the tax base of the dividends receivable is 100.[1]

[1]      Under this analysis, there is no taxable temporary difference.  An alternative analysis is that dividends receivable have a tax base of nil and that a tax rate of nil is applied to the resulting temporary difference of 100.  Under both analyses, there is no deferred tax liability.

5         A loan receivable has a carrying amount of 100.  The repayment of the loan will have no tax consequences.  The tax base of the loan is 100.

8         The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods.  In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.

Examples

1         Current liabilities include accrued expenses with a carrying amount of 100.  The related expense will be deducted for tax purposes on a cash basis.  The tax base of the accrued expenses is nil.

2         Current liabilities include interest revenue received in advance, with a carrying amount of 100.  The related interest revenue was taxed on a cash basis.  The tax base of the interest received in advance is nil.

3         Current liabilities include accrued expenses with a carrying amount of 100.  The related expense has already been deducted for tax purposes.  The tax base of the accrued expenses is 100.

4         Current liabilities include accrued fines and penalties with a carrying amount of 100.  Fines and penalties are not deductible for tax purposes.  The tax base of the accrued fines and penalties is 100.[2]

[2]      Under this analysis, there is no deductible temporary difference.  An alternative analysis is that fines and penalties payable have a tax base of nil and that a tax rate of nil is applied to the resulting temporary difference of 100.  Under both analyses, there is no deferred tax asset.

5         A loan payable has a carrying amount of 100.  The repayment of the loan will have no tax consequences.  The tax base of the loan is 100.

9         Some items have a tax base but are not recognised as assets and liabilities in the statement of financial position.  For example, research costs are recognised as an expense in determining accounting profit in the period in which they are incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later period.  The difference between the tax base of the research costs, being the amount the taxation authorities will permit as a deduction in future periods, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset.

10       Where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle upon which this Standard is based: that an entity shall, with certain limited exceptions, recognise a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences.  Example C following paragraph 51A illustrates circumstances when it may be helpful to consider this fundamental principle, for example, when the tax base of an asset or liability depends on the expected manner of recovery or settlement.

11       In consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base.  The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed.  In other jurisdictions, the tax base is determined by reference to the tax returns of each entity in the group.

Recognition of Current Tax Liabilities and Current Tax Assets

12       Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability.  If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognised as an asset.

13       The benefit relating to a tax loss that can be carried back to recover current tax of a previous period shall be recognised as an asset. 

14       When a tax loss is used to recover current tax of a previous period, an entity recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be reliably measured.

Recognition of Deferred Tax Liabilities and Deferred Tax Assets

Taxable Temporary Differences

15       A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from:

(a)      the initial recognition of goodwill; or

(b)      the initial recognition of an asset or liability in a transaction which:

(i)       is not a business combination; and

(ii)      at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, a deferred tax liability shall be recognised in accordance with paragraph 39.

16       It is inherent in the recognition of an asset that its carrying amount will be recovered in the form of economic benefits that flow to the entity in future periods.  When the carrying amount of the asset exceeds its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a deduction for tax purposes.  This difference is a taxable temporary difference and the obligation to pay the resulting income taxes in future periods is a deferred tax liability.  As the entity recovers the carrying amount of the asset, the taxable temporary difference will reverse and the entity will have taxable profit.  This makes it probable that economic benefits will flow from the entity in the form of tax payments.  Therefore, this Standard requires the recognition of all deferred tax liabilities, except in certain circumstances described in paragraphs 15 and 39.

Example

An asset which cost 150 has a carrying amount of 100.  Cumulative depreciation for tax purposes is 90 and the tax rate is 25%.

The tax base of the asset is 60 (cost of 150 less cumulative tax depreciation of 90).  To recover the carrying amount of 100, the entity must earn taxable income of 100, but will only be able to deduct tax depreciation of 60. 

Consequently, the entity will pay income taxes of 10 (40 at 25%) when it recovers the carrying amount of the asset.  The difference between the carrying amount of 100 and the tax base of 60 is a taxable temporary difference of 40.  Therefore, the entity recognises a deferred tax liability of 10 (40 at 25%) representing the income taxes that it will pay when it recovers the carrying amount of the asset.

17       Some temporary differences arise when income or expense is included in accounting profit in one period but is included in taxable profit in a different period.  Such temporary differences are often described as timing differences.  The following are examples of temporary differences of this kind which are taxable temporary differences and which therefore result in deferred tax liabilities.

(a)      Interest revenue is included in accounting profit on a time proportion basis but may, in some jurisdictions, be included in taxable profit when cash is collected.  The tax base of any receivable recognised in the statement of financial position with respect to such revenues is nil because the revenues do not affect taxable profit until cash is collected.

(b)      Depreciation used in determining taxable profit (tax loss) may differ from that used in determining accounting profit.  The temporary difference is the difference between the carrying amount of the asset and its tax base which is the original cost of the asset less all deductions in respect of that asset permitted by the taxation authorities in determining taxable profit of the current and prior periods.  A taxable temporary difference arises, and results in a deferred tax liability, when tax depreciation is accelerated (if tax depreciation is less rapid than accounting depreciation, a deductible temporary difference arises, and results in a deferred tax asset).

(c)       Development costs may be capitalised and amortised over future periods in determining accounting profit but deducted in determining taxable profit in the period in which they are incurred.  Such development costs have a tax base of nil as they have already been deducted from taxable profit.  The temporary difference is the difference between the carrying amount of the development costs and their tax base of nil.

18       Temporary differences also arise when:

(a)      the identifiable assets acquired and liabilities assumed in a business combination are recognised at their fair values in accordance with AASB 3 Business Combinations, but no equivalent adjustment is made for tax purposes (see paragraph 19);

(b)      assets are revalued and no equivalent adjustment is made for tax purposes (see paragraph 20);

(c)       goodwill arises in a business combination (see paragraph 21);

(d)      the tax base of an asset or liability on initial recognition differs from its initial carrying amount, for example, when an entity benefits from non-taxable government grants related to assets (see paragraphs 22, 33 and Aus33.1); or

(e)       the carrying amount of investments in subsidiaries, branches and associates or interests in joint arrangements becomes different from the tax base of the investment or interest (see paragraphs 38-45).

Business Combinations

19       With limited exceptions, the identifiable assets acquired and liabilities assumed in a business combination are recognised at their fair values at the acquisition date.  Temporary differences arise when the tax bases of the identifiable assets acquired and liabilities assumed are not affected by the business combination or are affected differently.  For example, when the carrying amount of an asset is increased to fair value but the tax base of the asset remains at cost to the previous owner, a taxable temporary difference arises which results in a deferred tax liability.  The resulting deferred tax liability affects goodwill (see paragraph 66).

Assets Carried at Fair Value

20       Australian Accounting Standards permit or require certain assets to be carried at fair value or to be revalued (see, for example, AASB 116 Property, Plant and Equipment, AASB 138 Intangible Assets, AASB 140 Investment Property and AASB 9 Financial Instruments).  In some jurisdictions, the revaluation or other restatement of an asset to fair value affects taxable profit (tax loss) for the current period.  As a result, the tax base of the asset is adjusted and no temporary difference arises.  In other jurisdictions, the revaluation or restatement of an asset does not affect taxable profit in the period of the revaluation or restatement and, consequently, the tax base of the asset is not adjusted.  Nevertheless, the future recovery of the carrying amount will result in a taxable flow of economic benefits to the entity and the amount that will be deductible for tax purposes will differ from the amount of those economic benefits.  The difference between the carrying amount of a revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset.  This is true even if:

(a)      the entity does not intend to dispose of the asset.  In such cases, the revalued carrying amount of the asset will be recovered through use and this will generate taxable income which exceeds the depreciation that will be allowable for tax purposes in future periods; or

(b)      tax on capital gains is deferred if the proceeds of the disposal of the asset are invested in similar assets.  In such cases, the tax will ultimately become payable on sale or use of the similar assets.

Goodwill

21       Goodwill arising in a business combination is measured as the excess of (a) over (b) below:

(a)      the aggregate of:

(i)        the consideration transferred measured in accordance with AASB 3, which generally requires acquisition-date fair value;

(ii)       the amount of any non-controlling interest in the acquiree recognised in accordance with AASB 3; and

(iii)      in a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree.

(b)      the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed measured in accordance with AASB 3.

Many taxation authorities do not allow reductions in the carrying amount of goodwill as a deductible expense in determining taxable profit.  Moreover, in such jurisdictions, the cost of goodwill is often not deductible when a subsidiary disposes of its underlying business.  In such jurisdictions, goodwill has a tax base of nil.  Any difference between the carrying amount of goodwill and its tax base of nil is a taxable temporary difference.  However, this Standard does not permit the recognition of the resulting deferred tax liability because goodwill is measured as a residual and the recognition of the deferred tax liability would increase the carrying amount of goodwill.

21A    Subsequent reductions in a deferred tax liability that is unrecognised because it arises from the initial recognition of goodwill are also regarded as arising from the initial recognition of goodwill and are therefore not recognised under paragraph 15(a).  For example, if in a business combination an entity recognises goodwill of CU100 that has a tax base of nil, paragraph 15(a) prohibits the entity from recognising the resulting deferred tax liability.  If the entity subsequently recognises an impairment loss of CU20 for that goodwill, the amount of the taxable temporary difference relating to the goodwill is reduced from CU100 to CU80, with a resulting decrease in the value of the unrecognised deferred tax liability.  That decrease in the value of the unrecognised deferred tax liability is also regarded as relating to the initial recognition of the goodwill and is therefore prohibited from being recognised under paragraph 15(a).

21B    Deferred tax liabilities for taxable temporary differences relating to goodwill are, however, recognised to the extent they do not arise from the initial recognition of goodwill.  For example, if in a business combination an entity recognises goodwill of CU100 that is deductible for tax purposes at a rate of 20 per cent per year starting in the year of acquisition, the tax base of the goodwill is CU100 on initial recognition and CU80 at the end of the year of acquisition.  If the carrying amount of goodwill at the end of the year of acquisition remains unchanged at CU100, a taxable temporary difference of CU20 arises at the end of that year.  Because that taxable temporary difference does not relate to the initial recognition of the goodwill, the resulting deferred tax liability is recognised.

Initial Recognition of an Asset or Liability

22       A temporary difference may arise on initial recognition of an asset or liability, for example if part or all of the cost of an asset will not be deductible for tax purposes.  The method of accounting for such a temporary difference depends on the nature of the transaction that led to the initial recognition of the asset or liability:

(a)      in a business combination, an entity recognises any deferred tax liability or asset and this affects the amount of goodwill or bargain purchase gain it recognises (see paragraph 19).

(b)      If the transaction affects either accounting profit or taxable profit, an entity recognises any deferred tax liability or asset and recognises the resulting deferred tax expense or income in profit or loss (see paragraph 59).

(c)       If the transaction is not a business combination, and affects neither accounting profit nor taxable profit, an entity would, in the absence of the exemption provided by paragraphs 15 and 24, recognise the resulting deferred tax liability or asset and adjust the carrying amount of the asset or liability by the same amount.  Such adjustments would make the financial statements less transparent.  Therefore, this Standard does not permit an entity to recognise the resulting deferred tax liability or asset, either on initial recognition or subsequently (see example below).  Furthermore, an entity does not recognise subsequent changes in the unrecognised deferred tax liability or asset as the asset is depreciated.

Example Illustrating Paragraph 22(c)

An entity intends to use an asset which cost 1,000 throughout its useful life of five years and then dispose of it for a residual value of nil.  The tax rate is 40%.  Depreciation of the asset is not deductible for tax purposes.  On disposal, any capital gain would not be taxable and any capital loss would not be deductible.

As it recovers the carrying amount of the asset, the entity will earn taxable income of 1,000 and pay tax of 400.  The entity does not recognise the resulting deferred tax liability of 400 because it results from the initial recognition of the asset.

In the following year, the carrying amount of the asset is 800.  In earning taxable income of 800, the entity will pay tax of 320.  The entity does not recognise the deferred tax liability of 320 because it results from the initial recognition of the asset.

23       In accordance with AASB 132 Financial Instruments: Presentation the issuer of a compound financial instrument (for example, a convertible bond) classifies the instrument’s liability component as a liability and the equity component as equity.  In some jurisdictions, the tax base of the liability component on initial recognition is equal to the initial carrying amount of the sum of the liability and equity components.  The resulting taxable temporary difference arises from the initial recognition of the equity component separately from the liability component.  Therefore, the exception set out in paragraph 15(b) does not apply.  Consequently, an entity recognises the resulting deferred tax liability.  In accordance with paragraph 61A, the deferred tax is charged directly to the carrying amount of the equity component.  In accordance with paragraph 58, subsequent changes in the deferred tax liability are recognised in profit or loss as deferred tax expense (income).

Deductible Temporary Differences

24       A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:

(a)      is not a business combination; and

(b)      at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

However, for deductible temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, a deferred tax asset shall be recognised in accordance with paragraph 44. 

25       It is inherent in the recognition of a liability that the carrying amount will be settled in future periods through an outflow from the entity of resources embodying economic benefits.  When resources flow from the entity, part or all of their amounts may be deductible in determining taxable profit of a period later than the period in which the liability is recognised.  In such cases, a temporary difference exists between the carrying amount of the liability and its tax base.  Accordingly, a deferred tax asset arises in respect of the income taxes that will be recoverable in the future periods when that part of the liability is allowed as a deduction in determining taxable profit.  Similarly, if the carrying amount of an asset is less than its tax base, the difference gives rise to a deferred tax asset in respect of the income taxes that will be recoverable in future periods.

Example

An entity recognises a liability of 100 for accrued product warranty costs.  For tax purposes, the product warranty costs will not be deductible until the entity pays claims.  The tax rate is 25%.

The tax base of the liability is nil (carrying amount of 100, less the amount that will be deductible for tax purposes in respect of that liability in future periods).  In settling the liability for its carrying amount, the entity will reduce its future taxable profit by an amount of 100 and, consequently, reduce its future tax payments by 25 (100 at 25%).  The difference between the carrying amount of 100 and the tax base of nil is a deductible temporary difference of 100.  Therefore, the entity recognises a deferred tax asset of 25 (100 at 25%), provided that it is probable that the entity will earn sufficient taxable profit in future periods to benefit from a reduction in tax payments.

26       The following are examples of deductible temporary differences that result in deferred tax assets:

(a)      retirement benefit costs may be deducted in determining accounting profit as service is provided by the employee, but deducted in determining taxable profit either when contributions are paid to a fund by the entity or when retirement benefits are paid by the entity.  A temporary difference exists between the carrying amount of the liability and its tax base; the tax base of the liability is usually nil.  Such a deductible temporary difference results in a deferred tax asset as economic benefits will flow to the entity in the form of a deduction from taxable profits when contributions or retirement benefits are paid;

(b)      research costs are recognised as an expense in determining accounting profit in the period in which they are incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later period.  The difference between the tax base of the research costs, being the amount the taxation authorities will permit as a deduction in future periods, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset;

(c)       with limited exceptions, an entity recognises the identifiable assets acquired and liabilities assumed in a business combination at their fair values at the acquisition date.  When a liability assumed is recognised at the acquisition date but the related costs are not deducted in determining taxable profits until a later period, a deductible temporary difference arises which results in a deferred tax asset.  A deferred tax asset also arises when the fair value of an identifiable asset acquired is less than its tax base.  In both cases, the resulting deferred tax asset affects goodwill (see paragraph 66); and

(d)      certain assets may be carried at fair value, or may be revalued, without an equivalent adjustment being made for tax purposes (see paragraph 20).  A deductible temporary difference arises if the tax base of the asset exceeds its carrying amount.

Example illustrating paragraph 26(d)

Identification of a deductible temporary difference at the end of Year 2:

Entity A purchases for CU1,000, at the beginning of Year 1, a debt instrument with a nominal value of CU1,000 payable on maturity in 5 years with an interest rate of 2% payable at the end of each year. The effective interest rate is 2%. The debt instrument is measured at fair value.

At the end of Year 2, the fair value of the debt instrument has decreased to CU918 as a result of an increase in market interest rates to 5%. It is probable that Entity A will collect all the contractual cash flows if it continues to hold the debt instrument.

Any gains (losses) on the debt instrument are taxable (deductible) only when realised. The gains (losses) arising on the sale or maturity of the debt instrument are calculated for tax purposes as the difference between the amount collected and the original cost of the debt instrument.

Accordingly, the tax base of the debt instrument is its original cost.

The difference between the carrying amount of the debt instrument in Entity A’s statement of financial position of CU918 and its tax base of CU1,000 gives rise to a deductible temporary difference of CU82 at the end of Year 2 (see paragraphs 20 and 26(d)), irrespective of whether Entity A expects to recover the carrying amount of the debt instrument by sale or by use, ie by holding it and collecting contractual cash flows, or a combination of both.

This is because deductible temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods, when the carrying amount of the asset or liability is recovered or settled (see paragraph 5). Entity A obtains a deduction equivalent to the tax base of the asset of CU1,000 in determining taxable profit (tax loss) either on sale or on maturity.

27       The reversal of deductible temporary differences results in deductions in determining taxable profits of future periods.  However, economic benefits in the form of reductions in tax payments will flow to the entity only if it earns sufficient taxable profits against which the deductions can be offset.  Therefore, an entity recognises deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilised. 

27A    When an entity assesses whether taxable profits will be available against which it can utilise a deductible temporary difference, it considers whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference.  If tax law imposes no such restrictions, an entity assesses a deductible temporary difference in combination with all of its other deductible temporary differences.  However, if tax law restricts the utilisation of losses to deduction against income of a specific type, a deductible temporary difference is assessed in combination only with other deductible temporary differences of the appropriate type.

28       It is probable that taxable profit will be available 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:

(a)      in the same period as the expected reversal of the deductible temporary difference; or

(b)      in periods into which a tax loss arising from the deferred tax asset can be carried back or forward. 

In such circumstances, the deferred tax asset is recognised in the period in which the deductible temporary differences arise.

29       When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that:

(a)      it is probable that the entity will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried back or forward).  In evaluating whether it will have sufficient taxable profit in future periods, an entity:

(i)        compares the deductible temporary differences with future taxable profit that excludes tax deductions resulting from the reversal of those deductible temporary differences.  This comparison shows the extent to which the future taxable profit is sufficient for the entity to deduct the amounts resulting from the reversal of those deductible temporary differences; and

(ii)       ignores taxable amounts arising from deductible temporary differences that are expected to originate in future periods, because the deferred tax asset arising from these deductible temporary differences will itself require future taxable profit in order to be utilised; or

(b)      tax planning opportunities are available to the entity that will create taxable profit in appropriate periods.

29A    The estimate of probable future taxable profit may include the recovery of some of an entity’s assets for more than their carrying amount if there is sufficient evidence that it is probable that the entity will achieve this.  For example, when an asset is measured at fair value, the entity shall consider whether there is sufficient evidence to conclude that it is probable that the entity will recover the asset for more than its carrying amount.  This may be the case, for example, when an entity expects to hold a fixed-rate debt instrument and collect the contractual cash flows.

30       Tax planning opportunities are actions that the entity would take in order to create or increase taxable income in a particular period before the expiry of a tax loss or tax credit carryforward.  For example, in some jurisdictions, taxable profit may be created or increased by:

(a)      electing to have interest income taxed on either a received or receivable basis;

(b)      deferring the claim for certain deductions from taxable profit;

(c)       selling, and perhaps leasing back, assets that have appreciated but for which the tax base has not been adjusted to reflect such appreciation; and

(d)      selling an asset that generates non-taxable income (such as, in some jurisdictions, a government bond) in order to purchase another investment that generates taxable income. 

Where tax planning opportunities advance taxable profit from a later period to an earlier period, the utilisation of a tax loss or tax credit carryforward still depends on the existence of future taxable profit from sources other than future originating temporary differences.

31       When an entity has a history of recent losses, the entity considers the guidance in paragraphs 35 and 36.

32       [Deleted by the IASB]

Goodwill

32A    If the carrying amount of goodwill arising in a business combination is less than its tax base, the difference gives rise to a deferred tax asset.  The deferred tax asset arising from the initial recognition of goodwill shall be recognised as part of the accounting for a business combination to the extent that it is probable that taxable profit will be available against which the deductible temporary difference could be utilised.

Initial Recognition of an Asset or Liability

33       One case when a deferred tax asset arises on initial recognition of an asset is when a non‑taxable government grant related to an asset is deducted in arriving at the carrying amount of the asset but, for tax purposes, is not deducted from the asset’s depreciable amount (in other words its tax base); the carrying amount of the asset is less than its tax base and this gives rise to a deductible temporary difference.  Government grants may also be set up as deferred income in which case the difference between the deferred income and its tax base of nil is a deductible temporary difference.  Whichever method of presentation an entity adopts, the entity does not recognise the resulting deferred tax asset, for the reason given in paragraph 22.

Aus33.1        In respect of not-for-profit entities, a deferred tax asset will not arise on a non‑taxable government grant relating to an asset.  Under AASB 1004 Contributions, a not-for-profit entity accounts for the receipt of non‑taxable government grants as income rather than as deferred income when those grants are controlled by the entity.  As such, a temporary difference does not arise.

Unused Tax Losses and Unused Tax Credits

34       A deferred tax asset shall 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.

35       The criteria for recognising deferred tax assets arising from the carryforward of unused tax losses and tax credits are the same as the criteria for recognising deferred tax assets arising from deductible temporary differences.  However, the existence of unused tax losses is strong evidence that future taxable profit may not be available.  Therefore, when an entity has a history of recent losses, the entity recognises a deferred tax asset arising from unused tax losses or tax credits only to the extent that the entity has sufficient taxable temporary differences or there is convincing other 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 such circumstances, paragraph 82 requires disclosure of the amount of the deferred tax asset and the nature of the evidence supporting its recognition.

36       An entity considers the following criteria in assessing the probability that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised:

(a)      whether the entity has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits can be utilised before they expire;

(b)      whether it is probable that the entity will have taxable profits before the unused tax losses or unused tax credits expire;

(c)       whether the unused tax losses result from identifiable causes which are unlikely to recur; and

(d)      whether tax planning opportunities (see paragraph 30) are available to the entity that will create taxable profit in the period in which the unused tax losses or unused tax credits can be utilised.

To the extent that it is not probable that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised, the deferred tax asset is not recognised.

Reassessment of Unrecognised Deferred Tax Assets

37       At the end of each reporting period, an entity reassesses unrecognised deferred tax assets.  The entity recognises a previously unrecognised deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.  For example, an improvement in trading conditions may make it more probable that the entity will be able to generate sufficient taxable profit in the future for the deferred tax asset to meet the recognition criteria set out in paragraph 24 or 34.  Another example is when an entity reassesses deferred tax assets at the date of a business combination or subsequently (see paragraphs 67 and 68).

Investments in Subsidiaries, Branches and Associates and Interests in Joint Arrangements

38       Temporary differences arise when the carrying amount of investments in subsidiaries, branches and associates or interests in joint arrangements (namely the parent or investor’s share of the net assets of the subsidiary, branch, associate or investee, including the carrying amount of goodwill) becomes different from the tax base (which is often cost) of the investment or interest.  Such differences may arise in a number of different circumstances, for example:

(a)      the existence of undistributed profits of subsidiaries, branches, associates and joint arrangements;

(b)      changes in foreign exchange rates when a parent and its subsidiary are based in different countries; and

(c)       a reduction in the carrying amount of an investment in an associate to its recoverable amount. 

In consolidated financial statements, the temporary difference may be different from the temporary difference associated with that investment in the parent’s separate financial statements if the parent carries the investment in its separate financial statements at cost or revalued amount.

39       An entity shall recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied:

(a)      the parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and

(b)      it is probable that the temporary difference will not reverse in the foreseeable future.

40       As a parent controls the dividend policy of its subsidiary, it is able to control the timing of the reversal of temporary differences associated with that investment (including the temporary differences arising not only from undistributed profits but also from any foreign exchange translation differences).  Furthermore, it would often be impracticable to determine the amount of income taxes that would be payable when the temporary difference reverses.  Therefore, when the parent has determined that those profits will not be distributed in the foreseeable future, the parent does not recognise a deferred tax liability.  The same considerations apply to investments in branches. 

41       The non-monetary assets and liabilities of an entity are measured in its functional currency (see AASB 121 The Effects of Changes in Foreign Exchange Rates).  If the entity’s taxable profit or tax loss (and, hence, the tax base of its non-monetary assets and liabilities) is determined in a different currency, changes in the exchange rate give rise to temporary differences that result in a recognised deferred tax liability or (subject to paragraph 24) asset.  The resulting deferred tax is charged or credited to profit or loss (see paragraph 58).

42       An investor in an associate does not control that entity and is usually not in a position to determine its dividend policy.  Therefore, in the absence of an agreement requiring that the profits of the associate will not be distributed in the foreseeable future, an investor recognises a deferred tax liability arising from taxable temporary differences associated with its investment in the associate.  In some cases, an investor may not be able to determine the amount of tax that would be payable if it recovers the cost of its investment in an associate, but can determine that it will equal or exceed a minimum amount.  In such cases, the deferred tax liability is measured at this amount.

43       The arrangement between the parties to a joint arrangement usually deals with the distribution of the profits and identifies whether decisions on such matters require the consent of all the parties or a group of the parties.  When the joint venturer or joint operator can control the timing of the distribution of its share of the profits of the joint arrangement and it is probable that its share of the profits will not be distributed in the foreseeable future, a deferred tax liability is not recognised.

44       An entity shall recognise a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, to the extent that, and only to the extent that, it is probable that:

(a)      the temporary difference will reverse in the foreseeable future; and

(b)      taxable profit will be available against which the temporary difference can be utilised.

45       In deciding whether a deferred tax asset is recognised for deductible temporary differences associated with its investments in subsidiaries, branches and associates, and its interests in joint arrangements, an entity considers the guidance set out in paragraphs 28 to 31.

Measurement

46       Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

47       Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

48       Current and deferred tax assets and liabilities are usually measured using the tax rates (and tax laws) that have been enacted.  However, in some jurisdictions, announcements of tax rates (and tax laws) by the government have the substantive effect of actual enactment, which may follow the announcement by a period of several months.  In these circumstances, tax assets and liabilities are measured using the announced tax rate (and tax laws). 

49       When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods in which the temporary differences are expected to reverse.

50       [Deleted by the IASB]

51       The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

51A    In some jurisdictions, the manner in which an entity recovers (settles) the carrying amount of an asset (liability) may affect either or both of:

(a)      the tax rate applicable when the entity recovers (settles) the carrying amount of the asset (liability); and

(b)      the tax base of the asset (liability).

In such cases, an entity measures deferred tax liabilities and deferred tax assets using the tax rate and the tax base that are consistent with the expected manner of recovery or settlement.

Example A

An item of property plant and equipment has a carrying amount of 100 and a tax base of 60.  A tax rate of 20% would apply if the item were sold and a tax rate of 30% would apply to other income.

The entity recognises a deferred tax liability of 8 (40 at 20%) if it expects to sell the item without further use and a deferred tax liability of 12 (40 at 30%) if it expects to retain the item and recover its carrying amount through use.

Example B
An item of property plant and equipment with a cost of 100 and a carrying amount of 80 is revalued to 150.  No equivalent adjustment is made for tax purposes.  Cumulative depreciation for tax purposes is 30 and the tax rate is 30%.  If the item is sold for more than cost, the cumulative tax depreciation of 30 will be included in taxable income but sale proceeds in excess of cost will not be taxable.
The tax base of the item is 70 and there is a taxable temporary difference of 80.  If the entity expects to recover the carrying amount by using the item, it must generate taxable income of 150, but will only be able to deduct depreciation of 70.  On this basis, there is a deferred tax liability of 24 (80 at 30%).  If the entity expects to recover the carrying amount by selling the item immediately for proceeds of 150, the deferred tax liability is computed as follows:
Taxable Temporary Difference	Tax Rate	Deferred Tax Liability
Cumulative tax depreciation	30	30%	9
Proceeds in excess of cost	50	nil	-
Total	80	9
(Note: in accordance with paragraph 61A, the additional deferred tax that arises on the revaluation is recognised in other comprehensive income.)

Example C

The facts are as in example B, except that if the item is sold for more than cost, the cumulative tax depreciation will be included in taxable income (taxed at 30%) and the sale proceeds will be taxed at 40%, after deducting an inflation-adjusted cost of 110.

If the entity expects to recover the carrying amount by using the item, it must generate taxable income of 150, but will only be able to deduct depreciation of 70.  On this basis, the tax base is 70, there is a taxable temporary difference of 80 and there is a deferred tax liability of 24 (80 at 30%), as in example B.

If the entity expects to recover the carrying amount by selling the item immediately for proceeds of 150, the entity will be able to deduct the indexed cost of 110.  The net proceeds of 40 will be taxed at 40%.  In addition, the cumulative tax depreciation of 30 will be included in taxable income and taxed at 30%.  On this basis, the tax base is 80 (110 less 30), there is a taxable temporary difference of 70 and there is a deferred tax liability of 25 (40 at 40% plus 30 at 30%).  If the tax base is not immediately apparent in this example, it may be helpful to consider the fundamental principle set out in paragraph 10.

(Note: in accordance with paragraph 61A, the additional deferred tax that arises on the revaluation is recognised in other comprehensive income.)

51B    If a deferred tax liability or deferred tax asset arises from a non-depreciable asset measured using the revaluation model in AASB 116, the measurement of the deferred tax liability or deferred tax asset shall reflect the tax consequences of recovering the carrying amount of the non-depreciable asset through sale, regardless of the basis of measuring the carrying amount of that asset.  Accordingly, if the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset that differs from the tax rate applicable to the taxable amount derived from using an asset, the former rate is applied in measuring the deferred tax liability or asset related to a non-depreciable asset.

51C    If a deferred tax liability or asset arises from investment property that is measured using the fair value model in AASB 140, there is a rebuttable presumption that the carrying amount of the investment property will be recovered through sale.  Accordingly, unless the presumption is rebutted, the measurement of the deferred tax liability or deferred tax asset shall reflect the tax consequences of recovering the carrying amount of the investment property entirely through sale.  This presumption is rebutted if the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.  If the presumption is rebutted, the requirements of paragraphs 51 and 51A shall be followed.

Example illustrating paragraph 51C
An investment property has a cost of 100 and fair value of 150.  It is measured using the fair value model in AASB 140.  It comprises land with a cost of 40 and fair value of 60 and a building with a cost of 60 and fair value of 90.  The land has an unlimited useful life.
Cumulative depreciation of the building for tax purposes is 30.  Unrealised changes in the fair value of the investment property do not affect taxable profit.  If the investment property is sold for more than cost, the reversal of the cumulative tax depreciation of 30 will be included in taxable profit and taxed at an ordinary tax rate of 30%.  For sales proceeds in excess of cost, tax law specifies tax rates of 25% for assets held for less than two years and 20% for assets held for two years or more.
Because the investment property is measured using the fair value model in AASB 140, there is a rebuttable presumption that the entity will recover the carrying amount of the investment property entirely through sale.  If that presumption is not rebutted, the deferred tax reflects the tax consequences of recovering the carrying amount entirely through sale, even if the entity expects to earn rental income from the property before sale. The tax base of the land if it is sold is 40 and there is a taxable temporary difference of 20 (60 – 40).  The tax base of the building if it is sold is 30 (60 – 30) and there is a taxable temporary difference of 60 (90 – 30).  As a result, the total taxable temporary difference relating to the investment property is 80 (20 + 60). In accordance with paragraph 47, the tax rate is the rate expected to apply to the period when the investment property is realised.  Thus, the resulting deferred tax liability is computed as follows, if the entity expects to sell the property after holding it for more than two years:
Taxable Temporary Difference	Tax Rate	Deferred Tax Liability
Cumulative tax depreciation	30	30%	9
Proceeds in excess of cost	50	20%	10
Total	80	19
If the entity expects to sell the property after holding it for less than two years, the above computation would be amended to apply a tax rate of 25%, rather than 20%, to the proceeds in excess of cost. If, instead, the entity holds the building within a business model whose objective is to consume substantially all of the economic benefits embodied in the building over time, rather than through sale, this presumption would be rebutted for the building.  However, the land is not depreciable.  Therefore the presumption of recovery through sale would not be rebutted for the land.  It follows that the deferred tax liability would reflect the tax consequences of recovering the carrying amount of the building through use and the carrying amount of the land through sale.
The tax base of the building if it is used is 30 (60 – 30) and there is a taxable temporary difference of 60 (90 – 30), resulting in a deferred tax liability of 18 (60 at 30%). The tax base of the land if it is sold is 40 and there is a taxable temporary difference of 20 (60 – 40), resulting in a deferred tax liability of 4 (20 at 20%). As a result, if the presumption of recovery through sale is rebutted for the building, the deferred tax liability relating to the investment property is 22 (18 + 4).

51D    The rebuttable presumption in paragraph 51C also applies when a deferred tax liability or a deferred tax asset arises from measuring investment property in a business combination if the entity will use the fair value model when subsequently measuring that investment property.

51E    Paragraphs 51B-51D do not change the requirements to apply the principles in paragraphs 24-33 (deductible temporary differences) and paragraphs 34-36 (unused tax losses and unused tax credits) of this Standard when recognising and measuring deferred tax assets.

52A    In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity.  In some other jurisdictions, income taxes may be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to shareholders of the entity.  In these circumstances, current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits.

52B    In the circumstances described in paragraph 52A, the income tax consequences of dividends are recognised when a liability to pay the dividend is recognised.  The income tax consequences of dividends are more directly linked to past transactions or events than to distributions to owners.  Therefore, the income tax consequences of dividends are recognised in profit or loss for the period as required by paragraph 58 except to the extent that the income tax consequences of dividends arise from the circumstances described in paragraph 58(a) and (b).

The applicable tax rate is the aggregate of the national income tax rate of 30% (X5: 35%) and the local income tax rate of 5%.

(ii)       a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed

X5	X6
%	%
Applicable tax rate	40.0	35.0
Tax effect of expenses that are not deductible for tax purposes:
Charitable donations	2.3	1.4
Fines for environmental pollution	3.2	-
Effect on opening deferred taxes of reduction in tax rate	-	(12.9)
Average effective tax rate (tax expense divided by profit before tax)	45.5	23.5

The applicable tax rate is the aggregate of the national income tax rate of 30% (X5: 35%) and the local income tax rate of 5%.

An explanation of changes in the applicable tax rate(s) compared to the previous accounting period (paragraph 81(d))

In X6, the government enacted a change in the national income tax rate from 35% to 30%.

In respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits:

(i)       the amount of the deferred tax assets and liabilities recognised in the statement of financial position for each period presented;

(ii)      the amount of the deferred tax income or expense recognised in profit or loss for each period presented, if this is not apparent from the changes in the amounts recognised in the statement of financial position (paragraph 81(g))

X5	X6
Accelerated depreciation for tax purposes	9,720	10,322
Liabilities for healthcare benefits that are deducted for tax purposes only when paid	(800)	(1,050)
Product development costs deducted from taxable profit in earlier years	100	-
Revaluation, net of related depreciation	-	10,573
Deferred tax liability	9,020	19,845

(Note: the amount of the deferred tax income or expense recognised in profit or loss for the current year is apparent from the changes in the amounts recognised in the statement of financial position)

Example 3 – Business Combinations

On 1 January X5 entity A acquired 100% of the shares of entity B at a cost of 600.  At the acquisition date, the tax base in A’s tax jurisdiction of A’s investment in B is 600.  Reductions in the carrying amount of goodwill are not deductible for tax purposes, and the cost of the goodwill would also not be deductible if B were to dispose of its underlying business.  The tax rate in A’s tax jurisdiction is 30% and the tax rate in B’s tax jurisdiction is 40%.

The fair value of the identifiable assets acquired and liabilities assumed (excluding deferred tax assets and liabilities) by A is set out in the following table, together with their tax bases in B’s tax jurisdiction and the resulting temporary differences.

Amounts recognised at acquisition	Tax base	Temporary differences
Property, plant and equipment	270	155	115
Accounts receivable	210	210	-
Inventory	174	124	50
Retirement benefit obligations	(30)	-	(30)
Accounts payable	(120)	(120)	-
Identifiable assets acquired and liabilities assumed, excluding deferred tax	504	369	135

The deferred tax asset arising from the retirement benefit obligations is offset against the deferred tax liabilities arising from the property, plant and equipment and inventory (see paragraph 74 of the Standard).

No deduction is available in B’s tax jurisdiction for the cost of the goodwill.  Therefore, the tax base of the goodwill in B’s jurisdiction is nil.  However, in accordance with paragraph 15(a) of the Standard, A recognises no deferred tax liability for the taxable temporary difference associated with the goodwill in B’s tax jurisdiction.

The carrying amount, in A’s consolidated financial statements, of its investment in B is made up as follows:

Fair value of identifiable assets acquired and liabilities assumed, excluding deferred tax	504
Deferred tax liability (135 at 40%)	(54)
Fair value of identifiable assets acquired and liabilities assumed	450
Goodwill	150
Carrying amount	600

Because, at the acquisition date, the tax base in A’s tax jurisdiction of A’s investment in B is 600, no temporary difference is associated in A’s tax jurisdiction with the investment.

During X5, B’s equity (incorporating the fair value adjustments made as a result of the business combination) changed as follows:

At 1 January X5	450
Retained earnings for X5 (net profit of 150, less dividend payable of 80)	70
At 31 December X5	520

A recognises a liability for any withholding tax or other taxes that it will incur on the accrued dividend receivable of 80.

At 31 December X5, the carrying amount of A’s underlying investment in B, excluding the accrued dividend receivable, is as follows:

Net assets of B	520
Goodwill	150
Carrying amount	670

The temporary difference associated with A’s underlying investment is 70.  This amount is equal to the cumulative retained earnings since the acquisition date.

If A has determined that it will not sell the investment in the foreseeable future and that B will not distribute its retained earnings in the foreseeable future, no deferred tax liability is recognised in relation to A’s investment in B (see paragraphs 39 and 40 of the Standard).  Note that this exception would apply for an investment in an associate only if there is an agreement requiring that the profits of the associate will not be distributed in the foreseeable future (see paragraph 42 of the Standard).  A discloses the amount of the temporary difference for which no deferred tax is recognised: that is, 70 (see paragraph 81(f) of the Standard).

If A expects to sell the investment in B, or that B will distribute its retained earnings in the foreseeable future, A recognises a deferred tax liability to the extent that the temporary difference is expected to reverse.  The tax rate reflects the manner in which A expects to recover the carrying amount of its investment (see paragraph 51 of the Standard).  A recognises the deferred tax in other comprehensive income to the extent that the deferred tax results from foreign exchange translation differences that have been recognised in other comprehensive income (paragraph 61A of the Standard).  A discloses separately:

(a)      the amount of deferred tax that has been recognised in other comprehensive income (paragraph 81(ab) of the Standard); and

(b)      the amount of any remaining temporary difference which is not expected to reverse in the foreseeable future and for which, therefore, no deferred tax is recognised (see paragraph 81(f) of the Standard).

Example 4 – Compound Financial Instruments

An entity receives a non-interest-bearing convertible loan of 1,000 on 31 December X4 repayable at par on 1 January X8.  In accordance with AASB 132 Financial Instruments: Presentation, the entity classifies the instrument’s liability component as a liability and the equity component as equity.  The entity assigns an initial carrying amount of 751 to the liability component of the convertible loan and 249 to the equity component.  Subsequently, the entity recognises imputed discount as interest expense at an annual rate of 10% on the carrying amount of the liability component at the beginning of the year.  The tax authorities do not allow the entity to claim any deduction for the imputed discount on the liability component of the convertible loan.  The tax rate is 40%.

The temporary differences associated with the liability component and the resulting deferred tax liability and deferred tax expense and income are as follows:

Year
X4	X5	X6	X7
Carrying amount of liability component	751	826	909	1,000
Tax base	1,000	1,000	1,000	1,000
Taxable temporary difference	249	174	91	-
Opening deferred tax liability at 40%	0	100	70	37
Deferred tax charged to equity	100	-	-	-
Deferred tax expense (income)	-	(30)	(33)	(37)
Closing deferred tax liability at 40%	100	70	37	-

As explained in paragraph 23 of the Standard, at 31 December X4, the entity recognises the resulting deferred tax liability by adjusting the initial carrying amount of the equity component of the convertible liability.  Therefore, the amounts recognised at that date are as follows:

Liability component	751
Deferred tax liability	100
Equity component (249 less 100)	149
1,000

Subsequent changes in the deferred tax liability are recognised in profit or loss as tax income (see paragraph 23 of the Standard).  Therefore, the entity’s profit or loss includes the following:

Year
X4	X5	X6	X7
Interest expense (imputed discount)	-	75	83	91
Deferred tax expense (income)	-	(30)	(33)	(37)
-	45	50	54

Example 5 – Share-based Payment Transactions

In accordance with AASB 2 Share-based Payment, an entity has recognised an expense for the consumption of employee services received as consideration for share options granted.  A tax deduction will not arise until the options are exercised, and the deduction is based on the options’ intrinsic value at exercise date. 

As explained in paragraph 68B of the Standard, the difference between the tax base of the employee services received to date (being the amount the taxation authorities will permit as a deduction in future periods in respect of those services), and the carrying amount of nil, is a deductible temporary difference that results in a deferred tax asset.  Paragraph 68B requires that, if the amount the taxation authorities will permit as a deduction in future periods is not known at the end of the period, it should be estimated, based on information available at the end of the period.  If the amount that the taxation authorities will permit as a deduction in future periods is dependent upon the entity’s share price at a future date, the measurement of the deductible temporary difference should be based on the entity’s share price at the end of the period.  Therefore, in this example, the estimated future tax deduction (and hence the measurement of the deferred tax asset) should be based on the options’ intrinsic value at the end of the period.

As explained in paragraph 68C of the Standard, if the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction relates not only to remuneration expense but also to an equity item.  In this situation, paragraph 68C requires that the excess of the associated current or deferred tax should be recognised directly in equity.

The entity’s tax rate is 40%.  The options were granted at the start of year 1, vested at the end of year 3 and were exercised at the end of year 5.  Details of the expense recognised for employee services received and consumed in each reporting period, the number of options outstanding at each year-end, and the intrinsic value of the options at each year-end, are as follows:

Employee services expense	Number of options at year-end	Intrinsic value per option
Year 1	188,000	50,000	5
Year 2	185,000	45,000	8
Year 3	190,000	40,000	13
Year 4	0	40,000	17
Year 5	0	40,000	20

The entity recognises a deferred tax asset and deferred tax income in years 1‑4 and current tax income in year 5 as follows.  In years 4 and 5, some of the deferred and current tax income is recognised directly in equity, because the estimated (and actual) tax deduction exceeds the cumulative remuneration expense.

Year 1

Deferred tax asset and deferred tax income:
(50,000 × 5 × 1/3* ×40%) =	33,333

* The tax base of the employee services received is based on the intrinsic value of the options, and those options were granted for three years’ services.  Because only one year’s services have been received to date, it is necessary to multiply the option’s intrinsic value by one-third to arrive at the tax base of the employee services received in year 1.

The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 83,333 (50,000 × 5 × 1/3) is less than the cumulative remuneration expense of 188,000.

Year 2

Deferred tax asset at year-end:
(45,000 × 8 × 2/3 × 40%) =	96,000
Less deferred tax asset at start of year	(33,333)
Deferred tax income for year	62,667*
* This amount consists of the following:
Deferred tax income for the temporary difference between the tax base of the employee services received during the year and their carrying amount of nil:
(45,000 × 8 × 1/3 × 40%) =	48,000
Tax income resulting from an adjustment to the tax base of employee services received in previous years:
(a)            increase in intrinsic value:
(45,000 × 3 × 1/3 × 40%) =	18,000
(b)           decrease in number of options:
(5,000 × 5 × 1/3 × 40%) =	(3,333)
Deferred tax income for year	62,667

The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 240,000 (45,000 × 8 × 2/3) is less than the cumulative remuneration expense of 373,000 (188,000 + 185,000).

Year 3

Deferred tax asset at year-end:
(40,000 × 13 × 40%) =	208,000
Less deferred tax asset at start of year	(96,000)
Deferred tax income for year	112,000

The deferred tax income is all recognised in profit or loss, because the estimated future tax deduction of 520,000 (40,000 × 13) is less than the cumulative remuneration expense of 563,000 (188,000 + 185,000 + 190,000).

Year 4

Deferred tax asset at year-end: (40,000 × 17 × 40%) =	272,000
Less deferred tax asset at start of year	(208,000)
Deferred tax income for year	64,000

The deferred tax income is recognised partly in profit or loss and partly directly in equity as follows:

Estimated future tax deduction (40,000 × 17) =	680,000
Cumulative remuneration expense	563,000
Excess tax deduction	117,000
Deferred tax income for year	64,000
Excess recognised directly in equity (117,000 × 40%) =	46,800
Recognised in profit or loss	17,200

Year 5

Deferred tax expense (reversal of deferred tax asset)	272,000
Amount recognised directly in equity (reversal of cumulative deferred tax income recognised directly in equity)	46,800
Amount recognised in profit or loss	225,200
Current tax income based on intrinsic value of options at exercise date (40,000 × 20 × 40%) =	320,000
Amount recognised in profit or loss (563,000 × 40%) =	225,200
Amount recognised directly in equity	94,800

Summary

Statement of comprehensive income				Statement of financial position
Employee services expense	Current tax expense (income)	Deferred tax expense (income)	Total tax expense (income)	Equity	Deferred tax asset
Year 1	188,000	0	(33,333)	(33,333)	0	33,333
Year 2	185,000	0	(62,667)	(62,667)	0	96,000
Year 3	190,000	0	(112,000)	(112,000)	0	208,000
Year 4	0	0	(17,200)	(17,200)	(46,800)	272,000
Year 5	0	(225,200)	225,200	0	46,800	0
(94,800)
Totals	563,000	(225,200)	0	(225,200)	(94,800)	0

Example 6 – Replacement Awards in a Business Combination

On 1 January 20X1 Entity A acquired 100 per cent of Entity B.  Entity A pays cash consideration of CU400 to the former owners of Entity B.

At the acquisition date Entity B had outstanding employee share options with a market-based measure of CU100.  The share options were fully vested.  As part of the business combination Entity B’s outstanding share options are replaced by share options of Entity A (replacement awards) with a market-based measure of CU100 and an intrinsic value of CU80.  The replacement awards are fully vested.  In accordance with paragraphs B56-B62 of AASB 3 Business Combinations (as revised in March 2008), the replacement awards are part of the consideration transferred for Entity B.  A tax deduction for the replacement awards will not arise until the options are exercised.  The tax deduction will be based on the share options’ intrinsic value at that date.  Entity A’s tax rate is 40 per cent.  Entity A recognises a deferred tax asset of CU32 (CU80 intrinsic value × 40%) on the replacement awards at the acquisition date.

Entity A measures the identifiable net assets obtained in the business combination (excluding deferred tax assets and liabilities) at CU450.  The tax base of the identifiable net assets obtained is CU300.  Entity A recognises a deferred tax liability of CU60 ((CU450 – CU300) × 40%) on the identifiable net assets at the acquisition date.

Goodwill is calculated as follows:

CU
Cash consideration	400
Market-based measure of replacement awards	100
Total consideration transferred	500
Identifiable net assets, excluding deferred tax assets and liabilities	(450)
Deferred tax asset	(32)
Deferred tax liability	60
Goodwill	78

Reductions in the carrying amount of goodwill are not deductible for tax purposes.  In accordance with paragraph 15(a) of the Standard, Entity A recognises no deferred tax liability for the taxable temporary difference associated with the goodwill recognised in the business combination.

The accounting entry for the business combination is as follows:

CU	CU
Dr  Goodwill		78
Dr  Identifiable net assets		450
Dr  Deferred tax asset		32
Cr  Cash	400
Cr  Equity (replacement awards)	100
Cr  Deferred tax liability	60

On 31 December 20X1 the intrinsic value of the replacement awards is CU120.  Entity A recognises a deferred tax asset of CU48 (CU120 × 40%).  Entity A recognises deferred tax income of CU16 (CU48 – CU32) from the increase in the intrinsic value of the replacement awards.  The accounting entry is as follows:

CU	CU
Dr  Deferred tax asset		16
Cr  Deferred tax income	16

If the replacement awards had not been tax-deductible under current tax law, Entity A would not have recognised a deferred tax asset on the acquisition date.  Entity A would have accounted for any subsequent events that result in a tax deduction related to the replacement award in the deferred tax income or expense of the period in which the subsequent event occurred.

Paragraphs B56-B62 of AASB 3 provide guidance on determining which portion of a replacement award is part of the consideration transferred in a business combination and which portion is attributable to future service and thus a post-combination remuneration expense.  Deferred tax assets and liabilities on replacement awards that are post-combination expenses are accounted for in accordance with the general principles as illustrated in Example 5.

Example 7—Debt instruments measured at fair value

Debt instruments

At 31 December 20X1, Entity Z holds a portfolio of three debt instruments:

Debt Instrument	Cost (CU)	Fair value (CU)	Contractual interest rate
A	2,000,000	1,942,857	2.00%
B	750,000	778,571	9.00%
C	2,000,000	1,961,905	3.00%

Entity Z acquired all the debt instruments on issuance for their nominal value. The terms of the debt instruments require the issuer to pay the nominal value of the debt instruments on their maturity on 31 December 20X2.

Interest is paid at the end of each year at the contractually fixed rate, which equalled the market interest rate when the debt instruments were acquired. At the end of 20X1, the market interest rate is 5 per cent, which has caused the fair value of Debt Instruments A and C to fall below their cost and the fair value of Debt Instrument B to rise above its cost. It is probable that Entity Z will receive all the contractual cash flows if it continues to hold the debt instruments.

At the end of 20X1, Entity Z expects that it will recover the carrying amounts of Debt Instruments A and B through use, ie by continuing to hold them and collecting contractual cash flows, and Debt Instrument C by sale at the beginning of 20X2 for its fair value on 31 December 20X1. It is assumed that no other tax planning opportunity is available to Entity Z that would enable it to sell Debt Instrument B to generate a capital gain against which it could offset the capital loss arising from selling Debt Instrument C.

The debt instruments are measured at fair value through other comprehensive income in accordance with AASB 9 Financial Instruments (or AASB 139 Financial Instruments: Recognition and Measurement[3]).

[3]      AASB 9 replaced AASB 139.  AASB 9 applies to all items that were previously within the scope of AASB 139.

Tax law

The tax base of the debt instruments is cost, which tax law allows to be offset either on maturity when principal is paid or against the sale proceeds when the debt 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 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.

General

On 31 December 20X1, Entity Z has, from other sources, taxable temporary differences of CU50,000 and deductible temporary differences of CU430,000, which will reverse in ordinary taxable profit (or ordinary tax loss) in 20X2.

At the end of 20X1, it is probable that Entity Z will report to the tax authorities an ordinary tax loss of CU200,000 for the year 20X2. This tax loss includes all taxable economic benefits and tax deductions for which temporary differences exist on 31 December 20X1 and that are classified as ordinary by tax law. These amounts contribute equally to the loss for the period according to tax law.

Entity Z has no capital gains against which it can utilise capital losses arising in the years 20X1–20X2.

Except for the information given in the previous paragraphs, there is no further information that is relevant to Entity Z’s accounting for deferred taxes in the period 20X1–20X2.

Temporary differences

At the end of 20X1, Entity Z identifies the following temporary differences:

Carrying amount (CU)	Tax base (CU)	Taxable temporary differences (CU)	Deductible temporary differences (CU)
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

The difference between the carrying amount of an asset or liability and its tax base gives rise to a deductible (taxable) temporary difference (see paragraphs 20 and 26(d) of the Standard). This is because deductible (taxable) temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base, which will result in amounts that are deductible (taxable) in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled (see paragraph 5 of the Standard).

Utilisation of deductible temporary differences

With some exceptions, deferred tax assets arising from deductible temporary differences are recognised to the extent that sufficient future taxable profit will be available against which the deductible temporary differences are utilised (see paragraph 24 of the Standard).

Paragraphs 28–29 of AASB 112 identify the sources of taxable profits against which an entity can utilise deductible temporary differences. They include:

(a)      future reversal of existing taxable temporary differences;

(b)      taxable profit in future periods; and

(c)       tax planning opportunities.

The deductible temporary difference that arises from Debt Instrument C is assessed separately for utilisation. This is because tax law classifies the loss resulting from recovering the carrying amount of Debt Instrument C by sale as capital and allows capital losses to be offset only against capital gains (see paragraph 27A of the Standard).

The separate assessment results in not recognising a deferred tax asset for the deductible temporary difference that arises from Debt Instrument C because Entity Z has no source of taxable profit available that tax law classifies as capital.

In contrast, the deductible temporary difference that arises from Debt Instrument A and other sources are assessed for utilisation in combination with one another. This is because their related tax deductions would be classified as ordinary by tax law.

The tax deductions represented by the deductible temporary differences related to Debt Instrument A are classified as ordinary because the tax law classifies the effect on taxable profit (tax loss) from deducting the tax base on maturity as ordinary.

In assessing the utilisation of deductible temporary differences on 31 December 20X1, the following two steps are performed by Entity Z.

Step 1: Utilisation of deductible temporary differences because of the reversal of taxable temporary differences (see paragraph 28 of the Standard)

Entity Z first assesses the availability of taxable temporary differences as follows:

(CU)
Expected reversal of deductible temporary differences in 20X2
From Debt Instrument A	57,143
From other sources	430,000
Total reversal of deductible temporary differences		487,143
Expected reversal of taxable temporary differences in 20X2
From Debt Instrument B	(28,571)
From other sources	(50,000)
Total reversal of taxable temporary differences		(78,571)
Utilisation because of the reversal of taxable temporary differences (Step 1)		78,571
Remaining deductible temporary differences to be assessed for utilisation in Step 2 (487,143 – 78,571)		408,572

In Step 1, Entity Z can recognise a deferred tax asset in relation to a deductible temporary difference of CU78,571.

Step 2: Utilisation of deductible temporary differences because of future taxable profit (see paragraph 29(a) of the Standard)

In this step, Entity Z assesses the availability of future taxable profit as follows:

(CU)
Probable future tax profit (loss) in 20X2 (upon which income taxes are payable (recoverable))	(200,000)
Add back: reversal of deductible temporary differences expected to reverse in 20X2	487,143
Less: reversal of taxable temporary differences (utilised in Step 1)	(78,571)
Probable taxable profit excluding tax deductions for assessing utilisation of deductible temporary differences in 20X2	208,572
Remaining deductible temporary differences to be assessed for utilisation from Step 1	408,572
Utilisation because of future taxable profit (Step 2)	208,572
Utilisation because of the reversal of taxable temporary differences (Step 1)	78,571
Total utilisation of deductible temporary differences	287,143

The tax loss of CU200,000 includes the taxable economic benefit of CU2 million from the collection of the principal of Debt Instrument A and the equivalent tax deduction, because it is probable that Entity Z will recover the debt instrument for more than its carrying amount (see paragraph 29A of the Standard).

The utilisation of deductible temporary differences is not, however, assessed against probable future taxable profit for a period upon which income taxes are payable (see paragraph 5 of the Standard). Instead, the utilisation of deductible temporary differences is assessed against probable future taxable profit that excludes tax deductions resulting from the reversal of deductible temporary differences (see paragraph 29(a) of the Standard). Assessing the utilisation of deductible temporary differences against probable future taxable profits without excluding those deductions would lead to double counting the deductible temporary differences in that assessment.

In Step 2, Entity Z determines that it can recognise a deferred tax asset in relation to a future taxable profit, excluding tax deductions resulting from the reversal of deductible temporary differences, of CU208,572. Consequently, the total utilisation of deductible temporary differences amounts to CU287,143 (CU78,571 (Step 1) + CU208,572 (Step 2)).

Measurement of deferred tax assets and deferred tax liabilities

Entity Z presents the following deferred tax assets and deferred tax liabilities in its financial statements on 31 December 20X1:

(CU)
Total taxable temporary differences	78,571
Total utilisation of deductible temporary differences	287,143
Deferred tax liabilities (78,571 at 30%)	23,571
Deferred tax assets (287,143 at 30%)	86,143

The deferred tax assets and the deferred tax liabilities are measured using the tax rate for ordinary gains of 30 per cent, in accordance with the expected manner of recovery (settlement) of the underlying assets (liabilities) (see paragraph 51 of the Standard).

Allocation of changes in deferred tax assets between profit or loss and other comprehensive income

Changes in deferred tax that arise from items that are recognised in profit or loss are recognised in profit or loss (see paragraph 58 of the Standard). Changes in deferred tax that arise from items that are recognised in other comprehensive income are recognised in other comprehensive income (see paragraph 61A of the Standard).

Entity Z did not recognise deferred tax assets for all of its deductible temporary differences at 31 December 20X1, and according to tax law all the tax deductions represented by the deductible temporary differences contribute equally to the tax loss for the period. Consequently, the assessment of the utilisation of deductible temporary differences does not specify whether the taxable profits are utilised for deferred tax items that are recognised in profit or loss (ie the deductible temporary differences from other sources) or whether instead the taxable profits are utilised for deferred tax items that are recognised in other comprehensive income (ie the deductible temporary differences related to debt instruments classified as fair value through other comprehensive income).

For such situations, paragraph 63 of the Standard requires the changes in deferred taxes to be allocated to profit or loss and other comprehensive income on a reasonable pro rata basis or by another method that achieves a more appropriate allocation in the circumstances.

DELETED IAS 12 TEXT

Deleted IAS 12 text is not part of AASB 112.

Paragraph 89

This Standard becomes operative for financial statements covering periods beginning on or after 1 January 1998, except as specified in paragraph 91.  If an entity applies this Standard for financial statements covering periods beginning before 1 January 1998, the entity shall disclose the fact it has applied this Standard instead of IAS 12 Accounting for Taxes on Income, approved in 1979.

Paragraph 90

This Standard supersedes IAS 12 Accounting for Taxes on Income, approved in 1979.

Paragraph 91

Paragraphs 52A, 52B, 65A, 81(i), 82A, 87A, 87B, 87C and the deletion of paragraphs 3 and 50 become operative for annual financial statements³ covering periods beginning on or after 1 January 2001.  Earlier adoption is encouraged.  If earlier adoption affects the financial statements, an entity shall disclose that fact.

3         Paragraph 91 refers to ‘annual financial statements’ in line with more explicit language for writing effective dates adopted in 1998.  Paragraph 89 refers to ‘financial statements’.

Paragraph 92

IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs.  In addition it amended paragraphs 23, 52, 58, 60, 62, 63, 65, 68C, 77 and 81, deleted paragraph 61 and added paragraphs 61A, 62A and 77A.  An entity shall apply those amendments for annual periods beginning on or after 1 January 2009.  If an entity applies IAS 1 (revised 2007) for an earlier period, the amendments shall be applied for that earlier period.

Paragraph 95

IFRS 3 (as revised in 2008) amended paragraphs 21 and 67 and added paragraphs 32A and 81(j) and (k).  An entity shall apply those amendments for annual periods beginning on or after 1 July 2009.  If an entity applies IFRS 3 (revised 2008) for an earlier period, the amendments shall also be applied for that earlier period.

Paragraph 99

The amendments made by Deferred Tax: Recovery of Underlying Assets, issued in December 2010, supersede SIC Interpretation 21 Income Taxes – Recovery of Revalued Non-Depreciable Assets.