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Articles
MASB25 Income Taxes pg1
MALAYSIAN ACCOUNTING STANDARDS BOARD
Income Taxes
Summary of the Differences between this Standard and the Original IAS 12
Introduction
This Standard supersedes MASB Approved Accounting Standard IAS 12, Accounting for Taxes on Income ('the original IAS 12') as an approved accounting standard. The major changes from the original IAS 12 are as follows.
The original IAS 12 required an enterprise to account for deferred tax using either the deferral method or a liability method which is sometimes known as the income statement liability method. This Standard prohibits the deferral method and requires another liability method which is sometimes known as the balance sheet liability method.
The income statement liability method focuses on timing differences, whereas the balance sheet liability method focuses on temporary differences. Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the balance sheet. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
All timing differences are temporary differences. Temporary differences also arise in the following circumstances, which do not give rise to timing differences, although the original IAS 12 treated them in the same way as transactions that do give rise to timing differences:
assets are revalued and no equivalent adjustment is made for tax purposes; and
the cost of a business combination that is an acquisition is allocated to the identifiable assets and liabilities acquired, by reference to their fair values but no equivalent adjustment is made for tax purposes.
Furthermore, there are some temporary differences which are not timing differences, for example those temporary differences that arise when:
the non-monetary assets and liabilities of a foreign operation that is integral to the operations of the reporting entity are translated at historical exchange rates;
non-monetary assets and liabilities are restated FRS 1292004, Financial Reporting in Hyperinflationary Economies; or
the carrying amount of an asset or liability on initial recognition differs from its initial tax base.
The original IAS 12 permitted an enterprise not to recognise deferred tax assets and liabilities where there was reasonable evidence that timing differences would not reverse for some considerable period ahead. This Standard requires an enterprise to recognise a deferred tax liability or (subject to certain conditions) asset for all temporary differences, with certain exceptions noted below.
The original IAS 12 required that:
deferred tax assets arising from timing differences should be recognised when there was a reasonable expectation of realisation; and
deferred tax assets arising from tax losses should be recognised as an asset only where there was assurance beyond any reasonable doubt that future taxable income would be sufficient to allow the benefit of the loss to be realised. The original IAS 12 permitted (but did not require) an enterprise to defer recognition of the benefit of tax losses until the period of realisation.
This Standard requires that deferred tax assets should be recognised when it is probable that taxable profits will be available against which the deferred tax asset can be utilised. Where an enterprise has a history of tax losses, the enterprise recognises a deferred tax asset only to the extent that the enterprise has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available.
As an exception to the general requirement set out in paragraph 2 above, this Standard prohibits the recognition of deferred tax liabilities and deferred tax assets arising from certain assets or liabilities whose carrying amount differs on initial recognition from their initial tax base. Because such circumstances do not give rise to timing differences, they did not result in deferred tax assets or liabilities under the original IAS 12.
The original IAS 12 did not refer explicitly to fair value adjustments made on a business combination. Such adjustments give rise to temporary differences and the Standard requires an enterprise to recognise the resulting deferred tax liability or (subject to the probability criterion for recognition) deferred tax asset with a corresponding effect on the determination of the amount of goodwill or negative goodwill. However, this Standard prohibits the recognition of deferred tax liabilities arising from goodwill itself (if amortisation of the goodwill is not deductible for tax purposes) and of deferred tax assets arising from negative goodwill that is treated as deferred income.
The original IAS 12 permitted, but did not require, an enterprise to recognise a deferred tax liability in respect of asset revaluations. This Standard requires an enterprise to recognise a deferred tax liability in respect of asset revaluations.
The tax consequences of recovering the carrying amount of certain assets or liabilities may depend on the manner of recovery or settlement, for example the amount that is deducted for tax purposes on sale of an asset is greater than the amount that may be deducted as depreciation.
The original IAS 12 gave no guidance on the measurement of deferred tax assets and liabilities in such cases. This Standard requires that the measurement of deferred tax liabilities and deferred tax assets should be based on the tax consequences that would follow from the manner in which the enterprise expects to recover or settle the carrying amount of its assets and liabilities.
The original IAS 12 did not state explicitly whether deferred tax assets and liabilities may be discounted. This Standard prohibits discounting of deferred tax assets and liabilities.
The original IAS 12 did not specify whether an enterprise should classify deferred tax balances as current assets and liabilities or as non-current assets and liabilities. This Standard requires that an enterprise which makes the current/non-current distinction should not classify deferred tax assets and liabilities as current assets and liabilities.
The original IAS 12 stated that debit and credit balances representing deferred taxes may be offset. This Standard establishes more restrictive conditions on offsetting, based largely on those for financial assets and liabilities in FRS 1322004, Financial Instruments: Disclosure and Presentation.
The original IAS 12 required disclosure of an explanation of the relationship between tax expense and accounting profit if not explained by the tax rates effective in the reporting enterprise's country. This Standard requires this explanation to take either or both of the following forms:
a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s); or
a numerical reconciliation between the average effective tax rate and the applicable tax rate.
The Standard also requires an explanation of changes in the applicable tax rate(s) compared to the previous accounting period.
New disclosures required by the Standard include:
in respect of each type of temporary difference, unused tax losses and unused tax credits:
the amount of deferred tax assets and liabilities recognised; and
the amount of the deferred tax income or expense recognised in the income statement, if this is not apparent from the changes in the amounts recognised in the balance sheet;
in respect of discontinued operations, the tax expense relating to:
the gain or loss on discontinuance; and
the profit or loss from the ordinary activities of the discontinued operation; and
the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when:
the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and
the enterprise has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred tax asset relates.
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