Recognition of Current and Deferred Tax
Accounting for the current and deferred tax effects of a transaction or other event is consistent with the accounting for the transaction or event itself. Paragraphs 56 to 66 implement this principle.
Current and deferred tax should be recognised as income or an expense and included in the net profit or loss for the period, except to the extent that the tax arises from:
a transaction or event which is recognised, in the same or a different period, directly in equity (see paragraphs 59 to 63); or
a business combination that is an acquisition (see paragraphs 64 to 66).
Most deferred tax liabilities and deferred tax assets arise where income or expense is included in accounting profit in one period, but is included in taxable profit (tax loss) in a different period. The resulting deferred tax is recognised in the income statement. Examples are when:
interest, royalty or dividend revenue is received in arrears and is included in accounting profit on a time apportionment basis in accordance with FRS 1182004, Revenue, but is included in taxable profit (tax loss) on a cash basis; and
development costs have been capitalised in accordance with FRS 1092004, Research and Development Costs, and are being amortised in the income statement, but were deducted for tax purposes when they were incurred.
The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences. This can result, for example, from:
a change in tax rates or tax laws;
a re-assessment of the recoverability of deferred tax assets; or
a change in the expected manner of recovery of an asset.
The resulting deferred tax is recognised in the income statement, except to the extent that it relates to items previously charged or credited to equity (see paragraph 61).
Items Credited or Charged Directly to Equity
Current tax and deferred tax should be charged or credited directly to equity if the tax relates to items that are credited or charged, in the same or a different period, directly to equity.
Financial Reporting Standards require or permit certain items to be credited or charged directly to equity. Examples of such items are:
a change in carrying amount arising from the revaluation of property, plant and equipment (see FRS 1162004, Property, Plant and Equipment);
an adjustment to the opening balance of retained earnings resulting from either a change in accounting policy that is applied retrospectively or the correction of a fundamental error (see FRS 1082004, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies);
exchange differences arising on the translation of the financial statements of a foreign entity (see FRS 1212004, The Effects of Changes in Foreign Exchange Rates); and
amounts arising on initial recognition of the equity component of a compound financial instrument (see paragraph 25).
In exceptional circumstances it may be difficult to determine the amount of current and deferred tax that relates to items credited or charged to equity. This may be the case, for example, when:
there are graduated rates of income tax and it is impossible to determine the rate at which a specific component of taxable profit (tax loss) has been taxed;
a change in the tax rate or other tax rules affects a deferred tax asset or liability relating (in whole or in part) to an item that was previously charged or credited to equity; or
an enterprise determines that a deferred tax asset should be recognised, or should no longer be recognised in full, and the deferred tax asset relates (in whole or in part) to an item that was previously charged or credited to equity.
In such cases, the current and deferred tax related to items that are credited or charged to equity is based on a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction concerned, or other method that achieves a more appropriate allocation in the circumstances.
FRS 1162004, Property, Plant and Equipment, does not specify whether an enterprise should transfer each year from revaluation surplus to retained earnings an amount equal to the difference between the depreciation or amortisation on a revalued asset and the depreciation or amortisation based on the cost of that asset. If an enterprise makes such a transfer, the amount transferred is net of any related deferred tax. Similar considerations apply to transfers made on disposal of an item of property, plant or equipment.
When an asset is revalued for tax purposes and that revaluation is related to an accounting revaluation of an earlier period, or to one that is expected to be carried out in a future period, the tax effects of both the asset revaluation and the adjustment of the tax base are credited or charged to equity in the periods in which they occur. However, if the revaluation for tax purposes is not related to an accounting revaluation of an earlier period, or to one that is expected to be carried out in a future period, the tax effects of the adjustment of the tax base are recognised in the income statement.
Deferred Tax Arising from a Business Combination
As explained in paragraphs 18 and 28(c), temporary differences may arise in a business combination that is an acquisition. In accordance with FRS 1222004, Business Combinations, an enterprise recognises any resulting deferred tax assets (to the extent that they meet the recognition criteria in paragraph 26) or deferred tax liabilities as identifiable assets and liabilities at the date of the acquisition. Consequently, those deferred tax assets and liabilities affect goodwill or negative goodwill. However, in accordance with paragraphs 14(a) and 26(a), an enterprise does not recognise deferred tax liabilities arising from goodwill itself (if amortisation of the goodwill is not deductible for tax purposes) and deferred tax assets arising from non-taxable negative goodwill which is treated as deferred income.
As a result of a business combination, an acquirer may consider it probable that it will recover its own deferred tax asset that was not recognised prior to the business combination. For example, the acquirer may be able to utilise the benefit of its unused tax losses against the future taxable profit of the acquiree. In such cases, the acquirer recognises a deferred tax asset and takes this into account in determining the goodwill or negative goodwill arising on the acquisition.
recognises the reduction in the net carrying amount of the goodwill as an expense.
An enterprise acquired a subsidiary which had deductible temporary differences of RM300. The tax rate at the time of the acquisition was 30%. The resulting deferred tax asset of RM90 was not recognised as an identifiable asset in determining the goodwill of RM500 resulting from the acquisition. The goodwill is amortised over 20 years. 2 years after the acquisition, the enterprise assessed that future taxable profit would probably be sufficient for the enterprise to recover the benefit of all the deductible temporary differences.
The enterprise recognises a deferred tax asset of RM90 (RM300 at 30%) and, in the income statement, deferred tax income of RM90. It also reduces the cost of the goodwill by RM90 and the accumulated amortisation by RM9 (representing 2 years' amortisation). The balance of RM81 is recognised as an expense in the income statement. Consequently, the cost of the goodwill, and the related accumulated amortisation, are reduced to the amounts (RM410 and RM41) that would have been recorded if a deferred tax asset of RM90 had been recognised as an identifiable asset at the date of the business combination.
If the tax rate has increased to 40%, the enterprise recognises a deferred tax asset of RM120 (RM300 at 40%) and, in the income statement, deferred tax income of RM120. If the tax rate has decreased to 20%, the enterprise recognises a deferred tax asset of RM60 (RM300 at 20%) and deferred tax income of RM60. In both cases, the enterprise also reduces the cost of the goodwill by RM90 and the accumulated amortisation by RM9 and recognises the balance of RM81 as an expense in the income statement.