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Chapter
9
/
Income Taxes (lAS 12)
83
Wherever tax planning opportunities are considere d, management must have the capability and
ability to implement them.
7.5 Simil arly, an entity can recognize a deferred tax asset arising from unused tax losses or cred–
its when it is probable that future taxable profits will be available against which these can be offset.
However, the existence of current tax losses is probably evidence that future taxable profit will not
be available.
7.6 The evidence to suggest that future taxabl e profits are available must be relevant and reliable.
For example, the existence of signed sales contracts and a good profit history may provide such
evidence. The period for which these tax losses can be carried forward under the tax regulations
must be taken into account also.
Practical Insight
Isotis SA, a Swiss ent ity, disclosed in its financia l statements
to
Decemb er 31, 2002 , that it has
ava ilable tax losses of £92 mill ion. Of that amount, £49 million relates to Dutch companies
and £43 mill ion to Swiss comp anies. The Dutch losses can be carried forward indefin itely, but
the Swi ss losses are available for only seven yea rs. The entity feels that it is unlikely to utilize
all the losses and, therefore, does not recogni ze a deferred tax asse t.
7.7 Where an entity has not been able to recognize a deferred tax asset because of insufficient
evidence concerning future taxable profit, it should review the situation at each subsequent balance
sheet date to see whether some or all of the unrec ognized asset can be recognized.
8. TAX RATES
8.1 The tax rates that should be used to calculate deferred tax are the ones that are expected to
apply in the peri od when the asset is realized or the liabilit y settled. The best estimate of this tax
rate is the rate that has been enacted or substantially enacted at the balance sheet date.
8.2 The tax rate that should be used should be that which was applicable to the part icular tax that
has been levied. For example, if tax is going to be levied on a gain on a particular asset, then the
rate of tax relating to those types of gain should be used in orde r to calculate the deferred taxation
amount.
9. DISCOUNTING
9.1 Deferred tax assets and liabilitie s should not be discounted. The reason for this is generally
because it is difficult to accurately predict the timin g of the reversal of each temporary difference.
Case Study 9
Facts
An entity operates in a jurisdiction where the tax rate is
30%
for retained profits and
40%
for distributed
profits. Management has declared a dividend of
$ 10
million, which is payable after the year-end. A
liability has not been recognized in the financial statements at the year-end. The taxable profit before tax
of the entity was
$100
million.
Required
Calculate the current incometax expense for the entity for the current year.
Solution
$30
million
(30%
of
$100
million). The tax rate that should be applied should be that relating to retained
profits.
10.
CURRENT AND DEFERRED TAX RECOGNITION
10.1 Current and deferred tax should both be recognized as income or expen se and included in
the net profit or loss for the period.
10.2 However, to the extent that the tax arises from a transaction or event that is recognized di–
rectly in equity, then the tax that relate s to these items that are credited or charged to equity should