Components of tax expense and deferred tax balances

Learning objectives

• Identify the components of tax expense and the disclosures required for each type of temporary difference.L2
• Prepare the income tax note: components, balances by nature, unrecognised losses, tax contingencies.L3, L4

Normative references

• IAS 12The major components of tax expense (tax income) are disclosed separately.
• IAS 12 §80Components of tax expense (tax income) may include in particular: current tax expense; adjustments recognised in the period for current tax of prior periods; deferred tax relating to the origination and reversal of temporary differences; deferred tax relating to changes in tax rates or the imposition of new taxes; the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce tax expense; deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset (para. 56); tax relating to changes in accounting policies and errors included in profit or loss under IAS 8 because they cannot be accounted for retrospectively.
• IAS 12 §81Disclosures required separately include in particular: the income tax relating to each component of other comprehensive income; an explanation of the relationship between tax expense (income) and accounting profit, in the form of a numerical reconciliation between tax expense and the product of accounting profit multiplied by the applicable tax rate(s), or between the average effective tax rate and the applicable tax rate, disclosing the basis on which the applicable rate is computed; an explanation of changes in the applicable tax rate(s) compared with the previous period; the amount of deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised; the aggregate amount of temporary differences associated with investments for which no deferred tax liability is recognised; for each type of temporary difference and of unused tax losses and credits, the deferred tax assets and liabilities recognised and the deferred tax recognised in profit or loss; the income tax consequences of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a liability.
• IAS 12The entity discloses the amount of a deferred tax asset and the nature of the evidence supporting its recognition when its utilisation depends on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences, or when it has suffered a loss in the current or preceding period in the tax jurisdiction to which the asset relates.
• IAS 12 §82AIn the circumstances described in para. 52A, the entity discloses the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders; it also discloses the amounts of those consequences that are practicably determinable and whether there are any potential consequences that are not practicably determinable.
• IAS 12It would often be impracticable to compute the amount of unrecognised deferred tax liabilities arising from investments; the standard therefore requires disclosure of the aggregate amount of the underlying temporary differences, while encouraging disclosure of the unrecognised liabilities where practicable.
• IAS 12 §88The entity discloses, in accordance with IAS 37, any tax-related contingent liabilities and contingent assets (for example, unresolved disputes with the taxation authorities); this paragraph deals only with disclosure, recognition being governed by IAS 12. When changes in tax rates or tax laws are enacted or announced after the reporting period, the entity discloses any significant effect of those changes on its current and deferred tax assets and liabilities (see IAS 10).

Original summaries of the paragraphs (reference register), never a quotation of the standard.

17 questions

• The major components of tax expense (income) are disclosed separately.L2
• Yspala, which recognises revaluations and actuarial differences in other comprehensive income, may simply disclose the total amount of tax relating to its other comprehensive income.L2
• The subsidiary Zarnovel incurred a tax loss in 20X5 but recognised a deferred tax asset whose use depends on future taxable profits. As long as management judges the asset recoverable, no specific disclosure about it is required.L3
• For its investments in subsidiaries with no deferred tax liability recognised, a group must disclose the aggregate amount of the related temporary differences; disclosing the amount of the unrecognised liabilities is only encouraged where practicable.L2
• Arquevin is challenging in court a tax reassessment that has not yet been decided. Which standard governs the disclosures about this unresolved tax dispute, and which standard governs any recognition?L2
• For each type of temporary difference and each type of unused tax losses and credits, what information does IAS 12 require?L3
• Which of these items does IAS 12 require in the income tax note?L2
• The Orsavel group's tax controller is preparing the note: which of the following circumstances require a deferred tax asset to be detailed, including its amount and the justification for it?L3
• To prepare its income tax note, the Brezolan group draws up the movement schedule of its net deferred tax liability: opening {opening_net_dtl}; deferred tax expense in profit or loss {profit_or_loss_charge}; deferred tax recognised in other comprehensive income (charge) {oci_charge}; liability arising from a business combination in the year {business_combination}. Compute the closing net deferred tax liability.L3
• Review of the Ferondil group's income tax note. Net deferred tax liability: opening {opening_net_dtl}; deferred tax income in profit or loss {profit_or_loss_income}; deferred tax charge in other comprehensive income {oci_charge}; deferred tax credited directly to equity {equity_credit}; liability arising from a business combination {business_combination}. The published statement of financial position shows a net liability of {reported_closing}. Compute the expected closing balance and the difference still to be explained.L4
• Gernasse prepares its 20X5 income tax note: current tax for the year {current_tax}; additional current tax due for 20X4, identified in 20X5 (case data) {prior_year_current_tax}; deferred tax expense {deferred_tax_expense}. Compute the tax expense for the year.L3
• Hollivane has unused tax losses of {unused_losses}; a deferred tax asset is recognised for only {losses_recognised} of those losses. In addition, deductible temporary differences of {unrecognised_differences} have given rise to no asset. What amount of unrecognised differences, losses and credits does Hollivane disclose in its note (no tax credits)?L4
• The Jorvella group recognised a deferred tax asset of 3,200,000 in its subsidiary in country K, which incurred a tax loss in 20X5; management relies on a firm order book and a completed restructuring. What information must the income tax note contain in this respect?L4
• Which of these items may be among the components of tax expense disclosed in the note?L2
• Kervadin's 20X5 income tax note: current tax before use of losses {current_tax_before_losses}; benefit from prior losses never recognised, used to reduce current tax {loss_benefit}; release of excess current tax for 20X4 {prior_year_release}; deferred tax expense on temporary differences originating in the year {origination_expense}; deferred tax income from a rate cut {rate_change_income}; write-down of a deferred tax asset {write_down}. Compute tax expense.L3
• In Lumbrac's country, tax on distributed profits is higher than on retained profits (case data); Lumbrac therefore measures its tax at the rate for undistributed profits. What does it disclose about future dividends?L3
• IFRIC 23 creates a specific disclosure requirement to describe in detail, in the income tax note, every uncertain tax treatment used by the entity.L2