Offsetting tax assets and liabilities

Learning objectives

• Identify the conditions for offsetting current tax and deferred tax.L2
• Determine the net or gross presentation of the tax balances of a group operating in several tax jurisdictions.L2, L3

Normative references

• IAS 12 §71An entity offsets current tax assets and current tax liabilities if, and only if, it has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
• IAS 12Although current tax assets and liabilities are separately recognised and measured, they are offset in the statement of financial position subject to criteria similar to those established for financial instruments; a right of set-off normally exists when they relate to income taxes levied by the same taxation authority, which permits a single net payment.
• IAS 12 §73In consolidated financial statements, a current tax asset of one entity in a group is offset against a current tax liability of another entity in the group only if the entities concerned have a legally enforceable right to make or receive a single net payment and intend to make or receive such a net payment, or to recover the asset and settle the liability simultaneously.
• IAS 12 §74An entity offsets deferred tax assets and deferred tax liabilities if, and only if, (a) it has a legally enforceable right to set off current tax assets against current tax liabilities and (b) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities that intend to settle on a net basis, or to realise and settle simultaneously, in each future period in which significant amounts are expected to be recovered or settled.
• IAS 12 §75To avoid the need for detailed scheduling of the timing of the reversal of each temporary difference, the standard requires an entity to set off a deferred tax asset against a deferred tax liability of the same taxable entity if they relate to the same taxation authority and the entity has a legally enforceable right to set off current tax assets against current tax liabilities.
• IAS 12 §76In rare circumstances, the right of set-off and the intention to settle net exist for some periods only; detailed scheduling may then be required to establish reliably whether the deferred tax liability of one taxable entity will result in increased tax payments in the same period in which a deferred tax asset of another taxable entity will result in decreased payments.

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

14 questions

• Valdérose is taxed in two countries. In country A, its instalments exceed the tax due by 15,000; in country B, it still owes 40,000. No legally enforceable right allows amounts owed to two different tax authorities to be set off (case data). What does it present at the reporting date?L2
• An entity offsets a current tax asset and a current tax liability if, and only if, it has a legally enforceable right to set off the recognised amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.L2
• Ostravelle holds a current tax receivable (overpaid instalments) and a current tax payable to the same authority, which grants it a right of set-off; Ostravelle has nevertheless decided to pay the liability in March and to obtain the refund in October. It may present only the net amount in its statement of financial position.L2
• In its consolidated financial statements, a group may offset the deferred tax asset of a subsidiary taxed in one country against the deferred tax liability of another subsidiary taxed in another country, since both balances belong to the same group.L2
• Which conditions allow a deferred tax asset and a deferred tax liability to be offset?L2
• Why does IAS 12 require the deferred tax asset and liability of the same taxable entity, relating to the same authority, to be offset when current tax can be set off, without requiring a schedule?L3
• The Pelvanor group reviews its deferred tax balances at 31 December 20X5. Which pairs of deferred tax assets and liabilities must be offset?L2
• The Quessaro group consolidates three subsidiaries. A (country X): deferred tax asset {a_dta} and deferred tax liability {a_dtl}, with a right to set off its current tax. B (country X, a taxable entity separate from A, with no intention of settling net with A): asset {b_dta}. C (country Y): liability {c_dtl}. Compute total deferred tax assets and total deferred tax liabilities presented in the consolidated statement of financial position.L2
• Silvadore group. P and Q (country M) are separate taxable entities that have a right of set-off and intend to settle net in each future period: P's liability {p_dtl}, Q's asset {q_dta}. R (country M, outside this arrangement, with no right or intention to settle net with P or Q): asset {r_dta}. S (country N): asset {s_dta} and liability {s_dtl}, same taxable entity, right of set-off. What totals of deferred tax assets and liabilities does the group present?L3
• The Trelmont group presents a net deferred tax liability of 380,000 in its consolidated statement of financial position, obtained by offsetting the 600,000 liability of its subsidiary in country X against the 220,000 asset of its subsidiary in country Y, 'both subsidiaries being 100% owned'. Where is the error?L3
• Uvrelac, a single taxable entity relating to a single authority that allows current tax to be set off, presents separately a deferred tax asset of 120,000 and a deferred tax liability of 410,000, 'for lack of a schedule showing that the reversals will be simultaneous'. Where is the error?L2
• In country Z, Valquessa (deferred tax liability 500,000) and Wenlandor (deferred tax asset 180,000), separate taxable entities, settle their tax net under a group regime which, under the tax law in the case, will end after 20X7. Reversals of Wenlandor's asset are expected in 20X6 and 20X9, those of Valquessa's liability in 20X8 and 20X9. How should the presentation be determined?L3
• In the Nimbrage group's consolidated financial statements, the subsidiary Orsavel has a current tax receivable of 150,000 and the subsidiary Pruvenza a current tax payable of 400,000 to the same authority. Each files and pays separately; no mechanism allows them to make a single net payment. How should these balances be presented?L3
• In country M, the subsidiaries Arquevin (deferred tax liability 700,000) and Belcastor (deferred tax asset 260,000) are separate taxable entities that each file and pay their tax, with no group regime or intention to settle net. The group presents a net liability of 440,000, 'both taxes being levied by the same authority'. Where is the error?L3