By Alok Jain, Contributor 
THE Institute of Chartered Accountants of Jamaica (ICAJ) has adopted International Accounting Standards (IAS), now termed International Financial Reporting Standards (IFRS), as Jamaica's national accounting standards for accounting periods beginning on or after July 1, 2002. Continuing the series on IAS, this article examines the main aspects of IAS 12, Income Taxes.
Provision for deferred taxation was not mandatory under Jamaican Accounting Standards and most Jamaican companies have traditionally not made such provisions. IAS 12, however, leaves very little room for discretion in this area and requires full provision for deferred taxation.
ACCRUALS CONCEPT
The objective of IAS 12 is to prescribe the accounting treatment for income taxes. The key concept on which IAS 12 is based is the "accrual" or "matching" concept. Essentially, this requires that the economic consequences of transactions be recognised in the financial statements when the transactions occur and not necessarily when actual cash passes.
Following from this concept, IAS 12 requires that, when a transaction or event is recognised in the financial statements of an entity, the current and future tax consequences of the transaction or event also be recognised at the same time.
For example, if it is probable that recovery of the carrying amount of an asset will make future tax payments larger than they would be if such recovery were to have no tax consequences, IAS 12 requires the recognition of a deferred tax liability.
DEFINITIONS
The standard contains the following key definitions:
Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. They may be either taxable i.e. those that will result in taxable amounts in determining taxable profit of future periods or deductible i.e. those that will result in amounts that are deductible in determining taxable profit of future periods. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Examples of Temporary Differences
Interest income is normally included in accounting profit on a time proportion basis but, for non-financial institutions, is included in taxable profit when cash is collected. Carrying amount = interest receivable on balance sheet; tax base = nil.
The depreciation charge for accounting purposes differs from capital allowances for tax purposes. Carrying amount = Net book value of fixed asset on the balance sheet; tax base = tax written value of fixed asset.
When assets are revalued for accounting purposes, no equivalent adjustment is normally allowed for tax purposes. Carrying amount = Net book value of fixed asset on the balance sheet after revaluation; tax base = tax written value of fixed asset.
A general provision for doubtful debts in the financial statements is not normally allowable for tax purposes. Tax relief is only obtained when a specific debt has to be provided for or written off. Carrying amount = net book value of receivable after deducting general provision; tax base = book value of receivable before deducting general provision.
RECOGNITION
There are three important exceptions to the principle that deferred tax should be provided on all temporary differences:
Positive or negative goodwill for which amortisation is not deductible or taxable for income tax purposes;
Initial recognition of an asset/liability in a transaction that is not a business combination and which, at the time of the transaction, affects neither accounting or taxable profit; and
Undistributed profits from investments in subsidiaries, associates or joint ventures where the parent or investor is able to control the timing of the reversal of the difference and it is probable that the reversal will not occur in the foreseeable future.
An entity should account for the current and deferred tax effects in the same way as for the underlying transactions or events. In other words, the tax should follow the item and should be included in the income statement if the item is itself recognised in the income statement, in equity if the item is itself recognised in equity, and in goodwill, for business combinations accounted for as acquisitions.
REVIEW OF DEFERRED TAX ASSETS
The carrying amount of a deferred tax asset should be reviewed at each balance sheet date. This means that an entity would need to assess whether a net deferred tax asset recognised in the balance sheet is still recoverable and has not been impaired. For example, an entity may have recognised a deferred tax asset in respect of tax losses in a previous period based on information then available. A year later circumstances may have changed such that it is no longer probable that the entity would earn sufficient future taxable profit to absorb all the tax benefit.
A deferred tax asset should be recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that the deferred tax asset will be realised i.e. it is probable that there will be sufficient future taxable profit against which the loss or credit can be utilised.
MEASUREMENT
Deferred tax assets and liabilities should be measured at the tax rates and tax laws that are expected to apply to the period when the asset is realised or the liability is settled. Where the future rate is not known, the tax rate that has been enacted or substantively enacted at the balance sheet date should be used as the best estimate of the rate that will apply in the future.
Occasionally, a new tax rate may be announced but actual enactment may follow the announcement by a period of several months. In such a situation, the question arises as to whether the announced tax rate should be used to measure deferred tax assets and liabilities. The standard does not explain the meaning of 'substantively enacted'. However, a practical approach is that tax rates and laws would be considered to be 'substantively enacted' only when draft legislation or regulations are nearing the end of the legislative approval process and are expected to be approved shortly after the entity's year-end.
The measurement of the deferred tax asset or liability should reflect the manner in which the entity expects to settle the carrying value of the liability or recover the carrying value of the asset. For instance, if an entity expects to sell a revalued building a significant portion of the revaluation increment may be a capital gain and, therefore, not subject to Jamaican income tax. On the other hand, if the entity expects to retain the building and recover its carrying amount through future cash flows from use, deferred tax on the revaluation increment should be recorded at the standard income tax rate.
Deferred tax assets and liabilities should not be discounted.
PRESENTATION
Current and deferred tax assets and liabilities should be presented separately on the face of the balance sheet and not combined with other assets or liabilities. Also, deferred tax assets and liabilities should not be classified as current assets or liabilities. Deferred tax assets/liabilities that are expected to be recovered/settled after more than 12 months should be separately disclosed in the notes.
Tax assets and tax liabilities should be offset on the balance sheet only if the entity has the legal right to offset them, they are levied by the same taxing authority and the entity intends to settle on a net basis.
DISCLOSURE
The standard contains a number of required disclosures, including:
major components of tax charge current tax, bonus tax credit, deferred tax, etc.
aggregate current and deferred tax relating to items charged or credited to equity
tax relating to extraordinary items
explanation of the relationship between actual tax charge and the expected tax charge by applying the current tax rate to accounting profit either as a reconciliation of amounts of tax or a reconciliation of the rate of tax
changes in tax rates
amounts and expiry dates of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognised in the balance sheet
Alok Jain is a partner at PricewaterhouseCoopers (PwC) in Kingston, Jamaica. He is a Chartered Accountant and a US Certified Public Accountant.
