Recognition of deferred tax liabilities and deferred tax assets. income taxes

The international standardization system is applied to facilitate the exchange of data between countries. IFRS is applied by Russian companies that are members of foreign enterprises - banks, insurance companies and when conducting trading or investment activities. Among domestic organizations, the formation of accounting and reporting in accordance with IFRS is a prerequisite for the activities of commercial banks. In the article we will talk about income tax under IFRS 12, consider the accounting procedure.

IFRS is a specific procedure for evaluating accounting objects, a list of required documents and grounds for entering information into reporting. The fundamental principles of international standardization are the availability of the format for presenting information, the absence of distortion of indicators, the interconnectedness between reporting periods. The information should not reflect the interests of a group of persons and should not have the significance of the information for making economic decisions.

Tasks implemented by the provisions of IAS 12

The main elements of international reporting standardization are assets, costs, liabilities, profits, equity. The standard that provides for the disclosure of information about profit is IFRS 12. To account for profit when using the standard, the terms used in the global document flow are used. The need for unification of operations and terms arose in connection with the development of relationships in the economy, the creation of firms that conduct joint activities.

Differences in the application of the provisions of the standards

When developing PBU 18/02, the provisions of the international standard were used to bring domestic and international reporting closer. The difference in the provisions of the two types of standards lies in the purpose of the application. The domestic standard is aimed at the correct formation of the financial result, the international one - at the detailed disclosure of the information received and the satisfaction of the interests of external users.

The standards have a number of detailed differences.

Condition	PBU	IFRS
Constant Differences	are taken into account	Not used in the standard
The concept of temporary differences	Profit generating data for accounting purposes	The difference between the value of an asset or liability on the balance sheet and when calculating the tax base
Accounting for prior differences	The absence of the necessary conditions of the provision does not allow to take into account the differences in the current reporting	The standard allows you to take into account data from earlier periods
The moment of accrual of taxes and differences	Throughout the accounting period	At the reporting date
Deferred tax accounting	Not specified	Specified
Accounting for transactions during the reorganization of enterprises	Missing data on consolidated reporting	Cases of deferred taxes are disclosed in case of merger, consolidation of companies

The purpose of creating the domestic standard PBU 18/02 is to create a relationship between the two types of accounting in terms of forming a base for income tax.

Accounting for income tax expenses

The main purpose of the international standard IAS 12 is to reflect income tax expenses, current (PTH) and deferred for payment or reimbursement for future periods (RON).

Type of expenses	Determining the amount	Formula	Peculiarities
current tax	The amount payable based on the profit received for the period current reporting	RTN = PV (profit taxable) x C (applied tax rate)	The indicator can be both negative and positive. The amount is not related to the debt
Deferred tax	The amount of changes in assets and liabilities calculated using the balance sheet method	RON \u003d value SHE + IT	The amount of RON is determined by temporary differences

Presentation of financial information in IFRS 12

The standard defines the accounting treatment associated with current and deferred taxation of income. When generating financial information, a number of rules are taken into account.

Condition (indicator)	Rationale
Current responsibility	Indicated in the amount that must be paid for the period according to the current rates or reimbursed according to legal regulations
Mismatch between book and tax profits	Elimination is carried out by applying IT or IT. At the same time, the main condition for the use of IT is the probability of making a profit
Rates for deferred indicators	Rates expected in the period apply
Source of repayment in case of rate change	When the expected rate changes, the difference is charged to profit or loss

Accounting for temporary differences as part of standardization

The standard introduced the concept of temporary differences between profit calculated from balance sheet and tax data. The essence of the concept is that income and expenses calculated on the basis of different data are recognized at different times. The ratio is defined as the difference between the carrying amount of an asset or liability and its tax base.

Temporary differences are subdivided into deductible values, which subsequently lead to a decrease in liabilities (ITA) and taxable ones, which further increase income tax (ITT). An example of a temporary difference is available when accounting for depreciation charges in the case of using a premium in taxation. Part of the cost of fixed assets in tax accounting is written off at a time, which determines the occurrence of temporary differences.

Using SHE and IT sums

If differences occur in the accounting, the assessment provides for the use of indicators of a deferred tax asset (ITA) and a liability (ITA). Before the possibility of creating data, an analysis confirms the right of the subject to use preferences. Features of data generation:

IT is taken into account for tax refunds in subsequent periods if there are deductible temporary differences or if there are losses carried forward to a future reporting period.
It is applied if there are taxable differences in accounting, on the basis of which tax is paid in the future.

It is possible to create an SHE if there is evidence of future profits, the amount of which will allow offsetting losses or applying the prescribed benefits.

To present reliable information, an entity must determine for each asset and liability the amount calculated at the reporting date at the carrying and tax values, then determine the differences and determine the OHO or SHE taking into account the forecast rate.

Evaluation of indicators of IT or IT and features of reflection in reporting

In the reporting, deferred indicators are taken into account at different rates applied depending on the conduct of activities. To create an IT or IT, you must have information about the rates used in the transfer period. A change in the rate entails recalculation of amounts and adjustment according to current data. When taking into account SHE and IT:

Discounting is not carried out.
At the reporting date, it is necessary to re-recognize SHE or IT in connection with the changed conditions.
Based on the results of the assessment, it is required to reduce the amount of IT, taking into account the likelihood of a decrease in the profit necessary for tax reimbursement.
In subsequent periods, increase IT when receiving a forecast of sufficient profitability.

An example of changing the value of IT

The company received a loss in the amount of 20 thousand USD. The shareholders have decided to carry forward the loss at a 20% tax rate on the deferred asset of CU4,000. e. The following year, the company's costs increased by 10 thousand USD, which did not allow to reduce losses in full. Accordingly, SHE needed to be reduced by 2,000 c.u. (20,000 - 10,000) x 20%. If a profit occurs in the next period, the amount of SHE is restored.

The peculiarity of grouping information in reporting

The articles separately indicate the constituent elements of profit, grouped by the degree of disclosure:

Detailed, detailing information set by the standard and internal company policy.
Explanatory, deciphering indicators in interconnection by periods or among themselves.
Other, representing information that the organization has deemed necessary to communicate to users.

The standard indicates the need to record rolled-up indicators that can be offset against an indication of the overall balance. It is possible to make a set-off operation for indicators related to the same period or contributed to one recipient. If the asset is expected to be recovered in one year, and the liability is due in two reporting periods, no offset is made.

The right to a set-off arises after a number of steps have been taken, including an analysis to confirm that the entity's liability will not decrease. When offsetting, companies use only significant data that influences economic decision-making.

Data submission requirements

The procedure for generating data is approved by the general requirements of the standards:

The reporting contains information confirming the assessment of the state of the subject and the result of the activity.
When entering data, the continuity and sequence of accounting are taken into account.
Evaluation of indicators is recognized only if there is reliable evidence.
Options for maintaining business models, recognizing units, individual parameters established by the organization are allowed.
The reporting confirms the concept of capital and provision of the required level.

Rubric “Questions and answers”

Question number 1. When does it become necessary to voluntarily report under international standards?

Subjects use international standardization to more easily provide information to foreign users. Reporting is formed by organizations wishing to attract foreign partners. When determining the need, expediency is taken into account, since the maintenance of operations requires professional knowledge.

Question number 2. Does the regulation deal with the procedure for granting government subsidies?

The standard records information in the form of temporary differences that arise when the deduction or subsidy is granted.

Question number 3. Is it allowed to indicate rolled-up data on amounts paid to different budgets?

Balanced data are indicated if it is possible to make a set-off, which is possible only with a single recipient.

Question number 4. How many periods are taken into account when presenting the first financial statements under IFRS?

The reporting, presented for the first time according to international standards, covers 2 calendar annual periods - the current and the previous one.

Question number 5. Which entities apply the Russian standard?

The provision is used by all organizations that apply the generally established taxation system and maintain accounting records in full. The standard is mandatory for entities paying income tax. They do not use the standard of small business organizations, which is fixed by internal acts.

Introduction 3

Chapter 1 Characteristics of IFRS 12 Income Taxes 6

1.1 Purpose and scope of Standard 6

1.2 Occurrence of temporary differences under IFRS 8

1.3 Calculation and reporting of income taxes in IFRS 12

Chapter 2. Practical application of IFRS 12 16

2.1 Occurrence of temporary differences 16

2.2 Deferred tax 17

2.3 Income tax 17

Chapter 3. Comparative analysis of IFRS 12 “Income taxes and RAS 18/02 “Accounting for corporate income tax calculations 19

3.1 Approach to highlighting differences 20

3.2 Differences in the treatment of temporary differences 22

3.3 Features of the operating method PBU 18/02. Features of the balance sheet approach in standard 12 IFRS 24

3.4 Accounting for temporary differences 27

Conclusion 30

References 32

Introduction

Income tax is one of the most common types of taxes paid by commercial companies. Income tax - a direct tax (levied by the state directly on the income or property of the taxpayer) levied on the profits of an organization (enterprise, bank, insurance company, etc.). Profit for the purposes of this tax is generally defined as income from the activities of the company minus the amount of established deductions and discounts. The deductions include: production, commercial, transport costs; interest on debt; advertising and representation costs; research costs.

In Russia, the tax has been in effect since 1992. Initially it was called the “enterprise income tax”, since January 1, 2002 it has been regulated by Chapter 25 of the Tax Code of the Russian Federation and is officially called the “organizational income tax”.

The base rate is 20% (until January 1, 2009 it was 24%): 2% is credited to the federal budget, 18% is credited to the budgets of the subjects of the Russian Federation.

At the end of the reporting period, taxpayers submit simplified tax returns. Non-profit organizations that do not have obligations to pay tax submit a tax return in a simplified form after the expiration of the tax period (clause 2 of article 289 of the Code).

Tax returns for income tax are submitted at the end of the reporting period no later than 28 days from the date of the end of the corresponding reporting period (I quarter, I half of the year, 9 months), at the end of the tax period - no later than March 28 of the year following the expired tax period (year ) (clause 3, clause 4 of article 289 of the Code).

Taxpayers who calculate the amount of monthly advance payments based on actually received profit submit tax returns no later than 28 calendar days from the end of the reporting period (1, 2, 3, 4...11 months).

The problems of accounting for this tax are largely similar for different countries. The main issue of income tax accounting is to reflect not only current, but also future tax liabilities that will arise as a result of recovering the value of assets or repaying liabilities included in the balance sheet as of the reporting date. That is, recovering the value of an asset or settling a liability will result in an increase or decrease in tax payments in future periods.

Russian legislation uses the following accounting provision. PBU 18/02 “Accounting for income tax settlements” was introduced by order of the Ministry of Finance dated November 19, 2002 N 114n. The standard establishes the rules for the formation in accounting and the procedure for disclosing in the financial statements information on income tax calculations for organizations recognized in accordance with the procedure established by the legislation of the Russian Federation as taxpayers of income tax (except for credit, insurance organizations and budgetary institutions). The document defines the relationship between an indicator reflecting profit (loss) calculated in the manner established by the regulatory legal acts on accounting of the Russian Federation and the tax base for income tax for the reporting period, calculated in the manner established by the legislation of the Russian Federation on taxes and fees. In international practice, Standard 12 of IFRS "Income Taxes" is used. It provides for a general procedure for the reflection in the financial statements of calculations for income tax.

It must be borne in mind that the Ministry of Finance of Russia developed PBU 18 based on the previous version of IFRS 12. The last standard has been significantly changed four times since 1998 alone. The latest revision of IFRS 12 was in 2007. And if modern IFRS 12 is based on the balance sheet approach, then PBU 18/02 still describes the liability method. However, the results of calculating deferred taxes by both methods should be the same. This is a prerequisite for the successful transformation of reporting from RAS to IFRS.

The purpose of this course work is to study IFRS 12 “Income taxes” and make a comparative analysis of this standard and PBU 18/02 “Accounting for corporate income tax calculations”.

Chapter 1 Characteristics of IFRS 12 Income Taxes

1.1 Purpose and scope of the Standard

In international standards, tax differences are defined as differences in the carrying value of assets and liabilities and their tax base. On their basis, the total amount of deferred taxes is calculated.

Carrying amount (BCV) of the asset or liability is the amount at which an asset or liability is carried on the balance sheet. The tax base (NTB) of an asset or liability is their value accepted for taxation purposes.

According to the balance method, the company's financial statements should reflect: the tax consequences of the reporting period (current income tax); future tax consequences (deferred taxes).

The objective of IAS 12 is consistent with the general objectives of international standards: to provide reliable information to interested users. Since income tax affects the outflow of funds and the value of the financial result, it must be accurately calculated and reflected in the financial statements. For users of financial information, not only the current but also the future tax consequences of the transactions that the company has carried out during the reporting period are important, as well as the impact that the settlement of obligations and the recovery of assets in future periods will have on income tax.

Key requirements of IFRS 12 Income Taxes

This Standard requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for those transactions and events themselves. Therefore, the tax consequences of transactions and other events recognized in the income statement are reflected in the same income statement. The tax consequences of transactions and other events recognized directly in equity are also reflected directly in equity. Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill or negative goodwill arising from the business combination. This Standard also addresses the recognition of deferred tax assets arising from unused tax losses or unused tax credits, the presentation of income taxes in the financial statements, and disclosures relating to income taxes.

For the purposes of this Standard, income taxes include all domestic and foreign taxes that are based on taxable income. Income taxes also include taxes, such as withholding tax, which are paid by a subsidiary, associate or joint venture on income distributed to the reporting company. In some jurisdictions, income taxes are paid at a higher or lower rate if some or all of the net income or retained earnings is paid out as dividends. In some other jurisdictions, income taxes may be refundable if some or all of the net income or retained earnings is paid out as dividends. This Standard does not specify when or how an entity should account for the tax consequences of dividends and other forms of profit distributions made by a reporting entity. This Standard does not deal with the accounting for government grants (see IAS 20 Accounting for Government Grants and Disclosure of Government Assistance) or investment tax credit. However, this Standard deals with the treatment of temporary differences that may result from such grants or investment tax credits.

1.2 Occurrence of temporary differences under IFRS

The difference between the book value (BC) of an asset or liability and its tax base (NB) is called temporary (TS).

BP = BS - NB

Temporary differences can be:

taxable temporary differences (NTDs), which are temporary differences that give rise to taxable amounts in future periods when the carrying amount of an asset or liability is recovered (settled); or

deductible temporary differences (DVR), which are temporary differences that give rise to amounts that are deductible in the calculation of taxable profit (tax loss) in the following tax periods when recovering (redeeming) the carrying amount of an asset or liability.

Temporary differences

(Carrying Value - Tax Base)

Deductible (RTD) x Forecast Income Tax Rate = Deferred Tax Assets (ITA = TRT x Tax Rate)

BS asset NB liabilities

Taxable (TRT) x Forecast Income Tax Rate = Deferred Tax Liability (ITL = TRT x Tax Rate)

Asset FB > Asset FB, or Liability FB

Where, BS - book value, NB - tax base

IT - deferred tax assets, IT - deferred tax liabilities.

The difference between the book value of an asset (liability) and its value determined for tax purposes, i.e. the time difference disappears over time.

The tax base (NTB) is the amount at which an asset or liability is recognized for tax purposes.

The tax base of an asset is the amount that will be recognized as an expense for tax purposes and deducted from any taxable income received by the entity when it recovers the carrying amount of the asset. However, if the economic benefits are not taxed, the tax base of the asset is equal to its carrying amount.

Recognition of the effect of future tax consequences leads to the emergence in the financial statements of deferred tax liabilities (DTL) and deferred tax assets (DTA).

Deferred tax assets- these are the amounts of income tax that are subject to reimbursement in subsequent tax periods in relation to:

deductible temporary differences,

uncredited tax losses carried forward,

unused tax credits carried forward.

Deferred tax liabilities are the amounts of income tax payable in future periods due to taxable temporary differences.

Natalya Serdyuk

Methods for recognizing and accounting for tax assets and liabilities under IFRS differ from those given in PBU 18/02 “Accounting for Income Tax Calculations”1. Knowledge of the main differences and intricacies of accounting will help to avoid difficulties in reporting according to international standards.

Natalya Serdyuk, Head of the IFRS Department of the Holding Vin group of companies

To account for taxes, IAS 12 Income Taxes uses the so-called balance method, and PBU 18/02 (like the previous version of IAS 12) requires them to be accounted for using the deferral method based on indicators income statement (PLO)2.

The carrying amount (BCV) of an asset or liability is the amount at which the asset or liability is carried on the balance sheet. The tax base (NTB) of an asset or liability is their value accepted for taxation purposes.

According to the balance method, the company's financial statements should reflect: the tax consequences of the reporting period (current income tax); future tax consequences (deferred taxes).

Opinion of the practitioner Irina Agafonova, Deputy Chief Accountant for IFRS, Petersburg FM LLC (St. Petersburg)

The difference between PBU 18/02 and IAS 12 is due to different reporting purposes. The objective of IAS 12 is consistent with the general objectives of international standards: to provide reliable information to interested users. Since income tax affects the outflow of funds and the value of the financial result, it must be accurately calculated and reflected in the financial statements. For users of financial information, not only the current but also the future tax consequences of the transactions that the company has carried out during the reporting period are important, as well as the impact that the settlement of liabilities and the recovery of assets in future periods will have on income tax.

The task of PBU 18/02 is to establish the relationship between profits received according to accounting and tax accounting. These fundamental differences in goals lead to differences in methods and results.

Occurrence of temporary differences

The difference between the carrying amount of an asset or liability and its tax base is called the time difference (Figure 1).

Recognition of the effect of future tax consequences leads to the emergence in the financial statements of deferred tax liabilities (DTL) and deferred tax assets (DTA).

Deferred tax assets are the amounts of income tax that are recoverable in future periods in connection with deductible temporary differences, as well as in connection with the carryforward of unused tax losses and tax credits. Deferred tax liabilities are income taxes payable in future periods due to taxable temporary differences.

The conditions for the occurrence of IT and IT are presented in table. one.

Alfa, in accordance with its accounting policy, creates a reserve for warranty service. In 2006, a reserve was created in the amount of 60,000 rubles, the cost of warranty service amounted to 20,000 rubles. Income tax rate - 30-. In tax accounting, deductions include the actual amount of the cost of warranty repairs.

The balance sheet at the end of 2006 will reflect the liability under the line "Reserve for warranty service" in the amount of 40,000 rubles. (60,000 - 20,000). The tax base of the reserve will be zero1.

The carrying amount of the liability is greater than its tax base, so there is a deductible temporary difference of RUB 40,000. (40,000 - 0). Thus, a deferred tax asset in the amount of 12,000 rubles is recognized in accounting. (40,000 x 30%).

Dr. Deferred tax asset 12,000

Kt Deferred tax expense 12,000

The initial cost of Alpha equipment as of December 31, 2006 is 70,000 rubles, the amount of accumulated depreciation is 20,000 rubles. The amount of accumulated depreciation for tax purposes is 30,000 rubles.

The income tax rate is 30%.

In this case, in the balance sheet, the cost of equipment at the end of the year 2007 will be 50,000 rubles, and the tax base of the asset will be 40,000 rubles. Since the PV of the asset is greater than its tax base, a taxable temporary difference of RUB 10,000 arises. (50,000 - 40,000) and a deferred tax liability in the amount of 3,000 rubles is recognized in accounting. (10,000 x 30%). Reflection of operations in accounting (rub.):

Dr Deferred tax expense 3000

Kt Deferred tax liability 3000

When recovering the carrying amount of the asset in subsequent periods, Alpha will pay income tax in the amount of 3,000 rubles.

According to PBU 18/02, there are differences that arise as a result of the fact that part of income and expenses is not taken into account for tax purposes either in the reporting or in future periods. In such cases, temporary differences do not arise, since no changes in tax payments are expected in the future, that is, the differences are permanent. IAS 12 does not use the concept of “permanent differences”, and if the difference is constant, then its tax base is taken equal to the accounting one and deferred taxes do not arise. For example, when accruing fines that are not deductible in tax accounting, the tax base of accrued liabilities will be equal to their book value.

Calculation and reporting of income taxes

In international accounting, the following components of income tax are distinguished.

1. Current tax (Fig. 2) is the amount of income taxes payable (reimbursable) in relation to taxable profit (loss taken into account for taxation) for the period.

It is shown on the balance sheet as a short-term liability equal to the amount unpaid, or as a current asset if the amount paid is greater than the amount payable.

Liabilities or assets for current tax are calculated in accordance with tax laws using the rates in effect at the reporting date.

2. Deferred tax. Deferred tax assets and liabilities are presented in the balance sheet separately from other assets and liabilities and are classified as non-current items. They must be valued using the tax rate that will exist when the asset is realized or the liability is settled. If a change in the tax rate is not known in the future, then IAS 12 allows the tax rate in force at the reporting date to apply.

Let's say, if from January 1, 2007 it is planned to reduce the income tax rate from 30 to 25%, then when preparing financial statements for 2006, to determine deferred taxes, you need to apply the new tax rate (25%), and reflect the current tax at the current rate ( thirty%).

Generally, current and deferred taxes are recognized as income or expense and included in net profit or loss for the period. However, if tax is charged on items that are charged directly to equity, then the resulting taxes (current and deferred) must be debited or credited directly to equity.

Alfa Company in 2006 carried out a revaluation of fixed assets. The revaluation amount was 50,000 rubles. The income tax rate is 25%. In tax accounting, the revaluation is not recognized, therefore, a taxable temporary difference in the amount of 50,000 rubles arises. and a deferred tax liability of RUB 12,500. (50,000 x 25%).

Reflection of operations in accounting (rub.):

Revaluation

Dr Fixed asset 50,000

Kt Reserve for revaluation of fixed assets 50,000

Deferred tax recognition in equity

Dr Provision for revaluation of property, plant and equipment 12,500

Kt Deferred tax liability 12,500

Deferred tax assets (liabilities) are long-term objects, the period of their repayment is often calculated over several years. Therefore, specialists sometimes have a question about the possibility of reflecting the discounted amount of deferred taxes in the financial statements. The current IAS 12 prohibits the discounting of deferred taxes.

Personal experience Irina Agafonova, Deputy Chief Accountant for IFRS, Petersburg FM LLC (St. Petersburg)

When calculating the current income tax, the IFRS reporting shows the amount of this tax for the reporting period, calculated according to the rules of tax accounting and transferred to the accounting on the credit of the Current Income Tax account and the debit of the Profit and Loss account. According to RAS, they proceed from accounting profit and reflected adjustments. This calculation is shown in the GTC.

When calculating IT and IT in IAS 12, the balance method is used: the tax base of assets and liabilities reflected in the balance sheet is determined, and the resulting difference forms deferred assets and liabilities. This methodology reflects all future tax consequences that a company will have when using assets and repaying liabilities reflected in the balance sheet at the end of the current period, but does not show in the financial statements the procedure for calculating current income tax. In our company, IT usually arise due to the difference in the amounts of tax and accounting depreciation, allowances for losses of previous years, losses from the sale of fixed assets, and IT - due to the difference in recognition of expenses for the acquisition of software products and rights to use intellectual property, the difference in the repayment of deferred expenses and depreciation of fixed assets.

Deferred tax assets and liabilities under RAS are calculated by comparing the income and expenses of the reporting period, reflected in the income statement, with the income and expenses included in the income tax return for the reporting period. This technique allows you to see in the reporting method of calculating the current income tax, but does not take into account future tax consequences.

Taxable temporary differences

15 A deferred tax liability is recognized for all taxable temporary differences unless the tax liability arises from:

(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction that:
(i) is not a business combination; and
(ii) at the time it occurs, it affects neither accounting profit nor taxable profit (tax loss).

However, for taxable temporary differences relating to investments in subsidiaries, branches and associates, and interests in joint ventures, a deferred tax liability is recognized in accordance with paragraph .

16 The mere recognition of an asset implies that the recovery of its carrying amount will be in the form of economic benefits that will flow to the entity in future periods. If the carrying amount of an asset exceeds its taxable value, then the amount of taxable economic benefits will exceed the amount that will be allowed to be deductible for tax purposes. This difference is a taxable temporary difference and the obligation to pay the resulting income taxes in future periods is a deferred tax liability. As the asset's carrying amount recovers, that taxable temporary difference will reverse and the entity will receive taxable profit. As a result, an outflow from the organization of economic benefits in the form of tax payments becomes likely. As a result, this Standard requires the recognition of all deferred tax liabilities, except in certain situations described in paragraphs and .

Example
An asset with a cost of 150 has a carrying amount of 100. Accumulated depreciation for tax purposes is 90 and the applicable tax rate is 25%.
The tax value of the asset is 60 (original value of 150 minus accumulated tax depreciation of 90). In order to recover the carrying amount of 100, the entity would have to earn taxable income of 100, but would only be able to deduct tax depreciation of 60. Therefore, the entity would pay income tax of 10 (25% of 40), when the carrying amount of the asset will be recovered. The difference between the carrying amount of 100 and the taxable amount of 60 is a taxable temporary difference of 40. Therefore, the entity recognizes a deferred tax liability of 10 (25% of 40) representing the income taxes that it will pay to recover the carrying amount of this asset.

17 Some temporary differences arise when income or expense is included in accounting profit in one period and taxable profit in another period. Such temporary differences are often referred to as temporary differences. The following are examples of such temporary differences that are taxable temporary differences and therefore give rise to deferred tax liabilities:

(a) interest income is included in accounting profit on a time-proportional basis, but some jurisdictions may require it to be included in taxable income when the cash is received. The tax value of any receivables recognized in the statement of financial position in respect of such income is nil, as these incomes do not affect taxable income until the cash is received;
(b) the depreciation used in determining taxable profit (tax loss) may differ from that used in determining accounting profit. A temporary difference is the difference between the carrying amount of a related asset and its taxable amount, which is equal to the asset's cost, after taking into account any deductions related to that asset that are allowed by the tax authorities in determining taxable income for the current and prior periods. When there is an accelerated tax depreciation, there is a taxable temporary difference that results in a deferred tax liability (if the tax depreciation rate is less than the accounting depreciation rate, then there is a deductible temporary difference that results in a deferred tax asset); and
(c) development costs may be capitalized and depreciated in subsequent periods in determining accounting profit, but are deductible in determining taxable profit in the period in which they are incurred. Such development costs have a taxable value of nil because they have already been deducted from taxable income. The temporary difference is the difference between the carrying amount of capitalized development costs and their taxable value of nil.

18 Temporary differences also arise when:

(a) identifiable assets and liabilities acquired and assumed in a business combination are recognized at their fair values in accordance with IFRS 3 Business Combinations, but no similar adjustment is made for tax purposes (see paragraph );
(b) assets are remeasured without a similar adjustment for tax purposes (see paragraph );
(c) goodwill arises in a business combination (see paragraph );
(d) the tax value of the asset or liability at initial recognition differs from its initial carrying amount, for example, when an entity receives a government grant for an asset that is not taxable (see paragraphs and ); or
(e) the carrying amount of investments in subsidiaries, branches and associates, or interests in joint ventures, begins to differ from the tax value of those investments or interests (see paragraphs -).

19 With certain exceptions, identifiable assets and liabilities acquired and assumed in a business combination are recognized at their fair values at the acquisition date. Temporary differences arise when a business combination does not or otherwise affects the taxable value of those identifiable assets acquired and liabilities assumed. For example, if the carrying amount of an asset is increased to its fair value, but the tax value of that asset remains equal to its original cost to the previous owner, a taxable temporary difference arises that results in a deferred tax liability. The resulting deferred tax liability affects goodwill (see paragraph ).

Assets carried at fair value

20 Under IFRS, certain assets are permitted or required to be carried at fair value or revalued (see, for example, IAS 16 Property, Plant and Equipment , IAS 38 Intangible Assets , IAS 40 Investment Property , IFRS 16 Leases and IFRS 9 Financial Instruments). In some jurisdictions, the revaluation or other revaluation of an asset to fair value affects taxable profit (tax loss) for the current period. As a result, the tax value of the asset is adjusted and no temporary difference arises. In other jurisdictions, the revaluation or restatement of an asset does not affect taxable income for the period in which that revaluation or restatement is made and, therefore, the taxable value of the asset is not adjusted. However, recovering its carrying amount in the future will result in the entity receiving a taxable inflow of economic benefits, and the amount that will be deductible for tax purposes will differ from the amount of those economic benefits. The difference between the carrying amount of a revalued asset and its taxable amount is a temporary difference and gives rise to a deferred tax liability or asset. This is true even if:

(a) the entity does not plan to dispose of the asset; in such cases, the revalued carrying amount of the asset will be recovered through use and this will create taxable income in excess of the amount of depreciation that will be deductible for tax purposes in future periods; or
(b) capital gains tax is deferred if the proceeds from the disposal of the asset are invested in similar assets; in such cases, tax will eventually become payable on the sale or use of those similar assets.

21 Goodwill arising in a business combination is measured at the excess of subparagraph (a) below over subparagraph (b):

(a) the aggregate:
(i) the consideration transferred, measured in accordance with IFRS 3, which generally requires a determination of fair value at the acquisition date;
(ii) the amount of any non-controlling interest in the acquiree recognized in accordance with IFRS 3; and
(iii) in a business combination in stages, the fair value of the acquirer's previously held equity interest in the acquiree at the acquisition date;

(b) the net amount of the identifiable assets acquired and liabilities assumed measured in accordance with IFRS 3 at the acquisition date.

Many tax authorities do not allow a reduction in the carrying amount of goodwill to be treated as a deductible expense in determining taxable income. In addition, in such jurisdictions, the cost of goodwill is often not deductible on disposal of the related business from a subsidiary. In such jurisdictions, goodwill has a taxable value of nil. Any difference between the carrying amount of goodwill and its taxable value of nil is a taxable temporary difference. However, this Standard does not permit the recognition of the resulting deferred tax liability because goodwill is measured as a residual and the recognition of such a deferred tax liability would increase the carrying amount of the goodwill.

21A Subsequent reductions in a deferred tax liability not recognized because it arises from the initial recognition of goodwill are also treated as arising from the initial recognition of goodwill and, therefore, are not recognized in accordance with paragraph . For example, if, as a result of a business combination, an entity recognizes goodwill of CU100 with a taxable amount of nil, the paragraph prohibits the entity from recognizing the associated deferred tax liability. If the entity subsequently recognizes an impairment loss of CU20 for that goodwill, the taxable temporary difference attributable to the goodwill is reduced from CU100 to CU80, with a corresponding decrease in the amount of the unrecognized deferred tax liability. This decrease in the amount of the unrecognized deferred tax liability is also treated as attributable to the initial recognition of that goodwill and, therefore, is not recognised, in accordance with paragraph .

21B However, deferred tax liabilities on taxable temporary differences relating to goodwill are recognized to the extent that they are not related to the initial recognition of goodwill. For example, if, as a result of a business combination, an entity recognizes goodwill of CU100 that is deductible for tax purposes at a rate of 20 percent per annum from the year the business was acquired, the taxable value of the goodwill will be CU100 on initial recognition. and CU80 at the end of the acquisition year. If the carrying amount of goodwill at the end of the year of acquisition does not change to CU100, there will be a taxable temporary difference of CU20 at the end of that year. Since this taxable temporary difference does not relate to the initial recognition of goodwill, the resulting deferred tax liability is subject to recognition.

22 A temporary difference may arise on initial recognition of an asset or a liability, for example, if the cost of the asset will not be deductible for tax purposes, in whole or in part. The accounting treatment for this temporary difference depends on the nature of the transaction that gave rise to the underlying asset or liability on initial recognition:

(a) in a business combination, an entity recognizes any deferred tax liabilities or assets and this affects the amount of goodwill or gain on a bargain purchase it recognizes (see paragraph );
(b) if the transaction affects either accounting profit or taxable profit, the entity recognizes any amount of the resulting deferred tax liability or asset and recognizes the related deferred tax expense or income in profit or loss (see paragraph );
(c) if the transaction is not a business combination and affects neither accounting profit nor taxable profit, the entity would—in the absence of the exemption in paragraphs and—recognize the resulting deferred tax liability or asset and adjust the carrying amount of the related asset or liability for the same amount. Such adjustments would make the financial statements less transparent. Therefore, this Standard does not permit an entity to recognize the resulting deferred tax liability or asset either on initial recognition or subsequently (see the example below). In addition, an entity does not recognize subsequent changes in the amount of an unrecognized deferred tax liability or asset as that asset is depreciated.

Example illustrating paragraph 22(c)
An asset with an initial cost of 1,000 is expected to be used by an entity over a five-year useful life, followed by disposal at a residual value of zero. The tax rate is 40%. Depreciation of an asset is not deductible for tax purposes. The gain or loss arising on disposal of the asset will neither be taxable nor deductible for tax purposes.
As it recovers the carrying amount of the asset, the entity will earn taxable income of 1,000 and pay tax of 400. The entity does not recognize the resulting deferred tax liability of 400 because it arises from the initial recognition of the asset.
In the following year, the asset's carrying amount is 800. On the taxable income received of 800, the entity will be liable to pay tax of 320. The entity does not recognize the resulting deferred tax liability of 320 because it arises from the initial recognition of the asset.

24 A deferred tax asset shall be recognized for all deductible temporary differences to the extent that it is probable that there will be taxable profit against which the deductible temporary difference can be utilised, unless that deferred tax asset arises from the initial recognition of an asset or liability as a result of an operation that:

(a) is not a business combination; and
(b) at the time it occurs, it affects neither accounting profit nor taxable profit (tax loss).

However, for deductible temporary differences relating to investments in subsidiaries, branches and associates, and interests in joint ventures, a deferred tax asset is recognized in accordance with paragraph .

25 The very recognition of a liability implies that its carrying amount will be settled in future periods through an outflow from the entity of resources embodying economic benefits. When there is an outflow of resources from an entity, it is possible that some or all of their cost will be deductible in determining taxable profit in a later period than that in which the liability was recognised. In such cases, a temporary difference arises between the carrying amount of the liability and its taxable value. Therefore, a deferred tax asset arises in respect of income taxes that will be recovered in future periods, in which the relevant part of the liability can be deducted in determining taxable profit. Similarly, if the carrying amount of an asset is less than its taxable amount, the difference results in a deferred tax asset for income taxes that will be recoverable in future periods.

Example
The entity recognizes a liability of 100 for the accrued costs of a product warranty. Warranty fulfillment costs are not deductible for tax purposes until the entity has made the appropriate payment. The tax rate is 25%.
The tax value of this liability is nil (the carrying amount of 100 minus the amount that will be deductible for tax purposes in respect of this liability in future periods). When the liability is settled at its carrying amount, the entity will reduce its future taxable income by 100 and therefore reduce its future tax payments by 25 (100 at the rate of 25%). The difference between the carrying amount of 100 and the taxable amount of nil is a deductible temporary difference of 100. Therefore, the entity recognizes a deferred tax asset of 25 (100 at 25%), provided that it is probable that the entity will receive future periods of taxable income sufficient to take advantage of the opportunity to reduce tax payments.

26 The following are examples of deductible temporary differences that give rise to deferred tax assets:

(a) Plan costs may be deductible in determining accounting profit as the employee renders service, but is deductible in determining taxable profit only when the entity either contributes to a pension fund or pays pensions to employees. There is a temporary difference between the carrying amount of this liability and its taxable value. The tax value of such a liability is usually nil. This deductible temporary difference gives rise to a deferred tax asset because the entity will receive economic benefits in the form of a deduction from taxable income at the time the contributions or pensions are paid.
(b) Research costs are recognized as an expense in determining accounting profit in the period in which they are incurred, but may only be deductible in determining taxable profit (tax loss) in a later period. The difference between the taxable value of these research costs, which is the amount that the tax authorities will allow to be deducted in future periods, and their carrying amount of nil is a deductible temporary difference, giving rise to a deferred tax asset.
(c) With certain exceptions, identifiable assets and liabilities acquired and assumed in a business combination are recognized by an entity at their fair values at the acquisition date. If a liability assumed is recognized at the acquisition date, but the related costs are deductible in determining taxable profit only in a later period, a deductible temporary difference arises that results in a deferred tax asset. A deferred tax asset also arises when the fair value of an identifiable asset being acquired is less than its taxable value. In both cases, the resulting deferred tax asset affects the amount of goodwill (see paragraph ).
(d) Some assets may be carried at fair value or remeasured without a similar adjustment to their value for tax purposes (see paragraph ). A deductible temporary difference arises if the taxable amount of such an asset exceeds its carrying amount.

Example illustrating paragraph 26(d)
Determining the deductible temporary difference at the end of year 2:
At the beginning of year 1, Entity A purchases for CU1,000 a debt instrument with a nominal value of CU1,000, which is due at maturity in 5 years, bearing an interest rate of 2%, with interest payable at the end every year. The effective interest rate is 2%. The debt instrument is measured at fair value.
At the end of year 2, as a result of an increase in market interest rates to 5%, the fair value of the debt instrument decreased to CU918. If Entity A continues to hold the debt instrument, it is probable that it will collect all of the contractual cash flows.
Gains (losses) on a debt instrument are taxable (deductible) only if they are realised. Gains (losses) arising from the sale or redemption of a debt instrument are calculated for tax purposes as the difference between the amount received and the original cost of the debt instrument.
Accordingly, the tax base of a debt instrument is its cost.
The difference between the carrying amount of the debt instrument in Entity A's statement of financial position of CU918 and its tax base of CU1,000 gives rise to a deductible temporary difference of CU82 at the end of year 2 (see paragraphs and ), whether Entity A expects to recover the carrying amount of the debt instrument through sale or use (ie, by holding it and collecting contractual cash flows), or by a combination of both.
This is because deductible temporary differences are differences between the carrying amount of an asset or liability on the statement of financial position and its tax base, resulting in amounts that are deductible in determining taxable profit (tax loss) in future periods in which the carrying amount of the asset or liability obligations are reimbursed or extinguished (see paragraph ). In determining taxable profit (tax loss) on the sale or settlement of an asset, Entity A receives a deduction equivalent to its tax base of CU1,000.

27 Reversals of deductible temporary differences result in deductions in determining deferred taxable profit. However, economic benefits in the form of reduced tax payments will only be available to an entity if sufficient taxable profits are generated against which these deductions can be offset. Therefore, an entity recognizes deferred tax assets only to the extent that it is probable that there will be taxable profit against which the deductible temporary differences can be utilised.

27A When an entity assesses whether there is taxable profit against which it can deduct a deductible temporary difference, it considers whether tax laws restrict the sources of taxable profit against which it can deduct when reversing that deductible temporary difference. If tax laws do not provide for such restrictions, an entity measures the deductible temporary difference in conjunction with all other deductible temporary differences. However, if the law restricts the loss set-off to a certain type of deduction from income, the deductible temporary difference is measured only in conjunction with other deductible temporary differences of a certain type.

28 It is probable that there will be taxable profit against which a deductible temporary difference can be utilised, when there are sufficient taxable temporary differences attributable to the same tax authority and to the same entity whose transactions are subject to tax that are expected to be restored:

(a) in the same period in which the deductible temporary difference is expected to reverse; or
(b) in the periods for which a tax loss for which a deferred tax asset has been recognized can be carried forward from previous or subsequent periods.

In such circumstances, a deferred tax asset is recognized in the period in which the deductible temporary differences arise.

29 In the absence of sufficient taxable temporary differences relating to the same tax authority and the same entity whose transactions are subject to tax, a deferred tax asset is recognized to the extent that:

(a) it is probable that the entity will generate sufficient taxable profits attributable to the same taxing authority and the same entity whose transactions are subject to tax in the same period in which the reversal of the deductible temporary difference will occur (or in periods for which a tax loss for which a deferred tax asset has been recognized is carried forward from prior or subsequent periods. In evaluating the prospects for earning sufficient taxable income in future periods, an entity:
(i) compares the deductible temporary differences with future taxable income, which excludes tax deductions from the reversal of those deductible temporary differences. This comparison shows the extent to which future taxable profits will be sufficient for the entity to deduct the amounts resulting from the reversal of those deductible temporary differences;
(ii) does not take into account taxable amounts arising from deductible temporary differences that are expected to arise in future periods because that deferred tax asset arising from those deductible temporary differences will itself require future taxable profits to be used;

(b) the entity has tax planning capabilities that will ensure that taxable profits are available in the relevant periods.

29A An estimate of probable future taxable profits may involve the recovery of some of an entity's assets in excess of their carrying amount if there is sufficient evidence that it is probable that the entity will receive them. For example, when an asset is measured at fair value, an entity must consider whether there is sufficient evidence to conclude that it is probable that the entity will recover the asset for more than its carrying amount. This may be the case, for example, when an entity expects to hold a fixed rate debt instrument and collect contractual cash flows.

30 Tax planning opportunities are actions that can be taken by an entity to create or increase taxable profits in a given period prior to the expiration of the period during which a carried forward tax loss or tax credit is allowed to be used. For example, in some jurisdictions, the creation or increase of taxable income is possible due to:

(a) choosing one of two options for taxing interest income: either on an accrual basis, i.e. in the amount of accrued interest, or on a cash basis, i.e. in the amount of interest received;
(b) deferring certain deductions from taxable income;
(c) the sale and possibly leaseback of assets that have appreciated in value but have not been adjusted in their taxable value to reflect the increase; and
(d) the sale of an asset that generates non-taxable income (for example, in some jurisdictions this includes government bonds) in order to acquire another investment that generates taxable income.

If the application of tax planning arrangements results in the carry forward of taxable profit from a later to an earlier period, the ability to use the tax loss or tax credit is still dependent on the availability of future taxable profit that does not come from the future occurrence of temporary differences.

31 If an entity has had losses in the recent past, the entity should be guided by paragraphs and .

32 [Deleted]

Goodwill

32A If the carrying amount of goodwill arising in a business combination is less than its taxable amount, that difference gives rise to a deferred tax asset. A deferred tax asset arising from the initial recognition of goodwill shall be recognized in business combination accounting to the extent that it is probable that future taxable profits will exist against which the deductible temporary difference can be utilised.

Initial recognition of an asset or liability

33 One case in which a deferred tax asset arises on initial recognition of an asset is when a tax-free government grant relating to an asset is deducted in calculating the carrying amount of that asset, but is not deducted for tax purposes from the depreciable amount of that asset (i.e., from its tax value). The carrying amount of the said asset is less than its taxable value, which results in a deductible temporary difference. Government grants may also be reported as deferred income, in which case the difference between the deferred income and its taxable value of zero is a deductible temporary difference. Whichever presentation method an entity chooses, it does not recognize the resulting deferred tax asset for the reasons described in paragraph .

Unused tax losses and unused tax credits

34 A deferred tax asset shall be recognized for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profits will be available against which those unused tax losses and unused tax credits can be utilised.

35 The recognition criteria for deferred tax assets arising from the carry forward of unused tax losses and tax credits are similar to the recognition criteria for deferred tax assets arising from deductible temporary differences. However, the existence of unused tax losses is strong evidence that there may not be future taxable profits. Therefore, if an entity has had losses in the recent past, it recognizes a deferred tax asset for unused tax losses or tax credits only to the extent that the entity has sufficient taxable temporary differences or there is other compelling evidence that future Sufficient taxable profit against which the entity can set off unused tax losses or unused tax credits. In such circumstances, the paragraph requires disclosure of the amount of that deferred tax asset and the nature of the evidence from which it was recognized.

36 In assessing the likelihood of having taxable profit against which unused tax losses or unused tax credits can be utilised, an entity considers the following criteria:

(a) whether that entity has sufficient taxable temporary differences attributable to the same taxing authority and to the same entity whose transactions are subject to tax that will give rise to taxable amounts against which unused tax losses can be utilised, or unused tax credits before they expire;
(b) whether it is probable that the entity will have taxable profits before the unused tax losses or unused tax credits expire;
(c) whether unused tax losses result from identifiable causes that are unlikely to reoccur; and
(d) whether the entity has tax planning capabilities (see paragraph ) that will result in taxable profit in the period in which unused tax losses or unused tax credits can be offset.

To the extent that it is not probable that there will be taxable profit against which unused tax losses or unused tax credits can be utilised, a deferred tax asset is not recognised.

Remeasurement of unrecognized deferred tax assets

37 An entity reassesses unrecognized deferred tax assets at the end of each reporting period. An entity recognizes a previously unrecognized deferred tax asset to the extent that it is probable that future taxable profit will recover that deferred tax asset. For example, an improvement in the terms of trade may increase the likelihood that an entity will be able to earn sufficient taxable profit in the future to make a deferred tax asset meet the recognition criteria in paragraph or . Another example is when an entity remeasures deferred tax assets at or after the date of the business combination (see paragraphs and ).

Investments in subsidiaries, branches, associates and interests in joint ventures

38 Temporary differences arise when the carrying amount of investments in subsidiaries, branches and associates or interests in joint ventures (namely, the parent or investor's interest in the net assets of the subsidiary, branch, associate or investee, including the carrying amount of goodwill) becomes different from the taxable value (often equal to the original cost) of the investment or interest. Such differences can arise in a number of different circumstances, for example:

(a) if there are retained earnings of subsidiaries, branches, associates or joint arrangements;
(b) in the event of changes in exchange rates where the parent and its subsidiary are located in different countries; and
(c) if the carrying amount of an investment in an associate is reduced to its recoverable amount.

In the consolidated financial statements, the temporary difference on an investment may differ from the temporary difference on that investment in the parent's separate financial statements if the parent's separate financial statements account for that investment at cost or at a revalued amount.

39 An entity shall recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches, associates and interests in joint ventures, unless both of the following conditions are met:

(a) that parent, investor, joint venturer or joint operator entity is able to control the timing of the reversal of the related temporary difference; and
(b) it is probable that the temporary difference will not reverse in the foreseeable future.

40 Because the parent controls the subsidiary's dividend policy, it is in a position to control the timing of the reversal of the temporary differences associated with the investment (including temporary differences arising not only on retained earnings but also on foreign exchange translation differences). In addition, in many cases it will be impracticable to determine the amount of income taxes that would be payable when the temporary difference reverses. Therefore, if the parent has determined that these profits will not be distributed in the foreseeable future, it does not recognize a deferred tax liability. The same approach applies to investment in affiliates.

41 An entity's non-monetary assets and liabilities are measured in its functional currency (see IAS 21 The Effects of Changes in Foreign Exchange Rates). If an entity's taxable profit or loss (and hence the taxable value of its non-monetary assets and liabilities) is determined in a different currency, changes in the relevant exchange rate give rise to temporary differences for which a deferred tax liability or (subject to paragraph ) an asset is recognised. The resulting deferred tax is recognized in profit or loss as a debit or a credit (see paragraph ).

42 An investor with an interest in an associate does not control the associate and generally does not have the ability to determine its dividend policy. Therefore, in the absence of an agreement prohibiting distribution of the associate's profits for the foreseeable future, the investor recognizes a deferred tax liability for taxable temporary differences associated with its investment in the associate. In some cases, an investor may not be able to determine the amount of tax that would be payable on recovering the cost of its investment in an associate, but may determine that the amount of tax will be no less than a certain minimum amount. In such cases, the deferred tax liability is measured at that amount.

43 An agreement between the participants in a joint venture usually governs the distribution of profits and determines whether the consent of all parties or any group of parties is required to resolve such issues. If a joint venturer or joint operator has control over the timing of the distribution of its share of the profits of the joint arrangement and it is probable that its share of the profits will not be distributed in the foreseeable future, a deferred tax liability is not recognised.

44 An entity shall recognize a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates and interests in joint ventures to the extent, and only to the extent that it is probable that:

(a) the temporary difference will reverse in the foreseeable future; and
(b) taxable profit will arise against which the related temporary difference can be utilised.

45 In deciding whether to recognize a deferred tax asset for deductible temporary differences relating to its investments in subsidiaries, branches and associates, and its interests in joint ventures, an entity takes into account the guidance in paragraphs - .

Experience and Solutions

How to account for deferred taxes

Anastasia Konshina, Deputy Financial Director of VL Logistic Group of Companies

The preparation of the tax balance and the calculation of deferred taxes is the final and rather laborious stage in the preparation of financial statements in accordance with IFRS and raises many questions for compilers of financial statements. How to report deferred taxes without errors?

Taxable income almost always differs from the profit reflected in the financial statements, because when calculating profit for tax purposes, companies are guided by the requirements of tax legislation, and not IFRS. As a result, the relationship between profit before tax shown in the financial statements and taxes payable is not visible. Restores this relationship deferred tax.

Key principles for accounting for deferred taxes

IAS 12 Income Taxes considers all differences in accounting and tax reporting in terms of the balance sheet method. Under this method, assets and liabilities recognized at their carrying amount are compared with their tax assessment. As a result of this comparison, temporary differences are revealed. Constant differences do not affect this method. By applying the tax rate to the temporary differences, a deferred tax is obtained to be recognized in the statement of financial position. Here are the key concepts on which the accounting of deferred taxes is based.

Temporary differences are the differences between the carrying amount of an asset or liability and its tax base. Temporary differences can be taxable (give rise to a deferred tax liability) or deductible (give rise to a deferred tax asset).

Tax base of the asset is the amount that will be deducted for tax purposes from any taxable economic benefits that the entity will receive when recovering the carrying amount of the asset. For example, as a result of the use of fixed assets, the enterprise receives taxable revenue, which is reduced by the amount of depreciation. At the end of the asset's useful life, the accumulated depreciation will be equal to its cost. At the same time, the tax consequences of transactions that the company has reflected in the financial statements in the current period may affect subsequent periods. Thus, at the time of purchase of an item of fixed assets, there is no temporary difference (provided that the value of the fixed asset is the same for tax and financial reporting purposes). The temporary difference may arise later when different depreciation rates are applied in accounting and accounting for tax purposes. As a result, the residual value of an item of property, plant and equipment reflected in the financial statements differs from the value calculated for tax purposes.

Tax base of liability equal to its carrying amount less any amounts that are deductible for tax purposes in respect of that liability in future periods.

When attributing deferred tax to the financial result of the reporting period, the relationship between profit before tax and income tax payable is restored.

What tax rate to use

Deferred taxes are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on the tax rates and tax laws that were in effect at the end of the reporting period.

If at the end of the reporting period there is already an income tax rate approved by the tax legislation and effective from the next reporting period, deferred tax assets and liabilities at the end of the reporting period must be recalculated at the new rate. The adjustment is calculated by the formula:

Adjustment amount = Opening deferred tax balance × New income tax rate: Former tax rate - Opening deferred tax balance

Note!

Changes in the amount of deferred tax assets and liabilities, including those due to a change in the tax rate, are reflected in the income statement (except for the part that relates to items previously recognized in equity).

To illustrate this point, consider the following situation. As of December 31, 2008 (24% income tax rate), the company's financial statements recognized:

deferred tax asset in the amount of RUB 32.4 thousand;
deferred tax liability in the amount of 64.5 thousand rubles.

Since 2009, the income tax rate of 20 percent has been introduced. Deferred taxes must be recalculated at the new tax rate. The calculation of the adjustment is given in tables 1 and 2.

Table 1. Adjustment of the balance of the deferred tax asset, thousand rubles

Table 2. Adjustment of the balance of the deferred tax liability, thousand rubles

It should also be borne in mind that different types of activities may have different tax rates.

The amount of deferred taxes should be calculated based on the expected method of recovering the asset or settling the liability. The intentions of the company's management will play a key role here. However, for property, plant and equipment carried at revalued amounts and investment property measured at fair value, the standard requires the assumption that such assets are normally recovered through sale.

Deferred taxes in consolidated financial statements

Deferred taxes often arise in the preparation of consolidated financial statements.

At the acquisition date of a subsidiary, its assets are measured at fair value. The fair value adjustment does not affect the tax base and, accordingly, a temporary difference arises.

Example

At the date of acquisition of the subsidiary, the acquirer revalued property, plant and equipment to fair value.

The book value of fixed assets is 500 thousand rubles. The estimated fair value was RUB 700 thousand. The following adjustments were made in the preparation of the consolidated financial statements.

Property, plant and equipment was revalued to fair value:

Dt "Fixed assets" - 200 thousand rubles.
Kt "Revaluation reserve" - 200 thousand rubles.

A deferred tax liability for the revaluation has been recognized:

Dt "Revaluation reserve" - 40 thousand rubles. (200 thousand rubles × 20%).
CT "Deferred tax" - 40 thousand rubles. (200 thousand rubles × 20%).

Goodwill arising in a business combination has a nil tax base because it is generally not recognized for tax purposes. But it should be noted that the standard prohibits the recognition of the resulting deferred tax liability.

This exception is made in order not to increase the amount of goodwill in the financial statements.

One of the necessary procedures carried out in the preparation of consolidated financial statements is the exclusion of intra-group transactions and unrealized profits arising from the sale of inventories, fixed assets.

From the point of view of the tax authorities, the tax base of an asset acquired as a result of an intragroup transaction is equal to the purchase price. In addition, the seller of goods, fixed assets is obliged to pay tax on profits from the sale of this asset. As a result, a deferred tax asset must be recognized in the consolidated financial statements.

Note!

Deferred tax is calculated at the buyer's tax rate.

Recognition of a deferred tax asset means that the income tax accrued by the selling enterprise from the sale of inventories, fixed assets, is not included in the consolidated income statement for the reporting period. It will be reflected in the future period when the Group recognizes profit.

Example

Alpha Company owns 100% of the capital of Beta Company. On January 1, 2011, Alfa sold fixed assets to Beta for RUB 50 million. The residual value of fixed assets at the date of sale is RUB 30 million. The remaining useful life of the assets is eight years. Profit from the sale of fixed assets amounted to 20 million rubles. When consolidating the financial statements for 2011, the following adjustments were made to eliminate intra-group profit from the sale of fixed assets:

Dt “Other income from the sale of fixed assets” - 20 million rubles.
CT "Fixed assets" - 20 million rubles.

Dt "Fixed assets" - 2.5 million rubles. (20 million rubles: 8 years).
CT "Cost" - 2.5 million rubles. (20 million rubles: 8 years).

Dt "Deferred tax" - 3.5 million rubles. (20 million rubles - (50 million rubles - 30 million rubles) : 8 years) 20%).
CT "Expense for income tax" - 3.5 million rubles. (20 million rubles - (50 million rubles - 30 million rubles) : 8 years) × 20%).

Offsetting deferred taxes

In rare cases, companies may offset deferred tax assets and deferred tax liabilities. This is possible if the company has the legal right to offset assets and liabilities for current income tax, and deferred tax assets and liabilities relate to income tax, which is collected by the same tax authority. That is, the company can make or receive a single tax payment. In the consolidated financial statements, the current tax assets and liabilities of the various companies that make up the Group can only be offset if they have the legal right to pay or refund tax in a single payment and intend to use it.

Practice of calculating deferred taxes

Differences between the tax assessment of assets and liabilities and their assessment under IFRS are present for most of the assets (liabilities) of our Group of Companies. For example, the Group's accounting policy for tax purposes does not provide for the creation of a provision for doubtful debts. And when preparing financial statements in accordance with IFRS, the company is obliged to create such a reserve.

Differences also arise in the accounting items of leasing agreements. Here, differences can arise both in the calculation of the initial amount of the obligation, and in the calculation of lease payments. In accordance with the provisions of our accounting policy for tax purposes, the amounts of accrued lease payments are recorded as part of other expenses accounted for for tax purposes. In accordance with IAS 17 Leases, lease payments are required to be divided into repayment of the principal amount of the finance lease liability and interest payments. Only interest payments affect accounting profit. In this case, the amount of interest under the contract is calculated using the discount rate. In this case, there are also temporary differences.

Differences between the tax and accounting base also arise due to the use of different methods for calculating depreciation in tax accounting and in accounting under IFRS. So, according to the accounting policy under IFRS, depreciation on vehicles is charged based on the mileage traveled. In tax accounting for this group of fixed assets, depreciation is charged on a straight-line basis.

Since the calculation of deferred taxes is the final stage of the transformation of RAS reporting into IFRS, at the time of the calculation of deferred taxes, transformation specialists already have sufficient information on possible sources of temporary differences. In accordance with the current regulations for the transformation of Russian reporting, chief accountants of the Group companies submit to the IFRS department income tax returns for the reporting period, as well as detailed breakdowns of the differences between accounting and tax accounting data (tax accounting registers).

The procedure for calculating deferred taxes consists of the following steps.

Stage 1. Determine the tax base of assets and liabilities. According to PBU 18/02 “Accounting for income tax settlements”, temporary differences are accrued using the accounts “Deferred tax assets” and “Deferred tax liabilities”. To calculate the tax base of assets and liabilities (subject to the correct maintenance of this section of accounting), you need to use the balance at the beginning and end of the period of accounts and with a breakdown by type of difference. If such analytics is not conducted, then for the purposes of compiling the tax balance, it is necessary to separately decipher the account data by type of assets or liabilities.

By adjusting the value of assets and liabilities for which there is a difference between accounting and tax accounting (that is, for which there is an account balance and ), we obtain the tax base of assets and liabilities for the purposes of calculating deferred taxes under IFRS.

The subsidiaries of our Group do not apply the provision of PBU 18/02, as they are small businesses. Therefore, for subsidiaries, the specialists of the IFRS department of the parent company identify temporary differences by comparing the value of assets and liabilities in an IFRS assessment with their tax assessment according to income tax returns. For clarity, all data for calculating deferred taxes are summarized in a separate table - the tax balance (table 3).

Table 3 Tax balance, thousand rubles

	Book value	The tax base	Reclassification entries	Time difference	SHE/IT
Fixed assets
Intangible assets	120	0	(120)	0	-
Earth	250	210	-	40	IT
fixed assets	110	60	-	50	IT
Other noncurrent assets	0	120	(120)	0	-
current assets
Stocks	29	35	-	(6)	SHE IS
Accounts receivable	263	279	-	(16)	SHE IS
Commitments
	(337)	(382)	-	45	IT

Step 2. Identify temporary differences. Differences between financial and tax accounting were formed as a result of the following events.

During the year, the company revalued the land plot by 40,000 rubles. According to the Tax Code of the Russian Federation, when revaluing fixed assets, a positive amount of such a revaluation is not recognized as income taken into account for tax purposes. Accordingly, the carrying amount of the asset will be higher than its tax base. The difference between the carrying amount of a revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability.
The company uses different depreciation rates for the purposes of financial and tax accounting (fixed by the accounting policy of the company). When compiling the tax balance, it is necessary to compare the value of fixed assets according to IFRS and tax accounting data. The differences between them are temporary and give rise to deferred tax assets or deferred tax liabilities. Based on the results of the analysis, it was revealed that depreciation for tax accounting purposes exceeds the amount of depreciation according to IFRS accounting data. A taxable temporary difference arises.
A reserve is created for illiquid stocks, the value of which is not taken into account for tax purposes. Under IAS 2 Inventories, this group of assets must be stated at the lower of cost and net realizable value. A reserve for illiquid inventories is created by the amount of the difference between the current market value and the actual cost, if the latter is higher than the market value. According to the norms of the Tax Code of the Russian Federation, the creation of such a reserve is not provided. The book value of the inventory in this case will be less than the tax value. This results in a deductible temporary difference and a deferred tax asset.
Accounts receivable in IFRS financial statements are shown net of allowance for doubtful debts. The Group's accounting policy for tax purposes does not provide for the creation of such a provision. The carrying amount of the receivables in this case would be less than the tax value, resulting in a deductible temporary difference and a deferred tax asset.
During the reporting period, one of the Group's companies entered into a lease agreement. The lease has been classified as a finance lease for IFRS purposes. Under the terms of the agreement, the leasing object is accounted for on the lessee's balance sheet. Under IAS 17 Leases, when accounting for a finance lease, the lessee recognizes a liability at the lower of the present value of the minimum lease payments or the fair value of the leased asset. The discounted value of the minimum lease payments is 337 thousand rubles. In tax accounting, accounts payable (leasing liability) are recognized based on the amount of the lease agreement. It is 382 thousand rubles. Accordingly, a taxable temporary difference arises that gives rise to a deferred tax liability.

Step 3. Identify persistent differences. Items for which this type of difference arises are excluded from the calculation of deferred taxes. For taxation purposes, expenses on accrued interest on credit obligations (25 thousand rubles), the amount of which exceeds the limit established by the Tax Code of the Russian Federation, are not taken into account. This amount is excluded from the calculation of deferred taxes.

Stage 4. Exclude reclassification entries generated during the transformation of financial statements. When calculating deferred taxes, it is necessary to exclude the amount of the transaction associated with the reclassification of the balance sheet item “Other non-current assets” to intangible assets (the criteria for recognizing an asset as an intangible asset are met).

Note!

A deferred tax asset may be recognized to the extent that it is probable that future taxable profit will exist against which the deductible temporary difference can be utilised. Based on professional judgment, it is necessary to estimate the amount of the deferred tax asset that can be recognized in the financial statements.

Step 5. Compare tax and IFRS balance sheet data and calculate temporary differences. The IFRS balance formed in the process of transformation must be compared with the tax balance. Differences between the IFRS balance sheet and the tax balance give rise to deferred taxes under IAS 12 (excluding reclassification entries).

When comparing the balance sheet according to IFRS with the balance sheet compiled according to the principles of tax accounting, it is necessary to take into account the signs of the numerical values of the differences: negative values are used in the calculation of deferred tax assets, positive values are used in the calculation of deferred tax liabilities.

In our example, taxable temporary differences amounted to RUB 135,000. (40,000 + 50,000 + 45,000). Deductible temporary differences are RUB 22,000. (16,000 + 6,000).

Step 6. Calculate deferred taxes (multiply the corresponding temporary difference by the tax rate). As of December 31, 2011, the company formed the following tax balance sheet to calculate deferred taxes (table 3). The tax rate as of December 31, 2011 is 20 percent. In our example, IT is 27 thousand rubles. (135 thousand rubles × 20%). IT is 4.4 thousand rubles. (22 thousand rubles × 20%).

Stage 7. Reflect deferred taxes in the financial statements. Deferred tax assets and liabilities are long-term elements of financial statements and often have a maturity period of years. It should be noted that deferred tax amounts are not subject to discounting. Real amounts of deferred taxes should be reflected in the financial statements, despite the fact that the effect of discounting can be significant.

Deferred taxes are recognized in the statement of financial position, and the change in their amount is recognized in the income statement or in the statement of changes in equity (if the occurrence of deferred taxes is associated with a transaction affecting equity). Most often, deferred tax is recognized in equity on an increase in the carrying amount of property, plant and equipment after revaluation. However, IAS 16 Property, Plant and Equipment allows a portion of the revaluation reserve for a property, plant and equipment to be transferred to retained earnings over the life of its depreciation, without waiting for its disposal. The amount of the provision transferred to retained earnings shall not include the associated deferred tax. In this case, the posting is formed annually:

Dt "Revaluation reserve"
Dt "Deferred tax"
CT "Retained earnings" 8 thousand rubles. (40 thousand rubles × 20%)

The amount of deferred tax that must be recognized in the statement of financial position is calculated on . When calculating the amount of deferred tax that should be reflected in the income statement, you need to take into account the following point. In the reporting period, the company revalued the land plot. Therefore, the amount of deferred tax resulting from the revaluation should be recognized in equity. In this case, the deferred tax liability is calculated as follows:

The amount of deferred tax to be recognized in the income statement will be the "balancing" amount. It is calculated as the difference between deferred tax at the end and beginning of the reporting period less the amount of deferred tax charged to equity. As of the end of the previous reporting period, a taxable temporary difference of 24 thousand rubles was recognized in the financial statements under the item “Fixed assets”, as well as a deductible temporary difference of 6 thousand rubles (of which 4 thousand rubles is a reserve for illiquid inventories, 2 thousand . rub - reserve for doubtful debts). Accounting profit for 2011 - 691 thousand rubles. Based on these data, a deferred tax in the amount of 11 thousand rubles should be reflected in the income statement. ((27 - 4.4) - 8 - (24 - 6) × 0.2). The deferred tax liability is accrued by recording:

Step 8. Generate deferred tax notes. A distinctive feature of IAS 12's requirements for disclosure of information about deferred taxes is the requirement to reflect changes in deferred tax assets and liabilities, as well as the reasons that caused the corresponding changes.

In accordance with the requirements of IAS 12 Income Taxes, information on the composition of income tax expenses (income) in the company's financial statements must be disclosed separately. In particular, companies need to show:

expenses (income) on current tax;
any adjustments to current taxes for prior periods accounted for in the reporting period;
deferred tax expenses (income) associated with the occurrence, increase or reduction of a temporary difference;
deferred tax expenses (income) associated with changes in tax rates or the introduction of new taxes.

You must also disclose the following information:

the aggregate amount of current and deferred taxes associated with items whose changes in value are charged directly to equity;
the relationship between tax expense (income) and accounting profit in the form of a numerical reconciliation of tax expense (income) with accounting profit multiplied by the current tax rate;
values of deferred taxes in the context of each object of financial statements;
movements in deferred tax assets and liabilities in the statement of financial position.

This information is disclosed in the notes to the financial statements. Examples of disclosures are shown in tables 4, 5, 6 and 7.

Table 4 Income tax expense for the year ended December 31, 2011, thousand rubles

Table 5 Numerical reconciliation of tax expense with accounting profit, thousand rubles.

Table 6 Movement of deferred tax assets and liabilities reflected in the statement of financial position, thousand RUB

Table 7 Deferred tax assets and liabilities in the context of each object, thousand rubles

Statement of financial position item	Value as of January 1, 2011	Change for 2011 (balancing value)		Charged to the statement of other comprehensive income
Statement of financial position item	Value as of January 1, 2011	Value as of December 31, 2011	Charged to income statement	Charged to the statement of other comprehensive income
Earth	-	-	8	8
fixed assets	24 x 0.2 = 4.8	5,2	-	10
Stocks	(4) × 0.2 = (0.8)	(0,4)	-	(1,2)
Accounts receivable	(2) × 0.2 = (0.4)	(2,8)	-	(3,2)
Finance lease liability	-	9	-	9
Total	3,6	11	8	22,6

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Experience and Solutions

How to test for impairment of assets

Natalya Shashkova, ACCA, Head of IFRS Department, JSC Zarubezhstroytekhnologiya

According to IFRS, assets must be carried at a cost not exceeding the amount that the company can receive from their sale or from future use. Therefore, it is important for an IFRS specialist to know how and when to test for impairment of assets.

Impairment of non-financial assets is addressed by IAS 36 Impairment of Assets and IFRIC 10 Interim Financial Reporting and Impairment. The requirements of the standard apply to all assets except:

investment property carried at fair value;
stocks;
biological assets carried at fair value less costs to sell;
deferred tax assets;
assets arising from construction contracts;
assets arising from employee benefits;
non-current assets held for sale;
deferred costs and financial assets (other than investments in subsidiaries, associates and joint ventures).

Impairment of financial instruments is regulated by IFRS 9, IAS 21, IAS 32, IAS 39 and the Interpretations thereto.

IAS 36 considers impairment in three directions: impairment of an individual asset, impairment of a cash generating unit (CGU), impairment of goodwill. It is necessary to distinguish between the concepts of "reserve" and "depreciation". In practice, the term “reserve” is often used to mean the estimated amount of loan losses or similar impairment losses. But unlike real reserves, which IAS 37 “Reserves, contingent liabilities and contingent assets” considers, impairment is not a reserve liability, but is an adjustment in the value of the related assets.

Note that there is no such standard for depreciation of assets among Russian PBUs. There is only one clause in PBU 14/2007 "Accounting for intangible assets". Thus, paragraph 22 of the Regulation states that intangible assets can be checked for impairment in the manner prescribed by IFRS. If we talk about the regulation of this aspect of reporting in US GAAP, then we can note many common points with IFRS in the very approach to impairment. However, a lot of the differences lie in the details. For example, US GAAP does not require discounting cash flows when determining the recoverable amount, and when determining the fair price of a transaction, it is not enough to use active market prices (there are a number of criteria), forecast periods are also different (IFRS recommends five years, US GAAP - the period of use of the asset by the company) etc.

Step 1. Determine the assets to be tested for impairment

First you need to understand whether the asset should be tested for impairment. To do this, you need to analyze the indicators that indicate a possible impairment, as well as determine the degree of sensitivity of assets to these indicators. The result of this stage will be a formalized decision to conduct testing or refuse it.

The standard indicates the presence of external (for example, negative changes in the external operating conditions or the legal environment, an increase in market interest rates, the emergence of large competitors) and internal signs (for example, the efficiency of using an asset has fallen, physical damage to the asset has occurred, etc.). In some cases, an impairment test is required even though there is no indication of impairment.

Note!

This check does not have to be done on December 31st. It can be done at any other time of the year. The main thing is that it is held at the same time every year. That is, if in 2010 a company tests goodwill for impairment on August 30, then in 2011, 2012, etc., it is on this date that the test should be carried out.

An annual mandatory impairment test is required for goodwill and for intangible assets that are not yet ready for use or that have an indefinite useful life.

At this stage, it is important to determine who in the company will make the decision that any asset should be marked down. Ideally, if it is a person from the "business". This may be an employee of the production department, a logistician, an employee of the property department, but not an accountant who has not even seen this asset and has no information about the future fate of this object, price dynamics for it, or the situation on the market.

However, this does not mean that the accountant should simply transfer the amount from the calculation of the responsible person to the accounting system. He needs to understand the calculation methodology, make sure that it complies with the methodology of previous years, as well as the principles laid down in IFRS. You should also explain to the responsible specialist why these calculations are needed and what kind of report you need to receive from him. You may need to consult with your colleagues or auditors if any aspects of the calculation are in doubt.

Step 2. Calculate the recoverable amount of the asset

Once you have decided that you need to test for impairment, you should calculate the recoverable amount of the asset. This is the larger of the two values:

value in use of an asset (the present value of future cash flows that are expected to be received from the asset both as a result of continued use and subsequent disposal);
fair value less costs to sell.

There is a fundamental difference between these two values. Fair value reflects the estimates and knowledge available to knowledgeable and willing buyers and sellers. Value in use, in contrast, reflects the assessments of a particular organization.

Note!

Goodwill is always tested for impairment at the level of the CGU or group of CGUs.

The standard recommends applying an individual approach to assets. That is, it is better to check assets for impairment object by object than to combine them into groups. If this is not possible (for example, too laborious and time consuming), the assets are tested for impairment as part of a cash generating unit (CGU).

A cash generating unit is the smallest group of assets that generates cash inflows from the use of the related assets and is independent of the cash inflows generated by other assets or groups of assets.

Example

In chain trade, the store with all its equipment (building, refrigeration equipment, racks, etc.) will represent the CGU. In this case, assessing, for example, a refrigeration plant, separately for impairment is not possible, since this asset generates cash flows only in combination with other assets. In addition, each store most likely has its own customer base. This is also an important "separation" factor. And even the fact that a store can use the same infrastructure as other stores, have one serving back office (that is, general marketing and other operating expenses), does not play a role in separating the store into a separate CGU. The key factor here is the ability to generate cash flow.

Separating a CGU can be one of the most difficult parts of the impairment test process. This is where professional judgment is required. Therefore, we again point out what was said at the beginning of the article - it is difficult for one accountant to cope with such a difficult analysis as identifying an autonomous, independent cash flow from CGUs. You need to seek help and advice from specialists from other departments. In this case, employees of the planning department, controllers, and operational managers can help.

The best way to determine fair value is to refer to the new IFRS 13. Although this standard does not explain the concept of fair value less costs to sell, in other aspects it is quite applicable to IAS 36. Selling costs in this aspect are recognized as additional costs that are associated with the disposal (alienation) of an asset and preparation asset for such disposal. Bank loan origination fees or income tax expense on the sale of an asset are not included as such costs because they have already been recognized as a liability.

The calculation of value in use is based on reasonable and adequate assumptions regarding cash flow forecasts that are approved by the company's management (as part of budgets and forecasts prepared in accordance with IFRS principles). The Standard recommends that such a forecast be made for a period not exceeding five years. The composition of cash flows is individual for each enterprise. In general, the calculation includes cash receipts from the further use of the asset, the necessary cash costs (including overheads), as well as the net cash flow from the subsequent disposal of the asset at the end of its useful life. It is also important that cash flow estimates should reflect the current state of the asset. Therefore, the calculation cannot include future capital expenditures that are aimed at improving the qualities of the asset and the corresponding benefits from this. However, the capital cost of maintaining the current state of the asset must be included in the calculation.

The value of use is sometimes difficult to determine. Therefore, you can use the following trick: calculate the fair value less costs to sell, and if it turns out to be higher than the carrying amount, then there will no longer be a need to calculate the value in use. It can also be the other way around: it is difficult for a company to determine fair value less costs to sell. In this case, you can use the same logic and calculate the value of use first.

Once a company has estimated future cash flows, they must be discounted at the appropriate rate. The discount rate can be calculated using one of the following methods:

calculate the weighted average cost of capital (WACC), if the company has the resources for this (analysts, databases);
use the weighted average cost of the company's loan portfolio (any IFRS specialist can calculate this indicator) or obtain information on long-term lending rates at which new loans can be attracted as of the date of the assessment;
you can use the recommendation of the Federal Tariff Service and use the risk-free rate increased by 2 percent. In this case, it is possible to take the average rate on deposits in several “reliable” banks as a risk-free one.

International standards recommend using the weighted average cost of capital of an enterprise as a starting point for calculating the discount rate, but in practice it is quite difficult to calculate. In our company, WACC is not calculated, but the third method is used.

Step 3. Determine the impairment loss

An impairment loss occurs when the carrying amount of an asset or CGU exceeds its recoverable amount. In this case, the cost of the asset in the statement of financial position is reduced by the amount of the impairment loss. If this is a fixed asset or an intangible asset, then you still need to proportionally reduce the amount of accumulated depreciation. Consider the following situation.

The company's management discovered one of the signs of depreciation of equipment producing spare parts for laptops: in the reporting period, spare parts were sold at a price below cost. Therefore, it was decided to conduct an impairment test for this production equipment.

The balance sheet value of the equipment is 290,000 rubles. The fair value less costs to sell (estimated by the company's analysts) is RUB 120,000. The expected net cash inflow from the equipment over the next three years (remaining life) is RUB 100,000 per year. The discount rate is 10 percent. Accordingly, the net present value of cash inflow for three years will be 248,684 rubles. (100,000: (1 + 0.1) + 100,000: (1 + 0.1) 2 + 100,000: (1 + 0.1) 3). This value is the value in use of the asset. First you need to compare it with fair value and compare the largest of them (248,684 rubles) with the carrying value of the equipment. As a result, we obtain an impairment loss in the amount of RUB 41,316. (290,000 - 248,684).

Different options for exceeding the three types of asset values and the outcomes of this comparison are shown in Table 1.

Table 1. determination of impairment loss of assets

Option	Value of use, thousand rubles	Fair value less costs to sell, RUB thousand	Recoverable amount (maximum 1 or 2), thousand rubles	Book value, thousand rubles	Impairment loss (4–3), RUB thousand	The value of the asset in the balance sheet after the impairment test, thousand rubles	Comment
Option	1	2	3	4	5	6	7
Option 1	200	90	200	100	Do not recognize	100	The value in use exceeds the carrying amount of the asset. The asset is not depreciated
Option 2	200	150	200	300	100	200	It is more profitable to use an asset, rather than sell it
Option 3	200	250	250	300	50	250	It is more profitable to sell an asset than to use it further

Step 4. Recognize an impairment loss

An impairment loss, as well as its reversal, is recognized in profit or loss for the period. Most often, an impairment loss is presented as a separate line within other expenses with disclosure of the relevant information in the notes to the financial statements.

Based on the conditions of the situation discussed above, the company will make the following posting:

Note!

If any of the assets in the CGU is clearly impaired, the impairment loss should be attributed to that asset first. Then the remaining amount should be attributed to goodwill. If the CGU's impairment loss exceeds the value of goodwill, then a further write-down is made pro rata to the carrying amount of the remaining assets.

It should be remembered that if an asset was previously revalued, then the impairment loss is recognized in other comprehensive income and presented in the revaluation reserve to the extent that the amount of the loss covers the previously recognized revaluation of the same asset. If the impairment loss is greater than the accumulated revaluation, the difference is recognized in profit or loss.

With the recognition of an impairment loss on CGUs, the situation is a bit more complicated. An impairment loss on a CGU must be allocated to the assets that are part of that CGU. Impairment losses are first recognized as goodwill (which is the most subjective estimate) and the remainder is allocated to other assets in CGUs in proportion to their carrying amounts.

In this case, you cannot write off the value of the asset below:

its fair value less costs to sell;
zero.

This is a fairly common accounting error: when prorating an impairment loss, it is often forgotten that there is such a limit.

Consider the following situation. The company acquired the Taxi business along with a fleet of vehicles, licenses for $230,000. An extract from the statement of financial position is shown in Table 2. All assets and liabilities are stated at fair value less costs to sell (usually determined by external appraisers).

Table 2. Summary Statement of Financial Position (Option 1)

Article
Business reputation	40 000	(15 000)	25 000
	120 000	(30 000)	90 000
License	30 000		30 000
Accounts receivable	10 000		10 000
Cash	50 000		50 000
Accounts payable	(20 000)		(20 000)
Total	230 000	(45 000)	185 000

Some time after the purchase, three cars are stolen. The company did not have time to reissue insurance policies for cars before the theft, and the insurance organization refused to compensate for the loss. The company should recognize an impairment loss. After the analysis and calculations, it turned out that the impairment loss would be greater than the cost of the cars. The fact is that the overall cost of using the CGU, which is the entire Taxi business, has fallen.

The company estimates that the total impairment loss is $45,000. In this case, $30,000 should be written off against property, plant and equipment and the balance against goodwill. The statement of financial position will change as shown in table 2.

Sometimes it may turn out that the company has distributed the impairment loss among the assets, taking into account the specified limit, but their value was not enough to completely “absorb” this loss.

Assume that the company estimates that the impairment loss was not $45,000 but $75,000. Changes in the statement of financial position are presented in table 3.

Table 3 Summary Statement of Financial Position (Option 2)

Article	Amount at the date of purchase, USD	Impairment loss, USD	Amount at the reporting date, USD
Business reputation	40 000	(40 000)	-
Cars (12 x $10,000)	120 000	(30 000)	90 000
License	30 000		30 000
Accounts receivable	10 000		10 000
Cash	50 000		50 000
Accounts payable	(20 000)		(20 000)
Total	230 000	(70 000)	160 000

In this situation, the CGU cannot depreciate to US$155,000 (230,000 – US$75,000), as the fair value of the CGU's assets less costs to sell is US$160,000. In this case, it is more profitable to sell the CGU separately by assets, rather than continue to use it in its current state.

Step 5. Analyze the situation after the reporting date

The company should also evaluate the market situation after the reporting date. Most often, unexpected situations in the market cannot be foreseen when making forecasts, so the calculation data are not corrected. But such events must be taken into account when testing for impairment in the next reporting period, as well as disclosure in the notes to the financial statements.

At the next reporting date, remember to assess the situation to determine if there is any indication that previously recognized impairment losses need to be reversed.

The exception is goodwill: once it has been depreciated, it will never be possible to recover this amount. This is because IFRS prohibit the recognition of internally generated goodwill, and an increase in the amount of goodwill after the recognition of an impairment loss is most often associated with the creation of internal goodwill.

Step 6. Prepare disclosures

All work, analysis, calculations for the impairment test must be documented - not only for future generations, but also in order to disclose data such as:

what criteria led you to think about the need for impairment;
how you calculated the value in use of the asset (if this is the estimate chosen as the recoverable amount), including what discount rate you used, how long was the forecast period in your calculation;
how you calculated the asset's fair value less costs to sell (if that estimate is chosen as the recoverable amount), including whether the fair value is based on an active market;
what amount of loss you reflected and for which line of reporting;
how much damage was recovered;
a description of the cash generating unit – how it was defined and valued;
a sensitivity analysis showing how a change in the assumptions used in the calculation would affect the amount of the impairment.

It is best to use the most conservative figures as possible. For example, to warn reporting users about the loss of 100 percent of the book value of an asset.

In practice, a situation may arise when the company realizes that an asset has been impaired and its carrying amount no longer reflects the real picture. However, due to certain circumstances (for example, the lack of necessary data), it is impossible to correctly calculate and reflect the amount of the loss. What to do in such cases? The following approach can be used here: it is better to count nothing than to count something that the company itself does not believe. Probably, this amount will be incomprehensible to the user, therefore, it can distort the reporting figures even more. In such a situation, it is necessary to disclose information about possible impairment losses in the notes to the financial statements in order to prepare the user of the financial statements for the fact that in the following periods, when the situation is clarified, he may see the negative financial consequences of any events.

Another slippery point is associated with asset insurance. The company knows that something happened to the asset and it falls under the insured event. But at the time of reporting, the situation had not been fully clarified and the insurance compensation had not yet been received. How to proceed in such a case? First, in no case "collapse" the amount of receivables for insurance with the amount of asset impairment. These are different accounting objects, and they need to be accounted for separately. And if the insurance company also disputes the amount of loss or does not currently recognize the case as insurance, then the company does not have the right to recognize any insurance asset in its financial statements.

We also note that if your company's staff is not strong enough to independently perform the impairment test, consultants and independent appraisers should be involved in this task. This is especially true for testing for impairment of goodwill and CGUs.

Order of the Federal Tariff Service (FTS of Russia) dated March 3, 2011 No. 57-e “On Approval of Methodological Guidelines for Calculating the Weighted Average Cost of Equity and Debt Capital Raised for the Purposes of Implementing an Investment Project to Form a Technological Reserve of Power Generation Capacities ".

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Nuances of methodology

Accounting for joint venture agreements in a new way

Yulia Yuryeva, Editor-in-Chief, IFRS in Practice magazine

To manage risks in the implementation of long-term projects, companies traditionally use various forms of joint activities. The accounting treatment for individual joint venture agreements will change dramatically in the near future.

Adopted in May 2011, IFRS 11 sets out the accounting treatment for joint arrangements. These agreements are defined by the standard as contractual agreements for the conduct of activities over which two or more contracting parties exercise joint control.

In order to properly measure and account for current and future joint arrangements, in addition to the provisions of IFRS 11, entities also need to understand the potential implications of applying the new IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosures stakes in other companies. Thus, IFRS 10 introduces a new definition of control and contains additional guidance that may affect the results of an earlier assessment of the existence of joint control. IFRS 12 contains extended disclosure requirements, including those related to joint arrangements.

The new standards are mandatory for annual periods beginning on or after 1 January 2013 and must be applied retrospectively.

New terms - new concepts

Some common terms in the new standard received new definitions that are not quite obvious and clear. This alone creates a fair amount of confusion. For example, what used to be called joint ventures is referred to in the new standard under the general term “joint arrangements”. And the definition of the term “joint venture” in IFRS 11 is significantly narrowed down. Similarly, the term "proportional consolidation" has been (and continues to be) widely used to refer to all methods of accounting for joint ventures where an entity recognizes its share of assets and liabilities in a joint venture. The term is now inconsistent with the treatment currently used for jointly controlled assets (JCA) and jointly controlled operations (JCO) under IAS 31 Interests in Joint Arrangements and will be used in the future for joint operations in in accordance with IFRS 11.

Joint control under new rules

Thank you for your assistance in preparing the material

This article is based on the publication "Impact of the New Standards Governing the Accounting for Joint Arrangements and Consolidation" by Ernst & Young. Special thanks to Alexey Loz, Partner, Head of the Oil and Gas Services Group in the CIS at Ernst & Young.

First, let's define what constitutes joint control. The new standard defines joint control as “…a contractual collective exercise of control over a joint arrangement that exists only when decisions on significant aspects of the arrangement require the unanimous consent of the parties exercising joint control.” At the same time, IFRS 11 highlights the following characteristics of joint control:

conditionality by contract - an agreement on joint activities, as a rule, is drawn up in writing and determines the conditions for conducting such activities;
control and significant aspects of operations - IFRS 10 describes an approach to assessing the existence of joint control, as well as to determining significant aspects of operations;
unanimous agreement - occurs when the parties to an agreement on a joint activity exercise collective control over this activity, but none of the parties has sole control over it.

Differences from the current procedure relate to establishing the fact of control, as well as determining significant aspects of the activity. The requirement for unanimous agreement is not new, but the standard contains additional guidance to clarify when it occurs.

Note!

Although certain aspects of joint control remain unchanged, entities should determine whether it exercises joint control in accordance with IFRS 11. This is because “control” in the new definition of joint control is based on the concept of control set out in IFRS 10.

How the new consolidation standard affects the establishment of joint control. A common practice in joint activities is the appointment of one of the parties to the agreement as an operator or manager (hereinafter referred to as the operator). The parties to the agreement may partially delegate decision-making powers to such an operator. It is now widely believed that the operator has no control over the joint activity: its functions are reduced only to the execution of the decisions of the parties to the joint venture agreement (or joint operations agreement (JPA)). That is, in fact, the operator acts as an agent. However, based on the new standards, it may turn out that the operator will control the joint activity. This is possible because IFRS 10 now introduces new requirements for assessing whether an entity is acting as a principal or agent. This approach is used to determine the party that exercises control. The assessment of whether an operator is acting as a principal (and therefore may effectively control the joint arrangement) or as an agent will require careful consideration. When conducting it, it is necessary to take into account the scope of the operator's decision-making powers, the rights of other parties, the operator's remuneration, income from other forms of participation in joint activities.

If it turns out that the operator is acting as an agent, then it recognizes only its interests in the joint venture, as well as fees for the operator's services. The treatment of an operator's interest in a joint arrangement will depend on whether the arrangement is a joint operation or a joint venture.

What are “significant aspects of activity”. These are aspects of joint activity that have a significant impact on its profitability. Professional judgment must be exercised in determining such aspects.

Among the decisions on significant aspects of activity are:

decisions on operational issues and capital investments, including the budget (for example, approval of the capital investment program for the next year);
decisions on the appointment of key management personnel, the involvement of contractors for the provision of services, the determination of their remuneration, etc.

Note!

The procedure for making decisions may change during the period of joint activities. For example, in the oil and gas industry, at the exploration and appraisal stage, all decisions can be made by one party to the agreement. However, at the design stage, decisions require the unanimous consent of all parties. In this case, it is necessary to determine which of the types of joint activities (exploration, evaluation, development) has the most significant impact on its profitability. If unanimous agreement is required on issues that have the most significant impact on profitability, then the activity is considered joint.

What does unanimous agreement mean? In order to conclude that there is joint control, there must also be unanimous agreement on significant aspects of the activity. Unanimous agreement means that any party to a joint arrangement may prevent other parties (or a group of parties) from making unilateral decisions on significant aspects of the arrangement. If the unanimous consent requirement applies only to decisions that give a party to the joint venture protection rights or to decisions involving administrative matters, then that party does not have joint control. Thus, the right to veto a decision to terminate a business under a joint venture agreement is a right of defense rather than a right resulting in joint control. However, if such a right of veto relates to significant aspects of the activity (for example, the approval of the capital budget), it may be the basis for joint control.

In some cases, joint control may be indirectly led by the decision-making process that is provided for in a joint work agreement (JPA). For example, for a joint venture with a 50/50 percent stake, the CAIS provides that decisions on significant aspects of the operation are made if at least 51 percent of the votes are cast for them. Thus, decisions on significant aspects of the activity cannot be made without the consent of both parties. In fact, the parties implicitly agreed on joint control.

The provisions of the SIDS may also establish a minimum threshold for decision-making. Often such a minimum threshold can be reached through the agreement of the various parties. In this case, it is impossible to talk about joint control, if the agreement does not provide for the unanimous consent of which parties is necessary for making decisions on significant aspects of the activity. IFRS 11 provides several examples to illustrate this aspect (Table 1).

Table 1. Influence of the requirements of the SVR on the establishment of joint control

Parties to the agreement	Example 1	Example 2	Example 3
Parties to the agreement		75 percent of the votes are required to make decisions on significant aspects	A majority vote is required to make decisions on significant matters.
Party A, percentage of votes	50	50	35
Party B, percentage of votes	30	25	35
Party C, percentage of votes	20	25	-
Other parties, percentage of votes	-	-	Dispersed among a large number of shareholders
Conclusion	Even though Party A can block any decision, it has no control over the joint activity. Party A needs the consent of Party B to make decisions. Thus, Parties A and B jointly control the activity		There is no control (joint control), since various options can be used to make a decision

Types of joint activities

Once joint control is established, joint arrangements fall into two categories: joint operations and joint ventures.

A significant difference between IFRS 11 and IAS 31 is that the existence of a legal agreement is no longer a key factor in choosing an accounting method. The classification of joint activities is now based on an assessment of the rights and obligations that arise for the participants under the terms of the agreement.

Under joint operations, the standard understands an agreement on joint activities, as a result of which the participants have direct rights in relation to assets and direct obligations to repay debts.

Joint ventures are joint arrangements whereby the participants obtain rights to the net assets and results of activities under the arrangement. At the same time, only those agreements that are structured in the form of a separate enterprise can be classified as joint ventures. Thus, arrangements that are not structured as a separate entity are always categorized as joint operations.

The classification of joint arrangements in accordance with IFRS 11 Joint Arrangements and IAS 31 Interests in Joint Arrangements is shown in the figure.

Picture. Types of joint arrangements under IAS 31 and IFRS 11

Accounting for joint operations

IAS 31 separates jointly controlled assets (JCA) and jointly controlled operations (JCO) into separate categories. Under IFRS 11, both of these joint arrangements are now referred to as joint operations (JOs). The accounting treatment for such transactions is largely in line with the requirements of IAS 31. In particular, a joint operator (not to be confused with a joint arrangement operator) continues to recognize its assets, liabilities, income and expenses and/or, if any, its shares in them. We have previously noted that this accounting treatment is often incorrectly referred to as proportionate consolidation, although in fact it is not. Probably, this ambiguity is related to the nature of the use of the term "proportional consolidation" in US GAAP. There, it is used to describe an accounting method similar to that of SCAs and SCOs (and now joint operations) under IFRS. As a result, unfounded concerns have arisen that all interests in joint arrangements will need to be accounted for using the equity method. This is not true.

Since the legal form of the arrangement is no longer a key factor in the choice of accounting method, it may turn out that some jointly controlled entities (in the terminology of IAS 31) will need to be classified as joint operations under the new requirements. If an entity has previously used proportionate consolidation to account for such arrangements, the transition to IFRS 11 may not have any effect on the entity's financial statements. Thus, if a joint operator has the rights to a certain share (for example, 50%) of all assets, as well as the obligation to fulfill the same certain share (50%) of all liabilities, most likely there will be no difference in accounting for joint operations ( under IFRS 11) and applying proportionate consolidation to account for a jointly controlled entity (under IAS 31). However, the financial statements will differ from those previously prepared under the proportionate consolidation method if.