PBE IAS 12

The objective of this Standard is to prescribe the accounting treatment for income taxes. The principal issue in accounting for income taxes is how to account for the current and future tax consequences of:

1. The future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity’s statement of financial position; and

2. Transactions and other events of the current period that are recognised in an entity’s financial statements.

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of that asset or liability. If it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, this Standard requires an entity to recognise a deferred tax liability (deferred tax asset), with certain limited exceptions.

This Standard requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognised in surplus or deficit, any related tax effects are also recognised in surplus or deficit. For transactions and other events recognised outside surplus or deficit (either in other comprehensive revenue and expense or directly in net assets/equity), any related tax effects are also recognised outside surplus or deficit (either in other comprehensive revenue and expense or directly in net assets/equity, respectively). Similarly, the recognition of deferred tax assets and liabilities in a PBE combination affects the amount of goodwill arising in that PBE combination or the amount of the bargain purchase gain recognised.

This Standard also deals with 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 the disclosure of information relating to income taxes.

1. This Standard shall be applied in accounting for income taxes.

2. For the purposes of this Standard, income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a controlled entity, associate or joint arrangement on distributions to the reporting entity.

3. [Not used]

4. This Standard does not deal with the methods of accounting for government grants or investment tax credits. However, this Standard does deal with the accounting for temporary differences that may arise from such grants or investment tax credits.

4.1 This Standard applies to Tier 1 and Tier 2 public benefit entities.

4.2 A Tier 2 entity is not required to comply with the requirements in this Standard denoted with an asterisk (*). Where a Tier 2 entity elects to apply a disclosure concession it shall comply with any RDR paragraphs associated with that concession.

5. The following terms are used in this Standard with the meanings specified:

Accounting profit is the surplus or deficit for a period before deducting tax expense.

Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable).

Tax expense (tax income) is the aggregate amount included in the determination of surplus or deficit for the period in respect of current tax and deferred tax.

Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.

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

Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:

1. Deductible temporary differences;

2. The carryforward of unused tax losses; and

3. The carryforward of unused tax credits.

Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences may be either:

1. Taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or

2. Deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.

The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

6. Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).

7. The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.

8. The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.

9. Some items have a tax base but are not recognised as assets and liabilities in the statement of financial position. For example, research costs are recognised as an expense in determining accounting profit in the period in which they are incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later period. The difference between the tax base of the research costs, being the amount the taxation authorities will permit as a deduction in future periods, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset.

10. Where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle upon which this Standard is based: that an entity shall, with certain limited exceptions, recognise a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences. Example C following Paragraph 51A illustrates circumstances when it may be helpful to consider this fundamental principle, for example, when the tax base of an asset or liability depends on the expected manner of recovery or settlement.

11. In consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed. In other jurisdictions, the tax base is determined by reference to the tax returns of each entity in the group.

12. Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognised as an asset.

13. The benefit relating to a tax loss that can be carried back to recover current tax of a previous period shall be recognised as an asset.

14. When a tax loss is used to recover current tax of a previous period, an entity recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be reliably¹ measured.

15. A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from:

1. The initial recognition of goodwill; or

2. The initial recognition of an asset or liability in a transaction which:

   1. Is not a PBE combination;

   2. At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss); and

   3. at the time of the transaction, does not give rise to equal taxable and deductible temporary differences.

However, for taxable temporary differences associated with investments in controlled entities, branches and associates, and interests in joint arrangements, a deferred tax liability shall be recognised in accordance with paragraph 39.

16. It is inherent in the recognition of an asset that is used in a taxable activity that its carrying amount will be recovered in the form of economic benefits that flow to the entity in future periods. When the carrying amount of the asset exceeds its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a deduction 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 entity recovers the carrying amount of the asset, the taxable temporary difference will reverse and the entity will have taxable profit. This makes it probable that economic benefits will flow from the entity in the form of tax payments. Therefore, this Standard requires the recognition of all deferred tax liabilities, except in certain circumstances described in paragraphs 15 and 39.

17. Some temporary differences arise when income or expense is included in accounting profit in one period but is included in taxable profit in a different period. Such temporary differences are often described as timing differences. The following are examples of temporary differences of this kind which are taxable temporary differences and which therefore result in deferred tax liabilities:

1. Interest revenue is included in accounting profit in accordance with the relevant PBE Standards but may, in some jurisdictions, be included in taxable profit when cash is collected. The tax base of any receivable recognised in the statement of financial position with respect to such revenues is nil because the revenues do not affect taxable profit until cash is collected;

2. Depreciation used in determining taxable profit (tax loss) may differ from that used in determining accounting profit. The temporary difference is the difference between the carrying amount of the asset and its tax base which is the original cost of the asset less all deductions in respect of that asset permitted by the taxation authorities in determining taxable profit of the current and prior periods. A taxable temporary difference arises, and results in a deferred tax liability, when tax depreciation is accelerated (if tax depreciation is less rapid than accounting depreciation, a deductible temporary difference arises, and results in a deferred tax asset); and

3. Development costs may be capitalised and amortised over future periods in determining accounting profit but deducted in determining taxable profit in the period in which they are incurred. Such development costs have a tax base of nil as they have already been deducted from taxable profit. The temporary difference is the difference between the carrying amount of the development costs and their tax base of nil.

18. Temporary differences also arise when:

1. The identifiable assets acquired and liabilities assumed in a PBE combination are recognised at their fair values in accordance with PBE IPSAS 40 PBE Combinations, but no equivalent adjustment is made for tax purposes (see paragraph 19);

2. Assets are revalued and no equivalent adjustment is made for tax purposes (see paragraph 20);

3. Goodwill arises in a PBE combination (see paragraph 21);

4. The tax base of an asset or liability on initial recognition differs from its initial carrying amount, for example when an entity benefits from non-taxable government grants related to assets (see paragraphs 22 and 33); or

5. The carrying amount of investments in controlled entities, branches and associates or interests in joint arrangements becomes different from the tax base of the investment or interest (see paragraphs 38–45).

19. With limited exceptions, the identifiable assets acquired and liabilities assumed in a PBE combination are recognised at their fair values at the acquisition date. Temporary differences arise when the tax bases of the identifiable assets acquired and liabilities assumed are not affected by the PBE combination or are affected differently. For example, when the carrying amount of an asset is increased to fair value but the tax base of the asset remains at cost to the previous owner, a taxable temporary difference arises which results in a deferred tax liability. The resulting deferred tax liability affects goodwill (see paragraph 66).

20. PBE Standards permit or require certain assets to be carried at fair value or to be revalued (see, for example, PBE IPSAS 17 Property, Plant and Equipment, PBE IPSAS 31 Intangible Assets, PBE IPSAS 16 Investment Property) and PBE IPSAS 41 Financial Instruments. The revaluation or other restatement of an asset used in a taxable activity to fair value affects taxable profit (tax loss) for the current period. As a result, the tax base of the asset is adjusted and no temporary difference arises. In other jurisdictions, the revaluation or restatement of an asset does not affect taxable profit in the period of the revaluation or restatement and, consequently, the tax base of the asset is not adjusted. Nevertheless, the future recovery of the carrying amount will result in a taxable flow of economic benefits to the entity 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 tax base is a temporary difference and gives rise to a deferred tax liability or asset. This is true even if:

1. the entity does not intend to dispose of the asset. In such cases, the revalued carrying amount of the asset will be recovered through use and this will generate taxable income which exceeds the depreciation that will be allowable for tax purposes in future periods; or

2. tax on capital gains is deferred if the proceeds of the disposal of the asset are invested in similar assets. In such cases, the tax will ultimately become payable on sale or use of the similar assets.

21. Goodwill arising in a PBE combination is measured as the excess of (a) over (b) below:

1. The aggregate of:

   1. The consideration transferred measured in accordance with PBE IPSAS 40, which generally requires acquisition-date fair value;

   2. The amount of any non-controlling interest in the acquired operation recognised in accordance with PBE IPSAS 40; and

   3. In a PBE combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquired operation.

2. The net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed measured in accordance with PBE IPSAS 40.

Many taxation authorities do not allow reductions in the carrying amount of goodwill as a deductible expense in determining taxable profit. Moreover, in such jurisdictions, the cost of goodwill is often not deductible when a controlled entity disposes of its underlying business. In such jurisdictions, goodwill has a tax base of nil. Any difference between the carrying amount of goodwill and its tax base 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 the deferred tax liability would increase the carrying amount of goodwill.

21A. Subsequent reductions in a deferred tax liability that is unrecognised because it arises from the initial recognition of goodwill are also regarded as arising from the initial recognition of goodwill and are therefore not recognised under paragraph 15(a). For example, if in a PBE combination an entity recognises goodwill of CU100 that has a tax base of nil, paragraph 15(a) prohibits the entity from recognising the resulting deferred tax liability. If the entity subsequently recognises an impairment loss of CU20 for that goodwill, the amount of the taxable temporary difference relating to the goodwill is reduced from CU100 to CU80, with a resulting decrease in the value of the unrecognised deferred tax liability. That decrease in the value of the unrecognised deferred tax liability is also regarded as relating to the initial recognition of the goodwill and is therefore prohibited from being recognised under paragraph 15(a).

21B. Deferred tax liabilities for taxable temporary differences relating to goodwill are, however, recognised to the extent they do not arise from the initial recognition of goodwill. For example, if in a PBE combination an entity recognises goodwill of CU100 that is deductible for tax purposes at a rate of 20 per cent per year starting in the year of acquisition, the tax base of the goodwill is CU100 on initial recognition and CU80 at the end of the year of acquisition. If the carrying amount of goodwill at the end of the year of acquisition remains unchanged at CU100, a taxable temporary difference of CU20 arises at the end of that year. Because that taxable temporary difference does not relate to the initial recognition of the goodwill, the resulting deferred tax liability is recognised.

22. A temporary difference may arise on initial recognition of an asset or liability, for example if part or all of the cost of an asset will not be deductible for tax purposes. The method of accounting for such a temporary difference depends on the nature of the transaction that led to the initial recognition of the asset or liability:

1. In a PBE combination, an entity recognises any deferred tax liability or asset and this affects the amount of goodwill or bargain purchase gain it recognises (see paragraph 19);

2. If the transaction affects either accounting profit or taxable profit, or gives rise to equal taxable and deductible temporary differences, an entity recognises any deferred tax liability or asset and recognises the resulting deferred tax expense or income in surplus or deficit (see paragraph 59);

3. If the transaction is not a PBE combination, affects neither accounting profit nor taxable profit and does not give rise to equal taxable and deductible temporary differences, an entity would, in the absence of the exemption provided by paragraphs 15 and 24, recognise the resulting deferred tax liability or asset and adjust the carrying amount of the asset or liability by the same amount. Such adjustments would make the financial statements less transparent. Therefore, this Standard does not permit an entity to recognise the resulting deferred tax liability or asset, either on initial recognition or subsequently. Furthermore, an entity does not recognise subsequent changes in the unrecognised deferred tax liability or asset as the asset is depreciated.

22A. A transaction that is not a PBE combination may lead to the initial recognition of an asset and a liability and, at the time of the transaction, affect neither accounting profit nor taxable profit. For example, at the commencement date of a lease classified as a finance lease, a lessee typically recognises assets acquired under finance leases as assets and the associated lease obligations as liabilities in their statements of financial position. Depending on the applicable tax law, equal taxable and deductible temporary differences may arise on initial recognition of the asset and liability in such a transaction. The exemption provided by paragraphs 15 and 24 does not apply to such temporary differences and an entity recognises any resulting deferred tax liability and asset.

23. In accordance with PBE IAS 28 Financial Instruments: Presentation the issuer of a compound financial instrument (for example, a convertible bond) classifies the instrument’s liability component as a liability and the equity component as equity. In some jurisdictions, the tax base of the liability component on initial recognition is equal to the initial carrying amount of the sum of the liability and equity components. The resulting taxable temporary difference arises from the initial recognition of the equity component separately from the liability component. Therefore, the exception set out in paragraph 15(b) does not apply. Consequently, an entity recognises the resulting deferred tax liability. In accordance with paragraph 61A, the deferred tax is charged directly to the carrying amount of the equity component. In accordance with paragraph 58, subsequent changes in the deferred tax liability are recognised in surplus or deficit as deferred tax expense (income).

24. A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:

1. Is not a PBE combination;

2. At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss); and

3. at the time of the transaction, does not give rise to equal taxable and deductible temporary differences.

However, for deductible temporary differences associated with investments in controlled entities, branches and associates, and interests in joint arrangements, a deferred tax asset shall be recognised in accordance with paragraph 44.

25. It is inherent in the recognition of a liability that the carrying amount will be settled in future periods through an outflow from the entity of resources embodying economic benefits. When resources flow from the entity, part or all of their amounts may be deductible in determining taxable profit of a period later than the period in which the liability is recognised. In such cases, a temporary difference exists between the carrying amount of the liability and its tax base. Accordingly, a deferred tax asset arises in respect of the income taxes that will be recoverable in the future periods when that part of the liability is allowed as a deduction in determining taxable profit. Similarly, if the carrying amount of an asset is less than its tax base, the difference gives rise to a deferred tax asset in respect of the income taxes that will be recoverable in future periods.

26. The following are examples of deductible temporary differences that result in deferred tax assets:

1. Retirement benefit costs may be deducted in determining accounting profit as service is provided by the employee, but deducted in determining taxable profit either when contributions are paid to a fund by the entity or when retirement benefits are paid by the entity. A temporary difference exists between the carrying amount of the liability and its tax base; the tax base of the liability is usually nil. Such a deductible temporary difference results in a deferred tax asset as economic benefits will flow to the entity in the form of a deduction from taxable profits when contributions or retirement benefits are paid;

2. Research costs are recognised as an expense in determining accounting profit in the period in which they are incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later period. The difference between the tax base of the research costs, being the amount the taxation authorities will permit as a deduction in future periods, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset;

3. With limited exceptions, an entity recognises the identifiable assets acquired and liabilities assumed in a PBE combination at their fair values at the acquisition date. When a liability assumed is recognised at the acquisition date but the related costs are not deducted in determining taxable profits until a later period, a deductible temporary difference arises which results in a deferred tax asset. A deferred tax asset also arises when the fair value of an identifiable asset acquired is less than its tax base. In both cases, the resulting deferred tax asset affects goodwill (see paragraph 66); and

4. Certain assets may be carried at fair value, or may be revalued, without an equivalent adjustment being made for tax purposes (see paragraph 20). A deductible temporary difference arises if the tax base of the asset exceeds its carrying amount.

27. The reversal of deductible temporary differences results in deductions in determining taxable profits of future periods. However, economic benefits in the form of reductions in tax payments will flow to the entity only if it earns sufficient taxable profits against which the deductions can be offset. Therefore, an entity recognises deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilised.

27A. When an entity assesses whether taxable profits will be available against which it can utilise a deductible temporary difference, it considers whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. If tax law imposes no such restrictions, an entity assesses a deductible temporary difference in combination with all of its other deductible temporary differences. However, if tax law restricts the utilisation of losses to deduction against income of a specific type, a deductible temporary difference is assessed in combination only with other deductible temporary differences of the appropriate type.

28. It is probable that taxable profit will be available against which a deductible temporary difference can be utilised when there are sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity which are expected to reverse:

1. In the same period as the expected reversal of the deductible temporary difference; or

2. In periods into which a tax loss arising from the deferred tax asset can be carried back or forward.

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

29. When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that:

1. It is probable that the entity will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried back or forward). In evaluating whether it will have sufficient taxable profit in future periods, an entity:

   1. Compares the deductible temporary differences with future taxable profit that excludes tax deductions resulting from the reversal of those deductible temporary differences. This comparison shows the extent to which the future taxable profit is sufficient for the entity to deduct the amounts resulting from the reversal of those deductible temporary differences; and

   2. Ignores taxable amounts arising from deductible temporary differences that are expected to originate in future periods, because the deferred tax asset arising from these deductible temporary differences will itself require future taxable profit in order to be utilised; or

2. Tax planning opportunities are available to the entity that will create taxable profit in appropriate periods.

29A. The estimate of probable future taxable profit may include the recovery of some of an entity’s assets for more than their carrying amount if there is sufficient evidence that it is probable that the entity will achieve this. For example, when an asset is measured at fair value, the entity shall 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 the contractual cash flows.

30. Tax planning opportunities are actions that the entity would take in order to create or increase taxable income in a particular period before the expiry of a tax loss or tax credit carryforward. For example, in some jurisdictions, taxable profit may be created or increased by:

1. Electing to have interest revenue taxed on either a received or receivable basis;

2. Deferring the claim for certain deductions from taxable profit;

3. Selling, and perhaps leasing back, assets that have appreciated but for which the tax base has not been adjusted to reflect such appreciation; and

4. Selling an asset that generates non-taxable income (such as, in some jurisdictions, a government bond) in order to purchase another investment that generates taxable income.

Where tax planning opportunities advance taxable profit from a later period to an earlier period, the utilisation of a tax loss or tax credit carryforward still depends on the existence of future taxable profit from sources other than future originating temporary differences.

31. When an entity has a history of recent losses, the entity considers the guidance in paragraphs 35 and 36.

32. [Deleted by IASB]

32A. If the carrying amount of goodwill arising in a PBE combination is less than its tax base, the difference gives rise to a deferred tax asset. The deferred tax asset arising from the initial recognition of goodwill shall be recognised as part of the accounting for a PBE combination to the extent that it is probable that taxable profit will be available against which the deductible temporary difference could be utilised.

33. [Not used]

34. A deferred tax asset shall be recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.

35. The criteria for recognising deferred tax assets arising from the carryforward of unused tax losses and tax credits are the same as the criteria for recognising deferred tax assets arising from deductible temporary differences. However, the existence of unused tax losses is strong evidence that future taxable profit may not be available. Therefore, when an entity has a history of recent losses, the entity recognises a deferred tax asset arising from unused tax losses or tax credits only to the extent that the entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available against which the unused tax losses or unused tax credits can be utilised by the entity. In such circumstances, paragraph 82 requires disclosure of the amount of the deferred tax asset and the nature of the evidence supporting its recognition.

36. An entity considers the following criteria in assessing the probability that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised:

1. Whether the entity has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits can be utilised before they expire;

2. Whether it is probable that the entity will have taxable profits before the unused tax losses or unused tax credits expire;

3. Whether the unused tax losses result from identifiable causes which are unlikely to recur; and

4. Whether tax planning opportunities (see paragraph 30) are available to the entity that will create taxable profit in the period in which the unused tax losses or unused tax credits can be utilised.

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

37. At the end of each reporting period, an entity reassesses unrecognised deferred tax assets. The entity recognises a previously unrecognised deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. For example, an improvement in trading conditions may make it more probable that the entity will be able to generate sufficient taxable profit in the future for the deferred tax asset to meet the recognition criteria set out in paragraphs 24 or 34. Another example is when an entity reassesses deferred tax assets at the date of a PBE combination or subsequently (see paragraphs 67 and 68).

38. Temporary differences arise when the carrying amount of investments in controlled entities, branches and associates or interests in joint arrangements (namely the controlling entity or investor’s share of the net assets of the controlled entity, branch, associate or investee, including the carrying amount of goodwill) becomes different from the tax base (which is often cost) of the investment or interest. Such differences may arise in a number of different circumstances, for example:

1. The existence of undistributed profits of controlled entities, branches, associates and joint arrangements;

2. Changes in foreign exchange rates when a controlling entity and its controlled entity are based in different countries; and

3. A reduction in the carrying amount of an investment in an associate to its recoverable amount.

In consolidated financial statements, the temporary difference may be different from the temporary difference associated with that investment in the controlling entity’s separate financial statements if the controlling entity carries the investment in its separate financial statements at cost or revalued amount.

39. An entity shall recognise a deferred tax liability for all taxable temporary differences associated with investments in controlled entities, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied:

1. The controlling entity, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and

2. It is probable that the temporary difference will not reverse in the foreseeable future.

40. As a controlling entity controls the dividend policy of its controlled entity, it is able to control the timing of the reversal of temporary differences associated with that investment (including the temporary differences arising not only from undistributed surpluses but also from any foreign exchange translation differences). Furthermore, it would often be impracticable to determine the amount of income taxes that would be payable when the temporary difference reverses. Therefore, when the controlling entity has determined that those surpluses will not be distributed in the foreseeable future the controlling entity does not recognise a deferred tax liability. The same considerations apply to investments in branches.

41. The non-monetary assets and liabilities of an entity are measured in its functional currency (see PBE IPSAS 4 The Effects of Changes in Foreign Exchange Rates). If the entity’s taxable profit or tax loss (and, hence, the tax base of its non-monetary assets and liabilities) is determined in a different currency, changes in the exchange rate give rise to temporary differences that result in a recognised deferred tax liability or (subject to paragraph 24) asset. The resulting deferred tax is charged or credited to surplus or deficit (see paragraph 58).

42. An investor in an associate does not control that entity and is usually not in a position to determine its dividend policy. Therefore, in the absence of an agreement requiring that the surpluses of the associate will not be distributed in the foreseeable future, an investor recognises a deferred tax liability arising from 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 if it recovers the cost of its investment in an associate, but can determine that it will equal or exceed a minimum amount. In such cases, the deferred tax liability is measured at this amount.

43. The arrangement between the parties to a joint arrangement usually deals with the distribution of the surpluses and identifies whether decisions on such matters require the consent of all the parties or a group of the parties. When the joint venturer or joint operator can control the timing of the distribution of its share of the surpluses of the joint arrangement and it is probable that its share of the surpluses will not be distributed in the foreseeable future, a deferred tax liability is not recognised.

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

1. The temporary difference will reverse in the foreseeable future; and

2. Taxable profit will be available against which the temporary difference can be utilised.

45. In deciding whether a deferred tax asset is recognised for deductible temporary differences associated with its investments in controlled entities, branches and associates, and its interests in joint arrangements, an entity considers the guidance set out in paragraphs 28 to 31.

46. Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

47. Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

48. Current and deferred tax assets and liabilities are usually measured using the tax rates (and tax laws) that have been enacted. However, in some jurisdictions, announcements of tax rates (and tax laws) by the government have the substantive effect of actual enactment, which may follow the announcement by a period of several months. In these circumstances, tax assets and liabilities are measured using the announced tax rate (and tax laws).

49. When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods in which the temporary differences are expected to reverse.

50. [Deleted by IASB]

51. The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

51A. In some jurisdictions, the manner in which an entity recovers (settles) the carrying amount of an asset (liability) may affect either or both of:

1. The tax rate applicable when the entity recovers (settles) the carrying amount of the asset (liability); and

2. The tax base of the asset (liability).

In such cases, an entity measures deferred tax liabilities and deferred tax assets using the tax rate and the tax base that are consistent with the expected manner of recovery or settlement.

51B. If a deferred tax liability or deferred tax asset arises from a non-depreciable asset measured using the revaluation model in PBE IPSAS 17, the measurement of the deferred tax liability or deferred tax asset shall reflect the tax consequences of recovering the carrying amount of the non-depreciable asset through sale, regardless of the basis of measuring the carrying amount of that asset. Accordingly, if the tax law specifies a tax rate applicable to the taxable amount derived from the sale of an asset that differs from the tax rate applicable to the taxable amount derived from using an asset, the former rate is applied in measuring the deferred tax liability or asset related to a non-depreciable asset.

51C. If a deferred tax liability or asset arises from investment property that is measured using the fair value model in PBE IPSAS 16, there is a rebuttable presumption that the carrying amount of the investment property will be recovered through sale. Accordingly, unless the presumption is rebutted, the measurement of the deferred tax liability or deferred tax asset shall reflect the tax consequences of recovering the carrying amount of the investment property entirely through sale. This presumption is rebutted if the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale. If the presumption is rebutted, the requirements of paragraphs 51 and 51A shall be followed.

51D. The rebuttable presumption in paragraph 51C also applies when a deferred tax liability or a deferred tax asset arises from measuring investment property in a PBE combination if the entity will use the fair value model when subsequently measuring that investment property.

51E. Paragraphs 51B–51D do not change the requirements to apply the principles in paragraphs 24–33 (deductible temporary differences) and paragraphs 34–36 (unused tax losses and unused tax credits) of this Standard when recognising and measuring deferred tax assets.

52A. In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net surplus or deficit or accumulated comprehensive revenue and expense is paid out as a dividend to shareholders of the entity. In some other jurisdictions, income taxes may be refundable or payable if part or all of the net surplus or deficit or accumulated comprehensive revenue and expense is paid out as a dividend to shareholders of the entity. In these circumstances, current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed surpluses.

52B. [Deleted by IASB]

53. Deferred tax assets and liabilities shall not be discounted.

54. The reliable determination of deferred tax assets and liabilities on a discounted basis requires detailed scheduling of the timing of the reversal of each temporary difference. In many cases such scheduling is impracticable or highly complex. Therefore, it is inappropriate to require discounting of deferred tax assets and liabilities. To permit, but not to require, discounting would result in deferred tax assets and liabilities which would not be comparable between entities. Therefore, this Standard does not require or permit the discounting of deferred tax assets and liabilities.

55. Temporary differences are determined by reference to the carrying amount of an asset or liability. This applies even where that carrying amount is itself determined on a discounted basis, for example in the case of retirement benefit obligations (see PBE IPSAS 39 Employee Benefits).

56. The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

57. Accounting for the current and deferred tax effects of a transaction or other event is consistent with the accounting for the transaction or event itself. Paragraphs 58 to 68C implement this principle.

57A. An entity shall recognise the income tax consequences of dividends when it recognises a liability to pay a dividend. The income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity shall recognise the income tax consequences of dividends in surplus or deficit, other comprehensive revenue and expense or net assets/equity according to where the entity originally recognised those past transactions or events.

58. Current and deferred tax shall be recognised as revenue or an expense and included in the surplus or deficit for the period, except to the extent that the tax arises from:

1. A transaction or event which is recognised, in the same or a different period, outside surplus or deficit, either in other comprehensive revenue and expense or directly in net assets/equity (see paragraphs 61A to 65); or

2. A PBE combination (other than the acquisition by an investment entity, as defined in PBE IPSAS 35 Consolidated Financial Statements, of a controlled entity that is required to be measured at fair value through surplus or deficit) (see paragraphs 66 to 68).

59. Most deferred tax liabilities and deferred tax assets arise where revenue or expense is included in accounting profit in one period, but is included in taxable profit (tax loss) in a different period. The resulting deferred tax is recognised in surplus or deficit. Examples are when:

1. Interest, royalty or dividend revenue is received in arrears and is included in accounting profit in accordance with PBE IPSAS 9 Revenue from Exchange Transactions, PBE IPSAS 23 Revenue from Non-Exchange Transactions or PBE IPSAS 41, as relevant, but is included in taxable profit (tax loss) on a cash basis; and

2. Costs of intangible assets have been capitalised in accordance with PBE IPSAS 31 and are being amortised in surplus or deficit, but were deducted for tax purposes when they were incurred.

60. The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences. This can result, for example, from:

1. A change in tax rates or tax laws;

2. A reassessment of the recoverability of deferred tax assets; or

3. A change in the expected manner of recovery of an asset.

The resulting deferred tax is recognised in surplus or deficit, except to the extent that it relates to items previously recognised outside surplus or deficit (see paragraph 63).

61. [Deleted by IASB]

61A. Current tax and deferred tax shall be recognised outside surplus or deficit if the tax relates to items that are recognised, in the same or a different period, outside surplus or deficit. Therefore, current tax and deferred tax that relates to items that are recognised, in the same or a different period,

1. In other comprehensive revenue and expense, shall be recognised in other comprehensive revenue and expense (see paragraph 62).

2. Directly in net assets/equity, shall be recognised in net assets/equity (see paragraph 62A).

62. PBE Standards require or permit particular items to be recognised in other comprehensive revenue and expense. Examples of such items are:

1. A change in carrying amount arising from the revaluation of property, plant and equipment (see PBE IPSAS 17); and

2. [Deleted by IASB]

3. Exchange differences arising on the translation of the financial statements of a foreign operation (see PBE IPSAS 4).

4. [Deleted by IASB]

62A. PBE Standards require or permit particular items to be credited or charged directly to net assets/equity.

Examples of such items are:

1. An adjustment to the opening balance of accumulated comprehensive revenue and expense resulting from either a change in accounting policy that is applied retrospectively or the correction of an error (see PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors); and

2. Amounts arising on initial recognition of the equity component of a compound financial instrument (see paragraph 23).

63. In exceptional circumstances it may be difficult to determine the amount of current and deferred tax that relates to items recognised outside surplus or deficit (either in other comprehensive revenue and expense or directly in net assets/equity). This may be the case, for example, when:

1. There are graduated rates of income tax and it is impossible to determine the rate at which a specific component of taxable profit (tax loss) has been taxed;

2. A change in the tax rate or other tax rules affects a deferred tax asset or liability relating (in whole or in part) to an item that was previously recognised outside surplus or deficit; or

3. An entity determines that a deferred tax asset shall be recognised, or shall no longer be recognised in full, and the deferred tax asset relates (in whole or in part) to an item that was previously recognised outside surplus or deficit.

In such cases, the current and deferred tax related to items that are recognised outside surplus or deficit are based on a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction concerned, or other method that achieves a more appropriate allocation in the circumstances.

64. PBE IPSAS 17 does not specify whether an entity should transfer each year from revaluation surplus to retained earnings an amount equal to the difference between the depreciation or amortisation on a revalued asset and the depreciation or amortisation based on the cost of that asset. If an entity makes such a transfer, the amount transferred is net of any related deferred tax. Similar considerations apply to transfers made on disposal of an item of property, plant or equipment.

65. When an asset is revalued for tax purposes and that revaluation is related to an accounting revaluation of an earlier period, or to one that is expected to be carried out in a future period, the tax effects of both the asset revaluation and the adjustment of the tax base are recognised in other comprehensive revenue and expense in the periods in which they occur. However, if the revaluation for tax purposes is not related to an accounting revaluation of an earlier period, or to one that is expected to be carried out in a future period, the tax effects of the adjustment of the tax base are recognised in surplus or deficit.

65A. When an entity pays dividends or other distributions to its owners, it may be required to pay a portion of the dividends or other distributions to taxation authorities on behalf of owners. In many jurisdictions, this amount is referred to as a withholding tax. Such an amount paid or payable to taxation authorities is charged to net assets/equity as a part of the dividends or distribution.

66. As explained in paragraphs 19 and 26(c), temporary differences may arise in a PBE combination. In accordance with PBE IPSAS 40, an entity recognises any resulting deferred tax assets (to the extent that they meet the recognition criteria in paragraph 24) or deferred tax liabilities as identifiable assets and liabilities at the acquisition date. Consequently, those deferred tax assets and deferred tax liabilities affect the amount of goodwill or the bargain purchase gain the entity recognises. However, in accordance with paragraph 15(a), an entity does not recognise deferred tax liabilities arising from the initial recognition of goodwill.

67. As a result of a PBE combination, the probability of realising a pre-acquisition deferred tax asset of the acquirer could change. An acquirer may consider it probable that it will recover its own deferred tax asset that was not recognised before the PBE combination. For example, the acquirer may be able to utilise the benefit of its unused tax losses against the future taxable profit of the acquired operation. Alternatively, as a result of the PBE combination it might no longer be probable that future taxable profit will allow the deferred tax asset to be recovered. In such cases, the acquirer recognises a change in the deferred tax asset in the period of the PBE combination, but does not include it as part of the accounting for the PBE combination. Therefore, the acquirer does not take it into account in measuring the goodwill or bargain purchase gain it recognises in the PBE combination.

68. The potential benefit of the acquired operation’s income tax loss carryforwards or other deferred tax assets might not satisfy the criteria for separate recognition when a PBE combination is initially accounted for but might be realised subsequently. An entity shall recognise acquired deferred tax benefits that it realises after the PBE combination as follows:

1. Acquired deferred tax benefits recognised within the measurement period that result from new information about facts and circumstances that existed at the acquisition date shall be applied to reduce the carrying amount of any goodwill related to that acquisition. If the carrying amount of that goodwill is zero, any remaining deferred tax benefits shall be recognised in surplus or deficit.

2. All other acquired deferred tax benefits realised shall be recognised in surplus or deficit (or, if this Standard so requires, outside surplus or deficit).

68A. In some tax jurisdictions, an entity receives a tax deduction (i.e., an amount that is deductible in determining taxable profit) that relates to remuneration paid in shares, share options or other equity instruments of the entity. The amount of that tax deduction may differ from the related cumulative remuneration expense, and may arise in a later accounting period. For example, in some jurisdictions, an entity may recognise an expense for the consumption of employee services received as consideration for share options granted, in accordance with relevant national or international standards, and not receive a tax deduction until the share options are exercised, with the measurement of the tax deduction based on the entity’s share price at the date of exercise.

68B. As with the research costs discussed in paragraphs 9 and 26(b) of this Standard, the difference between the tax base of the employee services received to date (being the amount the taxation authorities will permit as a deduction in future periods), and the carrying amount of nil, is a deductible temporary difference that results in a deferred tax asset. If the amount the taxation authorities will permit as a deduction in future periods is not known at the end of the period, it shall be estimated, based on information available at the end of the period. For example, if the amount that the taxation authorities will permit as a deduction in future periods is dependent upon the entity’s share price at a future date, the measurement of the deductible temporary difference should be based on the entity’s share price at the end of the period.

68C. As noted in paragraph 68A, the amount of the tax deduction (or estimated future tax deduction, measured in accordance with paragraph 68B) may differ from the related cumulative remuneration expense. Paragraph 58 of the Standard requires that current and deferred tax should be recognised as income or an expense and included in surplus or deficit for the period, except to the extent that the tax arises from (a) a transaction or event that is recognised, in the same or a different period, outside surplus or deficit, or (b) a PBE combination (other than the acquisition by an investment entity of a controlled entity that is required to be measured at fair value through surplus or deficit). If the amount of the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction relates not only to remuneration expense but also to an equity item. In this situation, the excess of the associated current or deferred tax should be recognised directly in net assets/equity.

69–70. [Deleted by IASB] Offset

71. An entity shall offset current tax assets and current tax liabilities if, and only if, the entity:

1. Has a legally enforceable right to set off the recognised amounts; and

2. Intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.

72. Although current tax assets and liabilities are separately recognised and measured they are offset in the statement of financial position subject to criteria similar to those established for financial instruments in PBE IPSAS 28. An entity will normally have a legally enforceable right to set off a current tax asset against a current tax liability when they relate to income taxes levied by the same taxation authority and the taxation authority permits the entity to make or receive a single net payment.

73. In consolidated financial statements, a current tax asset of one entity in a group is offset against a current tax liability of another entity in the group if, and only if, the entities concerned have a legally enforceable right to make or receive a single net payment and the entities intend to make or receive such a net payment or to recover the asset and settle the liability simultaneously.

74. An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:

1. The entity has a legally enforceable right to set off current tax assets against current tax liabilities; and

2. The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:

   1. The same taxable entity; or

   2. Different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realise the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

75. To avoid the need for detailed scheduling of the timing of the reversal of each temporary difference, this Standard requires an entity to set off a deferred tax asset against a deferred tax liability of the same taxable entity if, and only if, they relate to income taxes levied by the same taxation authority and the entity has a legally enforceable right to set off current tax assets against current tax liabilities.

76. In rare circumstances, an entity may have a legally enforceable right of set-off, and an intention to settle net, for some periods but not for others. In such rare circumstances, detailed scheduling may be required to establish reliably whether the deferred tax liability of one taxable entity will result in increased tax payments in the same period in which a deferred tax asset of another taxable entity will result in decreased payments by that second taxable entity.

77. The tax expense (income) related to surplus or deficit from ordinary activities shall be presented as part of surplus or deficit in the statement of comprehensive revenue and expense.

77A. [Deleted by IASB]

78. PBE IPSAS 4 requires certain exchange differences to be recognised as income or expense but does not specify where such differences shall be presented in the statement of comprehensive revenue and expense. Accordingly, where exchange differences on deferred foreign tax liabilities or assets are recognised in the statement of comprehensive revenue and expense, such differences may be classified as deferred tax expense (income) if that presentation is considered to be the most useful to financial statement users.

79. The major components of tax expense (income) shall be disclosed separately.

80. Components of tax expense (income) may include:

1. Current tax expense (income);

2. Any adjustments recognised in the period for current tax of prior periods;

3. The amount of deferred tax expense (income) relating to the origination and reversal of temporary differences;

4. The amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes;

5. The amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce current tax expense;

6. The amount of the benefit from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce deferred tax expense;

7. Deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset in accordance with paragraph 56; and

8. The amount of tax expense (income) relating to those changes in accounting policies and errors that are included in surplus or deficit in accordance with PBE IPSAS 3, because they cannot be accounted for retrospectively.

81. The following shall also be disclosed separately:

1. The aggregate current and deferred tax relating to items charged or credited directly to net assets/equity (see paragraph 62A);         (ab) * The amount of income tax relating to each component of other comprehensive revenue and expense (see paragraph 62 and PBE IPSAS 1 Presentation of Financial Reports);

2. [Deleted by IASB]

3. An explanation of the relationship between tax expense (income) and accounting profit in either or both of the following forms:

   1. A numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or

   2. A numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed;

4. An explanation of changes in the applicable tax rate(s) compared to the previous accounting period;

5. The amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognised in the statement of financial position;

6. * The aggregate amount of temporary differences associated with investments in controlled entities, branches and associates and interests in joint arrangements, for which deferred tax liabilities have not been recognised (see paragraph 39);

7. In respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits:

   1. The amount of the deferred tax assets and liabilities recognised in the statement of financial position for each period presented;

   2. The amount of the deferred tax income or expense recognised in surplus or deficit, if this is not apparent from the changes in the amounts recognised in the statement of financial position;

8. In respect of discontinued operations, the tax expense relating to:

   1. The gain or loss on discontinuance; and

   2. The surplus or deficit from the discontinued operation for the period, together with the corresponding amounts for each prior period presented;

9. * The amount of income tax consequences of dividends to shareholders of the entity that were proposed or declared before the financial statements were authorised for issue, but are not recognised as a liability in the financial statements;

10. * If a PBE combination in which the entity is the acquirer causes a change in the amount recognised for its pre-acquisition deferred tax asset (see paragraph 67), the amount of that change; and

11. * If the deferred tax benefits acquired in a PBE combination are not recognised at the acquisition date but are recognised after the acquisition date (see paragraph 68), a description of the event or change in circumstances that caused the deferred tax benefits to be recognised.

RDR81.1 A Tier 2 entity shall disclose the aggregate amount of current and deferred income tax relating to items recognised in other comprehensive revenue and expense.

*81.2 The term ‘imputation credits’ is used in paragraphs 81.3 and 81.5 to also mean ‘franking credits’. The disclosures required by paragraphs 81.3 and 81.5 shall be made separately in respect of any New Zealand imputation credits and any Australian imputation credits.

*81.3 An entity shall disclose the amount of imputation credits available for use in subsequent reporting periods.

*81.4 For the purposes of determining the amount required to be disclosed in accordance with paragraph 81.3, entities may have:

1. Imputation credits that will arise from the payment of the amount of the provision for income tax;

2. Imputation debits that will arise from the payment of dividends or other distributions recognised as a liability at the reporting date; and

3. Imputation credits that will arise from the receipt of dividends or other distributions recognised as receivables at the reporting date.

*81.5 Where there are different classes of investors with different entitlements to imputation credits, disclosures shall be made about the nature of those entitlements for each class where this is relevant to an understanding of them.

*82. An entity shall disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when:

1. The utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and

2. The entity has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred tax asset relates.

82A. In the circumstances described in paragraph 52A, an entity shall disclose the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders. In addition, the entity shall disclose the amounts of the potential income tax consequences practicably determinable and whether there are any potential income tax consequences not practicably determinable.

RDR82A.1 A Tier 2 entity is not required to disclose the amounts of the potential income tax consequences practicably determinable and whether there are any potential income tax consequences not practicably determinable as required in paragraph 82A.

83. [Deleted by IASB]

84. The disclosures required by paragraph 81(c) enable users of financial statements to understand whether the relationship between tax expense (income) and accounting profit is unusual and to understand the significant factors that could affect that relationship in the future. The relationship between tax expense (income) and accounting profit may be affected by such factors as revenue that is exempt from taxation, expenses that are not deductible in determining taxable profit (tax loss), the effect of tax losses and the effect of foreign tax rates.

85. In explaining the relationship between tax expense (income) and accounting profit, an entity uses an applicable tax rate that provides the most meaningful information to the users of its financial statements. Often, the most meaningful rate is the domestic rate of tax in the country in which the entity is domiciled, aggregating the tax rate applied for national taxes with the rates applied for any local taxes which are computed on a substantially similar level of taxable profit (tax loss). However, for an entity operating in several jurisdictions, it may be more meaningful to aggregate separate reconciliations prepared using the domestic rate in each individual jurisdiction. The following example illustrates how the selection of the applicable tax rate affects the presentation of the numerical reconciliation.

86. The average effective tax rate is the tax expense (income) divided by the accounting profit.

*87. It would often be impracticable to compute the amount of unrecognised deferred tax liabilities arising from investments in controlled entities, branches and associates and interests in joint arrangements (see paragraph 39). Therefore, this Standard requires an entity to disclose the aggregate amount of the underlying temporary differences but does not require disclosure of the deferred tax liabilities. Nevertheless, where practicable, entities are encouraged to disclose the amounts of the unrecognised deferred tax liabilities because financial statement users may find such information useful.

*87A. Paragraph 82A requires an entity to disclose the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders. An entity discloses the important features of the income tax systems and the factors that will affect the amount of the potential income tax consequences of dividends.

*87B. It would sometimes not be practicable to compute the total amount of the potential income tax consequences that would result from the payment of dividends to shareholders. This may be the case, for example, where an entity has a large number of foreign controlled entities. However, even in such circumstances, some portions of the total amount may be easily determinable. For example, in a consolidated group, a controlling entity and some of its controlled entities may have paid income taxes at a higher rate on undistributed profits and be aware of the amount that would be refunded on the payment of future dividends or other distributions to owners from consolidated accumulated surpluses. In this case, that refundable amount is disclosed. If applicable, the entity also discloses that there are additional potential income tax consequences not practicably determinable. In the controlling entity’s separate financial statements, if any, the disclosure of the potential income tax consequences relates to the controlling entity’s accumulated surpluses.

*87C. An entity required to provide the disclosures in paragraph 82A may also be required to provide disclosures related to temporary differences associated with investments in controlled entities, branches and associates or interests in joint arrangements. In such cases, an entity considers this in determining the information to be disclosed under paragraph 82A. For example, an entity may be required to disclose the aggregate amount of temporary differences associated with investments in controlled entities for which no deferred tax liabilities have been recognised (see paragraph 81(f)). If it is impracticable to compute the amounts of unrecognised deferred tax liabilities (see paragraph 87) there may be amounts of potential income tax consequences of dividends not practicably determinable related to these controlled entities.

88. An entity discloses any tax-related contingent liabilities and contingent assets in accordance with PBE IPSAS 19 Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise, for example, from unresolved disputes with the taxation authorities. Similarly, where changes in tax rates or tax laws are enacted or announced after the reporting period, an entity discloses any significant effect of those changes on its current and deferred tax assets and liabilities (see PBE IPSAS 14 Events After the Reporting Period).

88A. On initial application, an entity shall apply Appendix B either:

1. Retrospectively applying PBE IPSAS 3, if that is possible without the use of hindsight; or

2. Retrospectively with the cumulative effect of initially applying Appendix B recognised at the date of initial application. If an entity selects this transition approach, it shall not restate comparative information. Instead, the entity shall recognise the cumulative effect of initially applying Appendix B as an adjustment to the opening balance of accumulated comprehensive revenue and expense (or other component of net assets/equity, as appropriate). The date of initial application is the beginning of the annual reporting period in which an entity first applies Appendix B.

89–98. [Not used]

98.1 A public benefit entity shall apply this Standard for annual financial statements covering periods beginning on or after 1 April 2015. Earlier application is permitted for not-for-profit public benefit entities as long as the full suite of PBE Standards is applied at the same time.

98.2 2016 Omnibus Amendments to PBE Standards, issued in January 2017, added a footnote to paragraph 14. An entity shall apply that amendment for annual financial statements covering periods beginning on or after 1 January 2017.

98.3 2016 Omnibus Amendments to PBE Standards, issued in January 2017, amended paragraph 29 and added paragraphs 27A, 29A and the example following paragraph 26. An entity shall apply those amendments for annual financial statements covering periods beginning on or after 1 January 2017. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact. An entity shall apply those amendments retrospectively in accordance with PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors. However, on initial application of the amendment, the change in the opening net assets/equity of the earliest comparative period may be recognised in opening accumulated comprehensive revenue and expense (or in another component of net assets/equity, as appropriate), without allocating the change between opening accumulated comprehensive revenue and expense and other components of net assets/equity. If an entity applies this relief, it shall disclose that fact.

98.4 PBE IPSAS 35 Consolidated Financial Statements and PBE IPSAS 37 Joint Arrangements issued in January 2017, amended paragraphs 2, 15, 18, 24, the heading before paragraph 38, paragraphs 38−39, 43–45, 58, 68C, 81, 87 and 87C. An entity shall apply those amendments when it applies PBE IPSAS 35 and PBE IPSAS 37.

98.5 PBE IFRS 9 Financial Instruments, issued in January 2017, amended paragraph 20. An entity shall apply that amendment when it applies PBE IFRS 9.²

98.6 PBE IPSAS 39, issued in May 2017, amended paragraph 55. An entity shall apply that amendment when it applies PBE IPSAS 39.

98.7 2018 Omnibus Amendments to PBE Standards, issued in November 2018, added paragraph 57A and deleted paragraph 52B. An entity shall apply those amendments for annual financial statements covering periods beginning on or after 1 January 2019. Earlier application is permitted. If an entity applies those amendments earlier, it shall disclose that fact. When an entity first applies those amendments, it shall apply them to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period.

98.8 PBE IPSAS 40, issued in July 2019, amended paragraphs 15, 18, 19 and its related heading, 21, 21A, 21B, 22, 24, 26, 32A, 37, 51D, 58, 66 and its related heading, 67, 68, 68C and 81. An entity shall apply those amendments when it applies PBE IPSAS 40.

98.9 PBE IPSAS 41, issued in March 2019, amended paragraphs 17, 20, 59 and 98.5. An entity shall apply that amendment when it applies PBE IPSAS 41.

98.10 Uncertainty over Income Tax Treatments (Amendments to PBE IAS 12), issued in August 2019, added paragraph 88A and Appendix B. An entity shall apply these amendments for annual financial statements covering periods beginning on or after 1 January 2020. Earlier application is permitted. If an entity applies these amendments for an earlier period, it shall disclose that fact.

98.11 2022 Omnibus Amendments to PBE Standards, issued in June 2022, amended paragraphs 15, 22 and 24 and added paragraph 22A. An entity shall apply these amendments in accordance with paragraphs 98.12–98.13 for annual reporting periods beginning on or after 1 January 2023. Earlier application is permitted. If an entity applies the amendments for an earlier period, it shall disclose that fact.

98.12 An entity shall apply 2022 Omnibus Amendments to PBE Standards to transactions that occur on or after the beginning of the earliest comparative period presented.

98.13 An entity applying 2022 Omnibus Amendments to PBE Standards shall also, at the beginning of the earliest comparative period presented:

1. Recognise a deferred tax asset—to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised—and a deferred tax liability for all deductible and taxable temporary differences associated with:

   1. Assets acquired under finance leases and liability for the associated lease obligations; and

   2. Decommissioning, restoration and similar liabilities and the corresponding amounts recognised as part of the cost of the related asset; and

2. Recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of accumulated comprehensive revenue and expense (or other component of net asset/equity, as appropriate) at that date.

99. This Standard, when applied, supersedes PBE IAS 12 Income Taxes issued in May 2013.

A1. A change in the tax status of an entity or of its owners may have consequences for an entity by increasing or decreasing its tax liabilities or assets. As a result of such an event, an entity may be taxed differently; it may for example gain or lose tax incentives or become subject to a different rate of tax in the future.

A2. A change in the tax status of an entity or its owners may have an immediate effect on the entity’s current tax liabilities or assets. The change may also increase or decrease the deferred tax liabilities and assets recognised by the entity, depending on the effect the change in tax status has on the tax consequences that will arise from recovering or settling the carrying amount of the entity’s assets and liabilities.

A3. The current and deferred tax consequences of a change in tax status shall be included in surplus or deficit for the period, unless those consequences relate to transactions and events that result, in the same or a different period, in a direct credit or charge to the recognised amount of net assets/equity or in amounts recognised in other comprehensive revenue and expense. Those tax consequences that relate to changes in the recognised amount of net assets/equity, in the same or a different period (not included in surplus or deficit), shall be charged or credited directly to net assets/equity. Those tax consequences that relate to amounts recognised in other comprehensive revenue and expense shall be recognised in other comprehensive revenue and expense.

B1. PBE IAS 12 Income Taxes specifies requirements for current and deferred tax assets and liabilities. An entity applies the requirements in PBE IAS 12 based on applicable tax laws.

B2. It may be unclear how tax law applies to a particular transaction or circumstance. The acceptability of a particular tax treatment under tax law may not be known until the relevant taxation authority or a court takes a decision in the future. Consequently, a dispute or examination of a particular tax treatment by the taxation authority may affect an entity’s accounting for a current or deferred tax asset or liability.

B3. In this Appendix:

1. ‘Tax treatments’ refers to the treatments used by an entity or that it plans to use in its income tax filings.

2. ‘Taxation authority’ refers to the body or bodies that decide whether tax treatments are acceptable under tax law. This might include a court.

3. An ‘uncertain tax treatment’ is a tax treatment for which there is uncertainty over whether the relevant taxation authority will accept the tax treatment under tax law. For example, an entity’s decision not to submit any income tax filing in a tax jurisdiction, or not to include particular income in taxable profit, is an uncertain tax treatment if its acceptability is uncertain under tax law.

B4. This Appendix clarifies how to apply the recognition and measurement requirements in PBE IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, an entity shall recognise and measure its current or deferred tax asset or liability applying the requirements in PBE IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this Appendix.

B5. When there is uncertainty over income tax treatments, this Appendix addresses:

1. Whether an entity considers uncertain tax treatments separately;

2. The assumptions an entity makes about the examination of tax treatments by taxation authorities;

3. How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and

4. How an entity considers changes in facts and circumstances.

B6. An entity shall determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments based on which approach better predicts the resolution of the uncertainty. In determining the approach that better predicts the resolution of the uncertainty, an entity might consider, for example, (a) how it prepares its income tax filings and supports tax treatments; or (b) how the entity expects the taxation authority to make its examination and resolve issues that might arise from that examination.

B7. If, applying paragraph B6, an entity considers more than one uncertain tax treatment together, the entity shall read references to an ‘uncertain tax treatment’ in this Appendix as referring to the group of uncertain tax treatments considered together.

B8. In assessing whether and how an uncertain tax treatment affects the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, an entity shall assume that a taxation authority will examine amounts it has a right to examine and have full knowledge of all related information when making those examinations.

B9. An entity shall consider whether it is probable that a taxation authority will accept an uncertain tax treatment.

B10. If an entity concludes it is probable that the taxation authority will accept an uncertain tax treatment, the entity shall determine the taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates consistently with the tax treatment used or planned to be used in its income tax filings.

B11. If an entity concludes it is not probable that the taxation authority will accept an uncertain tax treatment, the entity shall reflect the effect of uncertainty in determining the related taxable profit (tax loss), tax bases, unused tax losses, unused tax credits or tax rates. An entity shall reflect the effect of uncertainty for each uncertain tax treatment by using either of the following methods, depending on which method the entity expects to better predict the resolution of the uncertainty:

1. The most likely amount—the single most likely amount in a range of possible outcomes. The most likely amount may better predict the resolution of the uncertainty if the possible outcomes are binary or are concentrated on one value.

2. The expected value—the sum of the probability-weighted amounts in a range of possible outcomes. The expected value may better predict the resolution of the uncertainty if there is a range of possible outcomes that are neither binary nor concentrated on one value.

B12. If an uncertain tax treatment affects current tax and deferred tax (for example, if it affects both taxable profit used to determine current tax and tax bases used to determine deferred tax), an entity shall make consistent judgements and estimates for both current tax and deferred tax.

B13. An entity shall reassess a judgement or estimate required by this Appendix if the facts and circumstances on which the judgement or estimate was based change or as a result of new information that affects the judgement or estimate. For example, a change in facts and circumstances might change an entity’s conclusions about the acceptability of a tax treatment or the entity’s estimate of the effect of uncertainty, or both. Paragraphs B15–B17 set out guidance on changes in facts and circumstances.

B14. An entity shall reflect the effect of a change in facts and circumstances or of new information as a change in accounting estimate applying PBE IPSAS 3 Accounting Policies, Changes in Accounting Estimates and Errors. An entity shall apply PBE IPSAS 14 Events after the Reporting Date to determine whether a change that occurs after the reporting period is an adjusting or non-adjusting event.

B15. In applying paragraph B13, an entity shall assess the relevance and effect of a change in facts and circumstances or of new information in the context of applicable tax laws. For example, a particular event might result in the reassessment of a judgement or estimate made for one tax treatment but not another, if those tax treatments are subject to different tax laws.

B16. Examples of changes in facts and circumstances or new information that, depending on the circumstances, can result in the reassessment of a judgement or estimate required by this Appendix include, but are not limited to, the following:

1. Examinations or actions by a taxation authority. For example:

   1. Agreement or disagreement by the taxation authority with the tax treatment or a similar tax treatment used by the entity;

   2. Information that the taxation authority has agreed or disagreed with a similar tax treatment used by another entity; and

   3. Information about the amount received or paid to settle a similar tax treatment.

2. Changes in rules established by a taxation authority.

3. The expiry of a taxation authority’s right to examine or re-examine a tax treatment.

B17. The absence of agreement or disagreement by a taxation authority with a tax treatment, in isolation, is unlikely to constitute a change in facts and circumstances or new information that affects the judgements and estimates required by this Appendix.

B18. When there is uncertainty over income tax treatments, an entity shall determine whether to disclose:

1. Judgements made in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates applying paragraph 137 of PBE IPSAS 1 Presentation of Financial Statements; and

2. Information about the assumptions and estimates made in determining taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates applying paragraphs 140–144 of PBE IPSAS 1.

B19. If an entity concludes it is probable that a taxation authority will accept an uncertain tax treatment, the entity shall determine whether to disclose the potential effect of the uncertainty as a tax-related contingency applying paragraph 88 of PBE IAS 12.

BC1. The New Zealand Accounting Standards Board (NZASB) has modified NZ IAS 12 Income Taxes for application by Tier 1 and Tier 2 public benefit entities. Where applicable, disclosure concessions have been identified for Tier 2 entities and the language generalised for use by public benefit entities.

BC2. Illustrative examples on the application of IAS 12 Income Taxes are available in the additional material for NZ IAS 12 Income Taxes on the XRB website at www.xrb.govt.nz.

BC3. The NZASB agreed to include, in PBE IAS 12, integral application guidance based on NZ SIC-25 Income Taxes—Changes in the Tax Status of an Entity or its Shareholders. The NZASB noted that public benefit entities may pay income tax, either directly, or through their controlled entities and that this guidance would continue to be useful for public benefit entities.

BC4. 2016 Omnibus Amendments to PBE Standards amended PBE IAS 12 by clarifying how to account for deferred tax assets related to debt instruments measured at fair value. These amendments were equivalent to the amendments set out in Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12) issued by the IASB in January 2016. The NZASB considered that these amendments would improve clarity in the PBE Standards and should be incorporated into PBE IAS 12.

BC5. In December 2017 the IASB issued Annual Improvements to IFRS® Standards 2015–2017 Cycle which amended IAS 12 Income Taxes. The amendments clarify that the requirements in the former paragraph 52B (to recognise the income tax consequences of dividends where the transactions or events that generated distributable profits are recognised) apply to all income tax consequences of dividends – the amendments moved the requirements away from paragraph 52A (as that paragraph deals only with situations where there are different tax rates for distributed and undistributed profits). The NZASB subsequently issued 2018 Omnibus Amendments to PBE Standards which incorporated equivalent amendments in PBE IAS 12.

BC6. In June 2017 the IASB issued IFRIC 23 Uncertainty over Income Tax Treatments. The NZASB subsequently issued this interpretation in August 2017 as NZ IFRIC 23 Uncertainty over Income Tax Treatments, effective for for-profit entities for annual reporting periods beginning on or after 1 January 2019. NZ IFRIC 23 clarifies how to apply the recognition and measurement requirements of NZ IAS 12 Income Taxes when there is uncertainty over income tax treatments.

BC7. PBE IAS 12 Income Taxes is based on NZ IAS 12. In August 2019, the NZASB issued Uncertainty over Income Tax Treatments (Amendments to PBE IAS 12), which incorporated into PBE IAS 12 the guidance from NZ IFRIC 23 as Appendix B. The NZASB noted that some public benefit entities may pay income tax, either directly or through their controlled entities, and that this guidance would be useful for public benefit entities.

BC8. When developing IFRIC 23, the IFRS Interpretations Committee observed that retrospective application of IFRIC 23 without the use of hindsight would often be impossible for entities. Consequently, IFRIC 23 and NZ IFRIC 23 do not require the restatement of comparative information when an entity first applies the guidance. However, retrospective application is permitted if that is possible without the use of hindsight. The transitional provisions in NZ IFRIC 23 are replicated in PBE IAS 12.

BC9. Illustrative examples on the application of Appendix B are available as part of the additional material for NZ IFRIC 23 Uncertainty over Income Tax Treatments on the XRB website at www.xrb.govt.nz.

BC10. Deferred Tax related to Assets and Liabilities arising from a Single Transaction, issued by the IASB in May 2021, amended IAS 12 Income Taxes. This amendment narrowed the scope of the recognition exemption for deferred tax assets and deferred tax liabilities, so that the recognition exemption would not apply to transactions that give rise to equal and offsetting temporary differences. The NZASB subsequently amended NZ IAS 12 Income Taxes by issuing Deferred Tax related to Assets and Liabilities arising from a Single Transaction in July 2021. PBE IAS 12 is based on NZ IAS 12. The NZASB therefore amended PBE IAS 12 in 2022 Omnibus Amendments to PBE Standards.