The Accounting of Deferred Taxes under IFRS

Inhaltsverzeichnis

1 Introduction

2 International Financial Reporting Standards
2.1 Main objects and principles of the International Financial Reporting Standard
2.2 Differences to the German Statutory Accounting Rules (HGB)

3 Accounting of Deferred Taxes under IFRS
3.1 Definition and function of deferred taxes
3.2 Concept of Deferral
3.3 Methods of Deferral
3.4 Deferred Taxes Assets and Deferred Taxes Liabilities

4 Conclusion

5 Literature

Abbildungsverzeichnis

Exhibit 1: The Accounting Principles of the IASB

Tabellenverzeichnis

Table 1: types of differences between financial and tax income

1 Introduction

In a global economy there is a need for common accounting rules. It is simply important for an enterprise to know that national and international stock exchange rules require the application of internationally accepted accounting directives. So there are several good reasons for a trend towards internationalization. For an investor means internationalization usually accompanied by a standardization of accounting rules that he can compare financial statements quicker and easier. There are no longer time- consuming and expensive conversions of financial statements necessary. Internalization means also that the national differences in the determination of profit will disappear. Standardization would give the term “profit” substance and would allow the comparison of financial statements of different enterprises from several countries.

In the European Union enterprises have a special responsibility since 2005. On the 12th of March 2002 the European Parliament endorsed the EC Commission’s proposal that all EU listed companies must follow standards issued by the International Accounting Standards Board (IASB) in their consolidated financial statements starting no later than 2005.

In this assignment I want to give a short overview about what the main principles of the International Financial Accounting Principles (IFRS)^[1] are all about and what differences to the German Statutory Accounting Rules (HGB) can be distinguished (chapter 2). Then I want to focus on the accounting of deferred taxes under IFRS (chapter 3). After a definition of deferral I want to explain the concepts and methods of deferral in this part. Finally I will have a closer look on deferred tax assets and deferred tax liabilities.

2 International Financial Reporting Standards

In this chapter I want to focus on the main principles of the International Financial Reporting Standards set by the International Accounting Standards Board. At the end of this chapter I want to give an overview what differences to the German Statutory Accounting Rules (HGB) can be distinguished.

2.1 Main objects and principles of the International Financial Reporting Standard

At first I want to define the main objects of the International Financial Accounting Principles. While the main objective of the accounting rules laid down in HGB is the protection of creditors, it is the protection of investors under IFRS. The most important target group under HGB are lenders; the target group focused on by IAS und US- GAAP are equity suppliers (Szabo 2007, S. 17). Consequently, great attention is attached under HGB to the determination of a distributable profit, while first and foremost maintaining the assets. The principle of prudence is applied. Internationally accepted accounting systems firstly aim at the protection of shareholders and consequently at the timely provision of information to this group.

As provided in Szabo 2007 the accounting principles of the International Accounting Standards Board can be divided into three (or, including the objectives, four) groups.

The underlying assumptions shape the form oh the accounting principles and are defined above all in IAS 1 (Presentation of Financial Statements) and in Framework number 22 and 23 (F.22 and F.23).They comprise basic beliefs: the going concern principle and assumptions o the accrual basic. Recognition and measurement must be done assuming the continuation of an enterprise’s activities. If the discontinuation of the enterprise’s activities during the following accounting year foreseeable, for example because of its inability to pay its debts, it is only allowed to depart form this principle. In this case assets must be measured on the basis of individual sales prices. Accrual basis demands that transaction and other events are recognised when they occur, rather than when the payments related to them are received or made, and that these transactions and other events reported in the financial statements of the periods to which they relate^[2]. Further principles have been derived from the accrual basis: the realization principle and the matching principle. Expenses related to a particular period, e.g. depreciations etc. have to be recorded on a pro rata basis^[3]. Furthermore there are the principle of cut- off date, the principle of identity of the opening balance sheet with the closing balance sheet of the previous period and the principle of measuring single items.

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^[1] They comprise the so- called International Accounting Standards (IAS), which have been officially termed International Financial Reporting Standards since 2001 and the United States Generally Accepted Accounting Principles (US- GAAP) (Szabo 2007, S. 5).

^[2] These rules are similar to the HGB. Expenses and revenues must be recorded in the periods to which they relate – irrespective of their effects on liquidity.

^[3] This is called deferral and will be main part of chapter 3.