Deferred taxes in IAS 12

Index of contents

1. Theoretical basic concept for deferred taxes

2. Causes for deferred taxes

3. Methods of Determination

4. Types of differences
4.1 permanentdifferences
4.2 Temporary differences
4.3 Timing differences

5. Evaluation Method
5.1 Liability method
5.2 Deferred method
5.3 Comparison of calculation of deferred taxes by using the deferred-method and by using the liability method
5.3.1 Explanation ofthe first period: deferred method
5.3.3 Accounting records for deferred method and liability method

list of abbreviations

US-GAAP, Generally Accepted Accounting Principles IAS International Accounting Standards DRS: Deutsche Rechnungslegung Standards Para Paragraph mill. Million € Euro

table of figures

Map 1 Correlation between taxable income and reporting income Map2 Causes for deferred taxes-primary differences Map3 Comparison of calculation of deferred taxes by using the deferred-method and by using the liability method

I Preamble

By writing this report I would like to introduce the reader into the topic of deferred taxes by using the International Accounting Standard 12. Therefore I would like to introduce you into the topic deferred taxes by giving you the theoretical basic concept of deferred taxes. The theoretical basic concept of deferred taxes should give you the idea and a definition of deferred taxes. Afterwards I would like to present the different causes for creating deferred taxes. The causes for creating deferred taxes will be emphasized by give examples. For a better understanding I would like to explain in the following the steps the methods of determination. You have to know that the IAS determines the deferred taxes by using the temporary concept. Because I would like to underline the differences I will present in short form the timing concept too. The temporary concept includes the timing and the temporary differences and excludes the permanent differences. Now we have to find a definition for each type of difference. If we know the idea of deferred taxes and we know how to determine them, we will be interested in the evaluation of deferred taxes. Therefore I will describe the liability method used by IAS and to show the differences I will describe the deferred method. For a better understanding I would like to conclude my report by giving the different way of calculation deferred taxes by using the deferred method and the liability method.

1. Theoretical basic concept for deferred taxes

With the help of deferred tax assets or liabilities we would like to find an agreement between the effectively calculation of deferred taxes by determination of taxable income and the theoretically calculation of deferred taxes by determination of reporting income. So you can say generally that deferred taxes arise from temporary differences between the carrying amount of an asset or liability in the balance sheet of a determination of reporting income and in the balance sheet of a determination of taxable income.^{1 2}

Map 1 Correlation between taxable income and reporting income²

Abbildung in dieser Leseprobe nicht enthalten

You will never find a total agreement of the reporting income and the taxable income. The reason therefore is that deferred taxes exclude permanent differences.³ Permanente differences are differences between determination of reporting income and determination of taxable income, which are produced during one period, but which couldn't compensate during the following periods. Mainly deferred taxes consist of timing differences and temporary differences. The reason for the existing differences between the German Commercial Code, US-GAAP, IAS and DRS are the different aims. Because I would like to focus on US-GAAP and IAS, I would like to explain only the aims of US-GAAP and IAS. Both accounting principles would like to give the shareholder relevant information for taking a decision. Therefore they would like to show the right value of assets and liabilities in US-GAAP/IAS balance sheet.⁴

2. Causes for deferred taxes

On decide between two levels of basic differences. Firstly the primary differences, which result out of the differences of the individual financial statement and the balance of tax. The causes for the differences between the commercial balance sheet and tax balance sheet based mainly on different inclusion and evaluation practise. The balance of tax is more restricted than the balance of trade. The second level of basic differences is the secondary differences, which result out of the differences of consolidated financial statement and the balance of tax.^{5 6}

Map2 Causes for deferred taxes-primary differences⁶

Abbildung in dieser Leseprobe nicht enthalten

Causes for deferred taxes in the consolidated financial statement as secondary differences:⁷

There could be following reasons for deferred taxes, if we arrange measures for consolidation:

- Differences within the limits of consolidation of investment in subsidiaries
- affecting net income debt consolidation
- Elimination of intermediate result
- intercompany distribution of profit
- intercompany loss compensation
- evaluation with the Equity-Method

3. Methods of Determination

If the accrual of deferred taxes is fixed on differences, which arise affecting net income and which could be solved affecting net income, we have a perception on the profit commission statement. The perception on the profit commission statement is also called timing concept. The timing concept focuses on the timing differences and excludes the temporary differences. The timing is mainly used for deferred taxes out of the German Commercial Code.⁸

IAS uses the temporary concept. This concept concentrates on the balance sheet. The consequence is that you have regularly differences in each position in your balance sheet, which result into differences between the reporting base and the tax base of each position in your balance sheet. The interest of the temporary concept is to investigate the right tax- assets and tax-liabilities on a special balance sheet key date. Out of this aim, it is unimportant to know if the differences, which arise affecting net income also solve affecting net income. It's only important to know that the temporary concept includes not only the timing differences and excludes the permanent differences. It includes also the temporary differences.⁹

4. Types of differences

So you see the inclusion of deferred taxes depends on the character of the used differences. Generally we have 3 types of differences.¹⁰

- timing differences
- temporary differences
- permanent differences.

4.1 permanent differences

Permanente differences are differences between by determination of reporting income and determination of taxable income, which are produced during one period, but which couldn't compensate during the following periods. On use permanent differences neither for accounting according to the German Commercial Code, nor for accounting according to US-GAAP, IAS or DRS.

Examples for permanent differences:

- distribution of profit according to §8 para.3 corporation tax law, which are no operating expenses for the balance of tax
- no acceptation of depreciation of Goodwill in the balance of tax
- income, which is free from taxes¹¹

4.2 Temporary differences

Temporary differences are differences, which focus on long-limited periods, in which the differences will be eliminated. Mostly the differences will be eliminated in point of the liquidation of the enterprise.

Examples for Temporary differences:

- different valuation rate for land and building in commercial balance sheet and tax balance sheet
- every permitted depreciation for fixed assets, which couldn't be wear off¹²

[...]

¹ Küting.pdf

² dito

³ http://www.iasplus.com

⁴ WP-Handbuch 2000, Bd. I, N Tz. 924.

⁵ Coenenberg, 382-424

⁶ dito

⁷ Lühmann, Volker, Latente Steuern im Konzernabaschluss, S.92

⁸ Küting.pdf S443

⁹ www.teitler.ch/IAS37Plain.ppt

¹⁰ Küting.pdf

¹¹ dito

¹² dito