|Financial Reporting Standard 112|
This Standard (FRS 112) replaces FRS 1122004 Income Taxes. FRS 112 is effective for accounting periods beginning on or after 1 July 2007.
The original IAS 12 required an entity to account for deferred tax using either the deferral method or a liability method which is sometimes known as the income statement liability method. FRS 112 prohibits the deferral method and requires another liability method which is sometimes known as the balance sheet liability method.
The income statement liability method focuses on timing differences, whereas the balance sheet liability method focuses on temporary differences. Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the balance sheet. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
All timing differences are temporary differences. Temporary differences also arise in the following circumstances, which do not give rise to timing differences, although the original IAS 12 treated them in the same way as transactions that do give rise to timing differences:
Furthermore, there are some temporary differences which are not timing differences, for example those temporary differences that arise when:
The original IAS 12 permitted an entity not to recognise deferred tax assets and liabilities where there was reasonable evidence that timing differences would not reverse for some considerable period ahead. FRS 112 requires an entity to recognise a deferred tax liability or (subject to certain conditions) asset for all temporary differences, with certain exceptions noted below.
The original IAS 12 required that:
FRS 112 requires that deferred tax assets should be recognised when it is probable that taxable profits will be available against which the deferred tax asset can be utilised. Where an entity has a history of tax losses, the entity recognises a deferred tax asset 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.
As an exception to the general requirement set out in paragraph IN3 above, FRS 112 prohibits the recognition of deferred tax liabilities and deferred tax assets arising from certain assets or liabilities whose carrying amount differs on initial recognition from their initial tax base. Because such circumstances do not give rise to timing differences, they did not result in deferred tax assets or liabilities under the original IAS 12.
The original IAS 12 required that taxes payable on undistributed profits of subsidiaries and associates should be recognised unless it was reasonable to assume that those profits will not be distributed or that a distribution would not give rise to a tax liability. However, FRS 112 prohibits the recognition of such deferred tax liabilities (and those arising from any related cumulative translation adjustment) to the extent that:
When this prohibition has the result that no deferred tax liabilities have been recognised, FRS 112 requires an entity to disclose the aggregate amount of the temporary differences concerned.
The original IAS 12 did not refer explicitly to fair value adjustments made on a business combination. Such adjustments give rise to temporary differences and FRS 112 requires an entity to recognise the resulting deferred tax liability or (subject to the probability criterion for recognition) deferred tax asset with a corresponding effect on the determination of the amount of goodwill or any excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over the cost of the combination. However, FRS 112 prohibits the recognition of deferred tax liabilities arising from the initial recognition of goodwill.
The original IAS 12 permitted, but did not require, an entity to recognise a deferred tax liability in respect of asset revaluations. FRS 112 requires an entity to recognise a deferred tax liability in respect of asset revaluations.
The tax consequences of recovering the carrying amount of certain assets or liabilities may depend on the manner of recovery or settlement, for example:
The original IAS 12 gave no guidance on the measurement of deferred tax assets and liabilities in such cases. FRS 112 requires that the measurement of deferred tax liabilities and deferred tax assets should be based on the tax consequences that would follow from the manner in which the entity expects to recover or settle the carrying amount of its assets and liabilities.
The original IAS 12 did not state explicitly whether deferred tax assets and liabilities may be discounted. FRS 112 prohibits discounting of deferred tax assets and liabilities. Paragraph B16(i) of FRS 3 Business Combinations prohibits discounting of deferred tax assets acquired and deferred tax liabilities assumed in a business combination.
The original IAS 12 did not specify whether an entity should classify deferred tax balances as current assets and liabilities or as non-current assets and liabilities. FRS 112 requires that an entity which makes the current/non-current distinction should not classify deferred tax assets and liabilities as current assets and liabilities.*
This requirement has been moved to paragraph 70 of FRS 101 Presentation of Financial Statements.
The original IAS 12 stated that debit and credit balances representing deferred taxes may be offset. FRS 112 establishes more restrictive conditions on offsetting, based largely on those for financial assets and liabilities in FRS 132 Financial Instruments: Disclosure and Presentation.
The original IAS 12 required disclosure of an explanation of the relationship between tax expense and accounting profit if not explained by the tax rates effective in the reporting entity's country. FRS 112 requires this explanation to take either or both of the following forms:
FRS 112 also requires an explanation of changes in the applicable tax rate(s) compared to the previous accounting period.
New disclosures required by FRS 112 include: