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Deferred tax – avoiding the pitfalls

Edward Haygarth

Deferred tax

Preparation of financial statements under International Financial Reporting Standards (IFRSs) requires the application of IAS 12 ‘Income Taxes’ (IAS 12). Income taxes, as defined in IAS 12, include current tax and deferred tax. For many finance executives the concepts underlying deferred tax are not intuitive. Applying these concepts also requires a thorough knowledge of the relevant tax laws. IAS 12 takes a mechanistic approach to the computation but also requires significant judgement in some areas. For all these reasons, many Chief Financial Officers (CFOs) find that the calculation of a deferred tax provision causes significant practical difficulties.

Fortunately, the member firms within Grant Thornton International Ltd (GTIL) have gained extensive insights into the more problematic aspects of accounting for deferred taxes under IAS 12. GTIL, through its IFRS team, develops general guidance that supports its member firms’ commitment to high quality, consistent application of IFRS.

We are pleased to share these insights by publishing ‘Deferred tax – A Chief Financial Officer’s guide to avoiding the pitfalls’ (the guide). The guide reflects the collective experience of GTIL’s IFRS team and member firm IFRS experts. It addresses IAS 12’s key application issues related to deferred taxes and includes interpretational guidance in certain problematic areas.

Who should read this guide

This guide is intended for CFOs of businesses that prepare financial statements under IFRSs. It illustrates IAS 12’s approach to the calculation of deferred tax balances but is not intended to explain every aspect of the standard in detail. Rather, it summarises the approach to calculating the deferred tax balance in order to help CFOs to prioritise and identify key issues. The sections on avoiding the pitfalls will assist in understanding potential problem areas in order to know when to consult further.

The guide has been revised to reflect changes made to IAS 12 up to 31 December 2012.

Overview of the guide

This guide summarises the approach to calculating a deferred tax balance, allocating the deferred tax charge or credit to the various components of the financial statements, sets out disclosure requirements and provides examples of the disclosures required by the standard. This guide also contains sections which cover some of the more complex areas of preparation of a deferred tax computation, for example the calculation of deferred tax balances arising from business combinations. The sections of the guide are as follows:

Section 1: Calculating a deferred tax balance – the basics
Section 2: Allocating the deferred tax charge or credit
Section 3: Disclosures
Section 4: Avoiding pitfalls – the manner of recovery and the blended rate
Section 5: Avoiding pitfalls – business combinations and consolidated accounts
Section 6: Avoiding pitfalls – share-based payments
Section 7: Avoiding pitfalls – recognition of deferred tax assets
Section 8: Avoiding pitfalls – other issues
Appendix – Glossary of terms