Journal of Information, Control and Management Systems, Vol. 1, (2003)
23
REPORTING INCOME TAXES AND INTERNATIONAL
ACCOUNTING STANDARDS
Anna Harumová
Faculty of Business Management, University of Economics in Bratislava
e-mail: [email protected]
Abstract
Accession of Slovak republic into the European Union will increase the need
for comparability of accounting data and sufficient relevance annual accounts
from national to international level. Application of International accounting
standards in Slovakia might be considered as a way of achieving this target.
Keywords: International accounting standards, comparison of data, comprehension
of account balance
1. INTRODUCTION
Taxes represent the most important part of contributions to the national budget.
As the amount of such income is derived from the projected amount of government
expenditures an interrelationship between the amount of tax incomes and the amount of
government expenditures is clearly identifiable.
The amount of the tax incomes is predominantly affected by income taxes. Even
though the tax legislation deal with primarily with current taxes, from the accounting
point of view deferred taxes are recognized as well.
The principal task that should be fulfilled by accounting in the market economy is
to provide the true and fair view of financial position of the enterprise and its
performance as well. Users of accounting information need (also in an international
context) objective and comparable information. Authorised translations of the
International Accounting Standards (IAS) have been published in Slovakia for the first
time in 2000. Accession of the Slovakia in to the European Union requires strict
comparability of the accounting and financial reporting information, so due
implementation of these standards is considered to be necessary.
2. CURRENT STATE IN THE SLOVAK REPUBLIC
In Slovakia, all currently valid International Accounting Standards (inclusive the
last one - IAS 41) have been published. Slovak edition of the complete set of IAS’s,
Interpretations of the Standing Interpretations Committee (SIC) and other materials
have been translated under close supervision of the Review Committee, which had
been authorised by IASC.
24
Reporting Income Taxes and International Accounting Standards
Wide use of IAS´s may contribute to improvement and harmonisation of the
accounting and financial reporting throughout the world. As a basis for implementation
of the IAS’s, Conceptual Framework is used. Conceptual Framework outlines basic
principles and terms used in preparation and presentation of the financial statements for
the external users. However, Conceptual Framework is not considered to have a status
of an International Accounting Standard, does not contain any procedures applicable to
specific problems of valuation or presentation, but it explains those terms, which are
inevitable for preparation and presentation of the financial statements.
From an international point of view, different social, legal and economical
conditions as well as different needs of various users of financial statements have had
impact on the practice for preparation of the financial statements (FS) in different
countries. A criterion, resulting from this variety of needs, was always closely
considered by every country if the preparation of the national statutes for accounting
was on the way.
Differences might be observed mainly in these areas:
• Different definitions of the element of the FS;
• Dissimilar criteria for disclosure of the various elements of FS;
• Various basis for valuation.
International Accounting Standards gain an increased credibility in the last ten
years and more and more companies are preparing their financial statements with
reference to them. Last year, European parliament approved by great majority the
proposal of the Commission which will (by 2005) introduce the IAS’s as a basis for
preparation and presentation of consolidated annual accounts of all European
companies, enlisted on regulated market.
After the successful accession of the Slovak Republic into the European Union
this requirement will become statutory also for companies in Slovakia. It is important
to know, that if financial statement is to be prepared for the year 2005 as IAS-based,
comparable information for the year 2004 should be provided as well. This is result of
generic IAS requirement under which the information in the financial statements
should be accompanied with comparable information for the previous accounting
period. The result is clear - IAS’s shall be applied in practice even before 2005.
Users of the accounting information require also information on the profit (or
loss) of the company, the area which is precisely covered in International Accounting
Standard No. 12: Income Taxes. Previous standard (approved for publication in 1979
and valid till 1998) required the enterprise to account for deferred taxes with the use of
either method of deferred payment or liability method based (timing concept)1. Current
revised standard prohibits the use of deferred payment method and require different
liability method2 (temporary concept), to be used.
1 Also known.as income statement liability method.
2
A.k.a. balance-sheet liability method.
Journal of Information, Control and Management Systems, Vol. 1, (2003)
25
The standard also deals with the disclosure of the deferred tax assets arising from
unspent tax losses or tax allowances, disclosures of income taxes in the face of the
financial statements and reporting information related to income taxes. The term
Income taxes includes both domestic and foreign taxes, which are computed in
reference to the taxable income, and corporation taxes as well.
Based on the above facts, income taxes could be classified as follows:
CURRENT
TAX
Payable
Tax
liability
DEFFERED
TAX
Recoverable
Tax
assets
Deferred
tax assets
Deferred
tax
liabilities
Figure 1 Income taxes
Income statement liability method is focused on timing differences, whilst the
balance sheet liability method is focused on temporary differences. Temporary
differences are such represent difference between tax base (for assets/liabilities) and
their accounting value in the balance sheet. Tax base (for assets or liabilities) is an
amount, allocated to respective assets (or liability) for the tax purposes. This amount
will be deducted from any taxable economic benefit, resulting from reimbursement of
accounting value of the assets. The use of the deferred taxes (as an example of the
application of the standards) will lead to correct disclosure of taxes in the Income
Statement and the Balance-sheet items as well.
3. MEASUREMENT OF TAX LIABILITIES AND ASSETS
Current tax liabilities (assets) for the current and previous periods should be
measured at the amount of anticipated payments to/from tax authorities, with regard to
tax rates (and tax laws), which have been in force or formally enacted at the balancesheet date.
Deferred tax assets and liabilities should be measured by tax rates to be valid in
the period, when the tax assets will be paid or the liabilities will be settled, on the basis
of the change in tax rates (or tax legislation, for that purpose), which were either in
force or formally stated to the balance-sheet date.
26
Reporting Income Taxes and International Accounting Standards
Measurement of deferred tax liabilities and tax assets should also take into
consideration possible tax implications which will result from the way the company is
expecting to cover or settle the accounting value of its assets and/or liabilities on the
balance-sheet date:
• Deferred tax assets and liabilities should not be discounted.
• Accounting value of the deferred tax assets should be revised on every
balance-sheet date. A company should decrease the accounting value of
deferred tax assets to the extent, at which it is not probable to obtain such
level of taxable profit, under which the benefit resulting from such deferred
tax assets could be incurred. However, such decrease should be revoked to the
extent, at which it is probable that sufficient level of the taxable profit will
occur.
• If, depending on its amount, the income is subject to different tax rates,
computation of the deferred taxes should be based on projected average tax
rate.
Example:
Carrying amount of the assets is 200 000 Sk and the tax base is 120 000 Sk. Let’s
assume that tax rate for the sale of an asset is 20 %, tax rate for other incomes is 30 %.
Solution:
a) if further sale of such assets is planned (without any internal exploitation of
such assets), the amount of recognised deferred tax liability is 16 000 Sk (20%
out 80 000) as a difference between the accounting value and the tax base.)
b) if the assets are used by the enterprise and its accounting value has been
settled, the amount of recognised deferred tax liability is 24 000 Sk (30 % out
of 80 000).
Revaluation of asset (Example):
The asset have been acquired for 200 000 Sk. Accounting value of such asset is
160 000 Sk The asset was re-valued to 300 000 Sk (there wasn’t any adjustments for
the tax purposes). Accumulated tax depreciations (amortizations) is 60 000 Sk and tax
rate is 30 %.
Tax base (for asset) is 140 000 (200 000 – 60 000).
Taxable temporary difference is 160 000 (300 000 – 140 000).
Deferred tax liability is 48 000 (30 % out of 160 000)
4. RECOGNITION OF CURRENT AND DEFERRED TAX
Current and deferred taxes should be accounted for as income or expense (on the
face of Income Statement) and included in the net profit or loss for the respective
accounted period except for transactions, where the taxes are arising from:
Journal of Information, Control and Management Systems, Vol. 1, (2003)
27
•
Transactions or events are accounted for in the same or in other period directly
with the equity; or
• Business combinations, such as acquisition.
Majority of deferred tax liabilities and assets are arising in such cases, where the
income or expense is disclosed in one period for the accounting purposes, but in
another period for the tax purposes. Deferred tax resulting from such differences is
disclosed in the Income Statement.
Accounting value of the deferred tax assets and liabilities might be modified even
if there isn’t any change in the amount of related temporary difference. There are
several reasons for this phenomenon:
• Change of tax rates and/or tax legislation;
• Reassessment of projected reimbursement of deferred tax assets; or
• Change in the anticipated way of replacement of related assets.
Current and deferred taxes should by accounted for directly with equity, if the tax
is related with such items, if and only if such tax is related to items, accounted for
directly with equity, within the same or in another period – like following examples:
• Change in accounting value due to re-valuation of certain items (PP&E)
• Adjustments of the opening balance of retained earnings (change in
accounting procedures, correction of accounting errors from the previous
periods)
• Differences resulting from translation of annual accounts.
5. PRESENTATION OF THE TAX ASSETS AND LIABILITIES
Tax assets and liabilities should be disclosed in the financial statements,
separately from other assets and liabilities. Deferred tax assets and liabilities should be
distinguished from current tax assets and liabilities.
If an accounting entity is differentiating current and non-current assets and
liabilities in its financial statements, it shall not classify its deferred tax assets
(liabilities) as short-term assets (liabilities).
Disclosure of the deferred tax liabilities and assets resulting from assets and
liabilities (example, based on balance-sheet approach):
Reporting Income Taxes and International Accounting Standards
28
Period
Debtors.
AV
X4
1500
TB
X4
1000
Inventories
3000
3000
Development expenses
2500
TD
X4
500
AV
X5
TB
X5
1500
TD
X5
-
1500
3500
PP&E.
40000
TB
X6
500
TD
X6
1000
1500
3000
3000
Investments
AV
X6
3000
3000
2500
1500
2000
3500
3500
2000
3500
1500
3500
3500
Total Assets
Current tax
50500
3000
Liabilities
4500
15000 25000
22500 28000
3000
4500
Paid charges (fines)
Liabilities from sick
benefits
Long- term loans
45000 20000
55000 28000
3500 3500
5500
3000
500
500
25000
47500
(2000)
(2000)
3000
20000
20000
18000
18000
Deferred taxes (20%)
5600
5600
Liabilities in total
33100
33100
16000 16000
4500
4500
8700
5000
8700
30500 (4500)
35000
Share capital
45000
80000 35000
27000 89500 42000
2500
2500
(1500) 4000
2000
500
500
(3000)
2000
5000
(4000)
33700 29700
5000
5000
5000
5000
Revaluation reserves
20000
Retained earnings
12400 (15600
7300
15000
Equity and Liabilities in 50500
total
Temporary differences
22500
(7500)
28000
30800
55000
89500 42000
28000
22500
43500
5600
5400
9500
(900)
(800)
4500
8700
(5600)
(4500)
(1100)
4200
Deferred tax liability
Deferred tax assets
Deferred tax liability
(net)
Less: Deferred liability
(opening balance)
Deferred tax expense
(income)
5600
Acronyms: AV – accounting value, TB – tax base, TD – temporary differences
Journal of Information, Control and Management Systems, Vol. 1, (2003)
29
6. SUMMARY
Accession process of the Slovak republic in to the European Union will require
the comparability of the accounting data and increased relevance of the financial
statements not only in Slovakia, but also internationally. Implementation of the
International Accounting Standards has a paramount importance in this process.
REFERENCES
[1] Farkaš, R.: Používanie medzinárodných účtovných štandardov v Slovenskej
republike, In: Dane a účtovníctvo v praxi č. 5/2002, Bratislava, Vydavateľstvo
IURA EDITION, 2002.
[2] Farkaš, R.: Odložené dane, Bratislava, Vydavateľstvo IURA EDITION, 1999.
[3] Harumová, A.: Dane v teórii a praxi, Bratislava, Vydavateľstvo IURA EDITION,
2002.
[4] Harumová, A.: Reporting odložených daňových pohľadávok a záväzkov, Žilina, In:
Znalectvo č. 2/2002, Vydavateľstvo: USI Žilinská univerzita, 2002.
[5] Tumpach, M.: IAS 41, Účtovníctvo, Audítorstvo, Daňovníctvo,Bratislava, Súvaha
12/2001, str. 422
[6] Medzinárodné účtovné štandardy 2000, International Accounting Standards
Committee, London, United Kingdom, 2000.
[7] Medzinárodné účtovné štandardy, Aktualizovaný doplnok 2001, International
Accounting Standards Committee, London, United Kingdom.
Referee: Ing. Mária Ďurišová