AASB 2016-1 Amendments to Australian Accounting Standards - Recognition of Deferred Tax Assets for Unrealised Losses - February 2016
| AASB Standard | AASB 2016-1February 2016 |
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Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses
[AASB 112]
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ISSN 1036-4803
Contents
PREFACE
ACCOUNTING STANDARD
AASB 2016-1 AMENDMENTS TO AUSTRALIAN ACCOUNTING STANDARDS – RECOGNITION OF DEFERRED TAX ASSETS FOR UNREALISED LOSSES
from page
OBJECTIVE 5
application 5
Amendments to AASB 112 Income Taxes 5
Amendments to the illustrative examples On AASB 112 Income Taxes 8
Commencement of the Legislative Instrument 11
available on the AASB website
Basis for Conclusions on IAS 12 – Amendments
Australian Accounting Standard AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses is set out on pages 5 – 11. All the paragraphs have equal authority.
Preface
Standards amended by AASB 2016-1
This Standard makes amendments to AASB 112 Income Taxes (July 2004) and AASB 112 Income Taxes (August 2015).
These amendments arise from the issuance of International Financial Reporting Standard Recognition of Deferred Tax Assets for Unrealised Losses by the International Accounting Standards Board (IASB) in January 2016.
Main features of this Standard
Main requirements
This Standard amends AASB 112 Income Taxes (July 2004) and AASB 112 Income Taxes (August 2015) to clarify the requirements on recognition of deferred tax assets for unrealised losses on debt instruments measured at fair value.
Application date
This Standard applies to annual periods beginning on or after 1 January 2017. Earlier application is permitted.
Accounting Standard AASB 2016-1
The Australian Accounting Standards Board makes Accounting Standard AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses under section 334 of the Corporations Act 2001.
| Kris Peach | |
|---|---|
| Dated 24 February 2016 | Chair – AASB |
Accounting Standard AASB 2016-1
Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses
Objective
This Standard amends:
(a) AASB 112 Income Taxes (July 2004); and
(b) AASB 112 Income Taxes (August 2015);
as a consequence of the issuance of International Financial Reporting Standard Recognition of Deferred Tax Assets for Unrealised Losses by the International Accounting Standards Board in January 2016.
Application
The amendments set out in this Standard apply to entities and financial statements in accordance with the application of the other Standards and Interpretations set out in AASB 1057 Application of Australian Accounting Standards (as amended).
This Standard applies to annual periods beginning on or after 1 January 2017. This Standard may be applied to annual periods beginning before 1 January 2017. When an entity applies this Standard to such an annual period, it shall disclose that fact.
This Standard uses underlining, striking out and other typographical material to identify some of the amendments to a Standard, in order to make the amendments more understandable. However, the amendments made by this Standard do not include that underlining, striking out or other typographical material.
Amendments to AASB 112 Income Taxes (July 2004 and August 2015)
| Paragraph 29 is amended and paragraphs 27A, 29A and 98H are added. An example following paragraph 26 is also added. New text is underlined and deleted text is struck through. Paragraphs 24, 26(d), 27 and 28 have not been amended but are included for ease of reference. |
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Deductible temporary differences
24 A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
However, for deductible temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, a deferred tax asset shall be recognised in accordance with paragraph 44.
…
26 The following are examples of deductible temporary differences that result in deferred tax assets:
(a) …
(d) certain assets may be carried at fair value, or may be revalued, without an equivalent adjustment being made for tax purposes (see paragraph 20). A deductible temporary difference arises if the tax base of the asset exceeds its carrying amount.
| Example illustrating paragraph 26(d) |
|---|
| Identification of a deductible temporary difference at the end of Year 2:Entity A purchases for CU1,000, at the beginning of Year 1, a debt instrument with a nominal value of CU1,000 payable on maturity in 5 years with an interest rate of 2% payable at the end of each year. The effective interest rate is 2%. The debt instrument is measured at fair value. |
| At the end of Year 2, the fair value of the debt instrument has decreased to CU918 as a result of an increase in market interest rates to 5%. It is probable that Entity A will collect all the contractual cash flows if it continues to hold the debt instrument. |
| Any gains (losses) on the debt instrument are taxable (deductible) only when realised. The gains (losses) arising on the sale or maturity of the debt instrument are calculated for tax purposes as the difference between the amount collected and the original cost of the debt instrument. |
| Accordingly, the tax base of the debt instrument is its original cost.The difference between the carrying amount of the debt instrument in Entity A’s statement of financial position of CU918 and its tax base of CU1,000 gives rise to a deductible temporary difference of CU82 at the end of Year 2 (see paragraphs 20 and 26(d)), irrespective of whether Entity A expects to recover the carrying amount of the debt instrument by sale or by use, ie by holding it and collecting contractual cash flows, or a combination of both. |
| This is because deductible temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods, when the carrying amount of the asset or liability is recovered or settled (see paragraph 5). Entity A obtains a deduction equivalent to the tax base of the asset of CU1,000 in determining taxable profit (tax loss) either on sale or on maturity. |
27 The reversal of deductible temporary differences results in deductions in determining taxable profits of future periods. However, economic benefits in the form of reductions in tax payments will flow to the entity only if it earns sufficient taxable profits against which the deductions can be offset. Therefore, an entity recognises deferred tax assets only when it is probable that taxable profits will be available against which the deductible temporary differences can be utilised.
27A When an entity assesses whether taxable profits will be available against which it can utilise a deductible temporary difference, it considers whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. If tax law imposes no such restrictions, an entity assesses a deductible temporary difference in combination with all of its other deductible temporary differences. However, if tax law restricts the utilisation of losses to deduction against income of a specific type, a deductible temporary difference is assessed in combination only with other deductible temporary differences of the appropriate type.
28 It is probable that taxable profit will be available against which a deductible temporary difference can be utilised when there are sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity which are expected to reverse:
(a) in the same period as the expected reversal of the deductible temporary difference; or
(b) in periods into which a tax loss arising from the deferred tax asset can be carried back or forward.
In such circumstances, the deferred tax asset is recognised in the period in which the deductible temporary differences arise.
29 When there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that:
(a) it is probable that the entity will have sufficient taxable profit relating to the same taxation authority and the same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried back or forward). In evaluating whether it will have sufficient taxable profit in future periods, an entity:
(i) compares the deductible temporary differences with future taxable profit that excludes tax deductions resulting from the reversal of those deductible temporary differences. This comparison shows the extent to which the future taxable profit is sufficient for the entity to deduct the amounts resulting from the reversal of those deductible temporary differences; and
(ii) ignores taxable amounts arising from deductible temporary differences that are expected to originate in future periods, because the deferred tax asset arising from these deductible temporary differences will itself require future taxable profit in order to be utilised; or
(b) tax planning opportunities are available to the entity that will create taxable profit in appropriate periods.
29A The estimate of probable future taxable profit may include the recovery of some of an entity’s assets for more than their carrying amount if there is sufficient evidence that it is probable that the entity will achieve this. For example, when an asset is measured at fair value, the entity shall consider whether there is sufficient evidence to conclude that it is probable that the entity will recover the asset for more than its carrying amount. This may be the case, for example, when an entity expects to hold a fixed-rate debt instrument and collect the contractual cash flows.
...
Effective date
…
98H AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses, issued in February 2016, amended paragraph 29 and added paragraphs 27A, 29A and the example following paragraph 26. An entity shall apply those amendments for annual periods beginning on or after 1 January 2017. Earlier application is permitted. If an entity applies those amendments for an earlier period, it shall disclose that fact. An entity shall apply those amendments retrospectively in accordance with AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors. However, on initial application of the amendment, the change in the opening equity of the earliest comparative period may be recognised in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. If an entity applies this relief, it shall disclose that fact.
Amendments to the Illustrative examples on AASB 112 Income Taxes
| Example 7—Debt instruments measured at fair value is added. New text is underlined. |
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Example 7—Debt instruments measured at fair value
Debt instruments
At 31 December 20X1, Entity Z holds a portfolio of three debt instruments:
| Debt Instrument | Cost (CU) | Fair value (CU) | Contractual interest rate | ||
|---|---|---|---|---|---|
| A | 2,000,000 | 1,942,857 | 2.00% | ||
| B | 750,000 | 778,571 | 9.00% | ||
| C | 2,000,000 | 1,961,905 | 3.00% |
Entity Z acquired all the debt instruments on issuance for their nominal value. The terms of the debt instruments require the issuer to pay the nominal value of the debt instruments on their maturity on 31 December 20X2.
Interest is paid at the end of each year at the contractually fixed rate, which equalled the market interest rate when the debt instruments were acquired. At the end of 20X1, the market interest rate is 5 per cent, which has caused the fair value of Debt Instruments A and C to fall below their cost and the fair value of Debt Instrument B to rise above its cost. It is probable that Entity Z will receive all the contractual cash flows if it continues to hold the debt instruments.
At the end of 20X1, Entity Z expects that it will recover the carrying amounts of Debt Instruments A and B through use, ie by continuing to hold them and collecting contractual cash flows, and Debt Instrument C by sale at the beginning of 20X2 for its fair value on 31 December 20X1. It is assumed that no other tax planning opportunity is available to Entity Z that would enable it to sell Debt Instrument B to generate a capital gain against which it could offset the capital loss arising from selling Debt Instrument C.
The debt instruments are measured at fair value through other comprehensive income in accordance with AASB 9 Financial Instruments (or AASB 139 Financial Instruments: Recognition and Measurement[1]).
Tax law
The tax base of the debt instruments is cost, which tax law allows to be offset either on maturity when principal is paid or against the sale proceeds when the debt instruments are sold. Tax law specifies that gains (losses) on the debt instruments are taxable (deductible) only when realised.
Tax law distinguishes ordinary gains and losses from capital gains and losses. Ordinary losses can be offset against both ordinary gains and capital gains. Capital losses can only be offset against capital gains. Capital losses can be carried forward for 5 years and ordinary losses can be carried forward for 20 years.
Ordinary gains are taxed at 30 per cent and capital gains are taxed at 10 per cent.
Tax law classifies interest income from the debt instruments as ‘ordinary’ and gains and losses arising on the sale of the debt instruments as ‘capital’. Losses that arise if the issuer of the debt instrument fails to pay the principal on maturity are classified as ordinary by tax law.
General
On 31 December 20X1, Entity Z has, from other sources, taxable temporary differences of CU50,000 and deductible temporary differences of CU430,000, which will reverse in ordinary taxable profit (or ordinary tax loss) in 20X2.
At the end of 20X1, it is probable that Entity Z will report to the tax authorities an ordinary tax loss of CU200,000 for the year 20X2. This tax loss includes all taxable economic benefits and tax deductions for which temporary differences exist on 31 December 20X1 and that are classified as ordinary by tax law. These amounts contribute equally to the loss for the period according to tax law.
Entity Z has no capital gains against which it can utilise capital losses arising in the years 20X1–20X2.
Except for the information given in the previous paragraphs, there is no further information that is relevant to Entity Z’s accounting for deferred taxes in the period 20X1–20X2.
Temporary differences
At the end of 20X1, Entity Z identifies the following temporary differences:
<table cellspacing="0" cellpadding="0" style="border-collapse:collapse"><thead><tr><td style="width:103.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableHeaderArial" style="margin-bottom:0pt"><span></span></p></td><td style="width:80.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:top"><p class="IASBTableHeaderArial" style="margin-bottom:0pt; text-align:right"><span style="font-weight:bold; text-decoration:underline">Carrying amount (CU)</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableHeaderArial" style="margin-bottom:0pt"><span></span></p></td><td style="width:64.85pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:top"><p class="IASBTableHeaderArial" style="margin-bottom:0pt; text-align:right"><span style="font-weight:bold; text-decoration:underline">Tax base (CU)</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableHeaderArial" style="margin-bottom:0pt"><span></span></p></td><td style="width:69.4pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:top"><p class="IASBTableHeaderArial" style="margin-bottom:0pt; text-align:right"><span style="font-weight:bold; text-decoration:underline">Taxable temporary differences (CU)</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableHeaderArial" style="margin-bottom:0pt"><span></span></p></td><td style="width:55.75pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:top"><p class="IASBTableHeaderArial" style="margin-bottom:0pt; text-align:right"><span style="font-weight:bold; text-decoration:underline">Deductible temporary differences (CU)</span></p></td></tr></thead><tbody><tr><td style="width:103.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Debt Instrument A</span></p></td><td style="width:80.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">1,942,857</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:64.85pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">2,000,000</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:69.4pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span></span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:55.75pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">57,143</span></p></td></tr><tr><td style="width:103.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Debt Instrument B</span></p></td><td style="width:80.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">778,571</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:64.85pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">750,000</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:69.4pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">28,571</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:55.75pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span></span></p></td></tr><tr><td style="width:103.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Debt Instrument C</span></p></td><td style="width:80.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">1,961,905</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:64.85pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">2,000,000</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:69.4pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span></span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:55.75pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">38,095</span></p></td></tr><tr><td style="width:103.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Other sources</span></p></td><td colspan="3" style="width:166.65pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:center"><span style="text-decoration:underline">Not specified</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:69.4pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">50,000</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:55.75pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">430,000</span></p></td></tr></tbody></table>
The difference between the carrying amount of an asset or liability and its tax base gives rise to a deductible (taxable) temporary difference (see paragraphs 20 and 26(d) of the Standard). This is because deductible (taxable) temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base, which will result in amounts that are deductible (taxable) in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled (see paragraph 5 of the Standard).
Utilisation of deductible temporary differences
With some exceptions, deferred tax assets arising from deductible temporary differences are recognised to the extent that sufficient future taxable profit will be available against which the deductible temporary differences are utilised (see paragraph 24 of the Standard).
Paragraphs 28–29 of AASB 112 identify the sources of taxable profits against which an entity can utilise deductible temporary differences. They include:
(a) future reversal of existing taxable temporary differences;
(b) taxable profit in future periods; and
(c) tax planning opportunities.
The deductible temporary difference that arises from Debt Instrument C is assessed separately for utilisation. This is because tax law classifies the loss resulting from recovering the carrying amount of Debt Instrument C by sale as capital and allows capital losses to be offset only against capital gains (see paragraph 27A of the Standard).
The separate assessment results in not recognising a deferred tax asset for the deductible temporary difference that arises from Debt Instrument C because Entity Z has no source of taxable profit available that tax law classifies as capital.
In contrast, the deductible temporary difference that arises from Debt Instrument A and other sources are assessed for utilisation in combination with one another. This is because their related tax deductions would be classified as ordinary by tax law.
The tax deductions represented by the deductible temporary differences related to Debt Instrument A are classified as ordinary because the tax law classifies the effect on taxable profit (tax loss) from deducting the tax base on maturity as ordinary.
In assessing the utilisation of deductible temporary differences on 31 December 20X1, the following two steps are performed by Entity Z.
Step 1: Utilisation of deductible temporary differences because of the reversal of taxable temporary differences (see paragraph 28 of the Standard)
Entity Z first assesses the availability of taxable temporary differences as follows:
<table cellspacing="0" cellpadding="0" style="border-collapse:collapse"><thead><tr><td style="width:40.1pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:325.9pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">(CU)</span></p></td></tr></thead><tbody><tr><td colspan="2" style="width:376.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Expected reversal of deductible temporary differences in 20X2</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td></tr><tr><td style="width:40.1pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:325.9pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">From Debt Instrument A</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">57,143</span></p></td></tr><tr><td style="width:40.1pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:325.9pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">From other sources</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">430,000</span></p></td></tr><tr><td colspan="2" style="width:376.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Total reversal of deductible temporary differences</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">487,143</span></p></td></tr><tr><td colspan="2" style="width:376.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Expected reversal of taxable temporary differences in 20X2</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td></tr><tr><td style="width:40.1pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:325.9pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">From Debt Instrument B</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">(28,571)</span></p></td></tr><tr><td style="width:40.1pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:325.9pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">From other sources</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">(50,000)</span></p></td></tr><tr><td colspan="2" style="width:376.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Total reversal of taxable temporary differences</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">(78,571)</span></p></td></tr><tr><td colspan="2" style="width:376.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Utilisation because of the reversal of taxable temporary differences (Step 1)</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">78,571</span></p></td></tr><tr><td colspan="2" style="width:376.8pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span style="text-decoration:underline">Remaining deductible temporary differences to be assessed for utilisation in Step 2 (487,143 – 78,571)</span></p></td><td style="padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial"><span></span></p></td><td style="width:51.2pt; padding-right:5.4pt; padding-left:5.4pt; padding-bottom:4.25pt; vertical-align:bottom"><p class="IASBTableArial" style="text-align:right"><span style="text-decoration:underline">408,572</span></p></td></tr></tbody></table>
In Step 1, Entity Z can recognise a deferred tax asset in relation to a deductible temporary difference of CU78,571.
Step 2: Utilisation of deductible temporary differences because of future taxable profit (see paragraph 29(a) of the Standard)
In this step, Entity Z assesses the availability of future taxable profit as follows:
| (CU) | ||
|---|---|---|
| Probable future tax profit (loss) in 20X2 (upon which income taxes are payable (recoverable)) | (200,000) | |
| Add back: reversal of deductible temporary differences expected to reverse in 20X2 | 487,143 | |
| Less: reversal of taxable temporary differences (utilised in Step 1) | (78,571) | |
| Probable taxable profit excluding tax deductions for assessing utilisation of deductible temporary differences in 20X2 | 208,572 | |
| Remaining deductible temporary differences to be assessed for utilisation from Step 1 | 408,572 | |
| Utilisation because of future taxable profit (Step 2) | 208,572 | |
| Utilisation because of the reversal of taxable temporary differences (Step 1) | 78,571 | |
| Total utilisation of deductible temporary differences | 287,143 |
The tax loss of CU200,000 includes the taxable economic benefit of CU2 million from the collection of the principal of Debt Instrument A and the equivalent tax deduction, because it is probable that Entity Z will recover the debt instrument for more than its carrying amount (see paragraph 29A of the Standard).
The utilisation of deductible temporary differences is not, however, assessed against probable future taxable profit for a period upon which income taxes are payable (see paragraph 5 of the Standard). Instead, the utilisation of deductible temporary differences is assessed against probable future taxable profit that excludes tax deductions resulting from the reversal of deductible temporary differences (see paragraph 29(a) of the Standard). Assessing the utilisation of deductible temporary differences against probable future taxable profits without excluding those deductions would lead to double counting the deductible temporary differences in that assessment.
In Step 2, Entity Z determines that it can recognise a deferred tax asset in relation to a future taxable profit, excluding tax deductions resulting from the reversal of deductible temporary differences, of CU208,572. Consequently, the total utilisation of deductible temporary differences amounts to CU287,143 (CU78,571 (Step 1) + CU208,572 (Step 2)).
Measurement of deferred tax assets and deferred tax liabilities
Entity Z presents the following deferred tax assets and deferred tax liabilities in its financial statements on 31 December 20X1:
| (CU) | ||
|---|---|---|
| Total taxable temporary differences | 78,571 | |
| Total utilisation of deductible temporary differences | 287,143 | |
| Deferred tax liabilities (78,571 at 30%) | 23,571 | |
| Deferred tax assets (287,143 at 30%) | 86,143 |
The deferred tax assets and the deferred tax liabilities are measured using the tax rate for ordinary gains of 30 per cent, in accordance with the expected manner of recovery (settlement) of the underlying assets (liabilities) (see paragraph 51 of the Standard).
Allocation of changes in deferred tax assets between profit or loss and other comprehensive income
Changes in deferred tax that arise from items that are recognised in profit or loss are recognised in profit or loss (see paragraph 58 of the Standard). Changes in deferred tax that arise from items that are recognised in other comprehensive income are recognised in other comprehensive income (see paragraph 61A of the Standard).
Entity Z did not recognise deferred tax assets for all of its deductible temporary differences at 31 December 20X1, and according to tax law all the tax deductions represented by the deductible temporary differences contribute equally to the tax loss for the period. Consequently, the assessment of the utilisation of deductible temporary differences does not specify whether the taxable profits are utilised for deferred tax items that are recognised in profit or loss (ie the deductible temporary differences from other sources) or whether instead the taxable profits are utilised for deferred tax items that are recognised in other comprehensive income (ie the deductible temporary differences related to debt instruments classified as fair value through other comprehensive income).
For such situations, paragraph 63 of the Standard requires the changes in deferred taxes to be allocated to profit or loss and other comprehensive income on a reasonable pro rata basis or by another method that achieves a more appropriate allocation in the circumstances.
Commencement of the legislative instrument
For legal purposes, this legislative instrument commences on 31 December 2016.
[1] AASB 9 replaced AASB 139. AASB 9 applies to all items that were previously within the scope of AASB 139.