HKAS 12 - Income Taxes
Objective of HKAS 12
The objective of this Standard is to prescribe the accounting treatment for income taxes. The principal issue in accounting for income taxes is how to account for the current and future tax consequences of:
(a) The future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an entity's statement of financial position; and
(b) Transactions and other events of the current period that are recognised in an entity's financial statements.
It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of that asset or liability. If it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, this Standard requires an entity to recognise a deferred tax liability (deferred tax asset), with certain limited exceptions.
Scope
Paragraph 1: This Standard shall be applied in accounting for income taxes.
Paragraph 2: For the purposes of this Standard, income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity.
Paragraph 4: This Standard does not deal with the methods of accounting for government grants (see HKAS 20) or investment tax credits. However, this Standard does deal with the accounting for temporary differences that may arise from such grants or investment tax credits.
Definitions (Paragraph 5)
| Term | Definition |
|---|---|
| Accounting profit | Profit or loss for a period before deducting tax expense |
| Taxable profit (tax loss) | The profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable) |
| Tax expense (tax income) | The aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax |
| Current tax | The amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period |
| Deferred tax liabilities | The amounts of income taxes payable in future periods in respect of taxable temporary differences |
| Deferred tax assets | The amounts of income taxes recoverable in future periods in respect of: (a) deductible temporary differences; (b) the carryforward of unused tax losses; and (c) the carryforward of unused tax credits |
| Temporary differences | Differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences may be either: (a) taxable temporary differences - will result in taxable amounts in future periods when the carrying amount is recovered or settled; or (b) deductible temporary differences - will result in deductible amounts in future periods when the carrying amount is recovered or settled |
| Tax base | The amount attributed to that asset or liability for tax purposes |
Paragraph 6: Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).
Tax Base
General Principles
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The concept of tax base is of key importance in implementing the principles in this Standard.
Fundamental Formula:
Carrying amounts of assets or liabilities
- Tax bases of assets or liabilities
= Taxable or deductible temporary differences
Taxable or deductible temporary differences × Tax rates = Deferred tax liabilities or assetsFor unused tax losses:
Unused tax losses × Tax rates = Deferred tax assetsTax Base of an Asset (Paragraph 7)
The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.
Calculation formula:
Tax base of asset = Carrying amount - Future taxable amounts + Future deductible amountsExamples of Tax Base Calculation for Assets:
Example 1 - Machine:
Example 2 - Leasehold Land (Revalued):
Example 3 - Freehold Land (Revalued):
Example 4 - Trade Receivables (No doubtful debts):
Example 5 - Trade Receivables (Specific bad debt provisions deducted for tax):
Example 6 - Trade Receivables (General bad debt provisions not yet deducted):
Example 7 - Loan Receivable:
Example 8 - Dividends Receivable (Not taxable):
Example 9 - Interest Receivable (Taxed on cash basis):
Tax Base of a Liability (Paragraph 8)
The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. In the case of revenue received in advance, the tax base is the carrying amount less any amount of the revenue that will not be taxable in future periods.
Calculation formula:
Tax base of liability = Carrying amount - Future deductible amounts + Future taxable amountsExamples of Tax Base Calculation for Liabilities:
Example 1 - Accrued Wages (Already deducted for tax):
Example 2 - Accrued Fines and Penalties (Not deductible):
Example 3 - Loan Payable:
Example 4 - Interest Revenue Received in Advance (Taxed on cash basis):
Example 5 - Foreign Currency Loan Payable (Unrealised exchange gain):
Example 6 - Interest Payable (Deductible when paid):
Items Not Recognised as Assets or Liabilities (Paragraph 9)
Some items have a tax base but are not recognised as assets and liabilities in the statement of financial position. For example, research costs are recognised as an expense in determining accounting profit in the period incurred but may not be permitted as a deduction in determining taxable profit until a later period. The difference between the tax base of the research costs (the amount the taxation authorities will permit as a deduction in future periods) and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset.
Fundamental Principle (Paragraph 10)
Where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle: an entity shall, with certain limited exceptions, recognise a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences.
Consolidated Financial Statements (Paragraph 11)
In consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed. In other jurisdictions, the tax base is determined by reference to the tax returns of each entity in the group.
Recognition of Current Tax Liabilities and Current Tax Assets
Paragraph 12: Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognised as an asset.
Paragraph 13: The benefit relating to a tax loss that can be carried back to recover current tax of a previous period shall be recognised as an asset.
Paragraph 14: When a tax loss is used to recover current tax of a previous period, an entity recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the entity and the benefit can be reliably measured.
Recognition of Deferred Tax Liabilities and Deferred Tax Assets
Taxable Temporary Differences (Paragraph 15)
A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from:
(a) The initial recognition of goodwill; or
(b) The initial recognition of an asset or liability in a transaction which:
However, for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, a deferred tax liability shall be recognised in accordance with paragraph 39.
Paragraph 16: It is inherent in the recognition of an asset that its carrying amount will be recovered in the form of economic benefits that flow to the entity in future periods. When the carrying amount of the asset exceeds its tax base, the amount of taxable economic benefits will exceed the amount that will be allowed as a deduction for tax purposes. This difference is a taxable temporary difference and the obligation to pay the resulting income taxes in future periods is a deferred tax liability.
Example - Deferred Tax Liability:
Paragraph 17: Some temporary differences arise when income or expense is included in accounting profit in one period but is included in taxable profit in a different period. Examples of taxable temporary differences:
(a) Interest revenue included in accounting profit on a time proportion basis but included in taxable profit when cash is collected;
(b) Tax depreciation differs from accounting depreciation (accelerated tax depreciation creates taxable temporary difference);
(c) Development costs capitalised and amortised for accounting purposes but deducted for tax purposes when incurred.
Paragraph 18: Temporary differences also arise when:
(a) Identifiable assets acquired and liabilities assumed in a business combination are recognised at fair values but no equivalent adjustment is made for tax purposes;
(b) Assets are revalued and no equivalent adjustment is made for tax purposes;
(c) Goodwill arises in a business combination;
(d) The tax base of an asset or liability on initial recognition differs from its initial carrying amount;
(e) The carrying amount of investments in subsidiaries, branches and associates or interests in joint arrangements becomes different from the tax base.
Business Combinations (Paragraph 19)
With limited exceptions, the identifiable assets acquired and liabilities assumed in a business combination are recognised at their fair values at the acquisition date. Temporary differences arise when the tax bases of the identifiable assets acquired and liabilities assumed are not affected by the business combination or are affected differently. For example, when the carrying amount of an asset is increased to fair value but the tax base remains at cost to the previous owner, a taxable temporary difference arises which results in a deferred tax liability. The resulting deferred tax liability affects goodwill.
Assets Carried at Fair Value (Paragraph 20)
HKFRSs permit or require certain assets to be carried at fair value or to be revalued. In some jurisdictions, the revaluation or other restatement of an asset to fair value affects taxable profit for the current period. As a result, the tax base is adjusted and no temporary difference arises. In other jurisdictions, the revaluation or restatement does not affect taxable profit and the tax base is not adjusted. The difference between the carrying amount of a revalued asset and its tax base is a temporary difference and gives rise to a deferred tax liability or asset. This is true even if:
(a) The entity does not intend to dispose of the asset; or
(b) Tax on capital gains is deferred if the proceeds are invested in similar assets.
Goodwill (Paragraph 21)
Goodwill arising in a business combination is measured as the excess of (a) over (b):
(a) The aggregate of:
(b) The net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed.
Many taxation authorities do not allow reductions in the carrying amount of goodwill as a deductible expense. In such jurisdictions, goodwill has a tax base of nil. Any difference between the carrying amount of goodwill and its tax base of nil is a taxable temporary difference. However, this Standard does not permit the recognition of the resulting deferred tax liability because goodwill is measured as a residual and the recognition of the deferred tax liability would increase the carrying amount of goodwill.
Paragraph 21A: Subsequent reductions in a deferred tax liability that is unrecognised because it arises from the initial recognition of goodwill are also regarded as arising from the initial recognition of goodwill and are therefore not recognised under paragraph 15(a).
Paragraph 21B: Deferred tax liabilities for taxable temporary differences relating to goodwill are recognised to the extent they do not arise from the initial recognition of goodwill.
Initial Recognition of an Asset or Liability (Paragraph 22)
A temporary difference may arise on initial recognition of an asset or liability. The method of accounting depends on the nature of the transaction:
(a) In a business combination - recognise any deferred tax liability or asset affecting goodwill or bargain purchase gain;
(b) If the transaction affects either accounting profit or taxable profit, or gives rise to equal taxable and deductible temporary differences - recognise any deferred tax liability or asset and the resulting deferred tax expense or income in profit or loss;
(c) If the transaction is not a business combination, affects neither accounting profit nor taxable profit and does not give rise to equal taxable and deductible temporary differences - do not recognise the resulting deferred tax liability or asset.
Example illustrating paragraph 22(c):
Paragraph 22A: A transaction that is not a business combination may lead to the initial recognition of an asset and a liability and, at the time of the transaction, affect neither accounting profit nor taxable profit. For example, at the commencement date of a lease, a lessee typically recognises a lease liability and the corresponding amount as part of the cost of a right-of-use asset. Depending on the applicable tax law, equal taxable and deductible temporary differences may arise on initial recognition of the asset and liability in such a transaction. The exemption provided by paragraphs 15 and 24 does not apply to such temporary differences and an entity recognises any resulting deferred tax liability and asset.
Paragraph 23: In accordance with HKAS 32, the issuer of a compound financial instrument (e.g., a convertible bond) classifies the instrument's liability component as a liability and the equity component as equity. In some jurisdictions, the tax base of the liability component on initial recognition is equal to the initial carrying amount of the sum of the liability and equity components. The resulting taxable temporary difference arises from the initial recognition of the equity component separately from the liability component. Therefore, the exception in paragraph 15(b) does not apply. Consequently, an entity recognises the resulting deferred tax liability. In accordance with paragraph 61A, the deferred tax is charged directly to the carrying amount of the equity component.
Deductible Temporary Differences (Paragraph 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;
(b) At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss); and
(c) At the time of the transaction, does not give rise to equal taxable and deductible temporary differences.
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.
Paragraph 25: It is inherent in the recognition of a liability that the carrying amount will be settled in future periods through an outflow of resources. When resources flow from the entity, part or all of their amounts may be deductible in determining taxable profit of a period later than the period in which the liability is recognised. In such cases, a temporary difference exists between the carrying amount of the liability and its tax base. Accordingly, a deferred tax asset arises.
Example - Deferred Tax Asset (Product Warranty):
Paragraph 26: Examples of deductible temporary differences:
(a) Retirement benefit costs - deducted in accounting profit as service is provided but deducted in taxable profit when contributions are paid or benefits are paid;
(b) Research costs - recognised as expense in accounting profit when incurred but may not be deductible for tax until a later period;
(c) Business combination - when a liability assumed is recognised at fair value but related costs are not deducted for tax until a later period;
(d) Assets carried at fair value or revalued without equivalent tax adjustment - deductible temporary difference arises if tax base exceeds carrying amount.
Paragraph 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.
Paragraph 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.
Paragraph 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.
Paragraph 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:
(b) Tax planning opportunities are available to the entity that will create taxable profit in appropriate periods.
Paragraph 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.
Example illustrating paragraph 29(a):
Paragraph 30: Tax planning opportunities are actions that the entity would take in order to create or increase taxable income in a particular period before the expiry of a tax loss or tax credit carryforward. Examples:
(a) Electing to have interest income taxed on either a received or receivable basis;
(b) Deferring the claim for certain deductions from taxable profit;
(c) Selling, and perhaps leasing back, assets that have appreciated but for which the tax base has not been adjusted;
(d) Selling an asset that generates non-taxable income in order to purchase another investment that generates taxable income.
Paragraph 31: When an entity has a history of recent losses, the entity considers the guidance in paragraphs 35 and 36.
Goodwill (Paragraph 32A)
If the carrying amount of goodwill arising in a business combination is less than its tax base, the difference gives rise to a deferred tax asset. The deferred tax asset arising from the initial recognition of goodwill shall be recognised as part of the accounting for a business combination to the extent that it is probable that taxable profit will be available against which the deductible temporary difference could be utilised.
Initial Recognition of an Asset or Liability (Paragraph 33)
One case when a deferred tax asset arises on initial recognition of an asset is when a non-taxable government grant related to an asset is deducted in arriving at the carrying amount of the asset but, for tax purposes, is not deducted from the asset's depreciable amount (i.e., its tax base). The carrying amount of the asset is less than its tax base, giving rise to a deductible temporary difference. Government grants may also be set up as deferred income, in which case the difference between the deferred income and its tax base of nil is a deductible temporary difference. Whichever method of presentation an entity adopts, the entity does not recognise the resulting deferred tax asset.
Unused Tax Losses and Unused Tax Credits
Paragraph 34: A deferred tax asset shall be recognised for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.
Paragraph 35: The criteria for recognising deferred tax assets arising from the carryforward of unused tax losses and tax credits are the same as the criteria for recognising deferred tax assets arising from deductible temporary differences. However, the existence of unused tax losses is strong evidence that future taxable profit may not be available. Therefore, when an entity has a history of recent losses, the entity recognises a deferred tax asset arising from unused tax losses or tax credits 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.
Paragraph 36: Criteria for assessing probability that taxable profit will be available:
(a) Whether the entity has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity;
(b) Whether it is probable that the entity will have taxable profits before the unused tax losses or unused tax credits expire;
(c) Whether the unused tax losses result from identifiable causes which are unlikely to recur;
(d) Whether tax planning opportunities are available.
Reassessment of Unrecognised Deferred Tax Assets
Paragraph 37: At the end of each reporting period, an entity reassesses unrecognised deferred tax assets. The entity recognises a previously unrecognised deferred tax asset to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Investments in Subsidiaries, Branches and Associates and Interests in Joint Arrangements
Paragraph 38: Temporary differences arise when the carrying amount of investments in subsidiaries, branches and associates or interests in joint arrangements becomes different from the tax base (which is often cost) of the investment or interest. Such differences may arise in a number of different circumstances:
(a) The existence of undistributed profits of subsidiaries, branches, associates and joint arrangements;
(b) Changes in foreign exchange rates when a parent and its subsidiary are based in different countries;
(c) A reduction in the carrying amount of an investment in an associate to its recoverable amount.
Paragraph 39: An entity shall recognise a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied:
(a) The parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and
(b) It is probable that the temporary difference will not reverse in the foreseeable future.
Paragraph 40: As a parent controls the dividend policy of its subsidiary, it is able to control the timing of the reversal of temporary differences associated with that investment. When the parent has determined that those profits will not be distributed in the foreseeable future, the parent does not recognise a deferred tax liability. The same considerations apply to investments in branches.
Paragraph 41: The non-monetary assets and liabilities of an entity are measured in its functional currency. If the entity's taxable profit or tax loss is determined in a different currency, changes in the exchange rate give rise to temporary differences that result in a recognised deferred tax liability or asset. The resulting deferred tax is charged or credited to profit or loss.
Paragraph 42: An investor in an associate does not control that entity and is usually not in a position to determine its dividend policy. Therefore, in the absence of an agreement requiring that the profits of the associate will not be distributed in the foreseeable future, an investor recognises a deferred tax liability arising from taxable temporary differences associated with its investment in the associate.
Paragraph 43: The arrangement between the parties to a joint arrangement usually deals with the distribution of the profits. When the joint venturer or joint operator can control the timing of the distribution of its share of the profits and it is probable that its share of the profits will not be distributed in the foreseeable future, a deferred tax liability is not recognised.
Paragraph 44: An entity shall recognise a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, to the extent that, and only to the extent that, it is probable that:
(a) The temporary difference will reverse in the foreseeable future; and
(b) Taxable profit will be available against which the temporary difference can be utilised.
Paragraph 45: In deciding whether a deferred tax asset is recognised for deductible temporary differences associated with its investments in subsidiaries, branches and associates, and its interests in joint arrangements, an entity considers the guidance set out in paragraphs 28 to 31.
Measurement
Paragraph 46: Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Paragraph 47: Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Paragraph 48: Current and deferred tax assets and liabilities are usually measured using the tax rates (and tax laws) that have been enacted. However, in some jurisdictions, announcements of tax rates (and tax laws) by the government have the substantive effect of actual enactment. In these circumstances, tax assets and liabilities are measured using the announced tax rate (and tax laws).
Paragraph 49: When different tax rates apply to different levels of taxable income, deferred tax assets and liabilities are measured using the average rates that are expected to apply to the taxable profit (tax loss) of the periods in which the temporary differences are expected to reverse.
Paragraph 51: The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax consequences that would follow from the manner in which the entity expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.
Paragraph 51A: In some jurisdictions, the manner in which an entity recovers (settles) the carrying amount of an asset (liability) may affect either or both of:
(a) The tax rate applicable when the entity recovers (settles) the carrying amount; and
(b) The tax base of the asset (liability).
In such cases, an entity measures deferred tax liabilities and deferred tax assets using the tax rate and the tax base that are consistent with the expected manner of recovery or settlement.
Example A - Property, Plant and Equipment:
Example B - Revalued Asset:
Example C - Different Tax Rates on Sale:
Paragraph 51B: If a deferred tax liability or deferred tax asset arises from a non-depreciable asset measured using the revaluation model in HKAS 16, the measurement shall reflect the tax consequences of recovering the carrying amount through sale, regardless of the basis of measuring the carrying amount of that asset.
Paragraph 51C: If a deferred tax liability or asset arises from investment property measured using the fair value model in HKAS 40, there is a rebuttable presumption that the carrying amount will be recovered through sale. Accordingly, unless the presumption is rebutted, the measurement shall reflect the tax consequences of recovering the carrying amount entirely through sale.
This presumption is rebutted if the investment property is depreciable and is held within a business model whose objective is to consume substantially all of the economic benefits embodied in the investment property over time, rather than through sale.
Example illustrating paragraph 51C:
Paragraph 51D: The rebuttable presumption in paragraph 51C also applies when a deferred tax liability or a deferred tax asset arises from measuring investment property in a business combination if the entity will use the fair value model when subsequently measuring that investment property.
Paragraph 51E: Paragraphs 51B-51D do not change the requirements to apply the principles in paragraphs 24-33 (deductible temporary differences) and paragraphs 34-36 (unused tax losses and unused tax credits).
Paragraph 52A: In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend. In these circumstances, current and deferred tax assets and liabilities are measured at the tax rate applicable to undistributed profits.
Example illustrating paragraphs 52A and 57A:
Paragraph 53: Deferred tax assets and liabilities shall not be discounted.
Paragraph 54: The reliable determination of deferred tax assets and liabilities on a discounted basis requires detailed scheduling of the timing of the reversal of each temporary difference. In many cases such scheduling is impracticable or highly complex. Therefore, this Standard does not require or permit the discounting of deferred tax assets and liabilities.
Paragraph 55: Temporary differences are determined by reference to the carrying amount of an asset or liability. This applies even where that carrying amount is itself determined on a discounted basis.
Paragraph 56: The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.
Recognition of Current and Deferred Tax
Paragraph 57: Accounting for the current and deferred tax effects of a transaction or other event is consistent with the accounting for the transaction or event itself.
Paragraph 57A: An entity shall recognise the income tax consequences of dividends as defined in HKFRS 9 when it recognises a liability to pay a dividend. The income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity shall recognise the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past transactions or events.
Items Recognised in Profit or Loss (Paragraph 58)
Current and deferred tax shall be recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from:
(a) A transaction or event which is recognised, in the same or a different period, outside profit or loss, either in other comprehensive income or directly in equity; or
(b) A business combination (other than the acquisition by an investment entity of a subsidiary that is required to be measured at fair value through profit or loss).
Paragraph 59: Most deferred tax liabilities and deferred tax assets arise where income or expense is included in accounting profit in one period, but is included in taxable profit (tax loss) in a different period. The resulting deferred tax is recognised in profit or loss.
Paragraph 60: The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences. This can result from:
(a) A change in tax rates or tax laws;
(b) A reassessment of the recoverability of deferred tax assets; or
(c) A change in the expected manner of recovery of an asset.
The resulting deferred tax is recognised in profit or loss, except to the extent that it relates to items previously recognised outside profit or loss.
Items Recognised Outside Profit or Loss (Paragraph 61A)
Current tax and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss. Therefore:
(a) Current tax and deferred tax that relates to items recognised in other comprehensive income shall be recognised in other comprehensive income.
(b) Current tax and deferred tax that relates to items recognised directly in equity shall be recognised directly in equity.
Paragraph 62: Examples of items recognised in other comprehensive income:
(a) A change in carrying amount arising from the revaluation of property, plant and equipment (see HKAS 16);
(c) Exchange differences arising on the translation of the financial statements of a foreign operation (see HKAS 21).
Paragraph 62A: Examples of items credited or charged directly to equity:
(a) An adjustment to the opening balance of retained earnings resulting from either a change in accounting policy that is applied retrospectively or the correction of an error (see HKAS 8);
(b) Amounts arising on initial recognition of the equity component of a compound financial instrument.
Paragraph 63: In exceptional circumstances it may be difficult to determine the amount of current and deferred tax that relates to items recognised outside profit or loss. This may be the case when:
(a) There are graduated rates of income tax and it is impossible to determine the rate at which a specific component of taxable profit has been taxed;
(b) A change in the tax rate or other tax rules affects a deferred tax asset or liability relating to an item that was previously recognised outside profit or loss;
(c) An entity determines that a deferred tax asset should be recognised, or should no longer be recognised in full, and the deferred tax asset relates to an item that was previously recognised outside profit or loss.
In such cases, the current and deferred tax related to items recognised outside profit or loss are based on a reasonable pro rata allocation or other method that achieves a more appropriate allocation.
Paragraph 64: HKAS 16 does not specify whether an entity should transfer each year from revaluation surplus to retained earnings an amount equal to the difference between the depreciation on a revalued asset and the depreciation based on the cost of that asset. If an entity makes such a transfer, the amount transferred is net of any related deferred tax.
Paragraph 65: When an asset is revalued for tax purposes and that revaluation is related to an accounting revaluation of an earlier period, or to one that is expected to be carried out in a future period, the tax effects of both the asset revaluation and the adjustment of the tax base are recognised in other comprehensive income in the periods in which they occur.
Paragraph 65A: When an entity pays dividends to its shareholders, it may be required to pay a portion of the dividends to taxation authorities on behalf of shareholders (withholding tax). Such an amount paid or payable to taxation authorities is charged to equity as a part of the dividends.
Deferred Tax Arising from a Business Combination (Paragraph 66)
As explained in paragraphs 19 and 26(c), temporary differences may arise in a business combination. In accordance with HKFRS 3, an entity recognises any resulting deferred tax assets (to the extent that they meet the recognition criteria in paragraph 24) or deferred tax liabilities as identifiable assets and liabilities at the acquisition date. Consequently, those deferred tax assets and deferred tax liabilities affect the amount of goodwill or the bargain purchase gain the entity recognises. However, in accordance with paragraph 15(a), an entity does not recognise deferred tax liabilities arising from the initial recognition of goodwill.
Paragraph 67: As a result of a business combination, the probability of realising a pre-acquisition deferred tax asset of the acquirer could change. The acquirer recognises a change in the deferred tax asset in the period of the business combination, but does not include it as part of the accounting for the business combination.
Paragraph 68: The potential benefit of the acquiree's income tax loss carryforwards or other deferred tax assets might not satisfy the criteria for separate recognition when a business combination is initially accounted for but might be realised subsequently. An entity shall recognise acquired deferred tax benefits that it realises after the business combination as follows:
(a) Acquired deferred tax benefits recognised within the measurement period that result from new information about facts and circumstances that existed at the acquisition date shall be applied to reduce the carrying amount of any goodwill related to that acquisition. If the carrying amount of that goodwill is zero, any remaining deferred tax benefits shall be recognised in profit or loss.
(b) All other acquired deferred tax benefits realised shall be recognised in profit or loss (or, if this Standard so requires, outside profit or loss).
Current and Deferred Tax Arising from Share-Based Payment Transactions (Paragraphs 68A-68C)
Paragraph 68A: In some tax jurisdictions, an entity receives a tax deduction that relates to remuneration paid in shares, share options or other equity instruments. The amount of that tax deduction may differ from the related cumulative remuneration expense, and may arise in a later accounting period.
Paragraph 68B: The difference between the tax base of the employee services received to date (being the amount the taxation authorities will permit as a deduction in future periods) and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset. If the amount the taxation authorities will permit as a deduction in future periods is not known at the end of the period, it shall be estimated based on information available at the end of the period.
Paragraph 68C: If the amount of the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction relates not only to remuneration expense but also to an equity item. In this situation, the excess of the associated current or deferred tax should be recognised directly in equity.
Presentation
Tax Assets and Tax Liabilities - Offset
Paragraph 71: An entity shall offset current tax assets and current tax liabilities if, and only if, the entity:
(a) Has a legally enforceable right to set off the recognised amounts; and
(b) Intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Paragraph 72: Although current tax assets and liabilities are separately recognised and measured, they are offset in the statement of financial position subject to criteria similar to those established for financial instruments in HKAS 32. An entity will normally have a legally enforceable right to set off a current tax asset against a current tax liability when they relate to income taxes levied by the same taxation authority and the taxation authority permits the entity to make or receive a single net payment.
Paragraph 73: In consolidated financial statements, a current tax asset of one entity in a group is offset against a current tax liability of another entity in the group if, and only if, the entities concerned have a legally enforceable right to make or receive a single net payment and the entities intend to make or receive such a net payment or to recover the asset and settle the liability simultaneously.
Paragraph 74: An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
(a) The entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
(b) The deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority on either:
Paragraph 75: To avoid the need for detailed scheduling of the timing of the reversal of each temporary difference, this Standard requires an entity to set off a deferred tax asset against a deferred tax liability of the same taxable entity if, and only if, they relate to income taxes levied by the same taxation authority and the entity has a legally enforceable right to set off current tax assets against current tax liabilities.
Paragraph 76: In rare circumstances, an entity may have a legally enforceable right of set-off, and an intention to settle net, for some periods but not for others. In such rare circumstances, detailed scheduling may be required.
Tax Expense
Paragraph 77: The tax expense (income) related to profit or loss from ordinary activities shall be presented as part of profit or loss in the statement(s) of profit or loss and other comprehensive income.
Paragraph 78: HKAS 21 requires certain exchange differences to be recognised as income or expense but does not specify where such differences should be presented. Where exchange differences on deferred foreign tax liabilities or assets are recognised in the statement of comprehensive income, such differences may be classified as deferred tax expense (income) if that presentation is considered to be the most useful to financial statement users.
Disclosure
Paragraph 79: The major components of tax expense (income) shall be disclosed separately.
Paragraph 80: Components of tax expense (income) may include:
(a) Current tax expense (income);
(b) Any adjustments recognised in the period for current tax of prior periods;
(c) The amount of deferred tax expense (income) relating to the origination and reversal of temporary differences;
(d) The amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes;
(e) The amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce current tax expense;
(f) The amount of the benefit from a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce deferred tax expense;
(g) Deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset in accordance with paragraph 56;
(h) The amount of tax expense (income) relating to those changes in accounting policies and errors that are included in profit or loss in accordance with HKAS 8.
Paragraph 81: The following shall also be disclosed separately:
(a) The aggregate current and deferred tax relating to items that are charged or credited directly to equity;
(ab) The amount of income tax relating to each component of other comprehensive income;
(c) An explanation of the relationship between tax expense (income) and accounting profit in either or both of the following forms:
(d) An explanation of changes in the applicable tax rate(s) compared to the previous accounting period;
(e) The amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognised in the statement of financial position;
(f) The aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint arrangements, for which deferred tax liabilities have not been recognised;
(g) In respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits:
(h) In respect of discontinued operations, the tax expense relating to:
(i) The amount of income tax consequences of dividends to shareholders that were proposed or declared before the financial statements were authorised for issue, but are not recognised as a liability in the financial statements;
(j) If a business combination in which the entity is the acquirer causes a change in the amount recognised for its pre-acquisition deferred tax asset, the amount of that change;
(k) If the deferred tax benefits acquired in a business combination are not recognised at the acquisition date but are recognised after the acquisition date, a description of the event or change in circumstances that caused the deferred tax benefits to be recognised.
Paragraph 82: An entity shall disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when:
(a) The utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences; and
(b) The entity has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred tax asset relates.
Paragraph 82A: In the circumstances described in paragraph 52A, an entity shall disclose the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders. In addition, the entity shall disclose the amounts of the potential income tax consequences practicably determinable and whether there are any potential income tax consequences not practicably determinable.
Paragraph 84: The disclosures required by paragraph 81(c) enable users of financial statements to understand whether the relationship between tax expense (income) and accounting profit is unusual and to understand the significant factors that could affect that relationship in the future.
Paragraph 85: In explaining the relationship between tax expense (income) and accounting profit, an entity uses an applicable tax rate that provides the most meaningful information to the users of its financial statements. Often, the most meaningful rate is the domestic rate of tax in the country in which the entity is domiciled.
Example illustrating paragraph 85:
Paragraph 86: The average effective tax rate is the tax expense (income) divided by the accounting profit.
Paragraph 87: It would often be impracticable to compute the amount of unrecognised deferred tax liabilities arising from investments in subsidiaries, branches and associates and interests in joint arrangements. Therefore, this Standard requires an entity to disclose the aggregate amount of the underlying temporary differences but does not require disclosure of the deferred tax liabilities.
Paragraph 87A: Paragraph 82A requires an entity to disclose the nature of the potential income tax consequences that would result from the payment of dividends to its shareholders. An entity discloses the important features of the income tax systems and the factors that will affect the amount of the potential income tax consequences of dividends.
Paragraph 87B: It would sometimes not be practicable to compute the total amount of the potential income tax consequences that would result from the payment of dividends to shareholders. However, even in such circumstances, some portions of the total amount may be easily determinable.
Paragraph 87C: An entity required to provide the disclosures in paragraph 82A may also be required to provide disclosures related to temporary differences associated with investments in subsidiaries, branches and associates or interests in joint arrangements.
Paragraph 88: An entity discloses any tax-related contingent liabilities and contingent assets in accordance with HKAS 37. Contingent liabilities and contingent assets may arise, for example, from unresolved disputes with the taxation authorities. Similarly, where changes in tax rates or tax laws are enacted or announced after the reporting period, an entity discloses any significant effect of those changes on its current and deferred tax assets and liabilities.
Effective Date
Paragraph 89: This Standard becomes operative for financial statements covering periods beginning on or after 1 January 2005. Earlier adoption is encouraged but not required.
Paragraph 98J: Deferred Tax related to Assets and Liabilities arising from a Single Transaction, issued in June 2021, amended paragraphs 15, 22 and 24 and added paragraph 22A. An entity shall apply these amendments for annual reporting periods beginning on or after 1 January 2023. Earlier application is permitted.
Paragraph 98K: An entity shall apply Deferred Tax related to Assets and Liabilities arising from a Single Transaction to transactions that occur on or after the beginning of the earliest comparative period presented.
Paragraph 98L: An entity applying Deferred Tax related to Assets and Liabilities arising from a Single Transaction shall also, at the beginning of the earliest comparative period presented:
(a) Recognise a deferred tax asset and a deferred tax liability for all deductible and taxable temporary differences associated with:
(b) Recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings (or other component of equity, as appropriate) at that date.
Key Takeaways Summary
| Concept | Key Point |
|---|---|
| Core Principle | Deferred tax is accounted for using the balance sheet liability method, focusing on temporary differences between carrying amount and tax base |
| Tax Base - Asset | Amount deductible for tax purposes against taxable economic benefits when asset is recovered |
| Tax Base - Liability | Carrying amount less amount deductible for tax purposes in future periods |
| Deferred Tax Liability | Recognised for all taxable temporary differences, except initial recognition of goodwill and certain initial recognition transactions |
| Deferred Tax Asset | Recognised for deductible temporary differences to extent probable taxable profit available, with similar exceptions |
| Measurement | Use enacted or substantively enacted tax rates expected to apply when asset realised or liability settled |
| Recovery/Settlement Manner | Measurement reflects tax consequences of expected manner of recovery or settlement |
| Non-depreciable Assets (Revaluation Model) | Presumed recovery through sale |
| Investment Property (Fair Value Model) | Rebuttable presumption of recovery through sale |
| Discounting | Not permitted for deferred tax assets and liabilities |
| Offsetting | Only permitted when legally enforceable right and same taxation authority |
| Tax Losses | Recognise deferred tax asset only to extent probable future taxable profit available; history of losses requires convincing evidence |
| Subsidiaries/Associates | Deferred tax liability recognised unless parent can control timing and reversal not probable in foreseeable future |
| Business Combinations | Deferred tax assets/liabilities affect goodwill; no recognition for goodwill initial recognition |
| Share-Based Payments | Deferred tax asset based on estimated future tax deduction; excess over cumulative remuneration expense recognised in equity |
| Pillar Two | Temporary exception for deferred taxes related to Pillar Two income taxes; new disclosures for periods beginning on/after 1 January 2023 |
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