International Financial Reporting Standards_guide.pdf

176 Chapter 15 Income Taxes (IAS 12)
An analyst should also consider the reasons that have caused deferred taxes to arise and how
likely these causes are to reverse.
15.6.8 In some cases, analysts ignore the deferred tax liabilities for analytical purposes
when it is difficult to determine whether they will take on the characteristics of a true liability
or equity capital over time. Ultimately, the analyst has to decide whether deferred tax
liabilities should be characterized as liabilities, equity, or neither based on the situation’s
unique circumstances.
15.6.9 Entities must include income tax information in their footnotes, which analysts
should use to:
■ understand why the entity’s effective income tax rate is different from the statutory
tax rate;
■ forecast future effective income tax rates, thereby improving earnings forecasts;
■ determine the actual income taxes paid by an entity and compare them with the
reported income tax expense to better assess operating cash flow; and
■ estimate the taxable income reported to the government and compare it with the
reported pretax income reported in the financial statements.
15.7 COMMENTARY
15.7.1 The industry and country in which an entity operates will have a large practical effect
on the recognition and measurement of deferred tax, which could complicate comparisons
between entities even within the same industry. Practical differences may arise as a result
of the following conditions:
■ The tax regulations of different countries and jurisdictions may be vastly different for
a specific type of asset or liability, which would result in very different tax bases and
deferred tax consequences between entities. Often special tax breaks are made available
to certain industries to encourage growth and investment.
■ The intentions that an entity has for a certain asset (for use or for disposal) may
determine the rate at which an entity recognizes deferred tax (either the normal or the
capital gains tax rate). Different entities, even within the same industry, may view one
asset type differently, which could result in different deferred tax being recognized for
similar asset types.
15.7.2 The recognition of a deferred tax asset is largely based on judgment as to the future
probability of profits. Though some guidance is provided on how this may be assessed, the
likelihood of difference in practice between entities is high. Tax planning opportunities also
play a large role in making such assessments. Entities will not always have similar tax planning
opportunities available. This will also be affected by the relevant tax legislation (such
as ring fencing of losses) with which the entity must comply, as well as the entity’s group
structure.
15.7.3 Indirect tax is tax on items other than income, for example value-added tax and
stamp duties. Each tax jurisdiction will have its own indirect taxes (for example value-added
tax). The inclusion of these amounts in an entity’s financial statements could have a negative
impact on the performance and financial position and provide an inaccurate picture of the
entity to analysts and investors. Care must be taken to separately disclose and deduct these
amounts before calculating direct tax.