International Financial Reporting Standards_guide.pdf

Chapter 36 Interim Financial Reporting (IAS 34) 405
Principles and issues
Practical application
C. Deferral of expenses
An entity that reports quarterly has an operating loss carry
forward of $10,000 for income tax purposes at the start of
the current financial year, for which a deferred tax asset has
not been recognized.
The entity earns $10,000 in the first quarter of the current
year and expects to earn $10,000 in each of the three
remaining quarters. Excluding the carry forward, the estimated
average annual income tax rate is expected to be 40 percent.
Tax expense for the year would be calculated as follows:
40 percent × (40,000 – 10,000 tax loss) = $12,000
The effective tax rate based on the annual earnings would
then be 30 percent (12,000 ÷ 40,000). The question is
whether the tax charge for interim financial reporting should
be based on actual or effective annual rates, which are
illustrated below:
Income Tax Payable
Quarter Actual Rate Effective Rate
First 0* 3,000
Second 4,000 3,000
Third 4,000 3,000
Fourth 4,000 3,000
$12,000 $12,000
* The full benefit of the tax loss carried forward is used in
the first quarter.
According to IAS 34, §30(c), the interim period income tax
expense is accrued using the tax rate that would be
applicable to expected total annual earnings, that is, the
weighted average annual effective income tax rate applied to
the pretax income of the interim period.
This is consistent with the basic concept set out in IAS 34,
§28 that the same accounting recognition and measurement
principles should be applied in an interim financial report as
are applied in annual financial statements. Income taxes are
assessed on an annual basis. Interim period income tax
expense is calculated by applying to an interim period’s
pretax income the tax rate that would be applicable to
expected total annual earnings, that is, the weighted average
annual effective income tax rate.
This rate would reflect a blend of the progressive tax rate
structure expected to be applicable to the full year’s earnings.
This particular issue is dealt with in IAS 34, Appendix B §22.