IAS12 & IAS34

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Leo
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IAS12 & IAS34

Post by Leo »

HI everyone,

If a company decide to adopt for the first time the projected ETR to calculate its income tax at each interim closing, do they have to retrospectively correct LY? For me, this is a change in accounting policies, but last year they didn't have projected ETR calculated at the budget.

THank you for your insights.

Regards !
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Marek Muc
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Re: IAS12 & IAS34

Post by Marek Muc »

How did you determine income tax charge in interim financial statements last year?
Leo
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Re: IAS12 & IAS34

Post by Leo »

A complete tax reporting based on H1 numbers.
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Marek Muc
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Re: IAS12 & IAS34

Post by Marek Muc »

So it's a change in accounting policy with retrospective application at best, but you're dangerously close to a correction of error as IAS 34 is quite clear on income tax recognition in interim FS
JRSB
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Re: IAS12 & IAS34

Post by JRSB »

I don't really follow the distinction, surely the tax provision is simply based on the best estimate using information available at the time
pub_acco
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Re: IAS12 & IAS34

Post by pub_acco »

IAS 34 technically doesn't allow us to rely on the best available information, saying that interim tax expense must be calculated by arithmetically multiplying accounting profit and ETR. But I don't really see a material difference between the two approaches either in the normal circumstances :?
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Marek Muc
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Re: IAS12 & IAS34

Post by Marek Muc »

it could be a material difference depending on the local tax law, e.g. some tax credits/reliefs settled only on annual tax return

But it will be interesting to hear from Leo what is the reason of significant difference between tax expense as per H1 tax return and ETR approach (and which country this is if you don't mind sharing)
Leo
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Re: IAS12 & IAS34

Post by Leo »

You are right, IAS34 specifies clearly that the interim income tax expenses should be recognised based on the best estimate of the weighted average annual effective income tax rate expected for the full financial year. However, a few companies still calculate the interim income tax expenses based on real figures.

Their methodology is to simply use the same one than the final year closing.

This is the reason that some of those companies want to apply IAS34. Apart from thinking which one is the more accurate, one of the big advantages are that IAS34 can save a lot of time. It's always easier to mupltiply the profit before tax and the projected ETR than to do a complete set of tax reporting at each interim period.

But the reason that some companies still calculate the income tax expneses based on real figures is :
1. Historical reasons + statutory consolidation only twice a year (HY and FY), so they prioritize accuracy.
2. In some type of businesses/group, there are many permanent differences that can affect the projected ETR, Income tax expenses based on H1 figures is more accurate than projected figures calculated at the budget (exposure to Fx etc...)
3. there are some intercompany invoicing (management fees etc.) that are not always included in the budget, so some of the ETR impacts haven't been included in the projected ETR.

That the reasons some companies didn't rely on projected ETR to calculate their interim income tax expenses.

But why it hasn't been raised by the auditors, this is something that is beyong my understanding of the topic. Maybe the application of IAS34 on income tax expenses is only an option and not mandatory?

From your experiences, all of your IFRS clients or companies have always been using projected ETR methodology for their interim closing? WHat if a company apply the IFRS but never calculate projected ETR at budget, it could happen right?
Last edited by Leo on 25 Oct 2021, 12:41, edited 1 time in total.
Leo
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Re: IAS12 & IAS34

Post by Leo »

https://www.grantthornton.global/en/ins ... provision/

I quote :

"As reporting entities look to record their interim income tax accruals, be it quarterly or half yearly during the 2020 reporting period, consideration should be given to whether the continued use of the ETR method is a reasonable approach to reporting income taxes on an interim basis. If a reasonable estimate of the ETR cannot be made, reporting issuers may wish to consider a year-to-date actual tax calculation as the best estimate of the ETR. IAS 34 in general, requires anticipated tax credits and benefits, relating to a one-off event be recognised in the interim period in which they are anticipated to be received. This requirement may further complicate the ability to derive a reasonable ETR."

Seems like that year to date actual tax calculation, if it's more appropriate and more suitable to the specificities of the comapny, can be used instead of the projected ETR ?

Also this one (US GAAP related):

https://viewpoint.pwc.com/dt/us/en/pwc/ ... th_US.html
Leo
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Re: IAS12 & IAS34

Post by Leo »

So, all that being said, if a company switch from year to date actual tax expenses to the projected ETR at interim reporting. Is that a change in accounting policies or something else? And do you think that the company should correct the LY comparative period or don't need to?
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Marek Muc
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Re: IAS12 & IAS34

Post by Marek Muc »

Change in accounting policies or correction of an error with retrospective application, subject to materiality considerations as always - is the impact material? What were you missing for half year closings? Some annual tax credits?
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