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There have been several complications and conflicts regarding one of the IASs set up, which is the IAS 12, regarding Income Taxes and more specifically focusing on both Current Taxes and Deferred Taxes. As defined by the IAS 12, both deferred tax assets and liabilities refer to the amount of income tax payable in future periods in respect of taxable temporary differences. To put it in simple terms, deferred taxes are taxes that are payable in future. The implementation of this IAS was to initially draw up an understanding of how deferred taxes in income taxes were to be treated in everyday accounting. By thoughtfully deriving accurate taxable profits, the IAS 12 aids organizations in deriving precise figures to enact a just amount of income taxes. The framework of that which is the IAS 12 is based on takes into account future recovery settlements of all assets and liabilities that are recognized in an entity's statement of financial position, as well as transactions and other events of the current period that are recognized in an entity's financial report, particularly the statement of financial position.
There are a few main requirements working towards achieving the essence of which is the IAS 12. Grant Thornton (2009) has brought out the fact that one of the requirements is that organizations incorporating deferred taxes in any of their financial reports must ensure clarity in the reports. This ensures that users may understand the origins of the deferred taxes. An easy way to ensure clarity is to allocate a footnote by the deferred taxes, redirecting users to any other sections in order to describe the deferred taxes. With this, the organization would be successful in allowing users to understand how the deferred taxes comes about, and hence ensures that users are able to understand the reasoning behind any differences when compared to other financial years. The absence of deferred taxes in an organization's financial reports may mislead users to misunderstand the overall performance of the organization. Furthermore, Deloitte (nd) and Grant Thornton (2009) have both agreed in stating that the IAS 12 requires all deferred tax liabilities to be provided on all temporary differences. This can be made possible by simply restating assets to fair value and by recognising intangible assets at fair value in a business combination. Deloitte (nd) goes on by bringing about the three exceptions to the requirement of recognising a deferred tax liability. According to Deloitte (nd), the first exception states that liabilities arising from initial recognition of goodwill, for which amortizations are not deductable for tax purposes cannot be deemed as deferred tax liabilities. Next, liabilities arising from the initial recognition of an asset or liability other than in a business combination, at which at the same time of the transaction does not affect either the accounting or the taxable profit, also cannot be regarded as deferred tax liabilities. Lastly, liabilities arising from undistributed profits from investments, where the entity is able to control the timing of the reversal of the difference, and it is probable that the reversal will not occur in the foreseeable future, cannot be treated as deferred tax liabilities.
Several controversies have risen from the establishment of IAS 12. The European Financial Reporting Advisory Group, EFRAG (2011) has mentioned in a discussion paper how users have made it clear that they find IAS 12 too difficult to apply and understand. It highlights that certain requirements of IAS 12 contradict with some other requirements. As an example, it draws about the presentation requirements for both deferred tax assets and liabilities. According to the Generally Accepted Accounting Principles, deferred tax assets and liabilities tentatively have to be measured and recognized separately, but the IAS 12 permits organizations to offset one against the other by displaying a net amount on the statement of financial position. Clearly this hinders the application of IAS 12, seeing as it contradicts to the GAAP. Moreover, conflicts may arise should this standard disagrees with certain jurisdiction rules. The EFRAG (2011) continued by stating that users have mentioned how they are unimpressed by the beating around the bush method of conveying instructions, requesting that they be given clear tax notes and disclosures. At the same time, such users do not wish to have to go through all the technical complexities. EFRAG (2011) also states that users also find IAS 12 rather confusing and broad, in a sense that they wish for more guidance and more specific instructions. Some of them state that additional information would be highly appreciated. I believe that this shows how the IAS 12 can be difficult to understand, as users are unable to interpret the standards set out for them to comply to. Also, despite the fact that users may understand some of the standards, they are not detailed enough to be comprehensive and hence, those standards of the IAS 12 are inapplicable. Moving along, Simon Fisher, a partner of RSM Ashvir in Kenya, pointed out his opinions in RSM Reporting, by RSM International (2011). In the newsletter, Fisher expresses that he agrees with the statement of how IAS 12 is difficult to apply and understand. Despite mentioning in the same article that IAS 12 is indeed a good standard to follow as the commendable writers knew their contents superbly, Fisher mentioned that some of the contents to IAS 12 do not make sense and simply do not have justification towards the standard.
Deloitte (nd). IAS 12 - Income Taxes.
Available at: http://www.iasplus.com/en/standards/standard11
[Accessed 18th February 2013].
EFRAG (2011). Improving the Financial Reporting of Income Tax: Discussion Paper. [ONLINE]
Available at: https://www.frc.org.uk/FRC-Documents/ASB/Discussion-Paper-Improving-the-Financial-Reporting.aspx
[Accessed 14th February 2013]
Grant Thornton (2009). Deferred Tax - A Finance Director's Guide to Avoiding the Pitfalls: Understanding Deferred Tax under IAS 12: Income Taxes.
[ONLINE] August 2009.
Available at: http://www.grant-thornton.co.uk/PageFiles/3964/Deferred_tax_-_a_Finance_Directors_guide.pdf
[Accessed 15th February 2013].
RSM International (2011). RSM Reporting.
[ONLINE] Issue 7, March 2011.
Available at: http://www.rsmi.com/attachments/approved/rsm-reporting---1st-quarter-2011/en/FINALRSMReporting_Feb2011_web.pdf
[Accessed 20th February 2013].