Method for Recognizing Deferred Income Tax under Differences between IFRS and Local Statutory Reporting Results
When profit differences arise between IFRS and local statutory reports due to different accounting policies or tax bases, the recognition and recording of deferred income tax must comply with the requirements of each respective standard. This article provides practical operational guidance to help financial personnel understand the sources of differences, perform deferred tax calculations, and achieve the linkage of the results of the two sets of reports through a reconciliation schedule.
Problem Background: Handling Differences Between IFRS and Local Statutory Reports
In multinational enterprises or entities that prepare consolidated financial statements under International Financial Reporting Standards (IFRS), a practical challenge often arises:When the accounting profit under IFRS differs from the profit in local statutory reports, how should deferred income taxes be recognized separately? Furthermore, how can the profit results of the two sets of reports be reconciled and matched with each other?
Root of Differences: Accounting Basis and Tax Basis
Profit differences between IFRS and local statutory reports typically arise from the following aspects:
- Differences in Accounting Policies: For example, asset depreciation methods, inventory valuation, revenue recognition timing, etc., may differ under IFRS and local GAAP.
- Differences in Tax Basis: The tax basis of assets and liabilities as stipulated by local tax laws may differ from their carrying amounts under IFRS, thereby creating temporary differences.
- Permanent Differences: Certain income or expenses are permanently tax-exempt or non-deductible under tax law, resulting in no deferred tax impact.
Recognition Principles for Deferred Income Tax
Under IFRS, deferred income tax should be recognized in accordance withIAS 12 Income Taxes, using the balance sheet liability method, recognizing deferred tax assets or liabilities for all temporary differences (except for specific exemptions). In local statutory reports, however, the recognition of deferred income tax must follow local accounting standards or tax regulations, which may adopt the income statement liability method or only recognize deferred tax for specific differences.
Key Point: Deferred income tax for the two sets of reports should be calculated independently; the same amount cannot be directly applied, as the tax bases and applicable tax rates may differ.
How to Achieve Matching of Results Between the Two Sets of Reports?
To match the profits of IFRS and local statutory reports, it is recommended to follow these steps:
- Identify Differences: Prepare a difference reconciliation schedule, listing each profit difference between IFRS and local statutory reports, and distinguishing between temporary and permanent differences.
- Calculate Deferred Tax: Calculate the deferred tax impact of each temporary difference separately under IFRS and local tax law, paying attention to applicable tax rates and expected reversal periods.
- Accounting Treatment: Recognize deferred tax in the IFRS ledger in accordance with IAS 12; recognize deferred tax in the local statutory ledger in accordance with local standards (if required).
- Reconciliation Verification: Use a "profit reconciliation schedule" to reconcile IFRS net profit to local statutory net profit, with deferred tax differences as one of the reconciliation items.
Illustrative Example (Simplified)
Assume an asset has a carrying amount of 100 under IFRS and a tax base of 80, resulting in a taxable temporary difference of 20. With an applicable tax rate of 25%, a deferred tax liability of 5 is recognized under IFRS. In the local statutory report, the asset has a carrying amount of 90 and a tax base of 80, a difference of 10. If the local tax rate is 20%, a deferred tax liability of 2 is recognized. In the profit difference between the two sets of reports, the deferred tax expense difference is 3 (5-2), which needs to be reflected in the reconciliation schedule.
Practical Recommendations
To ensure accuracy and auditability, it is recommended to:
- Establish detailed difference tracking documentation, recording the nature, cause, and reversal timing of each difference.
- Regularly review the recoverability of deferred tax assets, especially performing impairment tests under IFRS.
- Communicate with external auditors to ensure that the deferred tax treatment in both sets of reports complies with their respective standards.
In summary, the core of handling deferred income tax under differences between IFRS and local statutory reports lies inseparate calculation, independent recognition, and reconciliation verification. Through systematic difference management and reconciliation schedules, one result can be clearly matched to another, meeting financial reporting and compliance requirements.