| |
|
|
|
|
| 52A. |
In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained
earnings is paid out as a dividend to shareholders of the enterprise. In some other jurisdictions, income taxes
may be refundable or payable if part or all of the net profit or retained earnings is paid out as a dividend to
shareholders of the enterprise. In these circumstances, current and deferred tax assets and liabilities are measured
at the tax rate applicable to undistributed profits. |
| 52B. |
In the circumstances described in paragraph 52A, the income tax consequences of dividends are recognised when a
liability to pay the dividend is recognised. The income tax consequences of dividends are more directly linked
to past transactions or events than to distributions to owners. Therefore, the income tax consequences of dividends
are recognised in net profit or loss for the period as required by paragraph 58 except to the extent that the income
tax consequences of dividends arise from the circumstances described in paragraph 58(a) and (b).
Example Illustrating Paragraphs 52A and 52B
The following example deals with the measurement of current and deferred tax assets and liabilities for an enterprise
in a jurisdiction where income taxes are payable at a higher rate on undistributed profits (50%) with an amount
being refundable when profits are distributed. The tax rate on distributed profits is 35%. At the balance sheet
date, 31 December 20X1, the enterprise does not recognise a liability for dividends proposed or declared after
the balance sheet date. As a result, no dividends are recognised in the year 20X1. Taxable income for 20X1 is $100,000.
The net taxable temporary difference for the year 20X1 is $40,000.
The enterprise recognises a current tax liability and a current income tax expense of $50,000 ($100,000 at 50%).
No asset is recognised for the amount potentially recoverable as a result of future dividends. The enterprise also
recognises a deferred tax liability and deferred tax expense of $20,000 ($40,000 at 50%) representing the income
taxes that the enterprise will pay when it recovers or settles the carrying amounts of its assets and liabilities
based on the tax rate applicable to undistributed profits.
Subsequently, on 15 March 20X2 the enterprise recognises dividends of $10,000 from previous operating profits as
a liability.
On 15 March 20X2, the enterprise recognises the recovery of income taxes of $1,500 (15% of the dividends recognised
as a liability) as a current tax asset and as a reduction of current income tax expense for 20X2. |
|
| 53. |
Deferred tax assets and liabilities should not be discounted. |
| 54. |
The reliable determination of deferred tax assets and liabilities on a discounted basis requires detailed scheduling
of the timing of the reversal of each temporary difference. In many cases such scheduling is impracticable or highly
complex. Therefore, it is inappropriate to require discounting of deferred tax assets and liabilities. To permit,
but not to require, discounting would result in deferred tax assets and liabilities which would not be comparable
between enterprises. Therefore, this Statement does not require or permit the discounting of deferred tax assets
and liabilities. |
| 55. |
Temporary differences are determined by reference to the carrying amount of an asset or liability. This applies
even where that carrying amount is itself determined on a discounted basis, for example in the case of retirement
benefit obligations (see SSAP 34, Employee Benefits). |
| 56. |
The carrying amount of a deferred tax asset should be reviewed at each balance sheet date. An enterprise
should reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient
taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised.
Any such reduction should be reversed to the extent that it becomes probable that sufficient taxable profit will
be available. |
| |
Recognition of Current and Deferred Tax
|
| 57. |
Accounting for the current and deferred tax effects of a transaction or other event is consistent with the accounting
for the transaction or event itself. Paragraphs 58 to 68 implement this principle. |
| |
| Income Statement |
| 58. |
Current and deferred tax should be recognised as income or an expense and included in the net profit or loss
for the period, except to the extent that the tax arises from: |
| |
(a) |
a transaction or event which is recognised, in the same or a different period, directly in equity (see paragraphs
61 to 65); or |
| |
(b) |
a business combination that is an acquisition (see paragraphs 66 to 68). |
| 59. |
Most deferred tax liabilities and deferred tax assets arise where income or expense is included in accounting profit
in one period, but is included in taxable profit (tax loss) in a different period. The resulting deferred tax is
recognised in the income statement. Examples are when: |
| |
(a) |
interest, royalty or dividend revenue is received in arrears and is included in accounting profit on a time apportionment
basis in accordance with SSAP 18, Revenue, but is included in taxable profit (tax loss) on a cash basis; and |
| |
(b) |
costs of intangible assets have been capitalised in accordance with SSAP 29, Intangible Assets, and are being amortised
in the income statement, but were deducted for tax purposes when they were incurred. |
| 60. |
The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount
of the related temporary differences. This can result, for example, from: |
| |
(a) |
a change in tax rates or tax laws; |
| |
(b) |
a re-assessment of the recoverability of deferred tax assets; or |
| |
(c) |
a change in the expected manner of recovery of an asset. |
| |
The resulting deferred tax is recognised in the income statement, except to the extent that it relates to items
previously charged or credited to equity (see paragraph 63). |
| |
Items Credited or Charged Directly to Equity
|
| 61. |
Current tax and deferred tax should be charged or credited directly to equity if the tax relates to items
that are credited or charged, in the same or a different period, directly to equity. |
| 62. |
Statements of Standard Accounting Practice require or permit certain items to be credited or charged directly to
equity. Examples of such items are: |
| |
(a) |
a change in carrying amount arising from the revaluation of property, plant and equipment (see SSAP 17, Property,
Plant and Equipment); |
| |
(b) |
an adjustment to the opening balance of retained earnings resulting from either a change in accounting policy or
the correction of a fundamental error (see SSAP 2, Net Profit or Loss for the Period, Fundamental Errors and Changes
in Accounting Policies); and |
| |
(c) |
exchange differences arising on the translation of the financial statements of a foreign entity (see SSAP 11, Foreign
Currency Translation). |
| 63. |
In exceptional circumstances it may be difficult to determine the amount of current and deferred tax that relates
to items credited or charged to equity. This may be the case, for example, when: |
| |
(a) |
there are graduated rates of income tax and it is impossible to determine the rate at which a specific component
of taxable profit (tax loss) has been taxed; |
| |
(b) |
a change in the tax rate or other tax rules affects a deferred tax asset or liability relating (in whole or in
part) to an item that was previously charged or credited to equity; or |
| |
(c) |
an enterprise determines that a deferred tax asset should be recognised, or should no longer be recognised in full,
and the deferred tax asset relates (in whole or in part) to an item that was previously charged or credited to
equity. |
| |
In such cases, the current and deferred tax related to items that are credited or charged to equity is based on
a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction concerned,
or other method that achieves a more appropriate allocation in the circumstances. |
| 64. |
SSAP 17, Property, Plant and Equipment, does not specify whether an enterprise should transfer each year from revaluation
surplus to retained earnings an amount equal to the difference between the depreciation or amortisation on a revalued
asset and the depreciation or amortisation based on the cost of that asset. If an enterprise makes such a transfer,
the amount transferred is net of any related deferred tax. Similar considerations apply to transfers made on disposal
of an item of property, plant or equipment. |
| 65. |
When an asset is revalued for tax purposes and that revaluation is related to an accounting revaluation of an earlier
period, or to one that is expected to be carried out in a future period, the tax effects of both the asset revaluation
and the adjustment of the tax base are credited or charged to equity in the periods in which they occur. However,
if the revaluation for tax purposes is not related to an accounting revaluation of an earlier period, or to one
that is expected to be carried out in a future period, the tax effects of the adjustment of the tax base are recognised
in the income statement. |
| 65A. |
When an enterprise pays dividends to its shareholders, it may be required to pay a portion of the dividends to
taxation authorities on behalf of shareholders. In many jurisdictions, this amount is referred to as a withholding
tax. Such an amount paid or payable to taxation authorities is charged to equity as a part of the dividends. |
| |
Deferred Tax Arising from a Business Combination
|
| 66. |
As explained in paragraphs 19 and 26(c), temporary differences may arise in a business combination that is an acquisition.
In accordance with SSAP 30, Business Combinations, an enterprise recognises any resulting deferred tax assets (to
the extent that they meet the recognition criteria in paragraph 24) or deferred tax liabilities as identifiable
assets and liabilities at the date of the acquisition. Consequently, those deferred tax assets and liabilities
affect goodwill or negative goodwill. However, in accordance with paragraphs 15(a) and 24(a), an enterprise does
not recognise deferred tax liabilities arising from goodwill itself (if amortisation of the goodwill is not deductible
for tax purposes) and deferred tax assets arising from non-taxable negative goodwill which is treated as deferred income. |
| 67. |
As a result of a business combination, an acquirer may consider it probable that it will recover its own deferred
tax asset that was not recognised prior to the business combination. For example, the acquirer may be able to utilise
the benefit of its unused tax losses against the future taxable profit of the acquiree. In such cases, the acquirer
recognises a deferred tax asset and takes this into account in determining the goodwill or negative goodwill arising
on the acquisition. |
| 68. |
When an acquirer did not recognise a deferred tax asset of the acquiree as an identifiable asset at the date of
a business combination and that deferred tax asset is subsequently recognised in the acquirer's consolidated financial
statements, the resulting deferred tax income is recognised in the income statement. In addition, the acquirer: |
| |
(a) |
adjusts the gross carrying amount of the goodwill and the related accumulated amortisation to the amounts that
would have been recorded if the deferred tax asset had been recognised as an identifiable asset at the date of
the business combination; and |
| |
(b) |
recognises the reduction in the net carrying amount of the goodwill as an expense. |
| |
However, the acquirer does not recognise negative goodwill, nor does it increase the carrying amount of negative
goodwill.
Example illustrating the application of paragraph 68
An enterprise acquired a subsidiary which had deductible temporary differences of $300. The tax rate at the time
of the business combination was 30%. The resulting deferred tax asset of $90 was not recognised as an identifiable
asset in measuring the goodwill of $500 resulting from the acquisition, because it was assessed as not meeting
the "probable" recognition criterion at the date of acquisition. The goodwill is amortised over 20 years.
Two years after the acquisition, the enterprise assessed that future taxable amounts would probably be sufficient
for the enterprise to recover the benefit of all the deductible temporary differences.
The enterprise recognises a deferred tax asset of $90 (calculated as $300 x 30%) and, in net profit or loss,
deferred tax revenue of $90. It also reduces the cost of the goodwill by $90 and the accumulated amortisation by
$9 (representing 2 years' amortisation). The net adjustment of $81 to the amortised cost of the goodwill is recognised
as an expense in net profit or loss. Consequently, the cost of the goodwill, and the related accumulated amortisation,
are reduced to the amounts ($410 and $41) that would have been recorded if a deferred tax asset of $90 had been
recognised as an identifiable asset at the date of the acquisition.
If the tax rate has increased to 40%, the enterprise recognises a deferred tax asset of $120 (calculated as $300
x 40%) and, in net profit or loss, deferred tax revenue of $120. If the tax rate has decreased to 20%, the enterprise
recognises a deferred tax asset of $60 (calculated as $300 x 20%) and deferred tax revenue of $60. In both cases,
the enterprise also reduces the cost of the goodwill by $90 and the accumulated amortisation by $9 and recognises
the net adjustment of $81 as an expense in net profit or loss based on the 30% tax rate at the time of business
combination. |
|
| |
Presentation
Tax Assets and Tax Liabilities
|
| 69. |
Tax assets and tax liabilities should be presented separately from other assets and liabilities in the balance
sheet. Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities. |
| 70. |
When an enterprise makes a distinction between current and non-current assets and liabilities in its financial
statements, it should not classify deferred tax assets (liabilities) as current assets (liabilities). |
| |
| Offset |
| 71. |
An enterprise should offset current tax assets and current tax liabilities if, and only if, the enterprise: |
| |
(a) |
has a legally enforceable right to set off the recognised amounts; and |
| |
(b) |
intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. |
| 72. |
Although current tax assets and liabilities are separately recognised and measured, they are offset in the balance
sheet when an enterprise has a legally enforceable right to set off a current tax asset against a current tax liability
when they relate to income taxes levied by the same taxation authority and the taxation authority permits the enterprise
to make or receive a single net payment. |
| 73. |
In consolidated financial statements, a current tax asset of one enterprise in a group is offset against a current
tax liability of another enterprise in the group if, and only if, the enterprises concerned have a legally enforceable
right to make or receive a single net payment and the enterprises intend to make or receive such a net payment
or to recover the asset and settle the liability simultaneously. |
| 74. |
An enterprise should offset deferred tax assets and deferred tax liabilities if, and only if: |
| |
(a) |
the enterprise has a legally enforceable right to set off current tax assets against current tax liabilities;
and |
| |
(b) |
the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation
authority on either: |
| |
|
(i) |
the same taxable entity; or |
| |
|
(ii) |
different taxable entities which intend either to settle current tax liabilities and assets on a net basis,
or to realise the assets and settle the liabilities simultaneously, in each future period in which significant
amounts of deferred tax liabilities or assets are expected to be settled or recovered. |
| 75. |
To avoid the need for detailed scheduling of the timing of the reversal of each temporary difference, this Statement
requires an enterprise to set off a deferred tax asset against a deferred tax liability of the same taxable entity
if, and only if, they relate to income taxes levied by the same taxation authority and the enterprise has a legally
enforceable right to set off current tax assets against current tax liabilities. |
| 76. |
In rare circumstances, an enterprise may have a legally enforceable right of set-off, and an intention to settle
net, for some periods but not for others. In such rare circumstances, detailed scheduling may be required to establish
reliably whether the deferred tax liability of one taxable entity will result in increased tax payments in the
same period in which a deferred tax asset of another taxable entity will result in decreased payments by that second
taxable entity. |
| |
Tax Expense
Tax Expense (Income) related to Profit or Loss from Ordinary Activities
|
| 77. |
The tax expense (income) related to profit or loss from ordinary activities should be presented on the face
of the income statement. |
| |
| Exchange Differences on Deferred Foreign Tax Liabilities or Assets |
| 78. |
SSAP 11, Foreign Currency Translation, requires certain exchange differences to be recognised as income or expense
but does not specify where such differences should be presented in the income statement. Accordingly, where exchange
differences on deferred foreign tax liabilities or assets are recognised in the income statement, such differences
may be classified as deferred tax expense (income) if that presentation is considered to be the most useful to
financial statement users. |
| |
Disclosure
|
| 79. |
The major components of tax expense (income) should be disclosed separately. |
| 80. |
Components of tax expense (income) may include: |
| |
(a) |
current tax expense (income); |
| |
(b) |
any adjustments recognised in the period for current tax of prior periods; |
| |
(c) |
the amount of deferred tax expense (income) relating to the origination and reversal of temporary differences; |
| |
(d) |
the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes; |
| |
(e) |
the amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of
a prior period that is used to reduce current tax expense; |
| |
(f) |
the amount of the benefit from a previously unrecognised tax loss, tax credit or temporary difference of a prior
period that is used to reduce deferred tax expense; and |
| |
(g) |
deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred tax asset
in accordance with paragraph 56. |
| 81. |
The following should also be disclosed separately: |
| |
(a) |
the aggregate current and deferred tax relating to items that are charged or credited to equity; |
| |
(b) |
tax expense (income) relating to extraordinary items recognised during the period; |
| |
(c) |
an explanation of the relationship between tax expense (income) and accounting profit in either or both of
the following forms: |
| |
|
(i) |
a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by
the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or |
| |
|
(ii) |
a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing
also the basis on which the applicable tax rate is computed; |
| |
(d) |
an explanation of changes in the applicable tax rate(s) compared to the previous accounting period; |
| |
(e) |
the amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax
credits for which no deferred tax asset is recognised in the balance sheet; |
| |
(f) |
the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates
and interests in joint ventures, for which deferred tax liabilities have not been recognised (see paragraph 39); |
| |
(g) |
in respect of each type of temporary difference, and in respect of each type of unused tax losses and unused
tax credits: |
| |
|
(i) |
the amount of the deferred tax assets and liabilities recognised in the balance sheet for each period presented; |
| |
|
(ii) |
the amount of the deferred tax income or expense recognised in the income statement, if this is not apparent
from the changes in the amounts recognised in the balance sheet; and |
| |
(h) |
in respect of discontinued operations, the tax expense relating to: |
| |
|
(i) |
the gain or loss on discontinuance; and |
| |
|
(ii) |
the profit or loss from the ordinary activities of the discontinued operation for the period, together with
the corresponding amounts for each prior period presented; and |
| |
(i) |
the amount of income tax consequences of dividends to shareholders of the enterprise that were proposed or
declared before the financial statements were authorised for issue, but are not recognised as a liability in the
financial statements. |
| 82. |
An enterprise should disclose the amount of a deferred tax asset and the nature of the evidence supporting
its recognition, when: |
| |
(a) |
the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits
arising from the reversal of existing taxable temporary differences; and |
| |
(b) |
the enterprise has suffered a loss in either the current or preceding period in the tax jurisdiction to which
the deferred tax asset relates. |
| 82A. |
In the circumstances described in paragraph 52A, an enterprise should disclose the nature of the potential
income tax consequences that would result from the payment of dividends to its shareholders. In addition, the enterprise
should disclose the amounts of the potential income tax consequences practicably determinable and whether there
are any potential income tax consequences not practicably determinable. |
| 83. |
An enterprise discloses the nature and amount of each extraordinary item either on the face of the income statement
or in the notes to the financial statements. When this disclosure is made in the notes to the financial statements,
the total amount of all extraordinary items is disclosed on the face of the income statement, net of the aggregate
related tax expense (income). Although financial statement users may find the disclosure of the tax expense (income)
related to each extraordinary item useful, it is sometimes difficult to allocate tax expense (income) between such
items. Under these circumstances tax expense (income) relating to extraordinary items may be disclosed in the aggregate. |
| 84. |
The disclosures required by paragraph 81(c) enable users of financial statements to understand whether the relationship
between tax expense (income) and accounting profit is unusual and to understand the significant factors that could
affect that relationship in the future. The relationship between tax expense (income) and accounting profit may
be affected by such factors as revenue that is exempt from taxation, expenses that are not deductible in determining
taxable profit (tax loss), the effect of tax losses and the effect of foreign tax rates. |
| 85. |
In explaining the relationship between tax expense (income) and accounting profit, an enterprise uses an applicable
tax rate that provides the most meaningful information to the users of its financial statements. Often, the most
meaningful rate is the domestic rate of tax in the country in which the enterprise is domiciled, aggregating the
tax rate applied for national taxes with the rates applied for any local taxes which are computed on a substantially
similar level of taxable profit (tax loss). However, for an enterprise operating in several jurisdictions, it may
be more meaningful to aggregate separate reconciliations prepared using the domestic rate in each individual jurisdiction.
The following example illustrates how the selection of the applicable tax rate affects the presentation of the numerical reconciliation.
| |
|
|
|
|
| Whilst in most cases, the applicable rate of tax that provides the most meaningful information to users will be
the domestic rate of tax in the country in which the enterprise is domiciled, there will be exceptions. For example,
it is common in Hong Kong for groups to have a parent enterprise domiciled in Bermuda with operating subsidiaries
in Hong Kong. In these circumstances, the most meaningful rate of tax will be Hong Kong tax where the majority
of the operations are carried out. |
Example Illustrating Paragraph 85
In 20X2, an enterprise has accounting profit in its own jurisdiction (country A) of $1,500 (20X1: $2,000) and
in country B of $1,500 (20X1: $500). The tax rate is 30% in country A and 20% in country B. In country A, expenses
of $100 (20X1: $200)
are not deductible for tax purposes.
The following is an example of a reconciliation to the domestic tax rate. |
| |
|
20X1
|
|
20X2
|
| |
|
$
|
|
$
|
| Accounting profit |
|
2,500
====
|
|
3,000
====
|
| Tax at the domestic rate of 30% |
|
750
|
|
900
|
| Tax effect of expenses that are not deductible for tax purposes |
|
60
|
|
30
|
| Effect of lower tax rates in country B |
|
(50)
_____
|
|
(150)
_____
|
| Tax expense |
|
760
===
|
|
780
===
|
| The following is an example of a reconciliation prepared by aggregating separate reconciliations for each national
jurisdiction. Under this method, the effect of differences between the reporting enterprise's own domestic tax
rate and the domestic tax rate in other jurisdictions does not appear as a separate item in the reconciliation.
An enterprise may need to discuss the effect of significant changes in either tax rates, or the mix of profits
earned in different jurisdictions, in order to explain changes in the applicable tax rate(s), as required by paragraph
81(d). |
| |
|
$
|
|
$
|
| Accounting profit |
|
2,500
====
|
|
3,000
====
|
| Tax at the domestic rates applicable to profits in the country concerned |
|
700
|
|
750
|
| Tax effect of expenses that are not deductible for tax purposes |
|
60
____
|
|
30
____
|
| Tax expense |
|
760
===
|
|
780
===
|
| |
|
|
|
|
|
|
| 86. |
The average effective tax rate is the tax expense (income) divided by the accounting profit. |
| 87. |
It would often be impracticable to compute the amount of unrecognised deferred tax liabilities arising from investments
in subsidiaries, branches and associates and interests in joint ventures (see paragraph 39). Therefore, this Statement
requires an enterprise to disclose the aggregate amount of the underlying temporary differences but does not require
disclosure of the deferred tax liabilities. Nevertheless, where practicable, enterprises are encouraged to disclose
the amounts of the unrecognised deferred tax liabilities because financial statement users may find such information
useful. |
| 87A. |
Paragraph 82A requires an enterprise to disclose the nature of the potential income tax consequences that would
result from the payment of dividends to its shareholders. An enterprise discloses the important features of the
income tax systems and the factors that will affect the amount of the potential income tax consequences of dividends. |
| 87B. |
It would sometimes not be practicable to compute the total amount of the potential income tax consequences that
would result from the payment of dividends to shareholders. This may be the case, for example, where an enterprise
has a large number of foreign subsidiaries. However, even in such circumstances, some portions of the total amount
may be easily determinable. For example, in a consolidated group, a parent and some of its subsidiaries may have
paid income taxes at a higher rate on undistributed profits and be aware of the amount that would be refunded on
the payment of future dividends to shareholders from consolidated retained earnings. In this case, that refundable
amount is disclosed. If applicable, the enterprise also discloses that there are additional potential income tax
consequences not practicably determinable. In the parent's separate financial statements, if any, the disclosure
of the potential income tax consequences relates to the parent's retained earnings. |
| 87C. |
An enterprise required to provide the disclosures in paragraph 82A may also be required to provide disclosures
related to temporary differences associated with investments in subsidiaries, branches and associates or interests
in joint ventures. In such cases, an enterprise considers this in determining the information to be disclosed under
paragraph 82A. For example, an enterprise may be required to disclose the aggregate amount of temporary differences
associated with investments in subsidiaries for which no deferred tax liabilities have been recognised (see paragraph
81(f)). If it is impracticable to compute the amounts of unrecognised deferred tax liabilities (see paragraph 87)
there may be amounts of potential income tax consequences of dividends not practicably determinable related to these subsidiaries. |
| 88. |
An enterprise discloses any tax-related contingent liabilities and contingent assets in accordance with SSAP 28,
Provisions, Contingent Liabilities and Contingent Assets. Contingent liabilities and contingent assets may arise,
for example, from unresolved disputes with the taxation authorities. Similarly, where changes in tax rates or tax
laws are enacted or announced after the balance sheet date, an enterprise discloses any significant effect of those
changes on its current and deferred tax assets and liabilities (see SSAP 9, Events After the Balance Sheet Date). |
| |
Effective Date
|
| 89. |
The accounting practices set out in this Statement should be regarded as standard in respect of financial
statements relating to periods beginning on or after 1 January 2003. Earlier adoption is encouraged but not required.
If an enterprise applies this Statement for periods beginning before 1 January 2003, it should disclose that fact. |
| 90. |
This Statement supersedes SSAP 12 "Accounting for deferred tax". |
| |
Notes on Legal Requirements in Hong Kong
|
| 91. |
The references to "the Schedule" below are to the Tenth Schedule to the Companies Ordinance. |
| 92. |
Paragraph 8 of the Schedule requires that if an amount is set aside for the purpose of its being used to prevent
undue fluctuations in charges for taxation, it shall be stated. If such amount has been used during the financial
year for another purpose, the amount thereof and the fact that it has been so used shall be stated (paragraph 12(12)
of the Schedule). |
| 93. |
Paragraph 12(15) of the Schedule requires disclosure of the basis on which the amount, if any, set aside for Hong
Kong profits tax is computed. |
| 94. |
Paragraph 13(1)(c) of the Schedule requires disclosure of the amount of the charge to revenue for taxes imposed
by the Inland Revenue Ordinance and, if that amount would have been greater but for relief from double taxation,
the amount which it would have been but for such relief, and the amount of the charge for taxation imposed outside
Hong Kong of profits, income and (so far as charged to revenue) capital gains. |
| 95. |
The basis on which the charge for Hong Kong profit tax is computed shall be stated (paragraph 17(3) of the Schedule).
Particulars are required of any special circumstances affecting the tax liability for the financial year or succeeding
financial years (paragraph 17(4) of the Schedule). |
| 96. |
The requirements of paragraphs 92, 94 and 95 do not apply to licensed banks to the extent that these companies
take advantage of the disclosure exemptions permitted under Part III of the Schedule. |
| |
|
|
|
|
| |
|
|
|
|
Appendix A
Examples of Temporary Differences
The appendix is illustrative only and does not form part of the standards. The purpose of the appendix is
to illustrate the application of the standards to assist in clarifying their meaning.
|
A.
|
EXAMPLES OF CIRCUMSTANCES THAT GIVE RISE TO TAXABLE TEMPORARY DIFFERENCES
All taxable temporary differences give rise to a deferred tax liability.
|
| |
|
|
|
|
| |
Transactions that affect the income statement |
| 1. |
Interest revenue is received in arrears and is included in accounting profit on a time apportionment basis but
is included in taxable profit on a cash basis. |
| 2. |
Revenue from the sale of goods is included in accounting profit when goods are delivered but is included in taxable
profit when cash is collected. (note: as explained in B3 below, there is also a deductible temporary difference
associated with any related inventory). |
| 3. |
Depreciation of an asset is accelerated for tax purposes. |
| 4. |
Development costs have been capitalised and will be amortised to the income statement but were deducted in determining
taxable profit in the period in which they were incurred. |
| 5. |
Prepaid expenses have already been deducted on a cash basis in determining the taxable profit of the current or
previous periods. |
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Transactions that affect the balance sheet |
| 6. |
Depreciation of an asset is not deductible for tax purposes and no deduction will be available for tax purposes
when the asset is sold or scrapped. (note: paragraph 15(b) of the Statement prohibits recognition of the resulting
deferred tax liability unless the asset was acquired in a business combination, see also paragraph 22 of the Statement
). |
| 7. |
A borrower records a loan at the proceeds received (which equal the amount due at maturity), less transaction costs.
Subsequently, the carrying amount of the loan is increased by amortisation of the transaction costs to accounting
profit. The transaction costs were deducted for tax purposes in the period when the loan was first recognised.
(notes: (1) the taxable temporary difference is the amount of transaction costs already deducted in determining
the taxable profit of current or prior periods, less the cumulative amount amortised to accounting profit; and
(2) as the initial recognition of the loan affects taxable profit, the exception in paragraph 15(b) of the Statement
does not apply. Therefore, the borrower recognises the deferred tax liability). |
| 8. |
A loan payable was measured on initial recognition at the amount of the net proceeds, net of transaction costs.
The transaction costs are amortised to accounting profit over the life of the loan. Those transaction costs are
not deductible in determining the taxable profit of future, current or prior periods. (notes: (1) the taxable
temporary difference is the amount of unamortised transaction costs; and (2) paragraph 15(b) of the Statement prohibits
recognition of the resulting deferred tax liability) |
| 9. |
[Not used] |
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Fair value adjustments and revaluations |
| 10. |
Financial assets or investment property are carried at fair value which exceeds cost but no equivalent adjustment
is made for tax purposes. |
| 11. |
An enterprise revalues property, plant and equipment (under SSAP 17, Property, Plant and Equipment) but no equivalent
adjustment is made for tax purposes. (note: paragraph 61 of the Statement requires the related deferred tax
to be charged directly to equity). |
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Business combinations and consolidation |
| 12. |
The carrying amount of an asset is increased to fair value in a business combination that is an acquisition and
no equivalent adjustment is made for tax purposes. (note: on initial recognition, the resulting deferred tax
liability increases goodwill or decreases negative goodwill, see paragraph 66 of the Statement). |
| 13. |
Amortisation of goodwill is not deductible in determining taxable profit and the cost of the goodwill would not
be deductible on disposal of the business (note: paragraph 15(a) of the Statement prohibits recognition of the
resulting deferred tax liability). |
| 14. |
Unrealised losses resulting from intragroup transactions are eliminated by inclusion in the carrying amount of
inventory or property, plant and equipment. |
| 15. |
Retained earnings of subsidiaries, branches, associates and joint ventures are included in consolidated retained
earnings, but income taxes will be payable if the profits are distributed to the reporting parent. (note: paragraph
39 of the Statement prohibits recognition of the resulting deferred tax liability if the parent, investor or venturer
is able to control the timing of the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future). |
| 16. |
Investments in foreign subsidiaries, branches or associates or interests in foreign joint ventures are affected
by changes in foreign exchange rates. (notes: (1) there may be either a taxable temporary difference or a deductible
temporary difference; and (2) paragraph 39 of the Statement prohibits recognition of the resulting deferred tax
liability if the parent, investor or venturer is able to control the timing of the reversal of the temporary difference
and it is probable that the temporary difference will not reverse in the foreseeable future). |
| 17. |
An enterprise accounts in its own currency for the cost of the non-monetary assets of a foreign operation that
is integral to the reporting enterprise's operations but the taxable profit or tax loss of the foreign operation
is determined in the foreign currency. (notes: (1) there may be either a taxable temporary difference or a deductible
temporary difference; (2) where there is a taxable temporary difference, the resulting deferred tax liability is
recognised, because it relates to the foreign operation's own assets and liabilities, rather than to the reporting
enterprise's investment in that foreign operation (paragraph 41 of the Statement); and (3) the deferred tax is
charged in the income statement, see paragraph 58 of the Statement). |
| 18. |
[Not used] |
B.
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EXAMPLES OF CIRCUMSTANCES THAT GIVE RISE TO DEDUCTIBLE TEMPORARY DIFFERENCES
All deductible temporary differences give rise to a deferred tax asset. However, some deferred tax assets
may not satisfy the recognition criteria in paragraph 24 of the Statement.
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Transactions that affect the Income Statement |
| 1. |
Retirement benefit costs are deducted in determining accounting profit as service is provided by the employee,
but are not deducted in determining taxable profit until the enterprise pays either retirement benefits or contributions
to a fund. (note: similar deductible temporary differences arise where other expenses, such as product warranty
costs or interest, are deductible on a cash basis in determining taxable profit). |
| 2. |
Accumulated depreciation of an asset in the financial statements is greater than the cumulative depreciation allowed
up to the balance sheet date for tax purposes. |
| 3. |
The cost of inventories sold before the balance sheet date is deducted in determining accounting profit when goods
or services are delivered but is deducted in determining taxable profit when cash is collected. (note: as explained
in A2 above, there is also a taxable temporary difference associated with the related trade receivable). |
| 4. |
The net realisable value of an item of inventory, or the recoverable amount of an item of property, plant or equipment,
is less than the previous carrying amount and an enterprise therefore reduces the carrying amount of the asset,
but that reduction is ignored for tax purposes until the asset is sold. |
| 5. |
Research costs (or organisation or other start up costs) are recognised as an expense in determining accounting
profit but are not permitted as a deduction in determining taxable profit until a later period. |
| 6. |
Income is deferred in the balance sheet but has already been included in taxable profit in current or prior periods. |
| 7. |
A government grant which is included in the balance sheet as deferred income will not be taxable in future periods.
(note: paragraph 24 of the Statement prohibits the recognition of the resulting deferred tax asset, see also
paragraph 33 of the Statement ). |
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Fair value adjustments and revaluations |
| 8. |
Financial assets or investment property are carried at fair value which is less than cost, but no equivalent adjustment
is made for tax purposes. |
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Business combinations and consolidation |
| 9. |
A liability is recognised at its fair value in a business combination that is an acquisition, but none of the related
expense is deducted in determining taxable profit until a later period. (note: the resulting deferred tax asset
decreases goodwill or increases negative goodwill, see paragraph 66 of the Statement). |
| 10. |
Negative goodwill is included in the balance sheet as deferred income and the income will not be included in the
determination of taxable profit. (note: paragraph 24 of the Statement prohibits recognition of the resulting
deferred tax asset). |
| 11. |
Unrealised profits resulting from intragroup transactions are eliminated from the carrying amount of assets, such
as inventory or property, plant or equipment, but no equivalent adjustment is made for tax purposes. |
| 12. |
Investments in foreign subsidiaries, branches or associates or interests in foreign joint ventures are affected
by changes in foreign exchange rates. (notes: (1) there may be a taxable temporary difference or a deductible
temporary difference; and (2) paragraph 44 of the Statement requires recognition of the resulting deferred tax
asset to the extent, and only to the extent, that it is probable that: (a) the temporary difference will reverse
in the foreseeable future; and (b) taxable profit will be available against which the temporary difference can
be utilised). |
| 13. |
An enterprise accounts in its own currency for the cost of the non-monetary assets of a foreign operation that
is integral to the reporting enterprise's operations but the taxable profit or tax loss of the foreign operation
is determined in the foreign currency. (notes: (1) there may be either a taxable temporary difference or a deductible
temporary difference; (2) where there is a deductible temporary difference, the resulting deferred tax asset is
recognised to the extent that it is probable that sufficient taxable profit will be available, because the deferred
tax asset relates to the foreign operation's own assets and liabilities, rather than to the reporting enterprise's
investment in that foreign operation (paragraph 41 of the Statement); and (3) the deferred tax is recognised in
the income statement, see paragraph 58 of the Statement). |
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C.
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EXAMPLES OF CIRCUMSTANCES WHERE THE CARRYING AMOUNT OF AN ASSET OR LIABILITY IS EQUAL TO ITS TAX BASE
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| 1. |
Accrued expenses have already been deducted in determining an enterprise's current tax liability for the current
or earlier periods. |
| 2. |
A loan payable is measured at the amount originally received and this amount is the same as the amount repayable
on final maturity of the loan. |
| 3. |
Accrued expenses will never be deductible for tax purposes. |
| 4. |
Accrued income will never be taxable. |
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Appendix B
Illustrative Computations and Presentation
The appendix is illustrative only and does not form part of the standards. The purpose of the appendix is
to illustrate the application of the standards to assist in clarifying their meaning. Extracts from income statements
and balance sheets are provided to show the effects on these financial statements of the transactions described
below. These extracts do not necessarily conform with all the disclosure and presentation requirements of other
Statements of Standard Accounting Practice.
All the examples in this appendix assume that the enterprises concerned have no transaction other than those described.
Example 1 - Depreciable Assets
An enterprise buys equipment for $10,000 and depreciates it on a straight line basis over its expected useful life
of five years. For tax purposes, the equipment is depreciated at 25% per annum on a straight line basis. Tax losses may be carried back against taxable profit of
the previous five years. In year 0, the enterprise's taxable profit was $5,000. The tax rate is 40%.
The enterprise will recover the carrying amount of the equipment by using it to manufacture goods for resale. Therefore,
the enterprise's current tax computation is as follows:
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