Difference Between IAS 12 Under Going Concern and IAS 12 Under Liquidation

Introduction

IAS 12, “Income Taxes,” prescribes the accounting treatment for income taxes, including the recognition of current and deferred tax assets and liabilities. This report explores the key differences in applying IAS 12 under a going concern assumption and during liquidation.

IAS 12 Under Going Concern

Core Principle

Under IAS 12, the core principle is to account for current and deferred tax consequences of transactions and events recognized in the financial statements. This includes recognizing current tax liabilities (or assets) for the estimated taxes payable (or recoverable) for the current and prior periods and deferred tax liabilities (or assets) for the future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their tax bases.

Current Tax

Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. It is calculated using the tax rates that have been enacted or substantively enacted by the end of the reporting period.

Example: A company with a taxable profit of R1,000,000 and a tax rate of 30% would recognize a current tax liability of R300,000 (R1,000,000 * 30%).

Deferred Tax

Deferred tax is recognized for all temporary differences between the carrying amounts of assets and liabilities in the financial statements and their corresponding tax bases. Deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized for deductible temporary differences, carryforward of unused tax losses, and carryforward of unused tax credits to the extent that it is probable that future taxable profit will be available against which they can be utilized.

Example: A company recognizes a deferred tax liability of R100,000 for taxable temporary differences arising from accelerated tax depreciation on its property, plant, and equipment.

Measurement

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted by the end of the reporting period.

Example: A company expects to reverse its deferred tax liability in two years when the tax rate will be 25%, and measures the deferred tax liability accordingly.

Recognition of Deferred Tax Assets

Deferred tax assets are recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized. This involves a careful assessment of future profitability and tax planning strategies.

Example: A company recognizes a deferred tax asset of R50,000 for carryforward tax losses, based on its projection of future taxable profits.

IAS 12 Under Liquidation

Core Principle

When an entity is in liquidation, the focus shifts from long-term tax planning and utilization of tax assets to immediate realization and settlement of tax liabilities. The recognition and measurement of current and deferred taxes are impacted by the liquidation process.

Current Tax

Current tax calculations remain similar to the going concern basis, but the timing and certainty of tax payments may be affected by the liquidation process.

Example: A company in liquidation with a taxable profit of R500,000 and a tax rate of 30% would still recognize a current tax liability of R150,000 (R500,000 * 30%), but the timing of payment may be expedited due to liquidation proceedings.

Deferred Tax

The recognition of deferred tax assets and liabilities may change significantly in liquidation. Deferred tax assets may no longer be recognized if it is not probable that future taxable profits will be available to utilize the temporary differences.

Example: A company in liquidation that previously recognized a deferred tax asset of R100,000 for carryforward tax losses may derecognize this asset if it is no longer probable that sufficient taxable profits will be generated to utilize the losses.

Measurement

Deferred tax liabilities may still be recognized and measured based on the expected timing of reversal, but liquidation often leads to an accelerated reversal of temporary differences.

Example: A company in liquidation may have to recognize the immediate settlement of deferred tax liabilities, impacting the timing and amount of the recognized liability.

Recognition of Deferred Tax Assets

Deferred tax assets are less likely to be recognized in liquidation due to the reduced probability of future taxable profits. Entities must carefully assess the recoverability of these assets under the new circumstances.

Example: A manufacturing company in liquidation may derecognize deferred tax assets related to tax credits and loss carryforwards if it concludes that there will be insufficient future taxable profits to utilize them.

Reassessment of Tax Positions

Entities in liquidation must reassess all tax positions, including uncertain tax positions, to ensure that all potential tax liabilities are recognized and measured accurately.

Example: A company in liquidation reassesses its uncertain tax positions and recognizes additional tax liabilities for potential tax disputes that may arise during the liquidation process.

Conclusion

The application of IAS 12 under a going concern assumption and during liquidation involves the same fundamental principles but different practical considerations. Under going concern, the focus is on long-term tax planning and the utilization of deferred tax assets. In contrast, during liquidation, the emphasis shifts to the immediate realization and settlement of tax liabilities, with a more conservative approach to recognizing deferred tax assets. Entities must carefully reassess their tax positions and adjust their tax balances to ensure accurate and transparent financial reporting during the liquidation process. This adjustment ensures that stakeholders receive a true and fair view of the entity’s financial position and performance during liquidation.

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