1. International Financial Reporting Standards The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org Quiz: Income taxes Joint World Bank and IFRS Foundation train the trainers workshop hosted by the ECCB, 30 April to 4 May 2012 The views expressed in this presentation are those of the presenter, not necessarily those of the IASB or IFRS Foundation.

2. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 2 Quiz: income taxes Question 1: Entity has tax loss 30,000 in 20X8 and taxable profit 20,000 in 20X7. Tax rate 40%. Tax loss can be carried back one prior year only (no carryforward). Correct entry? a. Debit Current tax asset 8,000 Credit Current tax income 8,000 b. Debit Current tax asset 12,000 Credit Current tax income12,000 c. Debit Current tax expense 8,000 Credit Current tax liability 8,000 d. Debit Deferred tax asset 8,000 Credit Deferred tax income 8,000 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

3. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 3 Quiz: income taxes Question 1: Tax loss 30,000 in 20X8 and taxable profit 20,000 in 20X7. Tax rate 40%. Tax loss carried back one prior year only. Correct entry? a. Debit Current tax asset 8,000 Credit Current tax income 8,000 b. Debit Current tax asset 12,000 Credit Current tax inco me 12,000 c. Debit Current tax expense 8,000 Credit Current tax liability 8,000 d. Debit Deferred tax asset 8,000 Credit Deferred tax income 8,000 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

4. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 4 Quiz: income taxes Question 2: Entity has tax loss 30,000 in 20X8. Projected taxable profit for 20X9 is 20,000. Tax rate 40%. Tax loss can be carried forward one year only (no carryback). Correct entry? a. Debit Current tax asset 8,000 Credit Current tax income 8,000 b. Debit Current tax asset 12,000 Credit Current tax income12,000 c. Debit Current tax expense 8,000 Credit Current tax liability 8,000 d. Debit Deferred tax asset 8,000 Credit Deferred tax income 8,000 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

5. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 5 Quiz: income taxes Question 2: Entity has tax loss 30,000 in 20X8. Projected taxable profit for 20X9 is 20,000. Tax rate 40%. Tax loss can be carried forward one year only (no carryback). Correct entry? a. Debit Current tax asset 8,000 Credit Current tax income 8,000 b. Debit Current tax asset 12,000 Credit Current tax inco me 12,000 c. Debit Current tax expense 8,000 Credit Current tax liability 8,000 d. Debit Deferred tax asset 8,000 Credit Deferred tax income 8,000 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

6. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 6 Quiz: income taxes Question 3: At 31/12/X2 entity has an interest receivable CU4,000 that will be taxable in X3 when received in cash. Tax rate 20% first 500,000 income and 30% on excess. Taxable profit in X2 = 450,000. Estimated taxable profit X3 = 550,000. What is deferred tax liability 31/12/X2 for receivable? a. 1,200 b. 1,000c. 940 d. 836 e. 800 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

7. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 7 Quiz: income taxes Ques. 3: What is deferred tax liability 31/12/X2 for receivable? a. 1,200 b. 1,000c. 940 d. 836* e. 800 Estimated effective tax rate = [(500,000 × 20%) + (50,000 × 30%)] ÷ 550,000 = 115,000 ÷ 550,000 = 20.91%. 4,000 × 20.91% = 836 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

8. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 8 Quiz: income taxes Question 4: Tax rate is 30% on operating profit, 0% on capital gains. In 20X1 entity has pre-tax operating profit 50,000 and gain on sale of an asset of 5,000. Entity believes gain is capital gain, but small possibility (estimated 20%) that tax authority says it is operating. What is current tax liability at 31/12/X1? a. 16,500 b. 16,200 c. 15,300 d. 15,000 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

9. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 9 Quiz: income taxes Question 4: What is current tax liability at 31/12/X1? a. 16,500 b. 16,200 c. 15,300 d. 15,000 IAS 12 is silent on the treatment of uncertain tax positions. One way of treating the uncertain tax positions is to use probability weighted amounts: CU50,000 x 30% = CU15,000 tax on oper. profit (CU5,000 x 80% x 0%) + (CU5,000 x 20% x 30%) = CU300 tax on capital gain © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

10. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 10 Quiz: income taxes Ques. 5: Which is the correct use of discounting in measuring income tax assets and liabilities? Choice Current tax assets and liabilities Deferred tax assets and liabilities a DiscountedNot Discounted b Discounted c d Not Discounted

11. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 11 Quiz: income taxes Ques. 5: Which is the correct use of discounting in measuring income tax assets and liabilities? Choice Current tax assets and liabilities Deferred tax assets and liabilities a DiscountedNot Discounted b Discounted c d Not Discounted

12. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 12 Quiz: income taxes Question 6: Tax year ends 31 December. By 30 September entity must pay provisional tax based on prior years taxable profit. Tax rate is 30%. For 20X4 taxable profit was 50,000. Consequently, on 30/09/20X5 entity paid 15,000 toward 20X5 taxes. Taxable profit for 20X5 = 40,000. What is tax expense for 20X5? What is current tax asset at 20X5? What journal entry should be made at 31/12/X5? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

13. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 13 Quiz: income taxes Question 6: Tax expense 20X5: 30% x 40,000 = 12,000 Current tax asset at 31/12/20X5: 15,000 paid minus 12,000 owed. Tax asset is a receivable from the tax authority. Journal entry at 31/12/20X5: Debit current tax asset 3,000 Credit tax expense*3,000 *Assumes that on 30/09/20X5 the debit for the 15,000 payment was to tax expense. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

14. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 14 Quiz: income taxes Question 7: Entity A purchased an item of PPE on 1 January 20X1 for CU1,000. The estimated useful life of the PPE is 10 years and the residual value was estimated to be zero. These estimates have not changed. The tax authorities in the jurisdiction in which Entity A operates grant allowances over five years for such PPE. The applicable tax rate is 30 per cent. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

15. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 15 Quiz: income taxes Question 7 continued : At 31 December 20X1, the deferred tax balance and profit or loss effect are: a. Liability of CU30, income of CU30 b. Asset of CU30, income of CU30 c. Liability of CU30, expense of CU30 d. Asset of CU30, expense of CU30 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

16. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 16 Quiz: income taxes Question 7 continued : At 31 December 20X1, the deferred tax balance and profit or loss effect are: a. Liability of CU30, income of CU30 b. Asset of CU30, income of CU30 c. Liability of CU30, expense of CU30 d. Asset of CU30, expense of CU30 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

17. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 17 Quiz: income taxes Question 8: The facts are the same as Question 7. On 31 December 20X1, Entity A revalued the asset to CU1,300. What journal entry should be processed in the financial records of Entity A to account for the tax effect of the revaluation? © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

18. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 18 Quiz: income taxes Question 8: Dr AssetPPE CU400 Cr IncomeOCI: revaluation gain CU280 Cr Deferred tax liability CU120 CU1,300 revalued amount – CU900 previous carrying amount = CU400. CU400 increase in carrying amount x 30% = CU120 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

19. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 19 Quiz: income taxes Question 9: The facts are the same as Question 8. What journal entry should be processed in the financial records of Entity A to account for the tax effect of the 20X2 depreciation of the PPE? The estimates of estimated useful life and residual value remain unchanged. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

20. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 20 Quiz: income taxes Question 9: Dr Expenseprofit or loss: depreciation CU144 Cr AssetPPECU144 CU1,300/9 years = CU144 Dr Expenseprofit or loss: deferred tax CU17 Cr Deferred tax liabilityCU17 (CU144 accounting depreciation less CU200 tax depreciation) x 30% = CU17 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

21. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 21 Quiz: income taxes Question 10: Entity A owns a piece of land classified as PPE. The land is not depreciated and is measured using the revaluation model in IAS 16. On 1 January 20X1 the entity bought the land for CU1,500 (ie historical cost). On 31 December 20X1 the land was revalued to CU2,000. The applicable tax rate for operating profits is 30%. Proceeds on sale in excess of historical cost are taxed only at 15% © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

22. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 22 Quiz: income taxes Question 10 continued : At what rate should the tax consequences of the revaluation of the land be measured? a. 30 per cent b. 15 per cent c. No tax consequences as the land is a non- depreciable asset © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

23. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 23 Quiz: income taxes Question 10 continued : At what rate should the tax consequences of the revaluation of the land be measured? a. 30 per cent b. 15 per cent c. No tax consequences as the land is a non- depreciable asset Reason: the land can only be recovered through sale. It is not consumed in the process of generating income. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

24. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 24 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation. © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org

25. © 2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org 25 The requirements are set out in International Financial Reporting Standards (IFRSs), as issued by the IASB at 1 January 2012 with an effective date after 1 January 2012 but not the IFRSs they will replace. The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise. 25 © IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org