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Tax disclosures and IFRS - part I

Frank Imming en Patrick van Gerven

The holiday period is over; we are working our way towards the final two quarter closures of the year. The compulsory disclosures to the financial statements is an important element. Which disclosures are relevant when we look at IFRS? And how do you deal with this properly?

The disclosure notes are to provide clear information to the readers of the financial report, in order to make sure they interpret the reported figures correctly.

Proper explanatory notes are most important in a complex area such as income tax reporting. In this blog and in several upcoming blogs, we will focus on a few specific requirements related to IFRS-related tax disclosures, as described in IAS 12. We will kick off with tax losses and temporary differences.

Tax losses

Many companies have incurred losses which can be carried forward for settlement against future profits. Depending on expectations, these losses represent a value by ways of a deferred tax asset.

In order to properly include the disclosures about tax losses, you need understanding of:

  • The status of the available tax losses per company
  • Local legislation concerning these losses, for example regarding expiry or limited settlement
  • The current valuation of tax losses in the balance sheet
  • Information about the reasons why the tax losses are valued or not
  • Movements in the balances of tax losses, including those as a result of usage, allocation, corrections after filing the tax return – the so-called ‘return to accrual’-, expiry and changes in legislation
Temporary differences

Taxable and deductible temporary differences between the carrying and tax values generally result in taxes to be paid or to be recovered in future reporting years. Every type of temporary difference must be disclosed separately in the annual accounts. You can do this, for example, by showing the movement schedule of deferred taxes per underlying temporary difference. This explanation requires a detailed analysis of all these items.

In addition, the expiration of temporary differences in future years is also becoming increasingly important, mainly due to the trend in legislative changes in Europe. More and more countries are introducing a gradual adjustment of the tax rate. For example, in the coming years the tax rates in the UK, Belgium and France will change in small steps. It is exactly for this reason that it is important to gain insight into the course of the temporary differences in the following reporting years. This way you can present and explain the deferred tax on the balance sheet against the correct rate.

Avoid surprises!

Drawing up a correct and complete disclosures to the figures is an important part of the financial statements and should not be underestimated. It requires a lot of insight and a thorough analysis of the underlying information.

It usually takes a lot of time to get the relevant information out of the organization. Try to make good use of the coming months and start collecting the information in time. Preparing well now prevents you from encountering surprises at the end of the year!