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| Home > Accounting Standards > Interpretations of Financial Reporting Standards 2003 > INT FRS 25 |
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Interpretation of Financial Reporting Standard
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Income Taxes - Changes in the Tax Status of an Enterprise or its Shareholders |
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Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items. |
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Reference: FRS 12, Income Taxes |
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ISSUE |
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- A change in the tax status of an enterprise or of its shareholders may have consequences for an enterprise by increasing or decreasing its tax liabilities or assets. This may, for example, occur upon the public listing of an enterprise's equity instruments or upon the restructuring of an enterprise's equity. It may also occur upon a controlling shareholder's move to a foreign country. As a result of such an event, an enterprise may be taxed differently; it may for example gain or lose tax incentives or become subject to a different rate of tax in the future.
- A change in the tax status of an enterprise or its shareholders may have an immediate effect on the enterprise's current tax liabilities or assets. The change may also increase or decrease the deferred tax liabilities and assets recognised by the enterprise, depending on the effect the change in tax status has on the tax consequences that will arise from recovering or settling the carrying amount of the enterprise's assets and liabilities.
- The issue is how an enterprise should account for the tax consequences of a change in its tax status or that of its shareholders.
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CONSENSUS |
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| 4. |
A change in the tax status of an enterprise or its shareholders does not give rise to increases or decreases in amounts recognised directly in equity. The current and deferred tax consequences of a change in tax status should be included in net profit or loss for the period, unless those consequences relate to transactions and events that result, in the same or a different period, in a direct credit or charge to the recognised amount of equity. Those tax consequences that relate to changes in the recognised amount of equity, in the same or a different period (not included in net profit or loss), should be charged or credited directly to equity. |
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BASIS FOR CONCLUSIONS |
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| 5. |
FRS 12.56 requires current and deferred tax to be included in the net profit or loss for the period, except to the extent the tax arises from a transaction or event that is recognised directly in equity, in the same or a different period, (or arises from a business combination that is an acquisition). FRS 12.61 requires that current and deferred tax 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. |
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FRS 12.60 identifies examples of circumstances in which a transaction or event is recognised directly in equity as is permitted or required by another Financial Reporting Standard. All of these circumstances result in changes in the recognised amount of equity through recognition of a credit or charge directly to equity. |
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FRS 12.63 explains that where the tax base of a revalued asset changes, any tax consequence is recognised directly in equity only to the extent a related accounting revaluation was or is expected to be recognised directly in equity (revaluation surplus). |
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| 8. |
Because tax consequences recognised directly in equity must relate to a transaction or event recognised directly in equity in the same or a different period, the cumulative amount of tax charged or credited directly to equity can be expected to be the same amount that would have been charged or credited directly to equity if the new tax status had applied previously. FRS 12.61(b) acknowledges that determining the tax consequences of a change in the tax rate or other tax rules that affects a deferred tax asset or liability and relates to an item previously charged or credited to equity may prove to be difficult. Because of this, FRS 12.61 suggests that an allocation may be necessary. |
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Effective Date: INT FRS 25 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40. |
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