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IAS 12 (revised) “Income Taxes” requires an enterprise to provide for deferred tax in full for all deferred tax liabilities with only limited expectations. The...

      

IAS 12 (revised) “Income Taxes” requires an enterprise to provide for deferred tax in full for all deferred tax liabilities with only limited expectations. The original IAS 12, and the equivalent Kenyan Accounting Standard, allowed an enterprise not to recognize deferred tax assets and liabilities where there was reasonable evidence that timing differences would not reverse for some considerable period ahead; this was known as the partial provision method.
The original IAS 12 did not refer explicitly to fair value adjustments made on a business combination and did not require an enterprise to recognize a deferred tax liability in respect of asset revaluations. The revised IAS 12 now requires deferred tax adjustments for these items and classifies them as temporary differences.
Explain why the IASC decided to require recognition of the deferred tax liability for all temporary differences (with certain exceptions) rather than allowing the partial provision method.

  

Answers

Wilfred
Under the partial provision method, deferred tax assets and liabilities were recognised where there was reasonable evidence that timing differences would reverse in the near future. The original IAS 12 permitted an enterprise not to recognize deferred tax assets and liabilities where there was reasonable evidence that timing differences would not reverse for considerable period ahead. IAS 12 revised requires an enterprise to recognize a deferred tax liability or (subject to certain conditions) assets for all temporary differences with certain exceptions. IAS 12 is consistent with the principles which underlie the recognition of assets and liabilities in the balance sheet as laid down in the framework for the preparation and presentation of financial= statements. As per the framework an asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise. A liability is a present obligation of the enterprise arising from past events the statement of which is expected to result in an outflow of resources embodying economic benefits.
The framework further provides the recognition criteria for assets & liabilities;
- If it is probable that any future economic benefits associated with the asset or liability
will fall to or from the enterprise.
- The asset or liability has a value that can be measured with reliability
The partial provision approach regards only the limited future of the liability rather than the complete life-span of the liability. This is an adhoc position rather than one based on the principles laid down in the framework for recognition of liabilities. The requirement of IAS 12 on the other hand, is consistent with the principles which underlie the recognition of assets and liabilities in the balance sheet as laid down in the framework for the preparation and presentation of financial statements
Wilfykil answered the question on February 8, 2019 at 08:11

Next: Calculate The current tax account, deferred tax account and revaluation account for the years 1999 and 2000
Previous: Discuss the reasons why IAS 12 (revised) requires enterprises to provide for deferred taxation on revaluations of assets and fair value adjustments on business combination.

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