Since the adoption of International Financial Reporting Standards (IFRS) was announced by the federal government in 2010, companies, accounting officers, tax authorities, consultants, accounting software companies etc, in Nigeria, have done their cost effective best to bring themselves up to speed with the requirements of the new standards. It is therefore very easy to forget that feeling of anxiety we all had at the initial stage of conversion and the worries as to whether we were going to get things right.
At this point, lest we relapse into status quo, it would be nice to remind ourselves, at least from the tax perspective, of the rudiments of a typical IFRS based tax returns.
Meeting the filing deadline
The first thing to remember is the self-assessment regulation that was issued in 2012, requiring companies to file their tax returns, not later than the due date of six (6) months after their financial year end. In 2013, the first year of filing IFRS based tax returns, many companies found themselves not meeting up with this deadline for filing due to the complexities of IFRS conversion and the associated tax computations. Many companies had to leverage the 3 months grace period (obtainable upon request) granted by the Federal Inland Revenue Service (FIRS) in its Information Circular on IFRS implementation. That option is still available but only for small and medium scale entities which would be filing their first IFRS based tax returns this year.
Even then, with this option, many companies found themselves being levied interest on payments made after the ‘due date’ (which is still a subject of contention with the tax authorities) even with a written consent from the tax authority for the 3 months extension of filing deadline.
Recall also, that the self-assessment regulations only allows for installment payments, without interest charges, when they are made before the filing deadline. Installment payments can be granted after the filing deadline under the regulations but only to a maximum of 3 installments with interest at the CBN minimum re-discount rate.
Need we mention the Transfer Pricing (TP) Regulations which is now fully effective and under which disclosure and declaration forms are expected to be filed along with the tax returns, and contemporaneous annual TP documentations prepared for submission to FIRS on request?
Would it not be advisable then, for companies with 31 December accounting year end to commence their tax computations processes for the assessment year right now? Once the tax provisions are ready (even if they are based on draft accounts), companies can commence payments in monthly installments until the final accounts are ready for filing, all before the deadline date.
ITAS platform or physical filing?
Secondly, is the question of whether your company would choose to file your tax returns through the new FIRS’ Integrated Tax System (ITAS) e-platform or physically at the FIRS’ tax offices? A choice of the ITAS platform would require additional preparatory actions from the taxpayer. We would discuss the intricacies of the ITAS platform in details in our next newsletter.
Have you really built enough capacity in IFRS?
Thirdly, is the question of whether your company has truly built the required capacity in the area of IFRS? Another is whether the capacity built initially in the rush of the excitement of the new standards adoption has been watered down by other fiscal and business challenges. If the latter is the case, then efforts would need to be made by your company to renew training in this field and continuously engage the services of professionals on an advisory capacity.
From an IFRS compliance perspective, it is either the financials are IFRS compliant or they are not. The Financial Reporting Council (FRC) and other regulators are interested in the fairness and completeness of the new sets of accounts.
Recently, in October 2014 precisely, the FRC guidelines/ regulations for inspection and monitoring of reporting entities was approved by the honorable minister of commerce. The guidelines/regulations gazette is available for download on FRC’s website- www. financialreportingcouncil.gov.ng. The aim of the guideline/regulation as contained in the gazette is ‘the effective implementation of Nigeria’s accounting, auditing, actuarial and valuation standards and code of corporate governance. FRC is set to carry out inspections and investigations on companies to ascertain their compliance levels with the standards and impose sanctions accordingly for categorized non-compliance levels.
Tax accounting and disclosures under IFRS
As a reminder, we would go through the tax accounting and disclosure requirements under IFRS.
It could be said that, of all the IFRS, tax accounting governed by IAS 12 (International Accounting Standards 12) and accounting for financial instruments are the most complex. The IFRS require comprehensive disclosures for tax with a consistent story throughout the financial statements.
Taxes relating to continuing and discontinued operations have to be accounted for separately, current and deferred taxes have to be computed and disclosed for items in profit or loss as well as other comprehensive income and equity, respectively. A decision must be taken as to whether taxes are to be offset or not in the statement of financial position.
IAS 1 also require taxes to be presented separately for items which are recyclable into profit or loss (such as available for sale reserves, cash flow hedges etc.) and those which are not recyclable to profit or loss on realization (such as actuarial gains or losses on pension obligations and revaluation surpluses).
The effective tax rate must also be verifiable and reconcilable to the components of tax expense.
Tax disclosures on the statement of cash flows should be consistent with the tax disclosures in other sessions of the financial statements.
The full note on tax disclosures under IFRS could spread into at least 4 full A4 pages as against the half page note under Nigerian GAAP (Generally Accepted Accounting Principles). Tax working papers and reconciliations would also take several excel worksheets depending on the size of the company, asset/liability portfolio and volume/nature of transactions.
Calculating deferred and current taxes
Before now, few tax practitioners have computed deferred taxes and/or recognized most of the temporary differences existing in assets and liabilities.
Some have recognized only temporary differences arising from fixed assets; some have taken cognizance of timing differences alone, while others neither recognized temporary differences nor computed deferred taxes.
Under IFRS (IAS 12), temporary differences existing in all assets and liabilities must be computed and tested for recognition. They would be recognized when they impact either accounting or taxable profits and when (except under business combinations) the asset/ liability is not at its initial recognition stage.
Current and deferred taxes together are known as income tax expense and should be compared with the profit before tax to arrive at the effective tax rate (ETR). The ETR figure must also be consistent with the story told by the financial statements as a whole. Where there are exceptional items swaying the ETR, full disclosures of the originating factors must be made.
As against NGAAP, where deferred taxes are recognized on timing differences, IFRS requires computation of deferred tax based on temporary differences (determined by this equation: ‘carrying amount – tax base’). Temporary differences can either be taxable (giving rise to deferred tax liability) or deductible (giving rise to deferred tax assets).
Another major difference between the practice under NGAAP and that under IFRS bothers on recognition of deferred tax assets.
Recognition of deferred tax assets
Under NGAAP, deferred tax assets are hardly recognized or recognized in full without giving consideration to its recoverability in terms of future expectations of taxable profits and/or taxable temporary differences.
Under IFRS, recognition is allowed when it is ‘more likely than not’ (mostly given a percentage rating of 50 and above) that there will be taxable profits in the ‘future’ against which the deferred tax assets can be offset.
Deferred tax assets emanate not only on deductible temporary differences but also on unused capital allowances, unutilized tax losses, withholding tax credits and any other tax assets including those arising from business combinations.
The one challenge here is, “how does one determine what happens in future with absolute accuracy?” Past financial forecasts with eventual positive outcomes may be relied on, profit trends and existing taxable temporary differences, board resolutions and firm commitments for business restructuring and tax planning to generate taxable profits may also suffice as verifiable determinants of future taxable profits.
Group tax disclosures
Unlike the NGAAP, IFRS provides for deferred tax accounting in consolidated accounts. The aim is to achieve consistency in consolidated tax balances as well as in individual company accounts. An entity should recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements, except to the extent that both of the following conditions are satisfied:
a) The parent, investor, joint venturer or joint operator is able to control the timing of the reversal of the temporary difference; and
b) It is probable that the temporary difference will not reverse in the foreseeable future.
To this effect, all ‘outside’ and ‘inside’ basis differences must be recognized and accounted for appropriately. Outside basis differences would usually result in future dividends. Therefore, deferred tax provisions must be recognized on payable dividends (reversible temporary differences) at the rate of 10% (final tax on franked investment income). Taxes (especially deferred taxes) related to intercompany balances must also be accounted for on elimination and the group ETR should be computed and disclosed.
Other tax accounting intricacies to be considered
Financial instruments: companies must consider the challenges involved in tax accounting for financial instruments.
This is a very complex area of accounting under IFRS in which there are only few experts. While determining temporary differences relating to financial instruments, attention must be paid to classes of financial instruments, fair valuation and amortization adjustments, and accounting for compound financial instruments, methods of recovery and tax consequence of recovery. And the relevant question is, would they be subjected to company income tax or capital gains tax? In determining the tax implications, most importantly, substance would have to be considered over its legal form.
Fixed assets (commonly referred to as property, plant and equipment- PPE): There are accounting requirements for initial recognition on transition, de-recognition, replacement in parts, impairments, overhaul, exchange of similar and dissimilar assets, imputed costs, revaluations (where this is elected) and fair valuations (for investment properties only).
The local tax laws would drive tax accounting in these regard. Most importantly, tax consequences arising from the means (use or sale) through which the assets are realized at the time, would apply.
Fair valuations: the concept of fair valuation is prevalent under IFRS but tax practitioners are aware that fair values are not recognized by the local tax laws.
These fair values also represent the amounts that these items are worth if they were sold at their present conditions. Bearing these in mind, deferred taxes relating to fair valuations should be evaluated and recognized where applicable.
For instance, fair values relating to ‘below market interest rate’ or ‘interest free loans’ would not be realized even after the duration of the loan. Temporary differences relating to them are only disclosed to enhance completeness of the financial statements.
Preparing and keeping documentation
A very challenging task, which must be done though, is keeping the documentation relating to IFRS conversion and accounting. The tax man would like to have verifiable bases for the tax treatment of transactions in the IFRS tax computations. Documents relating to valuations, amortizations, implicit interest and finance cost computations, transition adjustments, accounting policies affecting temporary differences, schedule of tax reconciliation from NGAAP to IFRS, professional opinion of valuers and fees paid, bases of componentization adjustments, bases of revenue and recognition etc. are to be kept to support the tax computations and tax audits.
Audit of tax provisions
Finally, and not at all the least consideration, is the fact that every company’s IFRS accounts would be audited and an opinion rendered. For listed entities with 31 December accounting year end, the auditors should be on field now, auditing their IFRS accounts which would be published and also subjected to thorough scrutiny by the FRC and other regulators. The auditors would therefore seek to perform a thorough job in order to render an appropriate audit opinion.
For this reason, it is important that companies adequately comply with the requirements of the standards regarding tax provisioning and tax accounting (i.e. IAS 12).
FIRS’ Information Circular of IFRS implementation
The Federal Inland Revenue Service (FIRS) did substantial work in 2012 in preparing an Information Circular that would continue to serve as a guide to tax officers and practitioners in preparing tax computations based on IFRS accounts.
It contains details of:
• approved tax treatments of transactions under IFRS
• documents and schedules to accompany tax returns
• new tax computations and filing requirements including filing of deferred tax computations and reconciliation of current and deferred taxes.
No doubt, IFRS is a difficult topic, and not many practitioners are willing to go the extra mile of reading volumes of educational materials that would guarantee mastery of this topic. Worse still, these standards, as well as the educational literatures are reviewed and updated frequently to capture the international current trends in business. Keeping up with the knowledge requirement is a task which the average business man would not desire to venture into.
Nevertheless, we have found ourselves in a country where accounting based on these standards is mandatory. And like every other business challenge which we have tackled and surmounted, the entrepreneur in us, together with the support of our tax and accounting advisers, would do what it takes to comply with the standards together with the associated tax returns.