International Financial Reporting Standards (IFRS) tax implication - Part II
24 February 2014
Posted by: Author: All Africa
Author: All Africa
The current practice for determining contract revenue by FIRS shall be sustained. Only costs attributable to certified work done shall be allowed for tax purposes in line with provisions of CITA. Other incomes in the nature of incentive payments would be taxed accordingly.
The expected loss recognized as an expense shall be disallowed until the loss is actually incurred.
Interest received on advanced payment placed in an interest yielding account shall be treated as other income and be subjected to tax at the time it is earned.
Retention income shall be subjected to tax at the time it is earned.
Future cost shall not be allowable as expense for tax purposes
IAS 12 - Income taxes
Taxpayers shall furnish FIRS with all deferred tax disclosures as contained in the standard.
IAS 16 - Property, Plant and Equipment (PPE)
Land is not a qualifying capital expenditure under Schedule 2 of CITA, thus capital allowance is not claimable on land. Capital allowance claimed on land in error in prior years shall be adjusted for tax accordingly.
The entities should provide schedule of how they apportioned the cost between land and building.
Separation of historical cost of the land and building shall be at the proportion of the current market value of the land to building except where the historical cost can be easily ascertained.
Deferred Payment for PPE:
Capitalised cost of PPE shall be based on the cost indicated on the invoice. Any imputed interest element charged as finance cost in the income statement shall be disallowed.
The company should provide the details of the imputed interest included in the cost of asset for necessary adjustments. Cost of employee benefits directly attributable to the construction or acquisition of the PPE shall be allowed for inclusion in the cost of the PPE.
The schedule of such attributable staff costs should be provided.The cost of dismantling and removing the item of PPE and site restoration:
Provision/estimate of cost of abandonment, dismantling, removing the item of PPE and site restoration shall not be allowed for capitalization with PPE. The cost shall only be allowable for tax purposes when it has been incurred, or if it is set aside in a funded sinking fund, provided that:
i. Any company that has claimed deduction on any amount set aside for abandonment, dismantling, removal of items of PPE and site restoration shall not claim further deduction upon incurring the relevant expenditure except on amounts set aside for that purpose;
ii. Any amount claimed in excess of that expended for the abandonment, removal of items of PPE and site restoration shall be treated as taxable income.
Exchange of Assets:
a. Where there is exchange of dissimilar assets, the old asset shall be treated as a disposal with the sales proceed being the market value (price at arm's length) of the asset. Balancing charge/allowance, Value Added Tax and Capital Gains Tax shall be computed accordingly.
b. The cost of the new asset for capital allowance purposes shall be the market value of the old asset plus any cash consideration included in the exchange.
a. Cost and Tax Written Down Value (TWDV) is the basis of capital allowance computation. FIRS shall continue to disregard all revaluation of PPE. Any revaluation surplus shall not be taxable while deficit shall not be an allowable deduction.
b. Professional fees and valuation expenses relating to revaluation of PPE shall not be allowed for income tax purposes. These expenses should be separately disclosed. Where such expense is incurred prior to the sale, it shall be deductible from chargeable gains under Capital Gains Tax.
Schedule/breakdown of componentized PPE inclusive of the basis for determining the value of each component shall be filed with the FIRS as it shall form the basis of capital allowance claims and applicable rates.
FIRS shall rely on Schedule 2 of the CITA in granting capital allowance on componentized PPE. For a component to be significant, it must be 20% and above of the total cost of the asset.
Taxpayers shall provide reconciliation between the total cost of PPE under GAAP and componentized cost of same PPE under IFRS for first time adopters.
Historical cost of components shall be provided by the entities.
Depreciation of land used as quarries and landfill: The Second Schedule of CITA does not recognise any form of land as qualifying capital expenditure therefore capital allowances will not be granted until the relevant tax laws are amended.
Spare Parts and Servicing Equipment:
Stock of spare parts and servicing equipment should continue to be carried as inventory and expensed when consumed e.g. returnable containers. Where replacement results in improvement, the cost shall be added to the TWDV of the PPE while the carrying cost of the replaced part that was expensed in line with IFRS shall be added back in arriving at the assessable profit. Replacement cost shall be treated as allowable deduction if it does not result into improvement.
For assets reclassified to operating lease, paragraph 18(1) of Schedule Two of CITA which relates to rights to claim capital allowances on operating lease shall apply.
Also, FIRS Information Circular No. 2010/01 dated 12th April, 2012 (Guidelines On Tax Implications of Leasing) which relates to VAT and WHT shall apply. The lease/rental payments to be recognised for tax purposes each year shall be the amount incurred/realised.
Where land is on lease, the rental shall be allowed for tax purposes in line with Section 24 of CITA.
Lease of building: Where the building is on operating lease or finance lease, our existing tax treatment (FIRS Information Circular No. 2010/01 dated 12th April, 2012: Guidelines on Tax Implications of Leasing) shall be applied.
Sale and Leaseback Transaction that Results in a Finance Lease:
The sales and leaseback transactions shall be treated separately for tax purposes and relevant tax provisions shall apply. This position is based on the provisions of FIRS Information Circular on Lease of 12th April, 2010 (Guidelines on Tax Implications of Leasing).
The disposal shall be treated in line with the provision of Schedule 2 of CITA on capital allowance, balancing allowance and balancing charge.
Gain or loss on disposal shall be subjected to the provision of Capital Gains Tax Act. The finance lease shall be treated separately in line with the above guideline on finance lease.
Yearly amortisation of profit on disposal into profit or loss shall be treated as non-taxable income.
Sale and Leaseback Transaction that Results in an Operating Lease:
The existing tax treatment on disposal, operating lease, VAT and Capital Gains Tax shall be applied on the transaction. For tax purposes, the higher of sales price and market price shall be taken as the disposal value.
The actual lease rentals paid shall be adopted for tax purposes.
IAS18 - Revenue
In the case of deferred consideration where imputed interest is embedded in sales revenue, the entire value on the invoice will be subjected to tax. However: Where the interest element is clearly shown and separated on the invoice, VAT should not apply to the interest portion.
Where the interest element is clearly shown and separated on the invoice, the interest element shall suffer WHT at the rate of 10 percent.
For income tax purposes, both the sales and financial/interest income constitute taxable income. The taxpayer must always disclose clearly the components of deferred consideration.
The turnover to be subjected to tax treatment under loyalty program shall be the payments made for both the consumed and deferred portion of the services. Revenue shall be recognized for tax purposes at the point of realization. VAT will be charged on total invoice value, whether consumed or deferred. Where there is exchange of dissimilar goods, the revenue shall be separately treated for tax purposes. Where there is exchange of similar goods or services, the exchange will not be regarded as a transaction which generates income for tax purposes. The transaction will not be viewed as a case.
This article first appeared allafrica.com.