Deferred tax

Deferred tax assets (deferred from Latin latens = hidden) are hidden tax burdens or benefits, which have resulted in the valuation of assets or liabilities between the tax balance and trade balance due to differences in approach and / or and the expected future financial years degrade, that is in the future lead to differences between tax and commercial balance sheet profits. Deferred tax assets, future tax benefits (in future tax deduction higher profit potential), deferred taxes represent the future tax expense ( tax higher future earnings potential).

2.1 General
2.2 Liability Method
2.3 Deferral Method
2.4 Active vs. deferred tax liability

3.1 General
3.2 Timing Concept
3.3 temporary concept

Formation

Generally

Differences in the recognition or measurement of assets or liabilities come about by the different stated purpose of tax and commercial law accounting. Companies in Germany have to create a balance of trade in accordance with the provisions of the Commercial Code. This is the calculation of the profit distribution and the information of internal and external addressees (management, shareholders, creditors, etc., so-called stakeholders). In contrast, the determination of taxable income used to determine the basis for taxation. This is usually derived by various adaptations of the balance of trade ( § 60 para 2 of the Income Tax ) or done by setting up a separate tax accounts.

The different purpose-setting arise at points different balancing rules in trade law and tax law.

While commercial law to account gently for the purpose of determining the amount of a ( reasonable ) distribution of income for the Protection of creditors or for the purpose of informing stakeholders gain fluctuations ( volatility ) that are purely based accounting perspective, should be avoided whenever possible, are tax (special) provisions regularly politically motivated. This is clear in the case of the evaluation of fixed assets depreciation: to avoid volatility would prefer straight-line depreciation ( unless the " actual conditions " [§ 264 paragraph 2 HGB ] to do so), however, tax act degressive depreciation as a tax deferral ( subsidy ).

Mathematically, deferred taxes arise from the juxtaposition of the trade balance with the tax balance sheet, their differences are valued at the expected future tax rate.

Historical development

In Anglo-Saxon countries, there is no link between the commercial and tax balance sheet in the form of the German Maßgeblichkeitsprinzips. Therefore, the first time a concept was developed to deferred taxes in the United States. Important steps in this direction were here by the American Institute of Certified Public Accountants ( AICPA ) issued Opinion No.. 11 in 1967.

At the international level, the IASC has decided to IAS 12 in 1979, with effect from 1 January 1981. After repeated revision of this standard was adopted again in slightly amended form in October 1996. By 2004, this standard was not revised several times.

IAS 12 provides guidance to date, the treatment of income taxes and therefore the recognition and measurement of deferred taxes.

In Germany, the deferral of taxes by Article 43 paragraph 1 No. 11 of the 4th directive was introduced in 1987.

In § 274 German Commercial Code forms the basis for the recognition and measurement of deferred taxes. Due to the BilMoG, the repeal of various commercial law and the trend toward ever-larger differences between commercial and tax balance the importance to deferred taxes has increased significantly. It should be noted that the redesign of the tax deferral was at the center of the Accounting Law Reform by BilMoG.

Types of deviations

There are four cases can be distinguished:

(1a ) An asset is higher than in the tax balance in the trade balance.
(1b ) An asset is lower than in the tax balance in the trade balance.
(2a ), a liability is lower than in the tax balance in the trade balance.
(2b ), a liability is higher than in the tax balance in the trade balance.

The cases 1a and 2a pose for the future tax deduction higher profit potential (which is hidden in the balance of trade ), the cases 1b and 2b involve higher tax yield potential. Therefore, in principle, to form in the cases 1a and 2a a deferred tax asset position in subsequent years upon reversal of the difference ( realization of the hidden profit potential deduction ) is to be dissolved. Since BilMoG there is a choice with regard to the recognition of deferred taxes. The resolution of the deferred tax position leads to deferred tax expense in the income statement. In the cases 1b and 2b according to a deferred tax liability position to form ( no voting rights ). The legal basis is § 274 HGB.

Small corporations are exempt pursuant to § 274a HGB No. 5 of accounting for deferred taxes. Whether and to what extent the general provisions of § 249 paragraph 1 HGB undertake small corporations to account for deferred tax is controversial.

Such deviations arise, for example in the approach of assets from capitalization option rights under the Commercial Code, or for assessment of assets of different depreciation methods.

The deferred taxes recognized in the balance sheet is required to ensure in § 264 paragraph 2 HGB required correct representation of the net assets, financial position and results according to actual conditions (see also generally accepted accounting principles ).

Differences between financial and tax reporting can be temporary or permanent. From temporary differences is when the differences in approach or valuation of assets or liabilities ( balance sheet differentials) are degraded in the future. Permanent differences do not offset each other over time, such as non-deductible expenses and tax exempt income. One speaks of quasi- permanent differences, if they are not degradable in in the ordinary course of business in the near future, but depends on the disposition of the reporting entities are (eg sale of land ).

Accounting

Generally

For the accounting of deferred taxes, there are two ways to determine not taxed income or expenses. The method is a past- and profit-oriented ( consideration of differences between the commercial profit and tax base in the past) and the other balance sheet approach ( considering the differences between assets and liabilities - the so-called ' liability method '). In Germany in the for-profit § 274 HGB approach was governed until 2009. The Accounting Law Modernization Act (BilMoG ), the internationally common balance sheet oriented approach has been found in the HGB input. Theoretically, both approaches lead to the same results.

Liability method

Known case of the balance sheet liability method, also known as liability method, deferred tax assets such as receivables and deferred tax liabilities are considered as liabilities to the tax office. The right asset and debt card is placed in the foreground. When the liability method, it does not depend on the result of difference, but the differences in the individual balance sheet items.

The actual amount depends on the future tax rates that are applied in time of reversal of the differences. Therefore, these tax rates may need to be estimated. A subsequent change in the tax rate has the consequence that an adjustment of deferred taxes must be done.

Deferral method

In the deferral method, also referred to as accrual method, the goal is to show the tax expense that would have resulted from the trade balance. This method is the income statement method and is used for accrual income statements by their property of prepaid expenses.

This is based on the tax rate currently in force at the time of demarcation. When changing this tax rate will be no retroactive adjustment.

Active vs. deferred tax liability

In the future, higher tax income deduction potentials ( above cases 1a and 2a) result in deferred taxes on the assets side ( as an asset ), higher tax revenue potentials ( above cases 1b and 2b) lead to deferred taxes ( as a debt ). Statutory provision § 274 HGB.

Deferred Tax: In the balance of trade applies an accounting policy choice for deferred tax assets. Before one could BilMoG prepaid expenses, according to BilMoG may be a separate item " Deferred tax assets " are formed. Economically, these items how to understand a claim against the tax office. After the situation before BilMoG the deferred tax assets could indeed lead to a higher profit as presented in the balance of trade, but this amount was deducted in determining the amount available for distributions again. By BilMoG this restriction is no longer included in the current version of § 274 HGB. However, there is now according to § 268 para 8 HGB a distribution restriction in the amount of the active enabled overhang of deferred taxes. To the extent the option is exercised, the deferred tax assets, the resulting income can therefore not be distributed to the shareholders.
Deferred Tax: For deferred tax liabilities, a provision was to make the trade balance to BilMoG; today must this tax as " Deferred tax" passivated ( accounting obligation ). Economically, it is resulting in future tax profits more liabilities to the tax authorities for taxes.

In accounting according to IAS / IFRS is both the passivation and activation of deferred taxes arising from temporal or quasi- permanent differences, obligation ( IAS 12).

Assessment

Generally

In accounting according to HGB, deferred taxes only to such temporary differences could be accounted for before BilMoG of a temporary nature but not quasi -permanent are ( timing concept ). When accounting according to IAS / IFRS had always been deferred taxes on quasi- permanent differences are accounted for ( temporary concept).

In application of international accounting standards, deferred taxes must also in respect of revaluation of fixed assets as part of the " allowed alternative treatment" are reported. Since the revaluation carried directly to equity under a revaluation reserve, but which are recognized in the income statement after the revaluation of higher depreciation, no later success equalization takes place. This is for permanent differences, that is not at deferred taxes. Therefore, IAS 12.61 provides that in this case a part of the reserves ( equity) is reserved for deferred taxes. The whole process does not affect income. In contrast to HGB thus subject under international accounting standards not only results, but also differences in the equity accounting for deferred taxes. Deferred taxes are therefore under international accounting standards of significantly greater importance than under HGB. The meaning is clear, particularly against the background of falling tax rates in the context of international competition between countries to industrial sites.

Timing Concept

In Timing Concept temporary accounting differences between commercial and tax balance sheets are considered. Necessary for this is that these differences are reflected in the time of their creation and the time of its reversal in the profit and loss account, which is a deviation between the two balance sheets is created. Emergence of profit-neutral differences, eg due to an effect on income attribution, this does not result in deferral of taxes, as the result of the P & L does not distinguish between commercial and tax law.

So the timing concept takes into account only the income statement, but no effect on income differences. In addition, the timing concept unlimited and virtually unlimited find no differences approach.

Temporary concept

In contrast to the timing concept, the temporary concept takes into account the income statement and the effect on income differences between trade and the tax balance sheet. However, provided, however, that they lead in their resolution to an income or expense when they are incurred not.

The temporary concept is thus based on the balance sheet, not just the income statement as the timing concept. The overall objective is the correct statement of financial position in the financial statements, the accrual ID occurs more in the background.

The timing concept forms a subset of the Temporary concept. In addition to the temporary differences also certain quasi- permanent differences are taken into account.

Example

A securities should be recognized for purposes of determining taxable income as an asset with a value of 90,000 €. The value according to IAS / IFRS, however, is € 120,000. The difference of € 30,000 is due in the amount of € 20,000 to a profit-neutral reversal of the revaluation reserve to the IAS / IFRS balance sheet. The expected future tax rate of the company is 30%. Since the tax balance sheet is lower than the calculated according to IAS / IFRS value arises tax a higher yield potential (for example, sales to 150,000 € in the future, a higher profit than in accordance with IAS / IFRS would tax apply). So a deferred tax liability should be recognized in the balance sheet prepared in accordance with IAS / IFRS, which will be multiplied with the calculated future tax rate from the valuation difference: 30 % x € 30,000 = € 9,000. Of these, 30% x € 10,000 = € 3,000 in profit or loss through profit or loss, as the valuation difference in the amount of € 20,000 was recognized in equity and profit or loss only in the amount of € 10,000 have been possible. The amount of € 6,000 is profit-neutral book in nominal equity.

Limited company Equity (finance)

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