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Deferred tax implications of the removal of differential reporting

The differential reporting framework provided a partial exemption from NZ IAS 12. Qualifying entities were allowed to account for income tax using the taxes payable method, and basically ignore deferred tax.

However, the differential reporting framework is being phased out, and the new accounting standards framework for public benefit entities (PBEs) and for-profit entities does not include a similar exemption from accounting for deferred tax.

Public sector PBEs and for-profit entities moving to Tier 2 standards

Most entities that have applied the differential reporting framework will qualify to apply the Tier 2 reduced disclosure regime (RDR). RDR eliminates certain tax-related disclosure requirements but unlike differential reporting it has no recognition or measurement concessions. As a result, deferred tax will need to be recognised under RDR.

The new accounting standards for PBEs apply for reporting periods beginning on or after 1 July 2014. This includes PBE IAS 12, which is essentially the same as NZ IAS 12. As a result, a PBE with a June balance date would need to recognise deferred tax in their 2015 accounts.

For-profit entities cannot apply differential reporting for reporting periods beginning on or after 1 April 2015. For example, a for-profit entity with a June balance date would need to recognise deferred tax in their 2016 accounts.

In general, this change will require the calculation of comparative and opening deferred tax balances, and a restatement of the accounts (similar to transition to IFRS).

For some entities, the transition to the new framework will have little impact on their financial statement. For example, the entity may have a deferred tax asset that cannot be recognised because the probable test has not been satisfied. For these entities, the only significant change would be the additional disclosure of the balance of unrecognised temporary differences. In this case, a restatement of the accounts would not be required.

However, for other entities, the transition will have a significant impact on their financial statements, and will require the recognition of large deferred tax liabilities. This will include entities with building assets, revalued assets, or assets funded by grants.

a worked example of deferred tax calculations on transition from differential reporting to RDR, and further guidance material regarding the calculation of deferred tax are listed below:

Public sector PBEs moving to Tier 3 standard

Some PBEs will qualify to apply the public sector PBE Tier 3 simple format accrual standard. This standard does not deal with the accounting for income tax. In our view, tax paying entities will need to account for current tax under this standard, but will not be required to account for deferred tax.

Page created: 19 March 2015