WORLD ACADEMY OF INFORMATICS AND MANAGEMENT SCIENCES
ISSN : 2278-1315
will increase profit and tax while an adverse correction will
Inventory
Under the previous GAAP, an organization can adopt any
reduce profit and tax.
inventory (stock) valuation technique (LIFO, FIFO or Latest
IAS 16 – Accounting for Property, Plant and Equipment has
Purchase Price) it pleases. IAS 2 – Inventory restricts
imposed new depreciation rates on assets as follows:
valuation to lower of cost or net realizable value. This will
Land 0%
reduce the value of closing inventory. Reduction in the
Building 2%
value of closing inventory will reduce the cost of goods sold
Plant and Machinery 20%; and
which will increase gross profit and subsequently will
Motor vehicles 25%.
increase income tax.
This will reduce the depreciation to be charged to Profit or
loss account which will increase the profit and tax compared
Financial instruments at fair value through profit or loss
with previous GAAP that an organization chose the
and available for sale financial assets
Under the previous GAAP, financial instruments were not
depreciation rates they wanted to apply to reduce their
recognized in the profit or loss accounts of private
company income for lesser tax payments.
organizations. IAS 32, IAS 39, IFRS 7 and IFRS 9 –
Financial Instruments allows private organizations to
Question: The financial sector and other related financial
recognize ‘Available-for-sale financial assets that have been
institutions have been deeply affected by the introduction
‘marked to market’ at fair value in the profit or loss
of IFRS 9 to replace IAS 39, due to noticeable shortcoming
account’. Available-for-sale financial assets that are ‘marked
of IAS 39. What are the tax implications?
to market’ will increase revenue and also increase profit
which will result to increase in income tax of private
Response: In response to the shortcomings of IAS 39, the
organizations.
International Accounting Standards Board (IASB) completed
the final phase of its comprehensive response to the global
Fair value adjustment on assets
financial crisis of 2008 with the publication of the fourth and
IFRS 13 - Fair Value Measurement requires assets to be
final version of IFRS 9 Financial Instruments in July 2014. IFRS
measured initially at cost and subsequently at cost less
9, which replaces IAS 39, was effective for annual periods
accumulated depreciation or fair value. Increase in fair value
beginning on or after 1 January 2018, though early
of assets over their book values will increase the profit of
application was permitted. The new standard introduce a
the organization which in turn will result to higher income
logical classification and measurement model for financial
tax. Reduction in fair value (impairment loss) of assets
assets, an ‘expected credit loss’ impairment model and a
(tangible or intangible) will reduce the profit of the
substantially reformed approach to hedge accounting which
organization as well as the organization’s income tax.
aligns hedge accounting principles more closely with risk
management. Expectedly, the adoption of IFRS 9 will have a
Accounting Policies, Changes in accounting estimates
significant impact on the opening retained earnings (or other
and Errors
component of equity, as appropriate). Entities are allowed to
restate comparatives if, and only if, this is possible without
Under the previous GAAP, an entity was allowed to change
its accounting policy whenever it deemed fit.
the use of hindsight. For instance, according to the Federal
IAS 8 – Accounting Policies, Changes in Accounting
Inland Revenue Service (FIRS) of Nigeria Information Circular
estimates and errors provides accounting treatment for an
of March 2013 on the tax implications of the adoption of IFRS
entity that wishes to change its accounting policies or is
(IFRS Circular), taxpayers are required to submit a re-
adopting IFRS for the first time.
computation of income and deferred tax, for any financial
Change of accounting policy
period where there has been a change in accounting policy.
The conceptual framework on financial reporting states
This requirement may be impractical for taxpayers to comply
that:
with, as IFRS is very dynamic and a change in accounting
“An entity should not change its accounting policy unless:
standard could trigger a change in accounting policy.
The change is required by IFRS; or
The transition to IFRS 9 will have a significant tax impact
The change will better reflect the true financial and
especially on Money Deposit Banks (DMBs) and other
economic position of the entity”.
companies with significant holdings in financial instruments.
IAS 8 states that an entity that changes its accounting policy
One major issue with the adoption of IFRS 9 for DMBs is the
should apply the change retrospectively. Retrospective
effect of bigger and more volatile impairment losses on
application means that the entity will reflect the change for
capital ratios. From a tax perspective, it may also mean
the items affected by the change in the financial statements
significantly lower profits but higher scrutiny of specific
for the immediate two years proceeding the current year in
which the change is made.
impairments losses, a part of which may be disallowed for tax
Change of accounting policies by First-Time-Adopter will
purposes. Furthermore, there will be an increase in the
affect the tax of the entity as stated in (a) to (d) above. An
number of fair value movements through the income
organization that had deferred its tax will have to pay its
statement which will need to be properly tracked and
income tax based on the profit computed using IFRS from
adjusted for tax purposes. DMBs should consider engaging
the date of transition to IFRS.
tax authorities in their various jurisdictions for discussions on
Retrospective Correction of prior period errors will also
issues relating to the significant impact of impairment losses
affect the profit of the organization. A favorable correction
under IFRS 9, on their profits/capital.
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