KPMGs 2013 TEI PD Day

Workshop 4: Tax Accounting

Update
Date: April 11, 2013
Presenters: Andrew Forbes, Pamela
Zabarylo, Ji Kwon, Henri Klein
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Agenda
1. Introduction

2. IFRS Tax Accounting Developments / Update
IAS 12 Amendments
Substantive Enactment

3. US GAAP Tax Accounting Developments / Update
US GAAP / IFRS Conversion Update
US GAAP Exposure Draft for Unrecognized Tax Benefits
US GAAP & IFRS Revenue Recognition Convergence

4. Selected Tax Accounting Issues / Experiences
Ontario CMT and Pension Plan
Part VI.1 Tax
Upstream Loans
Asset Retirement Obligations
Discontinued Operations

5. ASPE Update

6. Wrap-up / Questions
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
3
Learning Objectives
This session will:

Provide an overview of current tax accounting developments under IFRS

Review overview of current tax accounting developments under US GAAP

Discuss selected practical tax accounting examples involving Ontario CMT,
Part VI.1 tax, upstream loans, asset retirement obligations and discontinued
operations
IFRS Tax Accounting
Developments
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
IAS 12 Amendments
Deferred Tax: Recovery of Underlying Assets [IAS 12.51C]
In general, measurement of deferred tax assets and liabilities based on
expected manner of recovery or settlement of underlying asset or liability

Amendment provides limited exception from the general measurement
principle for investment property measured using the fair value model in
accordance with IAS 40 (Investment Property)

Under exception, the measurement of deferred tax assets and liabilities is
based on a rebuttable presumption that the carrying amount of the
investment property will be recovered entirely through sale

Presumption can only be rebutted if the investment property is depreciable
and is held within a business model whose objective is to consume
substantially all of the assets economic benefits over the assets life

Effective for annual periods beginning on or after January 1, 2012 and to be
applied retroactively (early adoption was permitted if disclosed)


5
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
IAS 12 Amendments Example: How to measure deferred tax?
Investment property acquired consisting of land and building
Elects to account at fair value
Rebuts the presumption that carrying amount of the building will be recovered through
sale
Building depreciable over 20 years for tax ($60/20 = $3 depreciation per year)
Land not depreciable
Income tax rate of 26%


Cost and fair market value (FMV) as follows:

6
Cost FMV
Land $540 $650
Building 60 70
Total

$600

$720

2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
IAS 12 Amendments Example: How to measure deferred tax?
How to measure deferred tax asset (DTA) or deferred tax liability (DTL)?

In Year 1, following should be recorded:










Building used 26% tax rate because recovered through use rather than sale
Land 13% capital gain tax rate because land non-depreciable, therefore sale
presumption not rebutted






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Carrying
Amount
Tax
Basis
Temporary
Difference
DTA (DTL)
Land $ 650 $ 540 ($ 110) ($ 14)
Building $ 70 $ 57 ($ 13) ($ 3)
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Substantive Enactment
Enacted or substantively enacted tax rates (and tax laws) by end of the
reporting period are used to measure current and deferred taxes

- Under IFRS, substantively enacted requires likelihood of legislation
passage

Provincial Budget contained some change in tax rates:

- British Columbia general corporate income tax rate increase to 11%
(from 10%) effective April 1, 2013

- New Brunswick general corporate income tax rate to 12% (from 10%)
effective July 1, 2013

- Ontario budget expected to be released in weeks, some speculation of
possible corporate tax rate increases


When is the tax rate change considered substantively enacted?
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US GAAP Tax Accounting
Developments
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
FASB/IASB Income Tax Accounting Convergence
Goal of convergence reduction of differences

Project status reassessed as low priority, no longer on the active agenda

Key differences between the two GAAPS remain unresolved and in place
Uncertain Tax Positions
Investment Tax Credits
Outside basis disclosure
Enacted vs Substantively Enacted Tax Rates
Re-measurement of tax assets and liabilities
Others (e.g. deferred taxes on foreign exchange rate changes on non-monetary assets
and liabilities)





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2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
US GAAP Exposure Draft for Unrecognized Tax Benefits
Exposure Draft issued on February 21, 2013

Codification of presentation of unrecognized tax benefits

Generally presentation requires reduction of deferred tax assets

Exception for losses or tax credits unavailable to offset additional taxes when
settling unrecognized tax benefit

Unrecognized benefit to be presented as a liability
Not combined with other deferred tax assets and liabilities
Liability is either current or deferred



11
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
US GAAP Exposure Draft for Unrecognized Tax Benefits: Example
Facts:
Book net loss of $100 (includes $100 charge for certain permanent expenses)
Tax return reflects same $100 net loss resulting in NOL carry forward
60% chance that if challenged by the taxing authority the $100 deduction would be
disallowed
Company operates in a single tax jurisdiction

Treatment:
Unrecognized tax benefit would be presented as a reduction of the DTA for the NOL,
except if:
To extent NOL not available under tax law of applicable jurisdiction to settle any additional
income taxes that would result from disallowance of tax position, in which case then the
unrecognized tax benefit presented as liability
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2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
US GAAP & IFRS Revenue Recognition Convergence
Tentative effective date of January 1, 2017

Standard changes may accelerate revenue recognition for accounting and tax
purposes

Software vendors no longer require Vendor Specific Objective Evidence
estimate stand alone selling prices

Capitalization of costs of obtaining a contract

Collectability no longer a recognition threshold for revenue allowance for
credit impairment recognized separately may accelerate revenue
recognition

Adoption considerations include specific contractual for multiple element
contracts that may result in different allocation for tax and financial reporting

See KPMG Defining Issues March 2013 #13-14 for additional discussion

13
2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Canada.
Selected Tax Accounting
Issues / Experiences




2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Ontario CMT and Pension Plan
Corporations with defined benefit pension plans

Upon IFRS transition, election to record an adjustment for actuarial gains and
losses directly to retained earnings

Permanent difference between regular taxable income and income for CMT

Can generate CMT as pension plan is funded by cash payments

15
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Ontario CMT and Pension Plan - Example
Corporation with December 31 taxation year-end
On IFRS transition, actuarial losses in pension plan of $250 million to retained
earnings
Deficiency will be funded by $50 million per year over next 5 years (2011
2015)









16
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Part VI.1 Tax

Tax imposed on the payer of dividends on specific types of preferred shares

Computed based on the amount of dividend paid and is payable by a
corporation regardless of its amount of taxable income

Deduction (equal to a specified multiple of the dividend) in computing its
taxable income

Issue: Where to report part VI.1 tax on financial statements?

17
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Part VI.1 Tax Where to record?
Equity
classified
Liability
classified
Tax
recorded in
retained
earnings
Tax
recorded in
P&L -
interest
expense
Canadian GAAP IFRS
Equity
classified
Statement
of
Comprehen
sive
Income?
Liability
classified
?
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2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Part VI.1 Tax Where to record?
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View A: Profit or Loss
Tax charged when dividends
paid to preferred
shareholders

Part VI.1 tax, along with the
related deduction should be
recorded in profit or loss,
except for unusual
circumstance when
distribution itself arose from
transaction recorded
outside of profit or loss

View B: Equity
Should trace the tax to the
item to which it relates

52A and 52B of IAS 12 not
relevant, because meant to
capture taxes that are
adjustment to income taxes
and not any other taxes

Part VI.1 tax not within the
scope of IAS 12 because
computed with reference to
dividend and independent
of entitys income taxes
VS.
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Upstream Loans
In certain circumstances a taxpayer may be required to include in income the
amount of an upstream loan from a foreign affiliate if it is not repaid within two
years

Depending on the extent of appropriate tax attributes (i.e., surplus account
balances), the taxpayer (Canadian Parent) would be entitled to an offsetting (or
partially offsetting) deduction

Where the taxpayer includes the amount of the loan in income, the taxpayer is
entitled to a deduction when and to the extent the loan is repaid

The rules apply to loans or advances made on or after August 19, 2011, and
transitional rules apply to outstanding loans existing prior to that date





20
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Upstream Loans - Example


Scenario 1: Canco plans to repay
the loan from its own sources within
the two-year repayment time frame

Scenario 2: Canco plans to repay
the loan by having FA pay a
dividend within the two-year
repayment time frame

Scenario 3: Canco does not plan to
repay the loan within the two-year
time frame


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Canco
FA
loan
Does a temporary difference exist on the loan?
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Asset Retirement Obligations AROs
When entity recognizes a provision in the financial statements for site
restoration, typical accounting JE is as follows:

DR Property, plant & equipment (PPE) $100
CR ARO liability ($100)

Two temporary differences:
1. Taxable temporary difference on PPE as no increase in tax basis of PPE
2. Deductible temporary difference on ARO liability as expense not typically
deductible for tax until paid

Possible approaches
Initial recognition exception applies
Two separate temporary differences exist, which are tracked separately



22
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Asset Retirement Obligations AROs example
On Day 1






During Year 1
PPE depreciated $10 per year
$8 accretion booked to ARO liability

At Year-End
Net liability of $18 on FS ($90 PPE - $108 liability)





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DR. Property plant equipment (PPE) $100
CR. ARO Liability $(100)
JE to recognize provision for site restoration
DR. DTA ($18 x 26%) $4.7
CR. ARO Liability $(4.7)
JE to record net DTA
2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
24
Discontinued Operations
Tax expense on income from continuing operations generally determined separately
Tax effect of loss from continuing operations should take into account all components
Consider disclosure impact for comparative periods



Loss from continuing operations $(2,000)
Tax expense at 25%* $(250)
Income from discontinued operations $1,000
Tax expense at 25% $250
Total tax expense -
* Valuation Allowance / Non-recognition for $250 required as criteria to recognize
deferred tax asset not met for remaining $250
2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Canada.
Accounting Standards for
Private Enterprise




2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent
member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Accounting Standards for Private Enterprise
Accounting policy choice

Taxes Payable Method

Future Income Taxes Method




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Questions?


2011 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in Canada.
Contact Us

Andrew Forbes
Partner, Tax
KPMG
T. 416.777.8004
E. [email protected]


Ji Kwon
Senior Manager, Tax
KPMG
T. 416.777.3110
E. [email protected]

Pamela Zabarylo
Partner, Tax
KPMG
T. 416.777.8691
E. [email protected]



Henri Klein
Manager, Tax
KPMG
T. 416.777.8290
E. [email protected]

Thank You

This information is current to April 11, 2013.

2013 KPMG International Cooperative (KPMG International), a Swiss entity. Member firms
of the KPMG network of independent firms are affiliated with KPMG International. KPMG
International provides no client services.

The information contained herein is of a general nature and is not intended to address
the circumstances of any particular individual or entity. Although we endeavour to provide
accurate and timely information, there can be no guarantee that such information is accurate
as of the date it is received or that it will continue to be accurate in the future. No one should
act on such information without appropriate professional advice after a thorough examination
of the particular situation.