In IFRS, just as in German commercial law, deferred taxes must be taken into account. However, these play an important role exclusively in international accounting, since nationally there are many voting rights in accounting, as a result of which hardly any deferred taxes are formed in commercial accounts. This is primarily about a correct financial statement, but also partly about a proper periodization of the tax expense.

These deferred taxes result from recognition differences between IFRS or HGB and the respective national tax law. It is necessary to carry out a separate review of the current and future regulations for each company in each country. Because future changes have an impact on valuation differences in tax law. The level of deferred taxes depends on how national tax law is structured at the time of reversal of temporary differences.

Under the International Financial Reporting Standards (IFRS) deferred taxes are formed just as in German commercial law according to HGB. This also depends on the accounting differences between IFRS and national tax law.

The IAS 12 standard is the relevant standard for accounting for deferred taxes under IFRSs. Since deferred taxes, also known as deferred taxes, are taxes on an entity’s income, IAS 12 (International Accounting Standards 12) is the applicable standard for this. The distinction between IFRS and IAS is solely due to the fact that the newer standards issued by the IASB (International Accounting Standards Board) since 2001 are called IFRS. The IASB is made up of legal experts from different countries.

Deferred taxes can be recognised on the liabilities side or on the assets side of the balance sheet. If the recognition of an asset, also called asset, is now higher than the corresponding tax balance value according to IFRS, it is also necessary to recognise passive deferred taxes. These are to be treated as a debt, which stands for the outflow of future economic benefits (tax expense). This results from the values to be recognised in the tax balance sheet in the future, which were initially only recognised in IFRS. In addition, the recognition of a passive deferred tax on a liability applies corresponding to the asset if it is higher in the tax balance sheet than in the IFRS balance sheet. Furthermore, active deferred taxes shall be recognised on the same basis if assets in the IFRS balance sheet are temporarily lower than in the tax balance sheet or liabilities in the IFRS balance sheet are temporarily higher than in the tax balance sheet.

It should be noted in particular that the differences initially created have to balance out in the future, so there are only temporary differences between the two balance sheets. For example, a different procedure for realizing revenue according to IFRS 15 compared to realizing revenue in the HGB would only be a temporary difference, since the amount of transactions has to be valued equally high, only the time differs partially. In addition, it should be noted that the resolution of the differences in the course of time leads to additional tax burdens or reduced tax burdens.

Nevertheless, it is important to state very clearly that there are considerable differences between international and national accounting in Germany. In the trade balance, there are usually electoral rights regarding the application of deferred taxes, whereas these receive significantly more attention at international level. In principle, a balance sheet according to IFRS can be drawn up exclusively with the formation of deferred taxes and a commercial (individual) balance sheet can usually be drawn up without deferred taxes.

For an asset to be present under IFRSs, it is imperative that there be power over the asset. In addition, the resource must have entered the company through a past event and be reliably assessable. In addition, a future economic benefit is required, which is expected to flow to the company through the resource.

In order to present a liability under IFRS, certain criteria must be reviewed. For now, a sufficiently secure outflow of resources must be established. The probability of discharge must be higher than 50 %, otherwise this discharge must be classified as unsafe. In addition, this outflow of benefits only exists if a current external obligation has arisen, which is based on a past event. In addition, the value of the resource to the entity must be reliably demonstrated, otherwise, logically, no liability can be assessed.

The formation of deferred taxes becomes necessary, as already explained above, due to differences in the valuation between tax balance and IFRS. There are different balance sheet items, which can basically create these differences.

Now, on a tax-accounting basis, a different valuation method can be used for inventories compared to IFRS valuation, which can lead to the need to form deferred taxes. The different valuation methods often result in different values in the respective balance sheets. In German tax law, for example, only the Lifo method according to § 6 Abs. 1 no. 2a EStG are applied to. For the purposes of valuation, the approach is that the assets acquired or manufactured last are first consumed or sold. In accordance with IFRS, it is necessary to compare the current carrying amount of inventories with the net realisable price and, if necessary, to adjust the carrying amount. Thus, due to different approaches in the evaluation, different values can occur in the subsequent evaluation.

Recognition of deferred taxes comes exclusively if the difference is reversed in the future. Consequently, in the calculation of deferred taxes, the mentioned temporary difference of the comparison values is multiplied by the tax rate which is valid in the reverse thereof.

Furthermore, deferred taxes arise in the event of impairment of assets, as in turn IFRS regulations apply differently than in the German tax law. This is because, in the case of corresponding external or internal indications of a possible impairment, an impairment test or an impairment test applies. to perform the impairment test for the assets. The continuing book value of the assets is compared with the higher value from the so-called fair value less costs to sell and the fair value in use. The fair value in use is the intra-corporate value attributed to the asset if it continues to be used by the entity. On the other hand, fair value less costs to sell represents the market value of the asset less costs to sell. If the carrying amount is higher than the higher of the two fair values, an impairment shall be effected in accordance with IAS 36.

Now a depreciation ban applies in the tax balance sheet in the event of a temporary impairment. If the impairment is likely to be permanent, there is a depreciation option in the tax balance sheet. Particular attention shall be paid to the cases in which the impairment is likely to be permanent. This occurs, for example, when an impairment loss existing at the end of the reporting period continues until the balance sheet is prepared or until the previous sale or consumption date. Similarly, for assets that already lose value in the period from access to the end of the reporting period, the tax balance sheet has also had the right to choose from a possible depreciation since the introduction of BilMoG.

Due to the fact that both approaches are completely different, this often leads to accounting differences and therefore also often to the application of deferred taxes, since these usually balance out again in the future. Here, the prime example is goodwill, whereby I partly write off the purchase price in the supplementary balance sheet when buying a company, whereas this is tested for impairment in IFRS only for indications of impairment.

Since 2019, the accounting of leased items has changed significantly under IFRS. Since then, all lease items have to be passivated as a lease liability and capitalised with a corresponding right of use in the IFRS balance sheet. In the past, lease liabilities were booked exclusively as rental expenses and were not included in the balance sheet over a longer period of time, as is now the case.

This topic has been discussed for a very long time and has caused very strong balance sheet changes internationally, especially in leasing industries such as aviation. The balance sheet has been extended by increasing liabilities and assets equally. Nevertheless, the debt ratio of these companies increased enormously due to the former financing nature of leasing contracts.

Since only a change in lease accounting was made in IFRS, there are now accounting differences from the tax balance sheet, which results in deferred taxes. Now, however, the asset side increases just as the passive side, as a result of which active and passive latent taxes are created and thus also compensate themselves. In the case of IFRS, on the other hand, there are strict rules for offsetting deferred taxes, which hardly ever happens.

For the calculation of deferred taxes is usually a relatively simple process, the complicated is rather the determination of the differences. However, if the differences have been found, it is necessary to examine to what extent they are temporary or permanent in nature. Permanent accounting differences do not include deferred taxes, including, for example, the 95% tax exemption on dividend income at a holding company. In the case of temporary taxes, a further distinction must be made in active or passive deferred taxes.

Then it is only necessary to calculate the deferred taxes based on the correct tax rate. In this case, the tax rate from the year of the reversal of the temporary differences shall be applied. This is based on the valid legal regulations. Nevertheless, if tax rates are changed, this tax rate must be applied even before the Federal President has approved the law.

In conclusion, deferred taxes have a high significance in international accounting. In the national context with German tax law, however, they are of only minor interest. In the calculation, it is important to distinguish between temporary and permanent recognition and valuation differences. Otherwise, this will entail some corrections, if the error in the formation of deferred taxes in subsequent years is noticeable. If you have questions about deferred taxes, you can contact us.