15.9 Appendix A: Accounting for Income Taxes under ASPE

Under ASPE, a company has two choices of how to account for its income taxes: the taxes payable method or the future income taxes method. The taxes payable method, described previously, simply reports the balance of current taxes payable or receivable, and no attempt is made to account for the effect of temporary differences. If a loss is carried back, then the amount of the expected tax receivable can be recorded, however no amount is considered with respect to the loss carried forward. Although this method can result in a mismatched income tax expense, many small businesses choose it because of its simplicity, as the amount of tax calculated on the tax return needs to be recorded and nothing else. However, the company is still required to disclose a reconciliation of the statutory tax rate to the effective tax rate and the amount of unused tax losses carried forward. This simplified method is an example of how the cost versus benefit constraint is applied to financial reporting standards.

If a company chooses the future income taxes method, it will follow procedures very similar to what has been described in this chapter. Although the term future income taxes is used instead of deferred taxes, the concepts are essentially the same. There are other minor differences in terminology, as well, such as the use of income instead of profit for both accounting and tax purposes, the use of tax basis instead of tax base, and the use of tax benefit instead of tax income. Another difference in terminology is present in the evaluation of future tax assets. ASPE only allows a future tax asset to be recorded if its future realization is “more likely than not.” Although this term is not defined, it is generally interpreted in the same way as “probable” in IFRS.

Another significant difference between the two standards deals with the treatment of future tax assets. The initial calculation and measurement is similar under both standards, however ASPE allows the use of a valuation allowance. This is essentially a contra-account that reduces the future tax asset to a net amount that is “more likely than not” to be realized. This means that the full amount of the future tax asset can be recorded and offset by an amount believed to represent the risk that future income will not be sufficient to realize the asset. Although, conceptually, this is different from the IFRS approach of only recognizing an asset if its realization is “probable,” the net effect of the two methods remains the same. That is, the “more likely than not” criteria used in ASPE to determine the valuation allowance will generally produce the same result as the “probable” criteria used by IFRS to determine the asset value.

Additionally, a difference exists between the two standards in the presentation of future tax amounts. IFRS simply states that all deferred tax balances should be disclosed as non-current items on the balance sheet. In ASPE, however, the classification of future tax balances is more complicated as the classification of a future tax balance depends on the classification of the underlying asset or liability. For example, if the temporary difference relates to the difference between depreciation taken for tax and accounting purposes, then the future tax balance would be classified as non-current since the underlying asset (property, plant, and equipment) is reported as non-current. If the temporary difference relates to a difference in the treatment of warranty costs, then the future tax balance would likely be classified as current because the underlying liability (warranty liability) is classified as current. This rule can create a situation where a temporary difference may result in the future tax balance being classified as both current and non-current. This could happen if the underlying asset was an instalment receivable that required payments in the next year and in subsequent years. If the future tax amount resulted from a temporary difference that did not arise from a balance sheet amount, such as research costs, then the classification would be based on the expected reversal of the temporary difference. Again, this could result in a split classification of the amount.