Income Taxes / Deferred Taxes
Treatment under IFRS
Temporary-difference approach: deferred taxes on temporary differences between IFRS carrying amounts and tax bases. Deferred tax assets on loss carryforwards are recognised where utilisation is sufficiently probable.
- Temporary-difference approach: a balance-sheet comparison of the IFRS amount with the tax base.
- Deferred tax assets on loss carryforwards where future utilisation is probable.
- Deferred taxes are not discounted.
- Measured at the tax rate expected to apply when the difference reverses.
- Deferred taxes on items recognised in OCI are also recognised in OCI.
Treatment under German GAAP (HGB)
§ 274 HGB: a temporary-difference approach (since BilMoG). Deferred tax liabilities must be recognised; recognising a net deferred tax asset is optional (including loss carryforwards, limited to 5 years).
- § 274 (1) HGB: deferred tax liabilities must be recognised; recognising a net deferred tax asset is an option.
- § 274 (1) sentence 4 HGB: loss carryforwards are included only to the extent utilisation is expected within the next five years.
- § 268 (8) / § 285 HGB: a restriction on distribution (dividend block) and note disclosures.
- § 306 HGB: deferred taxes in the consolidated financial statements.
Key differences
- Recognition of deferred tax assets is optional under HGB but mandatory under IFRS – this can noticeably affect the effective tax rate.
- HGB: a net (total-difference) view with offsetting; IFRS: more granular recognition and offsetting rules.
- A restriction on distribution under § 268 (8) HGB for a net deferred tax asset; there is no equivalent in IFRS.
- Recognition of loss carryforwards is capped at 5 years under HGB, whereas IFRS looks to the probability of future profits.
Example
Worked example
Assumptions: A company has a tax loss carryforward of €5,000,000. The tax rate is 30%. There are no offsetting deferred tax liabilities (the deferred tax asset is therefore a net asset surplus). For IFRS it is assumed that utilisation of the loss carryforward is probable; for HGB that €2,500,000 of it can be used within the next five years. All amounts in euros.
Step 1 – Deferred tax asset on the loss carryforward
Both systems recognise deferred tax on the loss carryforward – but with a different scope and a different degree of obligation (mandatory vs optional).
| Item | IFRS | HGB |
|---|---|---|
| Total loss carryforward | 5,000,000 | 5,000,000 |
| of which eligible | 5,000,000 | 2,500,000 |
| Tax rate | 30% | 30% |
| Deferred tax asset | 1,500,000 | 750,000 |
| Recognition | mandatory | optional (or 0) |
IFRS recognises a deferred tax asset on the entire loss carryforward provided future utilisation is probable (IAS 12.34) – on a mandatory basis. HGB limits the amount included to the portion usable within five years (§ 274 (1) sentence 4 HGB) and makes recognition of a net asset surplus optional (§ 274 (1) sentence 2 HGB).
Step 2 – Journal entries
IFRS (mandatory recognition):
| Account | Debit | Credit |
|---|---|---|
| Deferred tax asset | 1,500,000 | |
| Deferred tax income (P&L) | 1,500,000 |
HGB (only if the recognition option is exercised):
| Account | Debit | Credit |
|---|---|---|
| Deferred tax asset | 750,000 | |
| Deferred tax income (P&L) | 750,000 |
Step 3 – Distribution block (HGB)
If the company recognises the net asset surplus, the corresponding amount is subject to a distribution block under § 268 (8) HGB: profits may be distributed only to the extent that the freely available reserves plus profit carried forward remaining afterwards cover the recognised amount. IFRS has no comparable distribution block.
Key takeaway
For a loss carryforward three differences combine: (1) scope – IFRS includes the entire probably usable carryforward, HGB only the amounts usable within five years (§ 274 (1) sentence 4 HGB); (2) mandatory vs optional – IFRS recognition is compulsory, whereas HGB leaves recognition of a net asset surplus to an option; (3) distribution block – only HGB blocks the recognised amount from distribution (§ 268 (8) HGB). In the example the recognisable amount is €1,500,000 (IFRS) versus at most €750,000 (HGB).