DipIFR Syllabus B. Elements of financial statements - IFRS 2 Share based payments deferred tax - Notes ^{6 / 7}

Issue

An entity recognises an expense for share options but the taxman offers the tax deduction on the later exercise date.

This is therefore an example of accounts showing more expenses (than the taxman has allowed so far) and so a deferred tax asset occurs.

The taxman may calculate his expense on the intrinsic value basis. 

This may offer a greater deduction (at the end) than our expense. 

This extra deferred tax asset is set off against equity (and OCI) not the income statement.

Illustration

An entity granted 1,000 share options to an employee vesting 3 years later. 

The fair value of at the grant date was $3.


Tax law allows a tax deduction of the intrinsic value of$1.20 at the end of year 1 and $3.40 at the end of year 2.


Assume a tax rate of 30%.

Solution

• Year 1

  Accounts 
1,000 x 1/3 x 3 = 1,000

  Tax 
Has allowed 0


  However, at the end he will allow 1,000 x 1/3 x 1.2 = 400
  

  Therefore the deferred tax asset is capped at 400. 

  So, the double entry is:

  Dr Deferred Tax Asset (400x30%) 120

  Cr Tax (I/S) 120

• Year 2 



  Accounts 
1,000 x 2/3 x 3 - 1,000 = 1,000

  Tax 
1,000 x 2/3 x 3.4 - 400 = 1.867

  Therefore we have expensed 2,000 (1,000 + 1,000)


  The tax man will allow at the end 2,267 (400 + 1,867)


  So, the deferred tax asset should now be 2267 x 30% = 680

  Of this only 2,000 x 30% = 600 should have gone to the income statement (to match with the 2,000 expense).

  
The remaining 80 should have gone to equity.
  

  Year 2

  
Income statement 

  Expense 1,000

  Tax (600 - 120) -480

  Equity 

  Share Options 2,000

  Tax asset 80

  Double entry 
  
Dr Deferred tax asset (680-120) 560

  Cr Income statement 480

  Cr Equity 80