Question

Computation of deferred taxes under IFRS is slightly different from GAAP. For example, in the United Kingdom (which follows IFRS), companies use the crystallisation approach. An equivalent concept in the United states is “realization”.

The concept underlying this “crystallisation” approach is that companies recognize deferred income taxes only if the taxes are expected to crystallize. Therefore, if a liability is deferred indefinitely, then the present value of that liability is zero. No deferred tax liability is recognized if the accumulated deferred tax amount is expected to increase each year, thereby delaying indefinitely the ultimate liquidation of this obligation.

Compare and contrast the theory behind the “crystallisation” approach with the interperiod allocation approach used in the U.S.

How might this same concept be applied to the recognition of liability for accounts payable? That is, if accounts payable are expected to increase each year, should the crystallization concept apply to this liability? Why or why not?

How reasonable does this approach seem? Explain.

Answer 1

Answer.

FRS 19 “Deferred Tax” was issued which was superseded by SSAP 15 ‘Accounting for deferred Taxes.’ SSAP 15 was withdrawn when FRS 102 was introduced.

FRS 102 requires deferred tax to be provided for on the full provision basis. It emphasizes on the reporting entities to explain the difference between their effective tax rates and standards rate of taxes. It requires the full provision to be made for the deferred tax assets and liabilities arising from timing differences between the recognition of gains and losses in the financial statements and their recognition in the computation of taxes. Deferred tax should be recognized as a liability or asset if the transactions indulge in the obligation to pay more tax or pay less tax in the future.

A liability such as ACCOUNTS PAYABLE is recognized only when present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.