Analysing the Impact of Deferred Tax on Financial Statements under IAS 12 & Corporate Tax of UAE

The International Accounting Standard 12 Income Taxes (IAS 12) mandates companies to evaluate deferred tax assets and liabilities using the tax rates that are expected to apply for the period when the asset is realized or the liability is settled. This evaluation is based on tax rates and laws. The Cabinet Decision, which outlines the tax threshold, has been issued, leading to the assessment and classification of the Law as officially “enacted” starting from 16 January 2023. Businesses must assess the impact of deferred tax and calculate the deferred tax (Deferred Tax Assets (DTA) / Deferred Tax Liabilities (DTL)) for reporting periods starting from 16 January 2023, including interim reporting.

A Glimpse at Deferred Tax

Under IAS 12, deferred tax is accounted as corporate tax. Corporate tax is related to the taxation of a company’s profits or losses rather than an individual’s income. In certain jurisdictions, taxes associated with companies may be termed as ‘corporation tax’ or ‘corporate income tax.’ If a taxpayer is subject to IFRS, they are obligated to deferred taxation. 

In the United Arab Emirates, Deferred tax is defined as a difference between the way a company accounts for its profits/loss in Financial statements and the way it calculates its taxable income/loss as per corporate tax regulations. It represents the taxes that a company is obligated to pay but has not yet paid, or taxes that have already been paid but will be acknowledged in the financial statements at a later date. The components of Deferred Tax are the following: 

Deferred Tax Assets: These are tax benefits that will be realized in the future. For example, if a company has tax losses carried forward, it can use them to offset future taxable income, reducing its tax liability.

Deferred Tax Liabilities: These arise when a company reports more profit in financial reporting than taxable profit. The taxes on this excess income will be paid in the future.

Impact of Deferred Tax on Financial Statements in UAE

Deferred tax under IAS 12 & Corporate Tax of UAE,  impacts financial statements by adjusting income tax expenses on the income statement and creating deferred tax assets or liabilities on the balance sheet, reflecting the timing differences between tax and accounting recognition. These adjustments provide insights into a company’s tax planning strategies and potential future tax obligations for stakeholders.

Income Statement

Deferred tax affects the income statement by adjusting the reported income tax expense. If a company has deferred tax assets, it may recognize a tax benefit, reducing the overall tax expense. Conversely, deferred tax liabilities may increase the tax expense.

Balance Sheet

Deferred tax assets and liabilities are reported on the balance sheet. These represent the expected future tax consequences of temporary differences. The net effect on the balance sheet is the deferred tax asset or liability.

Cash Flow Statement

While deferred tax doesn’t directly impact cash flows, changes in deferred tax assets and liabilities may affect a company’s future tax payments.

Enhancing Financial Transparency

IAS 12 enhances financial transparency by requiring companies to disclose the nature and amounts of deferred tax assets and liabilities. This transparency helps stakeholders, including investors and analysts, gain a clearer understanding of a company’s tax position and its potential impact on future cash flows.

Deferred Tax Importance for Stakeholders

Investors: Understanding the impact of deferred tax is significant for investors when analyzing a company’s financial statements. It provides insights into the company’s tax planning strategies and potential future tax obligations.

Creditors: Lenders and creditors assess a company’s financial health before extending credit. Deferred tax information is vital for evaluating a company’s ability to meet future tax liabilities.

Management: Companies need to manage deferred tax efficiently to optimize their tax positions. Proper management of deferred tax assets and liabilities can enhance a company’s financial performance.

How can BRISK Assist You?

BRISK, helps your business in navigating the complexities of deferred tax analysis under IAS 12 and the unique corporate tax laws of the Emirates. We provide tailored solutions for businesses seeking to understand and manage the impact of deferred tax on their financial statements. BRISK streamlines the process of recognizing and measuring deferred tax, ensuring compliance with international accounting standards and the specific regulations of the UAE. Trust BRISK to enhance your financial transparency, streamline compliance, and optimize your tax position in the UAE. Partner with us for a seamless and efficient approach to deferred tax analysis, tailored to meet the unique needs of your business in the Emirates.