Tax implication of the adoption of the International Financial Reporting Standards (IFRS)
By Frank Obaro
In line with section 8 of Federal Inland Revenue Service (FIRS) Establishment Act 2007, FIRS issued a draft circular in October 2012 to provide direction to stakeholders on the tax implications of the adoption of the International Financial Reporting Standards (IFRS). IFRS is expected to far have reaching implications on taxpayers, knowing that quoted companies are expected to adopt it, beginning from 2012, other businesses from 2013 while SMEs are to fully adopt the guidelines in 2014.
These is to give effect to the Federal Executive Council’s acceptance of the recommendation of the Committee on the roadmap for the adoption of IFRS in Nigeria, which places emphasis on the adoption of globally accepted accounting standards by reporting entities. The adoption of International Financial Reporting Standards (IFRS) in a phased transition in a process is to be supervised by the Financial Reporting Council of Nigeria(FRCN) formerly Nigerian Accounting Standards Board (NASB), under the supervision of the Nigerian Federal Ministry of Trade and Investment.
Section 55 (1) of the Companies Income Tax Act (CITA), Cap C21, LFN 2004 requires a company filing a return to submit its audited account with the Service while sections 8, 52 and 53 of the Financial Reporting Council of Nigeria Act, 2011 gave effect to the adoption of International Financial Reporting Standard. This implies that the audited accounts to be submitted to the Service after the adoption of International Financial Reporting Standard shall be prepared in compliance with standards issued by IFRS. It is in line with the above that FIRS has published these draft guidelines on tax treatments to be given to each of the Standards especially where there are deviations from the present Generally Accepted Accounting Practice (GAAP) after the adoption. The objective is to highlight some salient points in the FIRS draft policy document in alignment with the IFRS guidelines.
IFRS 1 – FIRST TIME ADOPTION -An entity shall prepare and present an opening IFRS statement of financial position at the date of transition to IFRS. This is the starting point for its accounting in accordance with IFRS. An entity shall use the same accounting policies in its opening IFRS statement of financial position and throughout all periods presented in its first IFRS financial statements. Those accounting policies shall comply with each IFRS effective at the end of its first IFRS reporting period.
In particular, the IFRS requires an entity to do the following in the opening IFRS statement of financial position that it prepares as a starting point for its accounting under IFRS:(a) recognise all assets and liabilities whose recognition is required by IFRSs; (b) not recognise items as assets or liabilities if IFRS do not permit such recognition. (a) reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with IFRSs; and (d) apply IFRS in measuring all recognised assets and liabilities”. FIRS draft guidelines emphasize that the new net asset based on the accounting balance shall be adopted for minimum tax computation and where dividend is paid from retained earnings, it shall be subject to tax in line with section 19 of CITA. Also the details of recognitions, de-recognitions and reconciliation must be forwarded to FIRS by the taxpayer including all adjustments to opening retained earnings. Furthermore entities shall have the option to either completely expense or spread within 3 years the revenue expense component of its cost of conversion to IFRS as first time adopters. All conversion cost (Capital & Revenue) must be verified and confirmed by the Service before it can be allowed as Qualified Capital Expenditure or expense. While any additional tax/refund as a result of the conversion shall be settled by the company or refunded by FIRS as may be agreed by FIRS within 3 years of adoption. For the treatment of Finance Lease the FIRS guideline notes that in compliance with IFRS re-classification of lease asset, there could be a situation whereby an operating lease becomes a finance lease. Where two parties had correctly applied the old principle but are now compelled by the IFRS standard to reclassify operating lease as finance lease, FIRS will rely on the Tax Written down value of the asset in granting further capital allowance to the leasee. Also, investment allowance and Initial allowance shall not be granted to the leasee on reclassification of the asset and where there are errors in compliance with previous standards on leases, the tax consequences resulting from the errors shall be adjusted for accordingly. For assets reclassified to finance lease, paragraph 18(2) and (3) of schedule two of CITA which relates to Rights to Claim Capital Allowances on finance lease shall apply. The guideline on finance lease as described in FIRS information circular No. 2010/01 dated 12th April, 2012 which relates to Value Added Tax (VAT) and With- Holding Tax (WHT) shall apply.
In IAS 19 – which dwells on EMPLOYEE BENEFITS, the FIRS draft guidelines notes that provisions in respect of other long-term employee benefits (other than post- employment benefits and termination benefits) that are not due to be settled within twelve months after the end of the period in which the employees render the related service shall not be allowed for tax purposes until actual payment is made. Profit sharing and bonus payments shall be allowed for tax purposes only if the amount and basis for its computation has been agreed and approved at the beginning of the accounting period and notably Personal Income Tax is payable on the bonus and profit sharing in line with the provisions of Personal Income Tax (amended 2011). For Pension remittances employer’s contributions over and above the 7.5% compulsory threshold is an allowable deduction by virtue of the provision of the National Pension Commission Act (section 7 & 9 of Pension Act) and Actual contribution paid to the pension fund in the current year shall be allowed for tax purposes in line with the existing practice. The National Pension Commission has been empowered to approve defined benefit plan for any entity that wants to run it. However, FIRS must be satisfied that a proper scheme manager is appointed for the security of the fund before allowing any expenses on the scheme for tax purposes. Any provision charged to Statement of Comprehensive Income (SOCI) that does not have the approval of Pension Commission (PENCOM) and FIRS shall be disallowed. Provision made for benefits payable to the employees offered voluntary redundancy shall not be an allowable deduction for tax purposes unless they result into cash payment to the employees.
There is no doubt that the transition to IFRS is a huge task, with over 100 countries already signed to it. IFRS has become the global reporting standards for accounts and it is imperative for various stakeholders to work together to engender a workable solutions in terms of capacity and enlightenment on the cut off dates. Its revolutionary impact tax requires a great deal of decisiveness and commitment. It is a new world order in corporate reporting that will alter not only the financial accounting and reporting landscape in Nigeria but also tax accounting, tax cash flow and tax distributable reserves.