News Column

Tax Implications of the Adoption of IFRS - Part 1

August 13, 2014

Mark Dike



On 28 July 2010, the Federal Executive Council accepted the recommendation of the Committee on the Roadmap to the Adoption of International Financial Reporting Standards (IFRS) in Nigeria, that it will be in the interest of the Nigerian economy for reporting entities in Nigeria to adopt globally accepted, high-quality accounting standards by fully adopting the IFRS in a phased transition.

The Council further directed the Nigerian Accounting Standards Board (NASB), under the supervision of the Federal Ministry of Commerce and Industry, to the take necessary action to give effect to the Council's approval.

Section 55 (1) of the Companies Income Tax Act, Cap C21, LFN 2004 requires a company filing a return to submit its audited account to the Federal Inland Revenue Service (FIRS) while Sections 8, 52 and 53 of the Financial Reporting Council of Nigeria Act, 2011 gave effect to the adoption of IFRS. This implies that the audited accounts to be submitted to the FIRS after the adoption of IFRS shall be prepared in compliance with its standards. It is in line with the above that FIRS published guidelines on tax treatments to be given to each of the standards especially where there are deviations from Generally Accepted Accounting Practice (GAAP) after the adoption.

IFRS1 -First time adoption

A taxpayer 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.

A first time adopter of IFRS is required by the standard:

- to recognise all assets and liabilities whose recog-nition is required by IFRS;

- not to recognise items as assets or liabilities if IFRS do not permit such recognition;

- to 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 IFRS; and

- To apply IFRS in mea-suring all recognised assets and liabilities.

The new net asset based on the accounting balance shall not be adopted for minimum tax computation in the year of transition.

If the retained earnings of a taxpayer that had previously paid tax based on dividend for a particular tax year increases as a result of the adoption of IFRS, and additional dividends are paid after the transition period from the portion of the retained earnings that relates to the tax year, the taxpayer shall be subjected to additional tax based on dividend in line with Section 19 of CITA.

Where however, the taxpayer was previously assessed to tax for the tax year in line with Section 40 of CITA, the taxpayer will only pay tax on its dividends based on Section 19, where the cumulative amount of dividends declared from the profits/retained earnings relating to the tax year, exceeds the taxable profits previously reported in the tax computations.

Details of recognitions, de-recognitions and reconciliation must be forwarded to FIRS by the taxpayer including all adjustments to opening retained earnings.

All conversion cost (capital and revenue) shall be subject to verification by the FIRS before it can be allowed as qualified capital expenditure or revenue expenditure.

Extension of time to file returns - First time adopters of IFRS would on application in accordance with Section 26 (5) of FIRSEA (and provisions of Self-Assessment Regu-lations 2012) be granted three (3) months extension for filing of their first set of IFRS financial statements and related returns to allow sufficient time to overcome initial conversion problems.

IFRS compliant finan-cial statement shall be included in tax returns in line with Financial Reporting Council of Nigeria (FRC) Act.

Tax returns under IFRS shall be in line with Section 55 of CITA and should include:

i. In respect of first time adopters;

- Statement of Financial Position as at the beginning of the earliest comparative period when a taxpayer applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statement.

- Statement comparing the tax effect of IFRS adoption with GAAP.

- Statement of recon-ciliations from GAAP to IFRS.

- Deferred tax compu-tation.

ii. In respect of post-first time adoption:

Deferred tax computation.

A statement showing the adjustments made on income statement or total comprehensive income to arrive at assessable profit and total profit for tax purposes as the taxpayer may wish to adopt shall be included.

IAS 2 - Inventories

Where allowable input VAT is included in the cost of inventories, it shall be disallowed for income tax purposes and treated separately as deductible from the output VAT as contained in the VAT Act.

When Inventories are Purchased with Deferred Settlement Terms:

Cost of inventories shall be based on the cost indicated on the invoice inclusive of any imputed interest. Where such interest has been charged in the income statement it shall be disallowed for tax purpose. If however the interest has been separately shown on the face of the invoice, such interest shall not form part of the inventory.

Any inventory (e.g. returnable packaging materials) reclassified in line with IFRS as non-current asset shall continue to be treated as inventory in line with the existing tax practice.

Estimates or provisions shall not be allowable for tax purposes, and any write-down on stock based on estimated cost of completion shall be disallowed.

IAS 8 - Change in accounting policies, changes in accounting estimates and correction of errors

Whereas IFRS provi-des for retrospective application of change in accounting policy, retrospective adjustment shall not be effected for first time adopters for tax purposes.

Taxpayers should submit a re-computation of income tax and deferred tax.

Taxpayers should disclose:

- All changes in esti-mates

- The basis of compu-tation

- The statement to which it has been charged

Obsolete stock/inventories - FIRS may allow claims on obsolete stock where it is satisfied that such stock is indeed obsolete. Any verification/certification of destruction of obsolete stock/inventories carried out without the FIRS witnessing such shall not be accepted for tax purposes.

FIRS shall assess each correction of error on its merit and in line with the existing laws. Taxpayers shall provide detailed disclosure of the sources of the errors and the future tax effect of the errors.

Dike is an Abuja-based tax and financial analyst


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Source: AllAfrica


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