This Standard sets out more detailed requirements for the provisions of sections 274, 206 and 314(1) nos. 21 and 22 of the HGB governing accounting for deferred taxes. It shall be applied to financial statements prepared in accordance with sections 290 ff. of the HGB. In addition, it shall also be applied to the consolidation of joint ventures in accordance with section 310 of the HGB and the inclusion of associates in accordance with section 312 of the HGB.
Following the amendments introduced by the BilMoG, the underlying concept governing accounting for deferred taxes under German law now follows the balance sheet liability method that is common in international practice.
Deferred taxes are recognised in respect of temporary differences. These differences are determined by comparing the carrying amounts of the individual assets and liabilities and items of prepaid expenses and deferred income with their tax base. All tax rules must be analysed when determining such temporary differences.
If these differences are expected to reverse over time, resulting in a tax liability or tax benefit in future periods, deferred taxes shall be recognised for these differences using the individual tax rates applicable to the entity. It must be more likely than not that the future tax liability or tax benefit can be expected.
Under the balance sheet liability method, differences in recognition may also lead to temporary differences.
Temporary differences that arise between the tax base of an investment in a subsidiary, associate, or joint venture and the carrying amounts of the net assets recognised in the consolidated financial statements may not be recognised.
Deferred tax assets shall be determined with particular reference to the prudence principle, and the use of general risk discounts is prohibited. Instead, a verifiable tax projection shall be prepared that is derived from the entity’s business plans and that incorporates intended, viable tax strategies.
Tax loss carryforwards shall be included in the determination of deferred tax assets, even if these do not relate to temporary differences between the carrying amounts of individual assets and liabilities, and items of prepaid expenses and deferred income, and their tax base. Expectations of the timing of realisation shall be backed by probability estimates that shall be incorporated into the tax projections described above. To ensure the verifiability and practicability of the probability estimates to be prepared for the recognition of tax loss carryforwards, as a general rule the legislature has only allowed tax loss carryforwards in the amount of the deductible tax losses expected in the next five years to be used to determine deferred tax assets. By contrast, if the entity expects a future overall tax liability resulting from temporary differences, tax loss carryforwards that can be carried forward for an indefinite period and that additionally meet the criteria for offsetting shall be recognised when determining deferred taxes, irrespective of the timing of their recognition. The same principles are applicable to tax credits and interest carried forward.
In the case of a consolidated income tax group, the Standard generally requires taxes to be recognised at the parent.
The individual tax rate of the entity that will apply when the temporary differences reverse shall be used for measurement. Deferred taxes may not be discounted.
As a general rule, deferred taxes are recognised and reversed in the income statement. Deferred taxes from initial consolidation that are recognised directly in equity in the course of deconsolidation as well as deferred taxes recognised directly in equity on initial application of the amended statutory requirements shall also be derecognised in the income statement.
In accordance with the classification format set out in section 266 of the HGB in conjunction with section 298(1) of the HGB, the aggregate deferred tax assets or liabilities arising shall be presented on the asset or equity and liabilities side of the balance sheet below prepaid expenses or deferred income respectively. Deferred tax assets and liabilities may be presented gross. In this case, primary deferred taxes in accordance with section 274 of the HGB may be combined with secondary deferred taxes from consolidation adjustments in accordance with section 306 of the HGB.
The temporary differences and tax loss carryforwards on which the recognised deferred taxes are based shall be disclosed in the notes to the consolidated financial statements, together with the tax rates used to measure deferred taxes. The disclosure of the differences or tax loss carryforwards on which deferred taxes are based shall also be made for those deferred taxes that are not recognised due to the exercise of options or that have been set off against taxable temporary differences. As a general rule, qualitative disclosures on the nature of the differences or tax loss carryforwards are sufficient to meet the disclosure requirement and identify the future potential benefit. By contrast, there is no requirement to explain temporary differences that are subject to the prohibition on recognition in accordance with section 306 sentence 4 of the HGB. If deferred tax liabilities are recognised in the consolidated balance sheet, the deferred tax balances at the end of the financial year and the changes in those balances over the course of the financial year shall also be disclosed.
A reconciliation shall be presented in the notes to the consolidated financial statements that discloses the relationship between the tax expense/income expected from application of the tax rate applicable in Germany or a weighted group tax rate and the effective tax expense/income.
The examples used in the Appendix are not intended to be exhaustive, but merely serve to illustrate the accounting issues involved.