Accounting Alerts

Understanding the Impact of COVID-19 on 2020 Deferred Tax Provisions

This Accounting Alert is issued to help preparers of financial statements identify key areas of tax provision that could be affected by the impact of COVID-19.

Background

The COVID-19 pandemic is having a tremendous impact on the world's economy. Many businesses are struggling to stay afloat and doing whatever they can right now to rationalize costs and preserve any cash surpluses they have in order to bridge future cash flow needs. Around the world governments are stepping in to try and limit the impact of the pandemic by providing financial support in numerous ways from direct cash payments through to the deferral of tax payments.

Summary

This alert sets out four key areas of tax provision that could be affected by the impact of COVID-19, namely on: recognition of deferred tax assets, deferred tax liabilities associated with investment in subsidiaries, expected manner of reversal of taxable and deductible temporary differences, and effective tax rate for interim reporting. This alert also focuses on how government support in the form of tax incentives and tax relief might change previous assessments that were made applying PAS 12, Income Taxes.

With the Philippine unemployment rate expected to hit 6.8% in 2020, some entities will be significantly challenged to support their profitability assumptions.  Further, complications can also exist for companies with limited working capital reserves that may now be facing going concern challenges. For established business with a long history of profitability, deferred tax assets are often recognized without debate for deductible temporary differences. For many companies, however, deferred tax assets are recognized for non-capital losses, but only when supported by convincing evidence of future taxable profit as outlined in paragraph 35 of PAS 12.  When it is no longer probable that future taxable profit will be available, the corresponding deferred tax asset can no longer be recognized under PAS 12.

To further protect companies' tax accounting and reporting positions, some additional areas that companies should consider, which include the receipt of government assistance, which may be within the scope of PAS 12 or PAS 20, Accounting for Government Grants and Disclosure of Government Assistance, changes to tax laws, and global tax planning arrangements, are covered in this alert.

 

See attached Accounting Alert for further details.