Secondary Objective No

Exposure Draft on

Financial Accounting for Income Tax

Contents

Standard on Financial Accounting for Income Tax

#	Subject	Page
1	Scope	133
2	Objective	133
3	Statement	134
4	Definitions	136
5	Analytical comparative Study.	139
6	Practical cases and examples for application of the standard.	153

Standard on Financial Accounting for Income Tax

1. Scope

1.1 This standard identifies the requirements for measurement, presentation and disclosure of income tax in the financial statements of profit-making enterprises irrespective of their size of activities and legal form.

(Paragraph 101)

1.2 For the purposes of this standard, income tax includes all local and foreign taxes computed on the basis of taxable income.

(Paragraph 102)

1.3 Measurement of tax shall be limited to showing the tax effect of temporary and permanent differences between the net taxable income and the net accounting income. This standard does not cover the method of calculating income tax which is determined in accordance with the provisions of income tax regulations and directives.

(Paragraph 103)

1.4 Paragraphs of this standard shall be read within the context of the conceptual framework of the financial accounting and general presentation and disclosure standard approved by GCCAAO.

(Paragraph 104)

1.5 This standard applies only to material items. (Paragraph 105)

2. Objective

2.1 The objective of this standard is to identify the requirements for measurement, recognition presentation and disclosure of the provision for income tax in the financial statements in order that these financial statements present fairly the financial position of the enterprise and results of its operations.

(Paragraph 106)

3. Statement

3.1 Measurement and recognition :

3.1.1 Provision for income tax should be measured and recognized for each fiscal period separately, in accordance with applicable income tax regulations and rules.

(Paragraph 107)

3.1.2 The provision for income tax should be adjusted in the same year in which the final assessment is accepted. Differences between the provision for income tax and the final assessment should be recognized in accordance with the requirements of the general presentation and disclosure standard relating to the accounting changes.

(Paragraph 108)

3.1.3 With due regards to the provision of paragraph 3.1.2 above, the tax effect of the temporary differences between the net taxable income and the net accounting income, should be recognized as deferred income taxes. Likewise, the deferred income taxes recorded in accordance with the method of the net change in deferred taxes should be reversed when the underlying differences are reversed.

(Paragraph 109)

3.1.4 Deferred income taxes in debit should be reviewed periodically to determine whether they are expected to be realized. Deferred income taxes in debit which are not expected to be realized should be written off during the current fiscal period.

(Paragraph 110)

3.2 Presentation

3.2.1 Provision for income tax should be presented in the income statement as a separate component after extra-ordinary gains or losses items and before net income.

(Paragraph 111)

3.2.2 Deferred income taxes should be classified as current and non current in accordance with the classification of the assets and liabilities from which the underlying temporary differences are originated.

(Paragraph 112)

3.2.3 Current deferred income taxes should be netted and reported as net balance. Likewise, non current deferred income tax should be netted and reported as net balance in the balance sheet.

(Paragraph 113)

3.3 Disclosure

The financial statements should at least disclose the following:

3.3.1 The accounting policy adopted in the treatment of provision for income tax.

(Paragraph 114)

3.3.2 Opening balance of the provision for income taxes, additions and eliminations made during the period and the closing balance.

(Paragraph 115)

3.3.3 The agreed amount per the final assessment for each period and the differences between the assessed amount and the provision for income taxes for that period and brief description of the nature of such differences.

(Paragraph 116)

3.3.4 Years for which a final tax assessment has not been raised, reasons thereof, the party before which the dispute between the enterprise and the tax authority, if any, is referred to (Appeal Committee…etc.) and the amount in dispute.

(Paragraph 117)

3.3.5 The provision for income tax relating to a subsidiary to which the controlling enterprise is committed.

(Paragraph 118)

3.3.6 Rights and obligations associated with each type of equity.

(Paragraph 119)

3.3.7 Types of permanent differences between net taxable income and net accounting income.

(Paragraph 120)

3.3.8 Types of temporary differences between net taxable income and accounting income originated during the period.

(Paragraph 121)

3.3.9 Any exceptions obtained by the enterprise. And in the case that foreign capital enjoys a tax holiday, the following should be disclosed :

· the period of tax holiday and the remaining period thereof

· Reasons for granting the tax holiday

· Net taxable income from the commencement of the tax holiday up to the end of the current period.

(Paragraph 122)

4. Definitions

4.1 Temporary differences :

These represent revenues, expenses, gains and/or losses included in the computation of net taxable income and net accounting income for different years. These differences are originated in a given year and automatically reversed in a future year(s). These differences result in a difference between the amount of income tax calculated on the basis of net accounting income and the amount of tax due calculated on the basis of the net accounting income for a given year.

(Paragraph 123)

4.2 Permanent differences

These represent revenues, expenses, gains and/or losses included in the computation of the net accounting income but not the net taxable income and vice versa.

(Paragraph 124)

4.3 The method of net change in deferred income tax

This method requires recording the tax effect of temporary differences at the enacted tax rate for the year in which these differences are originated and reversing tax effect of the temporary differences at the enacted tax rate for the year in which these differences are reversed. This does not require the enterprise to maintain records to trace the tax effect of the temporary differences for the years in which the temporary differences originated.

(Paragraph 125)

4.4 Net accounting income

Represents the net accounting income calculated for the purpose of preparing the financial statements in accordance with accepted accounting standards.

(Paragraph 126)

4.5 Net taxable income

Represents net accounting income after adjustment by elements of revenues, expenses, gains and/or losses which are not considered for the purpose of calculating tax.

(Paragraph 127)

4.6 Final Assessment

Is the final tax assessment issued by the tax authority and which has not been appealed against by the enterprise during the statutory appeal period, or the revised tax assessment issued by the tax authority and has not been contested in an appeal or the revised assessment issued in accordance with a ruling by the Appellate Committee.

(Paragraph 128)

4.7 Tax exemption :

Is the entity (or activity) not being subject to income tax upon meeting the conditions specified by the competent authority.

(Paragraph 129)

Analytical Comparative Study

Main topic : The Scope of standard

Sub- topic :

The title of standard : The standard on accounting for income tax

Standards approved in Saudi Arabia	Standards approved in some of GCC Countries (International standards)	Comparison	Conclusion	Proposed statements	Reasons
- This standard identifies the requirements for measurement, and presentation of the provision for income tax, and its disclosure in financial statements of business enterprises regardless of their size or legal form. - Tax measurement in this standard is restricted only to the measurement of the tax effect resulting from temporary and permanent differences between taxable net income and accounting net income, and this standard does not include the method of computation on income tax, which is governed by the regulations and rules for income tax determination. - The paragraphs of this standard should be read in the context of the explanations in the study accompanying the standard, and within the framework of the objectives and Concepts of Financial Accounting and the Presentation and General Disclosure Standard. - This standard applies only to material items.	- This standard should be applied in accounting for income taxes. - For the purpose of this standard, income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint venture on distributions to the reporting enterprise. - This standard does not specify when and how, an enterprise should account for the tax consequences of dividends and other distributions by the reporting enterprise. - This standard does not deal with the methods of accounting for government grants or investment tax credits. However , this standard does deal with the accounting for temporary differences that may arise from such grants or investment tax credits.	The two standards agree that, the scope of the standard is restricted to the determination of the requirements for measurement and presentation of the provision for income tax, and its disclosure in financial statements of business enterprises. It is restricted only to treatment of tax effects resulting from differences between net tax income and net accounting income. Saudi standard formulation is more clear and more inclusive.	Agreed	- This standard identifies the requirements for measurement, presentation and disclosure of income tax in the financial statements of profit-making enterprises irrespective of their size of activities and legal form. - For the purposes of this standard, income tax includes all local and foreign taxes computed on the basis of taxable income. - Measurement of tax shall be limited to showing the tax effect of temporary and permanent differences between the net taxable income and the net accounting income. This standard does not cover the method of calculating income tax which is determined in accordance with the provisions of income tax regulations and directives. - Paragraphs of this standard shall be read within the context of the conceptual framework of the financial accounting and general presentation and disclosure standard approved by GCCAAO. - This standard applies only to material items.	It is suggest to use the Saudi standard text, because it is more clear and inclusive and consistent with other accounting standards, the conceptual framework of financial accounting and the standard of presentation and general disclosure. A paragraph identifying the type of income taxes that are subject to the standard should be added.

Standards approved in

Saudi Arabia

Standards approved in some of GCC Countries (International standards)

Comparison

Conclusion

Proposed statements

Reasons

- This standard identifies the requirements for measurement, and presentation of the provision for income tax, and its disclosure in financial statements of business enterprises regardless of their size or legal form.

- Tax measurement in this standard is restricted only to the measurement of the tax effect resulting from temporary and permanent differences between taxable net income and accounting net income, and this standard does not include the method of computation on income tax, which is governed by the regulations and rules for income tax determination.

- The paragraphs of this standard should be read in the context of the explanations in the study accompanying the standard, and within the framework of the objectives and Concepts of Financial Accounting and the Presentation and General Disclosure Standard.

- This standard applies only to material items.

- This standard should be applied in accounting for income taxes.

- For the purpose of this standard, income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate or joint venture on distributions to the reporting enterprise.

- This standard does not specify when and how, an enterprise should account for the tax consequences of dividends and other distributions by the reporting enterprise.

- This standard does not deal with the methods of accounting for government grants or investment tax credits. However , this standard does deal with the accounting for temporary differences that may arise from such grants or investment tax credits.

The two standards agree that, the scope of the standard is restricted to the determination of the requirements for measurement and presentation of the provision for income tax, and its disclosure in financial statements of business enterprises. It is restricted only to treatment of tax effects resulting from differences between net tax income and net accounting income. Saudi standard formulation is more clear and more inclusive.

Agreed

- This standard identifies the requirements for measurement, presentation and disclosure of income tax in the financial statements of profit-making enterprises irrespective of their size of activities and legal form.

- For the purposes of this standard, income tax includes all local and foreign taxes computed on the basis of taxable income.

- Measurement of tax shall be limited to showing the tax effect of temporary and permanent differences between the net taxable income and the net accounting income. This standard does not cover the method of calculating income tax which is determined in accordance with the provisions of income tax regulations and directives.

- Paragraphs of this standard shall be read within the context of the conceptual framework of the financial accounting and general presentation and disclosure standard approved by GCCAAO.

- This standard applies only to material items.

It is suggest to use the Saudi standard text, because it is more clear and inclusive and consistent with other accounting standards, the conceptual framework of financial accounting and the standard of presentation and general disclosure. A paragraph identifying the type of income taxes that are subject to the standard should be added.

Analytical Comparative Study

Main topic : Objective of the standard

Sub- topic :

The title of standard : The standard on accounting for income tax

Standards approved in

Saudi Arabia

Standards approved in some of GCC Countries (International standards)

Comparison

Conclusion

Proposed statements

Reasons

The objective of this standard is to identify the requirements for measurement, presentation and disclosure of the provision for income tax in the financial statements in order that these financial statements present fairly the financial position of the enterprise and the results of its operations.

The objective of this standard is to prescribe the accounting treatment for income taxes. The principal issue in accounting for income taxes is how to account for the current and future tax consequences of :

a.The future recovery (settlement) of the carrying amount of assets (liabilities) that are recognized in an enterprise's balance sheet, and

b. Transactions and other events of the current period that are recognized in an enterprise's financial statements.

The two standards agree that , the objective of the standard is to describe the accounting treatment for income taxes, although there is some difference in formulation.

Agree

The objective of this standard is to identify the requirements for measurement, recognition presentation and disclosure of the provision for income tax in the financial statements in order that these financial statements present fairly the financial position of the enterprise and results of its operations.

It is suggested to use the Saudi standard text because it is clear and consistent with other accounting standards, the conceptual framework of financial accounting and the standard of presentation and general disclosure. However , "recognition" shall be added as one of the requirements included by the standard.

Analytical Comparative Study

Main topic : Measurement and recognition

Sub- topic :

The title of standard : The standard on accounting for income tax

Standards approved in Saudi Arabia	Standards approved in some of GCC Countries (International standards)	Comparison	Conclusion	Proposed statements	Reasons
- The provision for income tax should be measured and recognized for each financial period in accordance with rules and regulations pertaining to income tax in the Kingdom of Saudi Arabia. - The provision for income tax should be adjusted in the financial year in which the final assessment of income tax is approved. Any differences between the provision for income tax and the final assessment of income tax should recognized in accordance with the requirements related to accounting changes specified in the General Presentation and Disclosure Standard. - Taking into considerat-ion paragraph (3.1.2) above , the tax effect related to the temporary differences between accounting net income and taxable net income should be recognized as deferred income taxes when they arise, And the recorded deferred income taxes should be reversed using the net difference method when the differences related to it reverse. - The deferred income taxes debit should be periodically valuated to determine whether it is expected to be realized. The deferred income taxes debit which is not expected to be realized should be written – off during the financial period.	- Current tax for current and prior periods should , to the extent unpaid, be recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess should be recognized as an asset. - The benefit relating to a tax loss that can be carried back to recover current tax of a previous period should be recognized as an asset. - A deferred tax liability should be recognized for all taxable temporary differences, unless the deferred tax liability arises from : a. Goodwill for which amortization is not deductible for tax purposes. b. The initial recognition of and asset or liability in a transaction which : i. is not a business combination, and ii. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). However an enterprise should recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are satisfied : a. The parent, investor or venture is able to control the timing of the reversal of the temporary difference, and. b. It is probable that the temporary difference will not reverse in the foreseeable future. - A deferred tax asset should be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from: a. Negative goodwill which is treated as deferred income in accordance with IAS 22, Business Combinations; or b. The initial recognition of an asset or liability in a transaction which : i. Is not a business combination; and. ii. At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). However, for deductible temporary differences associated with investment in subsidiaries, branches and associates, and interests in Joint ventures, a differed tax asset should be recognized. - A deferred tax asset should be recognized for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. - Current tax liabilities (assets) for the current and prior periods should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. - The measurement of deferred tax liabilities and deferred tax assets should reflect the tax consequences that would follow from the manner in which the enterprise expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. - The carrying amount of a deferred tax assets should be reviewed at each balance sheet date. An enterprise should reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction should be reversed to the extent that it becomes probable that sufficient taxable profit will be available.	The standards agree on measurement basis for the expenses of income tax and related liabilities that may fall on the enterprise. The standard adopted by some of GCC Countries (except Saudi Arabia), uses the term "tax asset" to mean debit tax differences, and the term tax liability " to mean credit tax differences. Although the international standard includes more details with respect to treatment of tax assets and liabilities, the Saudi standard is more specific and more clearer in the treatment of credit and debit differences, using clear approach and terms generally accepted in GCC Countries.	Limited difference	- The provision for income tax should be measured and recognized for each fiscal period separately, in accordance with applicable income tax regulations and rules. - Provision for income tax should be measured and recognized for each fiscal period separately, in accordance with applicable income tax regulations and rules. - The provision for income tax should be adjusted in the same year in which the final assessment is accepted. Differences between the provision for income tax and the final assessment should be recognized in accordance with the requirements of the general presentation and disclosure standard relating to the accounting changes. - With due regards to the provision of paragraph 3.1.2 above, the tax effect of the temporary differences between the net taxable income and the net accounting income, should be recognized as deferred income taxes. Likewise, the deferred income taxes recorded in accordance with the method of the net change in deferred taxes should be reversed when the underlying differences are reversed. - Deferred income taxes in debit should be reviewed periodically to determine whether they are expected to be realized. Deferred income taxes in debit which are not expected to be realized should be written off during the current fiscal period.	There is an agreement in accounting treatment and limited difference in the texts of the two standards, however the Saudi standard text is sufficient and clear. It had been reformulated in order to be more consistent with other standards of financial accounting.

Standards approved in

Saudi Arabia

Standards approved in some of GCC Countries (International standards)

Comparison

Conclusion

Proposed statements

Reasons

- The provision for income tax should be measured and recognized for each financial period in accordance with rules and regulations pertaining to income tax in the Kingdom of Saudi Arabia.

- The provision for income tax should be adjusted in the financial year in which the final assessment of income tax is approved.

Any differences between the provision for income tax and the final assessment of income tax should recognized in accordance with the requirements related to accounting changes specified in the General Presentation and Disclosure Standard.

- Taking into considerat-ion paragraph (3.1.2) above , the tax effect related to the temporary differences between accounting net income and taxable net income should be recognized as deferred income taxes when they arise, And the recorded deferred income taxes should be reversed using the net difference method when the differences related to it reverse.

- The deferred income taxes debit should be periodically valuated to determine whether it is expected to be realized. The deferred income taxes debit which is not expected to be realized should be written – off during the financial period.

- Current tax for current and prior periods should , to the extent unpaid, be recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess should be recognized as an asset.

- The benefit relating to a tax loss that can be carried back to recover current tax of a previous period should be recognized as an asset.

- A deferred tax liability should be recognized for all taxable temporary differences, unless the deferred tax liability arises from :

a. Goodwill for which amortization is not deductible for tax purposes.

b. The initial recognition of and asset or liability in a transaction which :

i. is not a business combination, and

ii. at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

However an enterprise should recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures, except to the extent that both of the following conditions are satisfied :

a. The parent, investor or venture is able to control the timing of the reversal of the temporary difference, and.

b. It is probable that the temporary difference will not reverse in the foreseeable future.

- A deferred tax asset should be recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilized, unless the deferred tax asset arises from:

a. Negative goodwill which is treated as deferred income in accordance with IAS 22, Business Combinations; or

b. The initial recognition of an asset or liability in a transaction which :

i. Is not a business combination; and.

ii. At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

However, for deductible temporary differences associated with investment in subsidiaries, branches and associates, and interests in Joint ventures, a differed tax asset should be recognized.

- A deferred tax asset should be recognized for the carryforward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized.

- Current tax liabilities (assets) for the current and prior periods should be measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date.

- The measurement of deferred tax liabilities and deferred tax assets should reflect the tax consequences that would follow from the manner in which the enterprise expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities.

- The carrying amount of a deferred tax assets should be reviewed at each balance sheet date. An enterprise should reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction should be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

The standards agree on measurement basis for the expenses of income tax and related liabilities that may fall on the enterprise. The standard adopted by some of GCC Countries (except Saudi Arabia), uses the term "tax asset" to mean debit tax differences, and the term tax liability " to mean credit tax differences. Although the international standard includes more details with respect to treatment of tax assets and liabilities, the Saudi standard is more specific and more clearer in the treatment of credit and debit differences, using clear approach and terms generally accepted in GCC Countries.

Limited difference

- The provision for income tax should be measured and recognized for each fiscal period separately, in accordance with applicable income tax regulations and rules.

- Provision for income tax should be measured and recognized for each fiscal period separately, in accordance with applicable income tax regulations and rules.

- The provision for income tax should be adjusted in the same year in which the final assessment is accepted. Differences between the provision for income tax and the final assessment should be recognized in accordance with the requirements of the general presentation and disclosure standard relating to the accounting changes.

- With due regards to the provision of paragraph 3.1.2 above, the tax effect of the temporary differences between the net taxable income and the net accounting income, should be recognized as deferred income taxes. Likewise, the deferred income taxes recorded in accordance with the method of the net change in deferred taxes should be reversed when the underlying differences are reversed.

- Deferred income taxes in debit should be reviewed periodically to determine whether they are expected to be realized. Deferred income taxes in debit which are not expected to be realized should be written off during the current fiscal period.

There is an agreement in accounting treatment and limited difference in the texts of the two standards, however the Saudi standard text is sufficient and clear.

It had been reformulated in order to be more consistent with other standards of financial accounting.

Analytical Comparative Study

Main topic : The Presentation

Sub- topic :

The title of standard : The standard on accounting for income tax

Standards approved in Saudi Arabia	Standards approved in some of GCC Countries (International standards)	Comparison	Conclusion	Proposed statements	Reasons
-Taking into consideration paragraph (3.2.2) below, the provision for income tax should be presented as a separate item in the income statement after the extraordinary gains or losses and before net income. - Provision for income tax in mixed companies and partnerships should be presented as a separate item in the statement of owners' equity or the statement of retained earnings, as the case may be . - Deferred income taxes should be classified as current and noncurrent in accordance to the classification of the related assets or liabilities. The current deferred income taxes should be offset against each other and only a single net current amount should be presented in the statement of financial position; the noncurrent deferred income taxes should also be offset against each other and only a single net noncurrent amount should be presented in the statement of financial position.	- Current and deferred tax should be recognized as income or an expense and included in the net profit or loss for the period, except to the extent that the tax arises from : a. A transaction or event which is recognized, in the same or a different period, directly in equity or. b. a business combination that is an acquisition. - Tax assets and tax liabilities should be presented separately from other assets and liabilities in the balance sheet. Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities. - An enterprise should offset current tax assets and current tax liabilities if, and only if, the enterprise : a. has a legally enforceable right to set off the recognized amounts; and. b. intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. - An enterprise should offset deferred tax assets and deferred tax liabilities, and only if : a. the enterprise has a legally enforceable right to set off current tax assets against current tax liabilities; and. b. the deferred tax assets and the deferred tax liabilities related to income taxes levied by the same taxation authority on either : (i) the same taxable entity; or. (ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered. - The tax expense (income) related to profit or loss from ordinary activities should be presented on the face of the income statement.	Due the special nature of zakat and income system in Saudi income tax standard apply only to foreign shareholders' shares in net income of a foreign or mixed ownership enterprise, which is different practice considering other GCC Countries. The Saudi standard distinguish for presentation in the various companies by the kind of its ownership. The texts of the standard may be subjected to adaptation in order to be more inclusive and more flexable so as to be adopted by other GCC countries in consistency with their regulations and rules, and so as to be consistent with the conceptual framework of financial accounting and the standard of presentation and general disclosure approved by GCCAAO.	Significant difference	- Provision for income tax should be presented in the income statement as a separate component after extra-ordinary gains or losses items and before net income. - Deferred income taxes should be classified as current and non- current in accordance with the classification of the assets and liabilities from which the underlying temporary differences are originated. - Current deferred income taxes should be netted and reported as net balance. Likewise, non current deferred income tax should be netted and reported as net balance in the balance sheet.	The Saudi standard text, after being amended, is used as basis for formulation of proposed text, in such that make the text clear, easy to follow and consistent with the standard of presentation and general disclosure.

Standards approved in

Saudi Arabia

Standards approved in some of GCC Countries (International standards)

Comparison

Conclusion

Proposed statements

Reasons

-Taking into consideration paragraph (3.2.2) below, the provision for income tax should be presented as a separate item in the income statement after the extraordinary gains or losses and before net income.

- Provision for income tax in mixed companies and partnerships should be presented as a separate item in the statement of owners' equity or the statement of retained earnings, as the case may be .

- Deferred income taxes should be classified as current and noncurrent in accordance to the classification of the related assets or liabilities. The current deferred income taxes should be offset against each other and only a single net current amount should be presented in the statement of financial position; the noncurrent deferred income taxes should also be offset against each other and only a single net noncurrent amount should be presented in the statement of financial position.

- Current and deferred tax should be recognized as income or an expense and included in the net profit or loss for the period, except to the extent that the tax arises from :

a. A transaction or event which is recognized, in the same or a different period, directly in equity or.

b. a business combination that is an acquisition.

- Tax assets and tax liabilities should be presented separately from other assets and liabilities in the balance sheet. Deferred tax assets and liabilities should be distinguished from current tax assets and liabilities.

- An enterprise should offset current tax assets and current tax liabilities if, and only if, the enterprise :

a. has a legally enforceable right to set off the recognized amounts; and.

b. intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

- An enterprise should offset deferred tax assets and deferred tax liabilities, and only if :

a. the enterprise has a legally enforceable right to set off current tax assets against current tax liabilities; and.

b. the deferred tax assets and the deferred tax liabilities related to income taxes levied by the same taxation authority on either :

(i) the same taxable entity; or.

(ii) different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

- The tax expense (income) related to profit or loss from ordinary activities should be presented on the face of the income statement.

Due the special nature of zakat and income system in Saudi income tax standard apply only to foreign shareholders' shares in net income of a foreign or mixed ownership enterprise, which is different practice considering other GCC Countries. The Saudi standard distinguish for presentation in the various companies by the kind of its ownership. The texts of the standard may be subjected to adaptation in order to be more inclusive and more flexable so as to be adopted by other GCC countries in consistency with their regulations and rules, and so as to be consistent with the conceptual framework of financial accounting and the standard of presentation and general disclosure approved by GCCAAO.

Significant difference

- Provision for income tax should be presented in the income statement as a separate component after extra-ordinary gains or losses items and before net income.

- Deferred income taxes should be classified as current and non- current in accordance with the classification of the assets and liabilities from which the underlying temporary differences are originated.

- Current deferred income taxes should be netted and reported as net balance. Likewise, non current deferred income tax should be netted and reported as net balance in the balance sheet.

The Saudi standard text, after being amended, is used as basis for formulation of proposed text, in such that make the text clear, easy to follow and consistent with the standard of presentation and general disclosure.

Analytical Comparative Study

Main topic : Disclosure

Sub- topic :

The title of standard : The standard on accounting for income tax

Standards approved in Saudi Arabia	Standards approved in some of GCC Countries (International standards)	Comparison	Conclusion	Proposed statements	Reasons
Financial statements should , at least , disclose : - Accounting policies used in treatment of the provision for income tax. - The balance of the provision for income tax at the beginning of the period, additions and deductions made during the period and its balance at the end of the period. - The amount of the finally approved assessment for each period, the amount of differences between it and the provision for income tax for that period and a brief summary of their nature. - The years for which a final assessment has not been determined and the reason therefore as well as the body considering the dispute if any between the department and the enterprise and the amount which is the subject of the dispute. - The provision for income tax of a subsidiary which a parent enterprise undertook to pay. - Tax exemptions enjoyed by an international enterprise which is eligible for exemptions by its articles of association from taxes, commitments, and financial restrictions in the Kingdom of Saudi Arabia. - The privileges and the commitments associated with each type of owners' equity. - Types of permanent differences between accounting net income and taxable net income. - If foreign capital enjoys tax exemption the enterprise should disclose : · The period of tax exemption and the period remaining for that exemption. · The basis for the tax exemption. · The share of the foreign capital in taxable income from the beginning of the exemption period to the end of the current period.	- The major components of tax expense (income) should be disclosed separately. - The following should also be disclosed separately : a. The aggregate current and deferred tax relating to items that are charged or credited to equity; b. tax expense (income) relating to extraordinary items recognized during the period. c. an explanation of the relationship between tax expense (income)and accounting profit in either or both of the following forms : (i) and numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or. (ii) a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed; d. an explanation of changes in the applicable tax rate(s) compared to the previous accounting periods; e. The amount of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognized in the balance sheet; f. the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized. g. in respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits : i. the amount of the deferred tax assets and liabilities recognized in the balance sheet for each period presented; ii. the amount of the deferred tax income or expense recognized in the income statement, if this is not apparent from the changes in the amounts recognized in the balance sheet; and. h. in respect of discontinued operations, the tax expense relating to : i. the gain or loss on discontinuance; and. ii. the profit or loss from the ordinary activities of the discontinued operation for the period, together with the corresponding amounts for each prior period presented. i. Tax consequences amount for dividends to the enterprise's shareholders which was declared before publishing the financial statements and were not recognized as liabilities in the financial statements. - An enterprise should disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when : - the utilization of the deferred tax asset is dependent on future taxable profits, in excess of the profits arising from the reversal existing taxable temporary differences; and. b. the enterprise has suffered a loss in either the current or proceeding period in the tax jurisdiction to which the deferred tax asset relates.	There is a limited difference between the requirements of disclosure in the two standards arising from the difference in formulation. The Saudi standard formulation is more consistent with other texts of the proposed standard.	Limited difference	The financial statements should at least disclose the following: - The accounting policy adopted in the treatment of provision for income tax. - Opening balance of the provision for income taxes, additions and eliminations made during the period and the closing balance. - The agreed amount per the final assessment for each period and the differences between the assessed amount and the provision for income taxes for that period and brief description of the nature of such differences. - Years for which a final tax assessment has not been raised, reasons thereof, the party before which the dispute between the enterprise and the tax authority, if any, is referred to (Appeal Committee…etc.) and the amount in dispute. - The provision for income tax relating to a subsidiary to which the controlling enterprise is committed. - Rights and obligations associated with each type of equity. - Types of permanent differences between net taxable income and net accounting income. - Any exceptions obtained by the enterprise. And in the case that foreign capital enjoys a tax holiday, the following should be disclosed : · the period of tax holiday and the remaining period thereof · Reasons for granting the tax holiday · Net taxable income from the commencement of the tax holiday up to the end of the current period.	The Saudi standard formulation ins more consistent with other texts of the proposed standard.

Standards approved in

Saudi Arabia

Standards approved in some of GCC Countries (International standards)

Comparison

Conclusion

Proposed statements

Reasons

Financial statements should , at least , disclose :

- Accounting policies used in treatment of the provision for income tax.

- The balance of the provision for income tax at the beginning of the period, additions and deductions made during the period and its balance at the end of the period.

- The amount of the finally approved assessment for each period, the amount of differences between it and the provision for income tax for that period and a brief summary of their nature.

- The years for which a final assessment has not been determined and the reason therefore as well as the body considering the dispute if any between the department and the enterprise and the amount which is the subject of the dispute.

- The provision for income tax of a subsidiary which a parent enterprise undertook to pay.

- Tax exemptions enjoyed by an international enterprise which is eligible for exemptions by its articles of association from taxes, commitments, and financial restrictions in the Kingdom of Saudi Arabia.

- The privileges and the commitments associated with each type of owners' equity.

- Types of permanent differences between accounting net income and taxable net income.

- If foreign capital enjoys tax exemption the enterprise should disclose :

· The period of tax exemption and the period remaining for that exemption.

· The basis for the tax exemption.

· The share of the foreign capital in taxable income from the beginning of the exemption period to the end of the current period.

- The major components of tax expense (income) should be disclosed separately.

- The following should also be disclosed separately :

a. The aggregate current and deferred tax relating to items that are charged or credited to equity;

b. tax expense (income) relating to extraordinary items recognized during the period.

c. an explanation of the relationship between tax expense (income)and accounting profit in either or both of the following forms :

(i) and numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s), disclosing also the basis on which the applicable tax rate(s) is (are) computed; or.

(ii) a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis on which the applicable tax rate is computed;

d. an explanation of changes in the applicable tax rate(s) compared to the previous accounting periods;

e. The amount of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognized in the balance sheet;

f. the aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized.

g. in respect of each type of temporary difference, and in respect of each type of unused tax losses and unused tax credits :

i. the amount of the deferred tax assets and liabilities recognized in the balance sheet for each period presented;

ii. the amount of the deferred tax income or expense recognized in the income statement, if this is not apparent from the changes in the amounts recognized in the balance sheet; and.

h. in respect of discontinued operations, the tax expense relating to :

i. the gain or loss on discontinuance; and.

ii. the profit or loss from the ordinary activities of the discontinued operation for the period, together with the corresponding amounts for each prior period presented.

i. Tax consequences amount for dividends to the enterprise's shareholders which was declared before publishing the financial statements and were not recognized as liabilities in the financial statements.

- An enterprise should disclose the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when :

- the utilization of the deferred tax asset is dependent on future taxable profits, in excess of the profits arising from the reversal existing taxable temporary differences; and.

b. the enterprise has suffered a loss in either the current or proceeding period in the tax jurisdiction to which the deferred tax asset relates.

There is a limited difference between the requirements of disclosure in the two standards arising from the difference in formulation. The Saudi standard formulation is more consistent with other texts of the proposed standard.

Limited difference

The financial statements should at least disclose the following:

- The accounting policy adopted in the treatment of provision for income tax.

- Opening balance of the provision for income taxes, additions and eliminations made during the period and the closing balance.

- The agreed amount per the final assessment for each period and the differences between the assessed amount and the provision for income taxes for that period and brief description of the nature of such differences.

- Years for which a final tax assessment has not been raised, reasons thereof, the party before which the dispute between the enterprise and the tax authority, if any, is referred to (Appeal Committee…etc.) and the amount in dispute.

- The provision for income tax relating to a subsidiary to which the controlling enterprise is committed.

- Rights and obligations associated with each type of equity.

- Types of permanent differences between net taxable income and net accounting income.

- Any exceptions obtained by the enterprise. And in the case that foreign capital enjoys a tax holiday, the following should be disclosed :

· the period of tax holiday and the remaining period thereof

· Reasons for granting the tax holiday

· Net taxable income from the commencement of the tax holiday up to the end of the current period.

The Saudi standard formulation ins more consistent with other texts of the proposed standard.

Cases and Practical Examples for the Application of

The Standard on Accounting for Tax Income

Application case for illustrating the effect of temporary differences between net accounting income and net tax income on the expense of income tax and deferred income taxes

Assumptions :

1. A foreign corporation subject to income tax on corporation profits.

2.Net income of the corporation before depreciation and tax is 1,000,000 monetary units annually for five years and 2,000,000 monetary units annually for the next five years.

3. No permanent differences between net accounting income and net tax income.

4. The corporation purchased a group of fixed assets, for an original cost of 1,000,000 monetary units to be depreciated, for financial statement purposes, over five years using the straight – line method, and for income tax purposes over ten years using the straight – line method also.

5. At the end of the first five years, the corporation purchased another group of fixed assets of original cost amounting to 2,000,000 monetary units and decided to depreciate it, for financial statement purposes, over five years using the straight – line method and for income tax purposes, aver ten years using the straight line method also.

6. The overage of income tax rate on the corporation profits for net income not exceeding 1,000,000 monetary units is about 37% and average of tax rate on income not exceeding 2,000,000 monetary units is about 41%.

First : The following schedule indicates net tax income , net accounting income, tax expense and payable tax for each year of the first five years:

Description	Net accounting income	Net tax income
Net income before depreciation and tax	1,000,000	1,000,000
Depreciation	(2,000,000)	(100,000)
Net income before tax	800,000	900,000
Tax rate	37%	37%
Tax payable and tax expense	296000	333,000

Second : Annual deferred income tax during the first five years (years during which temporary differences arise as a result of depreciation ) :

Annual payable tax	333,000
Annual tax expense	(296,000)
Deferred income tax	37,000

Third : Annual entry to record tax expense, payable tax and deferred income tax during the first five years :

Expense of income tax		296,000
Deferred income taxes		37,000
	Payable income tax		333,000

Fourth : Balance of deferred income taxes at the end of the first five years :

37,000 monetary units X 5 years = 185,000 monetary units

Note : This balance is a debit non-current balance because the temporary differences, in this case, are related to fixed assets.

Fifth : The following schedule indicates net tax income and net accounting income for each year of the second five years :

Note : it should be considered that, during this period, the temporary differences related to the depreciation of the first group of fixed assets will be reversed and temporary difference will arise as a result of the depreciation of the second group of assets.

Description	Net accounting income	Net tax income
Net income before depreciation and tax	2,000,000	2,000,000
Depreciation of the first group of fixed assets	Zero	(100,000)
Depreciation of the second group of fixed assets.	(400,000)	(200,000)
Net income before tax	1,600,000	1,700,000

Sixth : Annual tax payable to the treasury during the second five years :

1,700,000 monetary units X 41% = 697,000 monetary units

Seventh : Expense of income tax for each year of the second five years :

The expense measurement depends on whether the corporation fellows net change method or aggregate change method in income taxes to record the effect of temporary differences when reversed.

1. Expense of income tax and deferred income tax in accordance with the net change method in deferred income taxes :

1.1 Expense of income tax :

Net accounting income 1,600,000 monetary units

Tax rate 41%

Annual tax expense 656,000 monetary units

1.2 Annual change in deferred income taxes =

697,000 – 656,000 = 41,000 monetary units

1.3 Annual entry to record the expense of tax , payable tax and deferred income taxes

Expense of income tax		656,000
Deferred income taxes		41,000
	Payable income tax		697,000

1.4 Balance of deferred income taxes at the end of the second five years :

Balance of account at the end of the first five years 185,000 monetary units

Annual addition (41,000 X 5) 205,000 monetary units

390,000 monetary units

2. Expense of income tax and deferred income tax in accordance with the aggregate change method in deferred income taxes :

2.1 Expense of income tax :

Payable income tax	697,000 monetary unit
Tax effect of reversed temporary differences (100,000 monetary units X 37%)	37,000
Tax effect of arising temporary differences (200,000 monetary units X 41%)	(82,000)
	652,000

2.2 Annual change in deferred income taxes :

Arising deferred income taxes	82,000 monetary units
Reversed income taxes	(37,000) monetary units
Annual change in deferred income taxes	45,000 monetary units

2.3 Annual entry to record the expenses of tax , payable tax and deferred income tax :

Expense of income tax		652,000
Deferred income taxes		45,000
	Payable income tax		697,000

2.4 Balance of deferred income taxes at the end of the second five years :

Balance of account at the end of first five years	185,000 monetary units
Tax effect of reversed temporary differences (37,000 monetary unit X 5 years)	(185,000) monetary units
Tax effect of arising temporary differences (82,000 monetary unit X 5 years)	(410,000) monetary units
Balance of account	410,000 monetary units