IFRS Adoption in Nigeria - Tax Implications

IFRS Adoption in Nigeria - Tax Implications
Paper presented by Mrs. Titilayo Fowokan (ACA, ACTI) CITN Seminar on IFRS Adoption in Nigeria
Overview
Introduction Why do countries adopt IFRS? IFRS Versus Nigerian GAAP
General implications for IFRS adoption

Tax implication of IFRS adoption The way forward
Conclusion
Introduction
The theoretical foundations underpinning Nigerian Generally Accepted Accounting Policies (GAAP) and International Financial Reporting Standards (IFRS) are not altogether similar. As such, there will be increased responsibilities in setting sound accounting policies that fit business models, on the part of the professional accountant, who must also be ready to explain and justify these policies in the context of the IFRS framework.
The objectives and importance of introducing IFRS include:

To develop a single set of high quality understandable and enforceable global accounting
standard that require transparent and comparable information in financial statements

To help participants in various capital markets (investors, stockbrokers etc) across the globe to
understand financial statements;

To work actively with the national standard setter to bring about convergence of national
accounting standards;
IFRSs are designed for adoption by profit-oriented entities.
IFRSs require that financial statements (FS) give a true and fair view of the financial health of
entities.
3 IFRS Adoption in Nigeria - Tax Implications
Why do countries adopt IFRS?

A financial reporting system supported by strong governance, high quality
standards, and sound regulatory frameworks is key to economic development. Indeed, high quality standards of financial reporting, auditing, and ethics underpin the trust that investors place in financial and non-financial information and, thus, play an integral role in contributing to a countrys economic growth and financial stability.
accounting standards would increase comparability of financial information among companies, and could foster more effective and efficient allocation of capital on a global basis. Enhanced comparability of financial information among all companies in all capital markets should increase the usefulness of the information available to users in making such allocation decisions. IFRS for the preparation of entities financial reports. One of the factors when countries adopt IFRS is the Net economic value of IFRS.
There is the belief that, the use of a single set of high-quality, globallyaccepted
Different countries have their specific consideration for adopting the use of
Net economic value of IFRS

The net economic value of IFRS to a country arises out of two factors:
a)
b)
the value from having a shared body of accounting standards; and

the relative quality of local governance institutions.
The value from having a shared body of accounting standards:
Proponents of IFRS argue that by adopting a common body of international standards, countries can expect to lower the cost of information processing and auditing to capital market participants (Barth, 2007; 2008). More preparers, users, and auditors of financial reports can be expected to become familiar with one common set of international accounting standards than with various local accounting standards.
The relative quality of local governance institutions:
The relative quality of local accounting standards is an important determinant in the decision to adopt IFRS. Local accounting standards are part of a complex system of governance institutions that include auditor training, auditing standards, enforcement (regulatory and judicial), precedent for the protection of property rights, government corruption, and the role of the press, among others.
Why did Nigeria decide to adopt IFRS?

Since the 1960s, business has become more and more global and thus lost a significant
part of its national identity. Nigerias global players are reporting to global finance market, therefore it makes sense to have global financial reporting benchmarks.
Nigerian businesses are making more and more international transactions, cross border
listing is now common place, accounting firms are beginning to follow their growing corporate clients into other countries in order to maintain services (this is what accounts partly for international accounting firms that you see nowadays which is now also forcing significant number of smaller firms to seek international networks) and governments are engaging in wide range reviews that recognise the importance of reassuring the markets and the public at large that corporate reporting and governance frameworks are sufficiently robust.
The adoption of IFRS in Nigeria will create opportunities for a broader finance
transformation for companies in Nigeria, increase centralisation of their process and assist in the realization of economies of scale.
IFRS Vs Nigerian GAAP

Main Differences
IFRS Vs Nigerian GAAP

Some of the accounting issues that Nigerian companies are likely to encounter which may also have tax implications include (but are not limited to) the following:
Fair value accounting for financial instruments Impairment provisioning for financial assets Risk management disclosures The scope of consolidation Application of the components approach for property, plant and equipment Identification and classification of lease agreements Accounting for business combination Impairment testing of goodwill Significant increased disclosure in general
Main differences - IFRS Vs SAS

IFRS Report
Financial instruments (IAS 32 & 39, IFRS 7 & 9)
Comparison to Nigerian GAAP

Extensive use of fair values; income statement volatility. Impact will be wide spread across all financial statements components. IFRS introduces a new set of accounting rules in the form of detailed guidance for derivatives, hedge accounting and derecognition of financial instruments. Impairment of financial assets follows an incurred loss model.
Revenue recognition (IAS 18):
More prescriptive and comprehensive than under Nigerian GAAP. For banks and financial institutions, the impact of these differences could be significant depending on the size of their asset portfolios and nature of fees. More rigorous process of determining goodwill, identifiable assets and liabilities, fair values and purchase price allocation. A key challenge is determining whether a business has been acquired as opposed to an asset.
Business combinations:
Main differences - IFRS Vs SAS

IFRS Report
Liabilities and equity distinctions:
Comparison to Nigerian GAAP

The distinction between equity and liability is based on substance rather than form. For instance, convertible debts must be split into debt and equity components and redeemable preference shares should be classified as debt rather than equity.
Format and components of financial statements:
The format of financial statements, components and nomenclature of certain items of financial statements are different under IFRS. For instance, there is no value added statements or five-year financial summary under IFRS while statement of changes in equity is required.
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General Implications of IFRS Adoption
General implications
The adoption of IFRS will specifically result in the following:
More entities, such as joint ventures, special purpose operations, and
franchises, may be consolidated.
Liabilities will be recognised and measured differently. Development costs will be deferred and amortized. Impairment charges will be recognised earlier and measured differently Financial assets and liabilities will be measured differently Depreciation computation will be more complicated There will be a need to focus more on the economics underlying transactions
and events.
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Cross functional requirements

The adoption of IFRS will require that cross functional accountants work closely together. For instance:
The need for detailed hedge documentation and effectiveness testing will
impact those responsible for treasury.
Tax department will have to work closely with accounting and corporate
finance teams to examine the impact IFRS might have on new financing structures.
Human resources might be required to adjust the calculation base for certain
types of compensation, such as profit sharing and bonuses as well as retirement benefit entitlements such as gratuity.
Marketing and sales might be confronted with issues related to branding and
trademarks, net value of inventory, revenue recognition, conditions of sale and derivatives.
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Focus areas
With the adoption of IFRS, companies and tax professionals would have to focus more on:
Record keeping, chart of accounts and mapping Preparation and presentation of financial statements Disclosure requirements Measurement bases of assets and liabilities Revenue recognition Nomenclature and format Approach adopted for audit of tax estimates Preparation of tax computations / Tax compliance requirements
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Tax Implications of IFRS Adoption

Main Differences
Tax laws Vs Nigerian GAAP

Prior to adoption of IFRS, the tax laws and accounting standards have different
treatment of tax sensitive items such as general provisions for bad and doubtful debts, depreciation, provision for gratuity, etc.
to tax on income/profit in Nigeria whereas financial statements are prepared in accordance with Generally Accepted Accounting Practice (GAAP) which is now to be replaced with IFRS. Nigerian Accounting Standards Board (NASB) which stipulates disclosure requirements for financial reports. the Companies and Allied Matters Act (CAMA).
The Companies Income Tax Act (CITA) is the legal basis for assessing companies
The Nigerian GAAPs are based on Statement of Accounting Standards issued by
The preparation of financial reports is also guided by the statutory provisions in
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IFRS adoption - Tax implications

Any company considering the adoption of international financial reporting
standards (IFRS) will need to consider the tax implications of such a move.
The adoption of IFRS will have tax implications for organisations, particularly in
light of the greater emphasis that IFRS place on fair-value accounting.

The immediate tax implication is that some items that ordinarily would have
been treated as off balance sheet would now be reflected on balance sheet, giving room for fairer presentation of the financial statements that IFRS is set out to achieve.
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IFRS adoption Tax implications

Issues in IFRS that have tax implications include (but not limited to) the following:
Fair value gains and losses on investment properties and financial
instruments
Dividends on redeemable preference shares
Impairment of upstream assets

IFRS Transition adjustments Differences between allowable tax items and non-deductible items
Different milestone dates for adoption of IFRS may affect comparability of
tax yield between similar entities.
There are also implications for tax administration, some of which will also be considered.
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IFRS adoption Tax Admin issues

Issues
Format of Financial Statement presentation Currency of FS presentation
IFRS No specific presentation format prescribed Financial Statements could be in currency other than the functional currency
Nigerian GAAP Format as prescribed by CAMA
Possible tax challenges Understanding of IFRS format in relation to CAMAs prescribed format for the purpose of tax preparation Conversion rate from functional currency to other currency for financial statements, tax treatment of exchange gain/loss
CAMA requirements a) is functional currency except for Oil Exploration & Production b) Companies Adjustments are corrected in retained earnings Capitalised
Correction of prior year accounting errors Expenses on reorganisation
Adjustment of opening equity and comparatives Expensed as incurred regardless of the amount
FIRS not likely to accept changes in equity due to prior year adjustment FIRS may not accept IFRS treatment on the basis of the matching concept
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Issues
Property held by a lessee under operating lease Decommissioning and restoration cost incurred through the production of inventory Exceptional and Extra-ordinary Items
IFRS
Can be recognised as investment property under certain conditions Included in coast of inventory and eventually cost of sales
Nigerian GAAP
Silent on whether it can be recognised in the balance sheet No guidance regarding treatment of such costs
Possible tax challenges

Right of capital allowance claim could be made by two entities (i.e. Lessor and Lessee) FIRS current position is that capital cost cannot form part of revenue inventory
No requirement to state exceptional items separately in the Financial Statements. Stating of extraordinary item is prohibited.
Financial Statement is required to state profit on ordinary activities distinct from exceptional or extraordinary items.
a)
b)
Confusion in income recognition between normal business activities and extraordinary or exceptional income. Capital gains tax issue Difficult to determine balancing allowance/ charge
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Issues
Revenue recognition
IFRS Based on a single standards that contain general principles
Nigerian GAAP No single standards. Revenue is recognised when it is capable of objective measurement and value of asset to be received in exchange is reasonably certain
Possible tax challenges a) Likelihood of paying tax on unrealised income b) Difficulty in separation of income for tax purposes.
Segment reporting
Only required for entities not quoted on stock exchanges
Required by entities that carry out different lines of business or located in different geographical points (E.g. Insurance Life Vs Non-life, Oil & Gas Upstream Vs Mid Vs Down stream, etc)
Difficulty in ascertaining the actual profit for tax purposes
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IFRS adoption Vs Tax laws

Without a formal adoption of IFRS in Nigeria, compliance with the standard
cannot be enforced and IFRS financial statements may not be acceptable for statutory purposes including filing of tax returns, CAC annual returns, filing with NSE/SEC, returns to the CBN, etc.
While companies who already prepare IFRS financial statements out of
necessity may have some sort of advantage, all entities still need to brace up for the significant change in the financial reporting landscape that will be brought about by the adoption of IFRS in Nigeria.
There may be need for introduction of fiscal filters for the transition process.
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Issues for tax consideration

Item
Transition adjustments
Introduction of new filters

Yes
Difficulty level
Complex
IFRS
IFRS 1
Transition adjustments will be registered in equity, namely in retained earnings and reserves. Specific taxation rules should be defined for these adjustments. For example, a transition period of three years for recognition of tax change or income.
Financial Instruments Yes Complex IAS 39
Current fiscal legislation states that only realised capital gains and losses are subject to taxation. In an IFRS environment, current fiscal rules should be maintained. Impairment Evaluate Complex IAS 39, IAS 36 Tax authority should evaluate whether to accept impairment losses determined under IFRS or define specific rules and support the introduction of a fiscal filter. Fixed tangible assets Yes Easy IAS 16 IFRS allow entities to measure fixed tangible assets at amortised cost or at fair value. Each entity can choose between one of the referred measurement methods. For tax purposes, the amortised cost method should be considered, with definition of assets economic life. 23 IFRS Adoption in Nigeria - Tax Implications
Issues for tax consideration

Item
Loan loss provisioning
IFRS Requirements
Tax Consideration
Impairment
Impairment for loan loss portfolio is based on a) Should loan loss provision on an incurred loss model. In order to calculate portfolio classified as non the impairment loan losses, banks will have to performing assets under segment the portfolio in homogeneous IFRS be treated as specific? If groups, defined impairment triggers, calculate not, consider impact on tax statistical parameters and consider fair value cash flow (taxpayer & collaterals government). b) What should be the tax On transition date any unrecognised loan loss treatment of unrecognised provisions will be recorded against retained loan loss recorded against earnings. retained earnings? Required for assets (tangible and intangible) Should impairment be treated as including financial instruments. provisions (general & specific) or losses (realised & unrealised)? Expenses that do not meet the criteria of capitalisation will be expensed or otherwise reclassified as intangible or fixed assets. Should tax rule on capital expense be modified?
Other assets
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IFRS adoption Vs UK Tax law

Considering that most of Nigerian tax laws are fashioned after the UK tax law, we can leverage on the UK Inland Revenue approach to handling the tax implication of UK conversion from GAAP to IFRS. Key issues addressed in some of the publications by the UK Inland Revenue on tax implications of IFRS adoption are as follows: Financial instruments
Under IFRS, International Accounting Standards (IAS) 39 provides a comprehensive code for accounting for financial instruments. In response to this, UK tax law in the loan relationships and derivative contracts rules, currently requires the accounting treatment to be followed in most cases, provided it amounts to either an "authorised accruals basis" or an "authorised mark to market basis".
The main change brought about by IAS 39 will be to require certain assets to be accounted for on a mark-to-market basis. If this were followed for tax purposes, it would require unrealized profits and losses on the instruments affected to be brought into account. This includes all derivative financial instruments, any part of a hedged asset where the hedging instrument is fair-valued and other financial instruments that are designated as "available for sale". The UK Inland Revenue has accepted that this will not be appropriate in relation to certain hedging arrangements and "available for sale" assets. Certain equity and property derivatives, will be split for tax purposes.
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IFRS adoption Vs UK Tax law

Intangibles
IFRS (IAS 38) will not permit amortization of goodwill. Tax relief for amortization of goodwill will not therefore be available for companies adopting IFRS. Companies that opt to show goodwill at its amortized cost upon adopting IAS will not suffer a clawback of any relief already claimed but companies that do not exercise this option may suffer a tax charge.
IFRS 22 requires immediate recognition of negative goodwill in some circumstances and this may give rise to a tax charge where the negative goodwill relates to intangibles. There is no UK revenue recognition accounting standard and IAS 18 will be followed. This may have the effect of changing the time of recognition of certain income. The tax treatment of share-based payments, pension contributions and employee incentives will continue to be determined by statutory rules rather than the accounting treatment.
Revenue recognition and employee incentives

Investment properties Under IAS 40, companies can opt to account for investment properties at fair value. If followed for tax purposes, this would have the effect of taxing revaluations. However, the Inland Revenue has confirmed that there are no proposals to require fair value changes to be brought into account for tax.
The Way Forward

Transition from Nigerian GAAP to IFRS
Transition tax issues

Transition issues
1) 2) De-recognition of existing assets and liabilities Recognition of new assets and liabilities (e.g. derivative financial assets and liabilities) Reclassification of assets and liabilities
Tax issues
Resetting of balances
Tax Implications
a) b) Deferred Tax Income & Education tax c) Capital Allowances d) Balancing Adjustments a) Deferred Tax b) Income & Education tax Income & Education tax a) b) c)
FIRS Requirements
Statement of Reconciliations from SAS to IFRS Audit Adjustment Journals Audit Adjustment Journals Acceptance Certificate Purchase receipts
3)
Write-off balances Write-back balances Accrue for interest expense
Statement of Financial Position Communicates financial position at the reporting date on Assets, Liabilities and Equity.
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Reclassification of current, non-current assets and equity
Capital Allowance a) Balancing Adjustment Deferred Tax b)

Transition issues
Statement of Comprehensive Income Communicates performance either in single statement or two separate statements as income statement and other comprehensive income. Income Statement is classified into: Operating Super-exceptional (exceptional) Financing Tax Other Comprehensive Income (OCI) Reports income and expenses not recognized on the income statement.
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Tax issues
Operating income
Tax Implications
a) b) c) a) b) c) d) a) b) a) Income & Education tax Value Added Tax Withholding Tax Income & Education tax Value Added Tax Withholding Tax Capital Gains Tax Income & Education tax Withholding Tax Income & Education tax Capital Gains Tax Deferred Tax
FIRS Requirements
Superexceptional income Financing
1) 2) 1) 2) 1) 2)
Third party documents Impairment test computation Third party documents Detailed Schedule Third party documents Detailed Schedule
Other Comprehensive Income
b) c)

Transition issues
Statement of Changes in Equity A. This links the statements of financial position and comprehensive income. B. It shows the changes in equity in the period arising from transactions between the entity and its owners.
Tax issues
Statement of Changes in Equity
Tax Implications
a) b) Tax on dividend Share-based payment
FIRS Requirements
Schedule of retained earnings
C. It highlights, new shares issued and dividend payment.
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Conclusion
IFRS adoption may result in companies in the same industry communicating with each other about IFRS issues they are facing. This is to aid the identification of IFRS issues that impact them. From tax perspective, IFRS adoption will result in changes to the way and manner of preparation of financial records and presentation of financial statements. This poses a challenge to Tax administrators and Tax practitioners/advisors on how to handle the gap between the current legal framework of financial reporting and the significant changes required for compliance with IFRS requirements. The place of record keeping cannot be over emphasized as transition adjustments have to be proved beyond reasonable doubt to aid fair treatment of transactions in line with the current legislations guiding tax accounting and reporting in Nigeria. There is no doubt that the Tax Institute, Tax Authorities and Tax Practitioners need to go back to the drawing board on how to fix the challenges posed by IFRS adoption in order to achieve the goal of creating a tax friendly environment for business enterprises and international investors. There is also the need to make the tax environment attractive to foreign direct investments by streamlining the provisions in the tax legislations along global standards as IFRS adoption by Nigeria is geared towards complying with global convergence on financial reporting.
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THANK YOU
Q & A?
References

The Revolutionary world of accounting Publication by PricewaterhouseCoopers IFRS Conversion: Tax Implications Paper presented by Taiwo Oyedele, PricewaterhouseCoopers Nigerias approach to IFRS adoption Paper presented by Obazee, Jim Osayande, Nigerian Accounting Standards Board (NASB) UK: Tax implications of international accounting standards by Herbert Smith Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers by KPMG LLP, a U.S. limited liability partnership Adoption of International Financial Reporting Standards - Prudential implications by Australia Prudential Regulation Authority Challenges and successes in implementing international standards: achieving convergence to IFRSs and ISAs by Peter Wong, a former member of the Board of the International Federation of Accountants (IFAC), Financial Sector IFRS Transition Paper presented by PricewaterhouseCoopers Why do countries adopt International Financial Reporting Standards? By Karthik Ramanna and Ewa Sletten, Harvard Business School Acceptance Speech by Jim Osayande Obazee, Chairman, Committee of Roadmap to the adoption of IFRS in Nigeria Adoption of International Financial Reporting Standard (IFRS): Implications on Tax Administration by Mr. Ajayi J. Bamidele, FIRS, Abuja Tax Consequences for adopting IFRS by Kris E. David Principal Partner, Midaspage Nigeria
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IFRS Adoption in Nigeria - Tax Implications

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General implications for IFRS adoption