ASBE No. 18
Active
Income Taxes
Income Taxes is part of the Chinese Accounting Standards for Business Enterprises (ASBE).
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Conceptual Framework Linkage
Recognising the future tax consequences of today's temporary differences
ASBE No. 18 governs the RECOGNITION and MEASUREMENT of CURRENT and DEFERRED income TAX – REQUIRING enterprises to RECOGNISE deferred TAX assets and LIABILITIES for the FUTURE tax CONSEQUENCES of TEMPORARY differences BETWEEN the ACCOUNTING carrying AMOUNT of assets/LIABILITIES and their TAX bases. This STANDARD represented a GENUINELY significant MODERNISATION when it was FIRST introduced (Section 2).
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A Landmark 2006 Reform – Introducing the Balance Sheet Liability Method
Replacing the older tax payable and deferral methods
PRIOR to the 2006 ASBE OVERHAUL, Chinese ENTERPRISES could APPLY various OLDER approaches to INCOME tax accounting – INCLUDING the "TAX PAYABLE method" (WHICH recognised NO deferred tax AT ALL, simply EXPENSING the CURRENT period's TAX payable) and an OLDER "DEFERRAL method." The 2006 REFORM INTRODUCED the "BALANCE SHEET LIABILITY method" for the FIRST time – a GENUINELY significant MODERNISATION, bringing CHINA'S income tax ACCOUNTING into LINE with IAS 12's OWN internationally-established APPROACH.
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Scope
All enterprises subject to income tax
This Standard applies to ALL enterprises SUBJECT to Chinese CORPORATE income TAX, ADDRESSING both the CURRENT period's tax PAYABLE and the FUTURE tax CONSEQUENCES arising FROM temporary DIFFERENCES.
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Temporary Differences – Comparing Carrying Amount to Tax Base
Item-by-item comparison, generating deferred tax
DEFERRED tax is DETERMINED by COMPARING the ACCOUNTING carrying AMOUNT of EACH asset and LIABILITY to its TAX BASIS – TEMPORARY differences (e.g. a PROVISION recognised for ACCOUNTING purposes but NOT yet tax-DEDUCTIBLE) give RISE to a DEFERRED tax ASSET or LIABILITY, REFLECTING the FUTURE tax CONSEQUENCE when the DIFFERENCE eventually REVERSES.
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Deferred Tax Asset Recognition – the "Probable" Threshold
A general, judgement-based test – not a structured classification framework
A DEFERRED tax ASSET is RECOGNISED to the EXTENT it is PROBABLE that SUFFICIENT future TAXABLE profit will be AVAILABLE against WHICH the TEMPORARY difference (or TAX loss carryforward) can be UTILISED – a GENERAL, PRINCIPLES-based "PROBABLE" threshold, CONSISTENT with IAS 12's OWN approach. This CONTRASTS with the MORE structured, TIERED "company CLASSIFICATION" recoverability FRAMEWORK applied UNDER Japan GAAP (see the COMPANION ASBJ Statement No. 28 poster EARLIER in this SERIES) – ASBE'S approach is MORE judgement-DRIVEN, RATHER than FORMULA-based.
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Recognition Exceptions
Narrow carve-outs from general deferred tax recognition
A DEFERRED tax LIABILITY is NOT recognised for the INITIAL recognition of GOODWILL, or for the INITIAL recognition of an ASSET or LIABILITY in a TRANSACTION that is NOT a BUSINESS combination and AFFECTS neither ACCOUNTING profit NOR taxable PROFIT at the TIME of the transaction – NARROW, TECHNICAL exceptions CONSISTENT with IAS 12's OWN equivalent carve-OUTS internationally.
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Measurement – Enacted or Substantively Enacted Tax Rates
Using the rate expected to apply on reversal
DEFERRED tax ASSETS and LIABILITIES are MEASURED using TAX rates that are ENACTED (or SUBSTANTIVELY enacted) as of the REPORTING date, and EXPECTED to APPLY in the PERIOD the TEMPORARY difference is EXPECTED to REVERSE.
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No Discounting
Deferred tax balances are not present-valued
DEFERRED tax ASSETS and LIABILITIES are NOT discounted to PRESENT value, REGARDLESS of HOW far in the FUTURE the UNDERLYING temporary DIFFERENCE is EXPECTED to REVERSE – CONSISTENT with IAS 12's OWN no-discounting RULE internationally.
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China's Standard Tax Rate and Preferential Regimes
A standard rate, with meaningful preferential variations
CHINA'S STANDARD corporate INCOME tax rate is 25%, though NUMEROUS preferential RATES apply in PRACTICE – INCLUDING a REDUCED 15% rate for QUALIFYING high-TECHNOLOGY enterprises, and VARIOUS reduced RATES for SMALL and MICRO enterprises MEETING specified CRITERIA. THESE preferential RATES materially AFFECT the MEASUREMENT of BOTH current and DEFERRED tax for QUALIFYING enterprises.
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Worked Example – Recognising a Deferred Tax Liability
A taxable temporary difference from accelerated tax depreciation
Example: Faster tax depreciation than accounting depreciation
A company's equipment has an accounting carrying amount of RMB 80,000,000, but a tax base of RMB 60,000,000 (reflecting faster depreciation allowed for tax purposes). The applicable tax rate is 25%.
The TAXABLE temporary DIFFERENCE of RMB 80,000,000 − RMB 60,000,000 = RMB 20,000,000 GIVES rise to a DEFERRED tax LIABILITY of RMB 20,000,000 × 25% = RMB 5,000,000.
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Worked Example – Recognising a Deferred Tax Asset
A deductible temporary difference from a provision
Example: A warranty provision not yet tax-deductible
A company recognises a warranty provision of RMB 8,000,000 (see the companion ASBE No. 13 poster), which is not tax-deductible until the warranty costs are actually paid. The company expects sufficient future taxable profit, and the tax rate is 25%.
The DEDUCTIBLE temporary DIFFERENCE of RMB 8,000,000 GIVES rise to a DEFERRED tax ASSET of RMB 8,000,000 × 25% = RMB 2,000,000, since SUFFICIENT future TAXABLE profit is CONSIDERED probable.
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Disclosure Requirements
What ASBE No. 18 requires
Components of deferred tax assets and liabilities, by type of temporary differenceReconciliation between accounting profit and taxable profit (or the effective tax rate)Unrecognised deductible temporary differences and tax loss carryforwards
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Critical Judgments & Estimates
Where judgement matters most
SIGNIFICANT JUDGEMENTS
Whether it is probable that sufficient future taxable profit will support recognition of a deferred tax asset
SIGNIFICANT ESTIMATES
Projected future taxable income supporting deferred tax asset recognitionTiming of reversal for temporary differences
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Relationship to IAS 12
Comparison – ASBE 18 vs IAS 12
FeatureASBE 18IAS 12
Overall approachBalance sheet liability methodBalance sheet liability method – converged
DTA recognition thresholdProbable (general judgement)Probable (general judgement) – converged
A GENUINELY thoroughly CONVERGED standard – THIS represents ONE of the CLEAREST examples of the 2006 REFORM successfully MODERNISING a PREVIOUSLY outdated Chinese accounting AREA into ALIGNMENT with INTERNATIONAL practice.
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Statement Mapping
Where every income tax event lands
EventStatement(s) affectedNotes
Deferred tax asset/liabilityBS ISRecognised for temporary differences, subject to the probable threshold for assets
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Related Standards
Cross-reference map
StandardConnection
ASBE No. 20Business Combinations – the initial goodwill recognition exception this Standard carves out
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Quick-Reference Glossary
Balance sheet liability method
A method comparing the accounting carrying amount of assets and liabilities to their tax bases, recognising deferred tax for the resulting temporary differences.
Tax base
The amount attributed to an asset or liability for tax purposes, compared against its accounting carrying amount to determine temporary differences.
Financial statement key (Chinese GAAP / ASBE terminology)
BS Balance Sheet (资产负债表)
IS Income Statement (利润表)
SCOE Statement of Changes in Owners' Equity (所有者权益变动表)
CFS Cash Flow Statement (现金流量表)
History & Development
2006-02
ASBE No. 18 Income Taxes issued
Operative for periods beginning on or after 1 February 2007