An Overview of Deferred Tax Asset on Share Based Payments

If you’re new to equity compensation or you don’t have a background in tax, calculating the correct corporate tax deductions for your company can seem like a formidable task. There’s no need to worry though. Here’s a quick overview of the current and deferred tax asset calculation process for share plans. This article is for those with some knowledge of tax or accounting.

What is deferred tax asset and why does it matter?

Your deferred tax asset (DTA) is an asset on your balance sheet that may be used to reduce your future taxable income. This asset may also help to reduce your company’s future tax liability. To avoid missing out on important tax deductions, it’s essential to calculate tax accurately and to use a transparent, auditable and robust method, such as the tools available in our share plan software. 

The International Financial Reporting Standards (IFRS) govern the Current and Deferred Tax Asset of share-based payments issued to employees. IAS 12 was originally issued in 1978 with the International Accounting Standards (IAS) aiming to bring transparency, accountability and efficiency to financial markets around the world. IAS was the frontrunner to IFRS, and the IFRS standards are currently required in more than 140 jurisdictions including the EU, Canada and Australia and are permitted in many more. This culminates in the current standard, IAS 12 68A-C.

The DTA relates to share plans because in some tax jurisdictions, an entity receives a tax deduction (i.e. an amount that is deductible in determining taxable profit) that relates to their share‑based payment. The amount of tax that’s deducted may differ from the IFRS2 expense and may be deferred to a later accounting period. The measurement of the tax deduction will be based on the entity’s share price at the date the shares are released to the employee.

Making the calculation process a success

Deferred tax asset calculations can be complicated. The IAS 12 68A-C standard provides good guidance on how to calculate your current and deferred tax asset. It also explains why you should work closely with your IFRS2 team. IAS 12 68A-C includes:

• IAS 12 68A, why you calculate current and deferred tax on Share Based Payments (SBP)
• IAS 12 68B, how to calculate deferred tax and current tax on SBP
• IAS 12 68C, when to split current and deferred tax on SBP in Equity and Profit & Loss (P&L)

Despite the IAS 12 68A-C clearly setting out the principles on DTA accounting, doing the calculation can still be a real challenge. Considerations that can further complicate matters may include:

- Different performance awards

- Employees who leave the company before their employee awards vest

- Share price volatility

- Mobile employees

- Multiple locations

And that’s not all. Here are more things you may want to consider:

1. Data and combining different data sources can be problematic. For many organisations, the same level of detail is not always stored across the various data points. For example, to calculate the correct split in Equity and P&L, your tax team will require IFRS2 expense information in the same format. So, if your tax team for security reasons, only have access to group-level reports, it can be a time-consuming exercise to convert this data to a business unit to apply correct tax rates.
2. Remember to pay attention to your market-based performance and the number of units released to employees and expected to be released, as these can differ from your IFRS2 expense.
3. Define if you incorporate reinvested dividends into your current and deferred tax asset calculation or exclude dividends completely.
4. If you include dividends, you need to decide whether you wish to exclude this value from your income statement to correspond with an IFRS2 expense income cap based only on original granted units.

In conclusion

Formulating the current and deferred tax asset recognition can be difficult. To help you, here’s a checklist for you to use:

- Establish the value of the share plan unit

- Understand your incentive share plan design and expectations

- Define the tax rate per jurisdiction

- Work with your IFRS2 expense team

If you’re still unsure of how to calculate your IFRS2 awards, have a look at our article on IFRS2.