Company A is preparing its first IFRS financial statements as at 31 December 20X8. The date of transition to IFRS from local GAAP is 1 January 20X7. Under local GAAP, no deferred taxes were recognized; only current taxes were required for recognition. Company A performed a preliminary analysis and identified a number of temporary differences that could potentially lead to recognition of deferred taxes under IFRS.
On 1 November 20X7, the local tax authority enacted significant changes in tax legislation, affecting the income tax calculation of Company A. These changes became effective 1 January 20X8.
Which of the following statements regarding Company A opening statement of the financial position as of 1 January 20X7 under IFRS is FALSE?
A. Company A recognizes deferred taxes based on conditions and estimates existing as at 1 January 20X7
B. Company A recognizes deferred taxes based on all information available when the first set of IFRS financial statements is prepared as at 31 December 20X8
C. Company A should recognize deferred taxes in its opening statement of financial position as at 1 January 20X7.
The false statement among the options provided is B. Company A recognizes deferred taxes based on all information available when the first set of IFRS financial statements is prepared as at 31 December 20X8.
According to IAS 12, "Income Taxes," when an entity adopts IFRS for the first time, it should prepare an opening balance sheet as at the date of transition to IFRS. This opening balance sheet should reflect the effect of all differences between the amounts recognized in the financial statements and their tax bases as at the date of transition, which is 1 January 20X7 in this case. Therefore, deferred taxes should be recognized based on the conditions and estimates existing as at 1 January 20X7, not on information available when the first set of IFRS financial statements is prepared at a later date, such as 31 December 20X8.
