2012 Americas School of Mines - PwC: Audit and … · 2012 Americas School of Mines IFRS - Tax Implications and Adjustments for Mining Companies Charmaine Neilsson & Johan Erasmus

2012 Americas School ofMines

IFRS - Tax Implications andAdjustments for Mining CompaniesAdjustments for Mining Companies

Charmaine Neilsson &Johan Erasmus

Agenda

1. IFRS Adjustments specific to mining companies:

- Asset acquisitions – initial recognition exemption

- Capitalization of non-deductible items

- Non-monetary assets and liabilities – tax currency differs fromfunctional currencyfunctional currency

- Compound financial instruments

- DIT on warrants

- Flow-through shares

- Other – uncertain tax positions

2. Presentation and Note Disclosure

3. What is new for 2012?

IFRS Tax Implications and Adjustments for Mining Companies2

May 2012

Asset Acquisitions – Initial RecognitionExemption

• Typically the purchase of shares of a company that holds anundeveloped mineral property

US GAAP & Can GAAP

• In asset purchases, that are not business combinations, a DITA or• In asset purchases, that are not business combinations, a DITA orDITL is recorded with a corresponding entry to mineral propertyusing a “gross up”/ simultaneous equations method.

IFRS

• No DIT is recorded on the temporary difference resulting from anasset acquisition outside of a business combination (asset purchase).


May 2012


Example:

• Canco 1 purchases the shares of Canco 2 for $1,000,000 by issuingshares of Canco 1

• Canco 2 owns Mexco

• Mexco holds an undeveloped mineral property with tax basis of• Mexco holds an undeveloped mineral property with tax basis of$1,000

• Mexican tax rate is 30%


May 2012


• Can GAAP and US GAAP

DR Mineral Property 1,428,571

CR FIT liability (428,571)

CR Share Capital (1,000,000)

• IFRS

• Under IFRS, DIT is never recorded on this temporary difference


May 2012



Capitalization of Non-Deductible Expenses

• Non-deductible expenses added to the book basis of mineralproperty, for example:

- Interest accretion

- Amortization

- Stock option expense- Stock option expense

- Costs incurred in Canada and not pushed down to foreignsubsidiaries

• Creates a temporary difference


May 2012


US GAAP

• As an ISO is not expected to result in a tax benefit to the entity, nodeferred tax benefit is established either at the outset or as thecompensation cost is either capitalized or recognized in the incomestatement (through amortization or depreciation). Upon adisqualifying disposition, an entity will receive a tax deduction.disqualifying disposition, an entity will receive a tax deduction.Assuming the related capitalized asset is not fully amortized ordepreciated and the book compensation expense will be recognizedover a future period, upon the disqualifying disposition an entity willhave to establish a deferred tax liability that will be recognized asdeferred tax expense as the amortization or depreciation expense isrecognized.


May 2012


Can GAAP

• Gross up book value of these items to account for the FIT on thetemporary difference

IFRS

• Capitalization of these items is considered an “asset” acquisition

• No DIT is recorded on the temporary difference

• DIT will never be recognized on these temporary differences

• These temporary differences need to be tracked separately


May 2012


Example:

• Canco 1 purchases the shares of Canco 2 for $1,000,000

• Canco 2 owns an undeveloped mineral property

• Canco 1 capitalizes $200,000 of stock option expense to the• Canco 1 capitalizes $200,000 of stock option expense to thebook value of the mineral property

• Canco 1 incurs $300,000 of tax deductible costs on the mineralproperty

• Book amortization – 10% in Year 1

• Tax amortization – 20% in Year 1

• Tax rate – 25%


May 2012


• DIT at acquisition:

Mineral property Book Basis Tax Basis Temp Diff

Initial asset acquisition 1,000,000 1,000 N/A

Non-deductible expensescapitalized

200,000 0 N/A


May 2012

capitalized

Tax deductible costs 300,000 300,000 0

DIT 0


• DIT at end of Year 1:

Mineral property Book Basis Tax Basis Temp Diff

Initial asset acquisition 900,000 800 N/A

Non-deductible expensescapitalized 180,000 0 N/A


May 2012

capitalized 180,000 0 N/A

Tax deductible costs 270,000 240,000 30,000

DIT (7,500)

Non-monetary assets and liabilities – tax currencydiffers from functional currency

US GAAP & Can GAAP

• Tax basis of non-monetary assets and liabilities were recorded usingthe historical exchange rate –

• No DIT recognized related to historical exchange rate and currentexchange rate translations.exchange rate translations.

IFRS

• Tax basis is recorded using the period-end exchange rate

• Exchange difference is recorded as DIT expense/recovery

• FX fluctuation needs to be calculated at each period end


May 2012


Example:

• Functional currency of Mexican subsidiary is the Can$

• Asset is purchased by Mexican subsidiary for $100

• Exchange rate at time of purchase: 10 Mxp = $1

• Therefore the tax basis of the asset is 1,000 Mxp

• Exchange rate at period end: 12 Mxp = $1


May 2012


At period end:

US GAAP & Can GAAP

• Book basis: $100

• Tax basis in Can$: 1,000 Mxp / 10 = $100

• No temporary difference

IFRS

• Book basis: $100

• Tax basis in Can$: 1,000 Mxp / 12 = 83

• Taxable temporary difference = 17


May 2012

Compound financial instruments

An instrument with a debt component and an equity component

US GAAP

• A temporary difference exists to the extent that the debt has adifferent basis for book and tax purposes.

Can GAAPCan GAAP

• If the instrument could be settled in accordance with its termswithout the incidence of tax, then the tax basis equals the book basis


IFRS

• Tax basis is the face amount of the instrument

• Taxable temporary difference – DIT liability


May 2012


Example:

• $1,000,000 of convertible debentures

• Convertible into shares at any time up until the maturity date of thedebentures

• Repayable in full at the maturity date• Repayable in full at the maturity date

• Based on calculations, the liability component of the debentures isconsidered to be $750,000

• The remaining $250,000 is considered equity

• Tax rate is 25%


May 2012


Can GAAP

• The debentures can be converted to shares without the incidence oftax

• The debenture can also be repaid on the maturity date without theincidence of tax

• Therefore the tax basis equals the book basis• Therefore the tax basis equals the book basis


IFRS

• Book basis of liability = $750,000

• Tax basis = full face amount = $1,000,000

• Taxable temporary difference = $250,000

• DIT liability = $62,500 (or $31,250 if capitaltreatment)


May 2012

DIT on warrants

• Under IFRS, if a company issues a warrant in a currency other thanits functional currency, the warrant is considered a liability

• DIT needs to be considered

• For tax, capital gain if any option expires unexercised, to the extent ofthe proceeds received on the issuance of the optionthe proceeds received on the issuance of the option

• In the absence of any other evidence, default value of “proceeds” =Black-Scholes value

• If the warrants are “in the money” – no DIT because no expectationthat warrants will expire unexercised

• If the warrants are “out of the money”, DIT liability recorded atcapital gains rates

• Needs to be reassessed at every period end


May 2012

DIT on warrants

Example:

• 1,000,000 warrants issued on a unit offering

• Warrants issued in Can$

• Functional currency of the issuing company is USD

• Black-Scholes value of warrants = $300,000• Black-Scholes value of warrants = $300,000

• Warrants are exercisable at $3.50 per share

• At period end, market price of shares is $2.50

• DIT calculated as: $300,000 x 12.5% = $37,500

• At period end, market price of shares is $3.55

• No DITIFRS Tax Implications and Adjustments for Mining Companies

19May 2012

Flow-through shares

US GAAP

• Split the proceeds from the shares between the sale of the sharesissued and the sale of tax benefits.

Can GAAPCan GAAP

• EIC 146 – specific guidance on the treatment of flow-through shares

IFRS

• No specific guidance

• Consensus is to follow US GAAP methodology


May 2012

Flow-through shares

Example:

• A company sells 1,000,000 flow-through shares for $1,025,000

• Market price for common shares at the time of issuance is $1.00

• 25% tax rate


May 2012

Flow-through shares

Can GAAP

• On issuance of shares:

DR Cash 1,025,000


• Money is spent


May 2012


CR Cash (1,025,000)

Flow-through shares

• On renunciation of expenses:

DR Share Capital 256,250

CR FIT liability (256,250)

• Release valuation allowance to offset FIT liability:


May 2012

DR FIT liability 256,250

CR FIT recovery (256,250)

Flow-through shares

US GAAP (and IFRS):

• On issuance of shares – shares are issued for FMV of regularcommon shares at time of issuance. Excess of proceeds is recordedas a premium (liability):

DR Cash 1,025,000


• Money is spent


May 2012


CR Flow-through premium (25,000)


CR Cash (1,025,000)

Flow-through shares

• When expenditures are incurred that will be renounced, the premiumis reversed and DIT is taken to income statement rather than sharecapital:

DR DIT expense 231,250

DR Flow-through premium 25,000

CR DIT liability (256,250)

• Release valuation allowance to offset FIT liability (“backwardstracing” could apply):


May 2012

CR DIT liability (256,250)

DR DIT liability 256,250

CR DIT recovery (256,250)

Flow-through shares

• Overall result – Can GAAP:


CR Share Capital (768,750)

CR FIT recovery (256,250)

• Overall result – US GAAP (and IFRS):


May 2012



CR DIT Recovery (25,000)

Other IFRS differences

Uncertain tax positions

• Very little guidance under IAS 12

• “Best estimate” approach is favoured

• PwC view: FIN48 approach is not an acceptable methodology

Tax effect of withholding tax on dividends

• US GAAP & Can GAAP – recognize when there is evidence thatprofits of foreign operations are not permanently re-invested

• IFRS – recognize only when there are specific plans to pay a dividend


May 2012

Other IFRS differences

Intercompany sales of assets

• US GAAP & Can GAAP – eliminate tax effects

• IFRS – recognize tax effects

“Backwards tracing”

• US GAAP & Can GAAP – no backwards tracing

• IFRS – backwards tracing on recognition of DIT assets


May 2012

Presentation and Disclosure

Presentation differences:

• Can GAAP – Current FIT if the asset the FIT pertains to is current, orif the FIT is expected to reverse within 12 months

• IFRS – All DIT is non-current

• DIT to reverse within the next 12 months is disclosed separately in• DIT to reverse within the next 12 months is disclosed separately inthe tax note

• IFRS – no valuation allowance – only realizable DIT assets arepresented

• Amount and nature of DIT assets that have not been recognized isdisclosed separately in the tax note


May 2012


Rate reconciliation:

• Similar to Can GAAP, but some specific items need to be presented:

• Effect of changes in accounting policy

• Effect of errors from prior periods

• DIT arising from changes in tax rates or new taxes

• Use of tax assets not previously recognized to offset current taxexpense

• Use of tax assets not previously recognized to offset deferred taxexpense

• Tax assets not recognized

• Tax assets previously recognized, now de-recognized


May 2012


DIT continuity schedule:

• In grid form

• For each significant category of DIT asset and liability

• Opening balance

• Charge/(credit) to income statement

• Charge/(credit) to OCI

• Charge/(credit) to equity

• Arising on acquisition

• Exchange differences

• Closing balance


May 2012


Example:

MineralProperty

TaxLosses

AFSSecurities Total

Openingbalance (2,000,000) 1,000,000 100,000 (900,000)

Income


May 2012

Incomestatement 200,000 100,000 300,000

OCI (25,000) (25,000)

Acquisition (4,000,000) (4,000,000)

FX variation (58,000) 11,000 750 (46,250)

Closing balance (5,858,000) 1,111,000 75,750 (4,661,250)


Estimated tax on repatriation of profits:

• Tax that would be required to be paid to repatriate all foreignretained earnings to Canada

• Foreign taxes

• Foreign withholding taxes• Foreign withholding taxes

• Canadian tax on profits not considered to be “exempt surplus”

• Calculate one total number

• Disclose in a narrative paragraph


May 2012


Other separate disclosures:

• Tax from Discontinued Operations

• Tax charged directly to Equity

• Tax charged directly to Other Comprehensive Income

Other additional explanations:

• Changes in applicable tax rates compared to the previous period

Other comments:

• Very limited netting of DIT assets/liabilities in separate entitiesunder IFRS


May 2012

What is new for 2012?

• IAS 12 – measurement of DITA/L follows method of recovery

• IASB added exception – Investment property

• Rebuttable presumption investment property measure at FV isrecovered entirely by sale.

- Can be rebutted if investment property is depreciable

- Cannot be rebutted for freehold land

• Amendment effective – January 1, 2012.

• Affects: entities holding investment property measured at FB whereno capital gains tax or capital gains tax rate differs from income taxrate.

• Need to consider:

- Recovery of DITA’s

- Consider impact on previous business combinations.


May 2012

Questions?

Charmaine Neilsson

[email protected]

Johan Erasmus

[email protected]


May 2012

Documents

2012 Americas School of Mines - PwC: Audit and … · 2012 Americas School of Mines IFRS - Tax Implications and Adjustments for Mining Companies Charmaine Neilsson & Johan Erasmus