Recognising a deferred tax asset for unused STC credits in compliance with international financial reporting standards – Is the consensus in AC 501 correct?

Abstract

In the past, South African companies did not recognise an asset for unused STC credits. AC 501, Accounting for ‘Secondary Tax on Companies (STC)’, which is effective for annual accounting periods beginning on or after 1 January 2004, now requires South African companies to recognise a deferred tax asset for unused STC credits to the extent that it is probable that an entity will declare dividends of its own against which the unused STC credits can be utilised. This change in the accounting treatment for unused STC credits has come in for some criticism, as accounting commentators do not all agree on the treatment enforced by AC 501. The objective of this study is to consider the soundness of this requirement in AC 501 by comparison with the International Financial Reporting Standard on income taxes, IAS 12, Income Taxes. The results of the conceptual analysis of AC 501 and IAS 12 were tested with reference to expert opinions of academics and practitioners in the field. This study concludes that recognising a deferred tax asset for unused STC credits contradicts IAS 12, which requires deferred tax assets and liabilities to be measured at the undistributed rate.