The Finnish tax rate change from 24.5% to 20% from 1 January 2014 was substantially enacted for the purposes of IAS 12, Income taxes on 17 December 2013. Deferred tax should be recorded at the new rate in Q4 2013.
The Finnish Government announced a 4.5% decrease in the corporate income tax rate in spring 2013 and this was further confirmed in budget announcements in August 2013. The Government Bill introducing the corporate income tax rate change (HE 185/2013 vp) was passed by the Parliament on 17 December 2013 and was signed by the President on 30 December 2013.
In Finland the Government issues its legislative proposals as a Government Bill (Hallituksen esitys) which initiates the process in Parliament. After approval by Parliament and signature by the President, the law enters into force.
Deferred tax assets and liabilities are measured under IFRS at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. The IASB (International Accounting Standards Board) has noted that substantive enactment occurs when any future steps in the enactment process will not change the outcome.
Given the Finnish legislative process and practice, our view is that the point of substantive enactment in Finland for IFRS reporting purposes occurs when the Parliament approves the legislation. We expect that the timing would be the same under Finnish Accounting Standards.
Under US GAAP (ASC 740) the measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The point of enactment in Finland for US GAAP reporting purposes occurs when all the steps in the legislative process are passed and the President signs the legislation.
For IFRS reporting purposes, companies with balance sheet dates on or after 17 December 2013 should measure deferred tax assets and liabilities being realised or settled on or after 1 January 2014 based on the new 20% rate.
For US GAAP reporting purposes, companies with balance sheet dates on or after 30 December 2013 should measure deferred tax assets and liabilities being realised or settled on or after 1 January 2014 based on the new 20% rate.
In practice, deferred tax assets and liabilities in the balance sheet as at 31 December 2013 should be fully measured with the new tax rate of 20%, for IFRS and US GAAP reporting purposes.
The effect of the change in tax rates on deferred tax balances is generally disclosed as a component of the income tax expense and/or a reconciling item in the effective tax reconciliation.
In the tax rate reconciliation, the starting point is often the parent company’s effective tax rate. For Finnish groups with calendar year ends, this will affect the 2014 effective tax reconciliation for the first time. The basis on which the applicable tax rate is computed as well as changes compared to the previous accounting period should also be disclosed. Again this is likely to affect the 2014 financial statements.