Issue 5 - Analysis of FIRS' Information Circular on tax implications of IFRS adoption
Financial instruments as they affect the financial services sector (Part 2)
In last week's edition, we started our analysis of the tax treatments of financial instruments as it affects the financial services sector. This week, we continue with our focus on financial instruments. Financial instruments classified as 'Available for Sale' (AFS) such as equity instruments not measured at FVTPL are capital instruments. Consequently, CGT shall apply to gains derived from the disposal of such instruments, except where specifically exempted by relevant provisions in the CGT Act and other regulations. The position in the Information Circular is that AFS financial instruments are not taxable given the provisions of the CGT Act and the 'Companies Income Tax (exemption of bonds and short term
government securities) order, 2011'.
AFS financial instruments are measured at fair value periodically with the fair value gains and losses recognised in Statement of Other Comprehensive Income (OCI). These fair value gains and losses are also not taxable/ allowable for tax for two reasons: they are not actual gains or losses and they do not impact profit or loss for the period on which current tax is computed. In jurisdictions where shares and other common financial instruments are taxable, the deferred tax effects of these AFS instruments are required to be recognised also in OCI.
Financial instruments classified as loans and receivables are to be treated in line with the provisions of the relevant tax laws. Under NGAAP (prudential guidelines), bank portfolio of loans are expected to be categorised into performing and non-performing loans with provisions for loan losses made according to the guidelines. IFRS adoption has introduced different/ additional consideration for assessing loan portfolio. When a Bank issues loans, events such as default or breach of contract, financial difficulty or bankruptcy of borrower, which are indicators of impairment, are expected to be considered in valuing such loans. Loans are periodically tested for impairment to ascertain whether the values of such loans have been eroded. If confirmed, impairment losses are recognised in the income statement.