taxation challenges of IFRS

1. TOPIC:
TAXATION CHALLENGES OF IFRSADOPTION IN
NIGERIA
PAPER PRESENTATION
ON ACC 916: FINANCIAL REPORTING STANDARDS
TO
THE DEPARTMENT OF ACCOUNTING,
NASARAWASTATE UNIVERSITY KEFFI
NASARAWASTATE.
PRESENTED BY:
SULEIMAN OZI ZUBAIR
NSU/PHD/ACCT/0031/17/18
COURSE FACILITATOR
PROFESSOR M. I, FODIO

2. Taxations Challenge of IFRS Adoption in Nigeria
ABSTRACT
IFRS has come to be a globally accepted accounting standard with several credits given
to it for high quality financial reports and the ease of global comparability of financial
reports. Since most countries’ taxation systems are based of the financial reports
provided by business entities, a change in the applicable financial reporting standard
certainly will impact on the tax bases either for the taxpayer or the tax collector. From
our review, we find mixed response to this taxation challenge by tax authorities as some
country still use national GAAP as basis for tax assessment and some country
adjust/change tax regulation to support IFRS implementation. The tax law in Nigeria,
which has remained unchanged since the adoption of IFRS, does not support fair value
basis of measurement but the tax body applies it when suitable to their revenue and
disallows when considered unfavourable. The unfair practice by the tax authority run
counter to the principle of fairness and equity. It is, therefore, recommended that the
Tax Laws should be reviewed and updated to take cognizance of the change in the
national financial reporting standard to bring home the much touted benefits of IFRS
adoption.
Keywords: IFRS implementation, IFRS adoption, IFRS taxation issue
INTRODUCTION
The Purposes of Accounting and Taxation The purpose of accounting is usually stated
to be the provision to interested parties of information relevant to stewardship, control

3. and decision-making. The interested parties may be internal (management) or external
(such as shareholders, creditors, tax authorities). To ensure that managers do not
communicate wrong financial information to the public and to ensure that entities within
the same jurisdiction communicate financial results in similar local standard setting
authorities set accounting standards to guide practitioners. Through the standards,
earnings management and other forms of creative accounting are expected to be
brought under control. To the Tax authority, their interest in the regulation of accounting
measurement and reporting is more than a cursory one considering the fact that
assessment of entities to tax is based primarily on the financial report of that entity
before adjustments are made for tax-specific matters.
As rightly observed by Healy and Wahlen (1999), financial reports may be subject to a
purposeful intervention to the extent that reported information can give misleading
impression to some stakeholders about the underlying economic outcomes. With the
adoption of IFRS and the assurances of improving the quality of financial reporting
stakeholder, like the Tax Authority, is expected to gain a high level of understanding of
the new standards and assess for protection of their interest in the financial reports.
Nobes and Parker (2002) did observe that the concepts behind the development of
accounting standards as contained in the IFRS Conceptual Framework is to provide
information to various users to improve their financial decision-making. In this regard,
the criticality of the quality of the financial report to the tax authority as a presentation of
the outcome of economic activities of the entity for the period covered by the report
cannot be over-emphasised. The requirements of the user of the financial report for tax
assessment can be quite different from other users arising from changing the base upon

4. which financial matters have been treated in the books and adopting a regulatory or
quasi-regulatory approach in the measurement of an element of the financial statement.
The primary objective of tax accounting has been made very clear, for example, in a
case before the US Supreme Court, Thor Power Tools Company v. Commissioner of
Internal Revenue 58L Ed. 2d.785 at 802 (1979). The case was concerned with matters
related to inventory accounting procedures and additions to bad debt reserves and that
accountant might be more conservative for commercial reasons than was appropriate
for the assessment of tax. It was stated that:
The primary goal of financial accounting is to provide useful information to
management, shareholders, creditors, and others properly interested; the
major responsibility of the accountant is to protect these parties from being misled. The
primary goal of the income tax system, in contrast, is the equitable collection of
revenue; the major responsibility of the Revenue Service is to protect, maintain
and expand sources of revenue for public finance. Consistently with its goals and
responsibilities, financial accounting has as its foundation the principle of
conservatism, with its corollary that ‘possible errors in measurement [should] be
in the direction of understatement rather than overstatement of net income and net
assets’. In view of the Treasury’s markedly different goals and responsibilities,
understatement of income is not destined to be its guiding light. Given this diversity,
even contrariety of objectives, any presumptive equivalency between tax and financial
accounting would be unacceptable. Furthermore, there are other reasons why
taxation might deviate from accounting concepts of income. While the most
obvious purpose of taxation is to finance public expenditure, taxation in modern
economies also makes it a powerful instrument of government economic and social
policy in its own right.

5. International Financial Reporting Standards (IFRS) has now become the most accepted
financial reporting standard globally since its first adoption by the European Union (EU)
as reporting standard for consolidated financial report of corporation listed in European
stock market. Upton (2010) has identified two approaches used in IFRS adoption as
convergence and full adoption. IFRS convergence involves local standard setter
adjusting national GAAP to conform substantially with IFRS while under full adoption all
IFRS are unconditionally adopted to replace national GAAP. Nigeria took the decision to
adopt IFRS in 2010 for financial reporting starting from January 2013 in a phased
manner. As a consequence, the national GAAP (Statement of Accounting Standards -
SAS) gave way to IFRS.
Since the tax accounting is financial accounting modified for tax rules, it simply means
that with the change from national GAAP as the standard to IFRS for financial reporting
there is bound to be some effect. This study is basically concerned with how the tax
authorities in the two countries selected have responded to the tax issues following their
adoption of IFRS as the standard for financial reporting.
2. REVIEW OF LITERATURE
2.1 Impact of IFRS on Taxation
The impact of IFRS on taxation can be examined from the point of tax authority or from
the tax payer. On the tax authority/administrator, the major concern will be the
protection of revenue; they will want to ensure that within the principles of equity and
fairness, revenue is maximized. In pursuant of this objective, the tax administrators are

6. aware that tax payers will look for all means to avoid tax and here lies the challenge in
ensuring that tax payers do not exploit the new standards to frustrate their revenue
maximization objective.
This impact upon the tax payers is dependent upon size and geographies of operation.
A multinational company (MNC) operating in several national jurisdictions will most
likely have more challenges to manage following the adoption of IFRS in the
jurisdictions it operates. The MNC’s tax planning will have to be at its best in managing
to keep to the possible minimum its effective tax rate (ETR).
Three resolution response have been identified to manage the objectives of tax
administrators in the jurisdictions where IFRS have been adopted and implemented.
The first response is to disregard the IFRS financial statements and insist that corporate
entities continue to maintain reports in national GAAP alongside the IFRS reports and
tax assessments are done using the national GAAP reports. Mulyadi, Soepriyanto and
Anwar (2012) assert that “although IFRS now commonly used as reporting standard, in
some country tax authority still required corporation to prepare financial report based on
national GAAP for taxation purpose” and listed a lot of countries where this prevails
including Nigeria, Libya, Tunisia and South Africa (for the Countries in Africa reviewed).
In India, however, taxation is based on Tax Accounting Standards (TAS) not IFRS or
national GAAP.
The second response is the full use of IFRS financial statements for taxation with
adjustments, where necessary for compliance with the tax laws. Countries like Canada
and Brazil were identified by Mulyadi, Soepriyanto and Anwar (2012) to belong to this
group among other countries. As for the full usage of IFRS financial statements for

7. assessment while Eberhartinger and Klostermann (2007), asserts that this will simplify
the reporting process and minimize compliance cost Haverals (2007) advised that some
specific industry will record increase in their effective tax rate (ETR). So the delicate
balance, to determine the resultant benefit, is the quantum of cost saving vis-à-vis the
increase ETR.
Thirdly, a middle course or hybrid has also been reported where the IFRS report is
moderated/adjusted for tax assessment. Even though Mulyadi, Soepriyanto and Anwar
(2012) classified Nigeria under the first group requiring corporate entities to submit
Nigerian Generally Accepted Accounting Principles (NGAAP) statement for tax
assessment, I believe Nigeria actually uses the hybrid approach which had been the
practice even under NGAAP. This opinion is found upon the fact that financial
statements prepared under NGAAP had always been adjusted for allowable and
disallowable expenses while accounting policies which do not agree with tax policies
result in further adjustments to the reported financials.
2.2 Effects of financial accounting standards on tax accounting
How relevant IFRS is from a tax perspective depends on three things; assuming no
changes is undertaken in tax legislation in a country. First, to what extent is financial
accounting connected to tax accounting in specific country. Second, if a country
chooses to use the “full IFRS” option for annual accounts of companies. Third, to what
extent national accounting standard setters take IFRS into consideration when setting
standards for national Generally Accepted Accounting Practice (GAAP) and what
choices of accounting principles companies can make within national GAAP.

8. In countries where there is no connection between financial accounting and tax
accounting, there should be no impact of IFRS on tax accounting, of course. For
example, the United States accounting profits do not serve as the point of origin for
determining taxable income (Gilbai, 2015) as the Federal Income tax is a separate
system. Therefore, since the systems are substantially two separate systems, an
adoption of IFRS will bring about very few changes in tax liability (Gilbai 2015).
In countries where there is some degree of connection between financial accounting
and tax accounting there are a number of alternative outcomes. If “full IFRS” is
mandatory for annual accounts, it will affect the tax accounting in connected areas. If
the company has an option to either apply “full IFRS” or national GAAP the effect
depends on the choice of the company and whether tax law recognizes IFRS as a tax
base. But in substance the effects of IFRS depend on the degree at which national
GAAP incorporates IFRS accounting principles.
2.3 Transaction-Based Approach Vs Value-Based Approach
The transaction approach is the concept of deriving the financial results of a business
by recording individual revenue, expense, and other purchase transactions. These
transactions are then aggregated to see if a business has earned a profit or a loss. The
transaction approach is a fundamental concept that underlies much of accounting which
is also called Historical cost approach. Historical cost accounting is an accounting
method in which the assets listed on a company's financial statements are recorded
based on the price at which they were originally purchased.

9. Value-based approach is the approach which tries to report transactions as close as
possible to their current market value. It goes by several names as fair value or marked-
to-market. IFRS 13 defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. This effectively makes the concept one of an exit price.
Before IFRS became dominant global financial reporting standard there had been
agitations for the replacement of the historical cost accounting (or transaction-based
approach) because of its failure to provide decision-useful information especially during
inflation periods. This led to agitation for price level accounting but there was no
consensus as to the approach to adopt. So the crafters of the IFRS framework were
duly guided by this year-long agitation and have incorporated the concept of fair value
and impairment testing for all items that will be reported in the financial statements. So
Samuel, Samuel, & Obiamaka (2013) assert that the key question that could arise when
identifying the effects of IFRS adoption on tax accounting is, should accounting move
from a transaction based approach to a value based approach. This concern was
actualized when Nigeria’s Federal Inland Revenue Service rolled out its guidance
circular FIRS Circular on the tax implications of IFRS adoption (FIRS 2013) in which it
categorically showed preference for Historical cost approach.
Notwithstanding the position of some tax authorities, there are some proponents as well
as opponents of IFRS serving as the tax base. Some arguments in favor of IFRS as the
tax base, says that this will bring a company’s tax basis closer to “real economic
income” (Samuel, Samuel, & Obiamaka, 2013). The arguments against moving toward
a value-based approach are that, fair value accounting is subjective, and not easy to

10. control for tax purposes (Samuel, Samuel, & Obiamaka, 2013). Also implementing IFRS
will lead to a situation where a company’s unrealized income becomes taxable, and
affect the liquidity of companies (Samuel, Samuel, & Obiamaka, 2013). The complexity
of the IFRS standards which makes it difficult to interpret and understand, opponents
claim, will result in the risk of more tax disputes for companies (Samuel, Samuel, &
Obiamaka, 2013).
2.4 Specific Elements of Accounting to Focus
Experts have pointed out some areas where the effects of the adoption of IFRS were
likely to be significant. Teixeira (2004) and Bradbury and van Zijl (2005) recognized the
following reporting areas where the impact on a number of companies was expected to
be major: (a) income tax, because of fundamental changes in the concepts and method
for recognising deferred tax assets and liabilities; (b) property plant and equipment,
where offsetting revaluation decreases and increases could no longer occur within an
asset class; (c) employee benefits, revenue recognition and intangibles; (d) financial
instruments, for which derivative financial instruments must be recognised at fair value
and detailed rules applied to account for hedges; (e) business combinations, because of
the change in accounting treatment for goodwill on consolidation; (f) agricultural assets,
where fair value accounting was required; and (g) share-based payments transactions
which were required to be recognised in the financial statements.
RESPONSE OF FEDERAL INLAND REVENUE SERVICE
3.1 THE FIRS CIRCULAR ON IFRS ADOPTION

11. On July 28, 2010, the Federal Executive Council (FEC) accepted the recommendation
of the Committee on the Roadmap to the Adoption of International Financial Reporting
Standards (IFRS) in Nigeria, that it will be in the interest of the economy for reporting
entities in Nigeria to adopt globally accepted, high-quality accounting standards by fully
adopting the IFRS in a phased transition.
As a follow up to FEC declaration, the Federal Inland Revenue Service (FIRS) issued a
circular on the issue intimating stakeholders of its stand on the impending change and
how tax assessment will be done. The Key highlights include:
Transition adjustments - Taxpayers are required to present a reconciliation of their
IFRS transition adjustments for tax purposes.
Minimum Tax - The new net asset based on IFRS adoption shall not be adopted for
minimum tax computation in the year of transition.
Excess dividend tax – where dividend paid exceeds taxable profit excess dividend tax
at 30% will apply notwithstanding that profit being distributed may have resulted from
transition adjustments
Extension of time for filing returns – First time adopters of IFRS would on application
in accordance with Section 26 (5) of FIRSEA (and provisions of Self-Assessment
Regulations 2012) be granted 3 months’ extension for filing of their first set of IFRS
Financial statements and related returns to allow sufficient time to overcome initial
conversion problems.

12. Inventory - (e.g. returnable packaging materials) reclassified in line with IFRS as non-
current asset shall continue to be treated as inventory in line with the existing tax
practice.
Decommissioning - Provision/estimate of cost of abandonment, dismantling, removing
the item of PPE and site restoration shall not be allowed for capitalisation with PPE.
Revaluation – Cost (and TWDV) is the basis of capital allowance computation, FIRS
shall continue to disregard all revaluation of PPE. Any revaluation surplus shall not be
taxable while deficit shall not be an allowable deduction.
Asset valuation fees - Professional fees and valuation expenses relating to revaluation
of PPE shall not be allowed for tax purposes.
Componentisation – The breakdown of componentised PPE inclusive of the basis for
determining the value of each component shall be filed with the FIRS as it shall form the
basis of capital allowance claims and applicable rates.
Interest free loan - when it relates to individual, it shall be regarded as benefit in kind
and taxed under the provisions of PITA. In the case of corporate taxpayer, it shall be
treated in line with Transfer Pricing Regulations. In all cases, the interest rate to be used
shall be MPR plus a spread to be determined by the Finance Minister in line with
Section 32(1) of FIRS Act.
Impairment - all impairment losses shall not be allowed for tax purposes.
Intangible assets - certain intangible assets such as software, franchise, and website
cost will qualify for tax deduction based on amount amortised over the useful life.

13. Discontinued Operation - Cessation rule shall apply when a taxpayer discontinues a
line of business and commencement rule will apply if the line of business is bought over
by another party at arm's length in line with Section 29 (9) of CITA.
Financial Instruments - classified as Fair Value Through Profit or Loss (FVTPL)
or held for trading are revenue in nature and therefore liable to CITA.
Fair value measurement - All gains and losses that may arise from fair value
measurement shall be disregarded for tax purposes.
The Council further directed the Nigerian Accounting Standards Board (NASB), under
the supervision of the Federal Ministry of Commerce and Industry, to the take
necessary action to give effect to the Council’s approval.
Section 55 (1) of the Companies Income Tax Act, Cap C21, LFN 2004 requires a
company filing a return to submit its audited account to the Federal Inland Revenue
Service (FIRS) while Sections 8, 52 and 53 of the Financial Reporting Council of Nigeria
Act, 2011 gave effect to the adoption of IFRS. This implies that the audited accounts to
be submitted to the FIRS after the adoption of IFRS shall be prepared in compliance
with its standards. It is in line with the above that FIRS published guidelines on tax
treatments to be given to each of the standards especially where there are deviations
from Generally Accepted Accounting Practice (GAAP) after the adoption.
3.2 REVIEW OF FIRS CIRCULAR AGAINST RELEVANT IFRS
3.2.1 IFRS1: First time Adoption

14. The Circular requires a taxpayer to prepare and present an opening IFRS statement of
financial position at the date of transition to IFRS. This is the starting point for its
accounting in accordance with IFRS.
A first time adopter of IFRS is required by the standard:
• to recognise all assets and liabilities whose recognition is required by IFRS;
• not to recognise items as assets or liabilities if IFRS do not permit such recognition;
• to reclassify items that it recognised in accordance with previous GAAP as one type of
asset, liability or component of equity, but are a different type of asset, liability or
component of equity in accordance with IFRS; and
• To apply IFRS in measuring all recognised assets and liabilities.
Having complied with the stipulation of the standard, FIRS says the new net asset
based on the accounting balance shall not be adopted for minimum tax computation in
the year of transition. The minimum tax legislation is one of the ingenious ways that
FIRS uses to checkmate business entities from tax avoidance. The implication of not
using the new assets value in the year of transition is to avoid charging minimum tax of
revalued assets which is likely to produce very huge balance as a result of high inflation
level in our environment.
If the retained earnings of a taxpayer that had previously paid tax based on dividend for
a particular tax year increases as a result of the adoption of IFRS, and additional
dividends are paid after the transition period from the portion of the retained earnings

15. that relates to the tax year, the taxpayer shall be subjected to additional tax based on
dividend in line with Section 19 of CITA.
Where, however, the taxpayer was previously assessed to tax for the tax year in line
with Section 40 of CITA, the taxpayer will only pay tax on its dividends based on Section
19, where the cumulative amount of dividends declared from the profits/retained
earnings relating to the tax year, exceeds the taxable profits previously reported in the
tax computations.
Details of recognitions, de-recognitions and reconciliation must be forwarded to FIRS by
the taxpayer including all adjustments to opening retained earnings.
All conversion cost (capital and revenue) shall be subject to verification by the FIRS
before it can be allowed as qualified capital expenditure or revenue expenditure.
Extension of time to file returns
First time adopters of IFRS would on application in accordance with Section 26 (5) of
FIRSEA (and provisions of Self-Assessment Regulations 2012) be granted three (3)
months extension for filing of their first set of IFRS financial statements and related
returns to allow sufficient time to overcome initial conversion problems.
IFRS compliant financial statement shall be included in tax returns in line with Financial
Reporting Council of Nigeria (FRC) Act. Tax returns under IFRS shall be in line with
Section 55 of CITA and should include:
i. In respect of first time adopters;

16. • Statement of Financial Position as at the beginning of the earliest comparative period
when a taxpayer applies an accounting policy retrospectively or makes a retrospective
restatement of items in its financial statement.
• Statement comparing the tax effect of IFRS adoption with GAAP.
• Statement of reconciliations from GAAP to IFRS.
• Deferred tax computation.
ii. In respect of post-first time adoption:
Deferred tax computation.
A statement showing the adjustments made on income statement or total
comprehensive income to arrive at assessable profit and total profit for tax purposes as
the taxpayer may wish to adopt shall be included.
3.2.2 IAS 2: Inventories
Where allowable input VAT is included in the cost of inventories, it shall be disallowed
for income tax purposes and treated separately as deductible from the output VAT as
contained in the VAT Act.
When inventories are purchased with deferred settlement terms:
Cost of inventories shall be based on the cost indicated on the invoice inclusive of any
imputed interest. Where such interest has been charged in the income statement it shall
be disallowed for tax purpose. If however the interest has been separately shown on the
face of the invoice, such interest shall not form part of the inventory.

17. Any inventory (e.g. returnable packaging materials) reclassified in line with IFRS as
non-current asset shall continue to be treated as inventory in line with the existing tax
practice.
Estimates or provisions shall not be allowable for tax purposes, and any write-down on
stock based on estimated cost of completion shall be disallowed.
3.2.3 IAS 8: change in accounting policies, changes in accounting estimates and
correction of errors
Whereas IFRS provides for retrospective application of change in accounting policy,
retrospective adjustment shall not be effected for first time adopters for tax purposes.
Taxpayers should submit a re-computation of income tax and deferred tax.
Taxpayers should disclose:
• All changes in estimates
• The basis of computation
• The statement to which it has been charged
Obsolete stock/inventories – FIRS may allow claims on obsolete stock where it is
satisfied that such stock is indeed obsolete. Any verification/certification of destruction
of obsolete stock/inventories carried out without the FIRS witnessing such shall not be
accepted for tax purposes.
FIRS shall assess each correction of error on its merit and in line with the existing laws.
Taxpayers shall provide detailed disclosure of the sources of the errors and the future
tax effect of the errors.

18. 3.2.4 Impact of Asset Revaluation and Fair Valuation on Net Assets
The value of an asset will typically change from its historical cost with time, use,
demand, and other factors. This means that the cost of an asset may subsequently
decrease or increase.
With the advent of the Standards, companies can now choose to recognize such
changes in the historical cost of their assets through a concept known as fair
valuation/revaluation. They can also continue to recognize such assets at their historical
cost value. Such valuations, however, will not have any cash implication in the financials
of a company.
However, the “net assets” position of a company, which is the excess of a company’s
assets over its liabilities, will increase or decrease with the corresponding increase or
decrease in the asset position arising from the valuation.
This occurrence has serious implications on the minimum tax position of a company, as
the “net asset” value is one of the parameters used in determining minimum tax. A
company may find itself paying significantly more taxes, simply because of a revaluation
of its assets, which is only notional. This impact is examined in greater detail below.
3.2.5 Minimum Tax Implication of Asset Revaluation and Fair Valuation
The minimum tax provision in the Nigerian Companies Income Tax Act (“CITA”) (the
Companies Income Tax (CIT) Act, Cap. C21, Laws of the Federation of Nigeria (LFN),
2004 [as amended by the CIT (Amendment) Act, 2007] provides the legal basis for the
imposition of taxes on the income of companies in Nigeria, other than those involved in
the exploration and production of petroleum) is one of a series of anti-tax avoidance

19. provisions in the Nigerian tax laws. It combines several parameters (including net
assets) to define the minimum tax payable by a company.
By the provision, companies with no taxable profit or taxable profit less than minimum
tax, and which do not meet the exemption criteria, are required to pay income tax based
on the minimum tax computed.
Specifically, section 33(1) of the Act provides that:
“Notwithstanding any other provisions in this Act where in any year of assessment the
ascertainment of total assessable profits from all sources of a company results in a loss,
or where a company’s ascertained total profits results in no tax payable or tax payable
which is less than the minimum tax, there shall be levied and paid by the company the
minimum tax as prescribed by subsection (2) of this section.”
In calculating this minimum tax, section 33(2) provides that:
“for the purposes of subsection (1) of this section, the minimum tax to be levied and
paid shall:
a. If the turnover of the company is N500,000 or below and the company has been in
business for at least four calendar years be —
i. 0.5 percent of gross profit; or
ii. 0.5 percent of net assets; or
iii. 0.25 percent of paid up capital; or
iv. 0.25 percent of turnover of the company for the year,

20. whichever is higher, or
b. if the turnover higher than N500,000, be whatever is payable in paragraph (a) of this
subsection plus such additional tax on the amount by which the turnover is in excess of
N500,000 at a rate which shall be 50 per cent of the rate used in (a) (iv) above.”
Based on the above provision, companies risk paying more taxes based on net assets,
from the upward revaluation of their assets.
Put simply, revaluation gains will lead to increased minimum taxes. In some
circumstances, such increase in minimum tax could easily run into billions of Nigerian
naira. Land is one category of assets that would quickly and easily fit into this narrative.
With the understanding that such revaluations are only notional and have no cash flow
implication, and undertaken to reflect changes in their market values in the financial
statements, it is important to consider the provisions of the tax laws as well as the
position of the tax authorities with respect to revaluation of assets and its overreaching
implications.
3.2.6 Position of CITA on Asset Revaluation and Fair Valuation
Unfortunately, the CITA has not been updated to reflect the accounting changes
introduced by the IFRS. Hence, the CITA does not specifically provide guidelines on
how revaluations and fair valuations of assets should be treated for tax purposes.
However, inference can be drawn from the Second Schedule to the CITA which
provides the basis of how capital allowances can be claimed on qualifying assets.

21. Based on Paragraph 1 of this Schedule, capital allowances are to be claimed on
qualifying expenditure.
Qualifying expenditure, as defined by the CITA, means expenditure incurred on
qualifying assets. This implies that capital allowances should only be claimed on the
historical cost of assets (i.e. actual expenditure incurred) and not on the revalued
amounts of assets.
From the above, it is evident that the CITA supports the historical cost model as the
basis for valuing assets for tax purposes, and so fair valuation and revaluation should
be disregarded for tax purposes.
However, the Federal Inland Revenue Service (“FIRS”) has, over time, required
companies to pay minimum tax based on the revalued amount of net assets as
presented in the financial statements. The reason is due largely to the fact that
revaluations and fair valuations will usually result in a higher net assets value, thereby
resulting in a higher minimum tax liability.
The FIRS’ position is based on the conflicting provisions contained in one of the FIRS’
clarification circulars.
3.2.6 Conflicting Positions of FIRS’ Circular on Asset Revaluation and Fair
Valuation
In March 2013, to address the tax issues associated with the adoption of the newly
introduced IFRS, the FIRS published a circular: “Tax Implications of the Adoption of
IFRS” (“the Circular”). Among other things, the Circular sought to clarify the tax

22. treatment of asset revaluation and fair valuation. The provisions of the Circular in this
regard are discussed below:
Paragraph 8.9 of the Circular states that “Cost and Tax Written Down Value (TWDV) is
the basis of capital allowance computation, FIRS shall continue to disregard all
revaluation of PPE. Any revaluation surplus shall not be taxable while deficit shall not be
an allowable deduction.”
Paragraph 17.4 of the Circular also states that capital allowances are not allowed on the
revalued amount but on the historical cost of the asset in line with the provisions of the
tax laws.
From the above paragraphs, taxpayers will only be allowed to claim capital allowances
based on the historical cost of assets. This implies that the computation of capital
allowance will not be based on “revalued cost” or “deemed cost” of PPE for tax
purposes.
Therefore, the inference from the combined reading of Paragraphs 8.9 and 17.4 of the
Circular is that all asset impairments and revaluations are to be disregarded for tax
purposes. This position aligns with the provisions of the Second Schedule of the CITA,
discussed earlier.
Paragraph 30.1 of the Circular states that all gains and losses that may arise from fair
value measurement shall be disregarded for tax purposes.
Therefore, based on the above, it appears that the intention of the Circular is to
disregard all revaluations and fair valuations for tax purposes. This position, again,

23. clearly aligns with the Second Schedule of the CITA which supports the historical cost
as the basis for asset valuation for tax purposes.
However, Paragraphs 17.2 and 17.7 of the Circular seem to contradict Paragraphs 8.9,
17.4 and 30.1 of the Circular, and thus provide a basis for the FIRS’ position on
revaluation for minimum tax purposes.
Paragraph 17.2 states that “no adjustment shall be allowed to the net asset on the
financial statement for the purpose of computing minimum tax.”
Paragraph 17.7 provides that “where there is reversal of impairment, no adjustment
would be required to the net assets on the financial statement for the purpose of
computing minimum tax.”
The interpretation of the above Paragraphs is that the net assets in the financial
statement should not be adjusted by elements such as fair valuations and revaluations
which are notional while computing minimum tax.
The situation in which companies pay minimum tax based on the revalued net assets
value is contrary to the provisions of the CITA, which disregard revaluations and fair
valuations for asset valuation.
In addition, the FIRS’ position on minimum tax amounts to double standards. While on
the one hand, the FIRS supports the view that capital allowances are to be computed
on the historical cost of assets and that revaluation and fair value measurements are to
be disregarded for tax purposes, on the other hand, the FIRS is advocating that
taxpayers pay minimum tax based on the revalued amount of net assets.

24. This is self-contradictory and negates the doctrine of tax equity and fairness which the
Nigerian National Tax Policy advocates. Moreover, it must be emphasized that positions
taken by the FIRS in its circulars cannot take precedence over the clear provisions of
the CITA.
4.0 METHODOLOGY
The study adopted the library research approach by reviewing scholarly works on IFRS
and its impact on Taxation as well as Circulars issued by Federal Inland Revenue
Service following approval by FEC to adopt IFRS and complaints by taxpayers and
consultants thus far into the implementation of IFRS.
5.0 CONCLUSION
With different IFRS implementation and convergence process between one country to
another leading to different response of taxation issue, Policy of taxation due to IFRS
implementation might be different.
There is currently an unfair practice by the Nigerian Tax Authority (FIRS) in the
treatment of IFRS Fair Value recognition which they accept with one hand when it is
applicable to charging minimum tax (and thereby increasing tax charge) and reject
when it comes to granting allowance. Since the provision of the CITA is unambiguous
on the basis on which assets should be valued for tax purposes, which is on the
historical cost (i.e. actual expenditure incurred), and the Circular is also clear on the tax
treatment to be accorded revaluation gains and losses for tax purposes, the same basis
should be adopted for minimum tax purposes.

25. In addition, while the proactivity of the FIRS on the release of the guidelines is laudable,
the FIRS needs to ensure that such clarifications are not only consistent with the law,
but also free of bias or contradictions. Ultimately, the need for our tax laws to catch up
with changing accounting policies and regulatory standards cannot be overemphasized.
According to research carried out by E&Y respondents the results conclude that the
greatest areas of tax concerns are calculation and explanation of deferred taxes, impact
on effective tax rate, tax treatment of financial instruments and tax treatment of
intangible assets (Stretch, 2006).

26. REFERENCES
Eberhartinger, E., & Klostermann, M. (2007). What if IFRS were a Tax Base? New
Empirical Evidence from an Austrian Perspective. Accounting in Europe, 141-168.
Federal Board of Inland Revenue (2013) “Tax Implications of the Adoption of IFRS”
Information Circular IMD NO. PC-T12.2.3.1025
Gilbai, E. (2015). The relationship between GAAP and tax accounting in countries
around the world
Haverals, J. (2007). IAS/IFRS in Belgium: Quantitative Analysis on The Impact on The
Tax Burden of Companies. Journal of International Accounting, Auditing and Taxation,
69-89.
Martin Surya Mulyadi, M. S., Soepriyanto, G., Anwar, Y. (2012). IFRS adoption and
taxation issue International Journal of Arts and Commerce Vol. 1 No. 7
Nobes, C. (2002). International harmonization of accounting, in: C. Nobes and R. Parker
(Eds) Comparative International Accounting, 7th edn: 72-102 (Upper Saddle River, NJ:
Prentice-Hall).
Samuel, F. A., Samuel, F. O., and Obiamaka, N., (2013), The Impact of International
Financial Reporting Standards on Taxation, International Journal of Business and Social
Sciences, Vol. 4 (10)
Teixeira, A. (2004), “IFRS - the New Zealand way”, Chartered Accountants Journal, Vol.
83,No. 3, pp. 5-8.

27. Upton, W. (2010, April 16). Adopt, adapt, converge?
http://www.ifrs.org/News/Features/Adopt+adapt+converge.htm