IAS 12: Income Taxes
1. Objective
The objective of IAS 12 is to prescribe the accounting treatment for income taxes. The principal issue is how to account for the current and future tax consequences of:
(a) the future recovery (or settlement) of the carrying amount of assets (or liabilities) that are recognised in an entity's balance sheet, and
(b) transactions and other events of the current period that are recognised in an entity's financial statements
The items below reveal more about the requirements of IAS 12.
a. Deferred tax
The carrying amount of assets and liabilities may be recovered or settled at an amount, or under a timing, different from that considered for tax purposes.
In such cases, IAS 12 requires an entity to recognise a deferred tax liability or a deferred tax asset (with certain limited exceptions), so as to recognise the deferred tax effects in the current financial statements as if those differences did not exist.
The deferred tax liability (or asset) subsequently reverses as the differences between tax and accounting treatment reduce, and ultimately disappears.
b. Where to account for the tax
IAS 12 requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves, i.e:
in the income statement
in equity, or
in calculation of goodwill
c. IAS 12 also deals with...
IAS 12 also addresses:
the recognition of deferred tax assets arising from unused tax losses or unused tax credits
the presentation of income taxes in the financial statements, and
the disclosure of information relating to income taxes
2. The scope of IAS 12
IAS 12 should be applied in accounting for income taxes.
Income taxes include:
all domestic and foreign taxes that are based on taxable profits
taxes, such as withholding taxes, payable by a subsidiary, associate or joint venture on distributions to the reporting entity
IAS 12 does not address:
methods of accounting for government grants (see IAS 20, Accounting for Government Grants and Disclosure of Government Assistance), or
investment tax credits
However, it does address accounting for temporary differences that may arise from such grants or investment tax credits.
3. Key definitions
a. Accounting profit
Accounting profit is profit or loss for a period before deducting tax expense.
b. Taxable profit (or tax loss)
Taxable profit (or tax loss) is the profit (or loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which it will be determined whether income taxes are payable (or recoverable).
This is the profit or loss, as calculated by the tax authorities, at the end of a financial period based on the income and expenses that are included or excluded for tax purposes (e.g. accounting depreciation versus tax depreciation).
c. Tax expense (or tax income)
Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax.
i.e. Tax expense (or tax income) = current tax + deferred tax
d. Current tax
Current tax is the amount of income taxes payable (or recoverable) in respect of the taxable profit (or tax loss) for a period.
i.e. Current tax = taxable profit (or tax loss) x tax rate
It is the amount of tax due to or from the tax authorities for a period.
e. Tax base
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes, i.e. the value of an asset or liability in terms of the tax laws.
For example: an asset has a cost of 100, depreciation to date is 20 but tax depreciation is 25.
Therefore:
Carrying amount = 80 (accounting value)
Tax base = 75 (tax value)
f. Temporary differences
Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base, i.e. the difference between the accounting value (carrying amount) and the tax authority amount (tax base) due to the differences in treatment between the relevant tax legislation and the accounting policies of the entity.
Temporary differences may be either:
(a) taxable temporary differences - temporary differences that will result in taxable amounts in determining taxable profit (or tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled
or
(b) deductible temporary differences - temporary differences that will result in amounts that are deductible in determining taxable profit (or tax loss) of future periods, when the carrying amount of the asset or liability is recovered or settled
g. Deferred tax liabilities
Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.
i.e. Deferred tax liabilities = taxable temporary differences x tax rate
h. Deferred tax assets
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences
(b) the carryforward of unused tax losses, and
(c) the carryforward of unused tax credits
i.e. deferred tax assets = deductible temporary differences * tax rate + unused tax losses * tax rate and tax credits
1. Objective
The objective of IAS 12 is to prescribe the accounting treatment for income taxes. The principal issue is how to account for the current and future tax consequences of:
(a) the future recovery (or settlement) of the carrying amount of assets (or liabilities) that are recognised in an entity's balance sheet, and
(b) transactions and other events of the current period that are recognised in an entity's financial statements
The items below reveal more about the requirements of IAS 12.
a. Deferred tax
The carrying amount of assets and liabilities may be recovered or settled at an amount, or under a timing, different from that considered for tax purposes.
In such cases, IAS 12 requires an entity to recognise a deferred tax liability or a deferred tax asset (with certain limited exceptions), so as to recognise the deferred tax effects in the current financial statements as if those differences did not exist.
The deferred tax liability (or asset) subsequently reverses as the differences between tax and accounting treatment reduce, and ultimately disappears.
b. Where to account for the tax
IAS 12 requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves, i.e:
in the income statement
in equity, or
in calculation of goodwill
c. IAS 12 also deals with...
IAS 12 also addresses:
the recognition of deferred tax assets arising from unused tax losses or unused tax credits
the presentation of income taxes in the financial statements, and
the disclosure of information relating to income taxes
2. The scope of IAS 12
IAS 12 should be applied in accounting for income taxes.
Income taxes include:
all domestic and foreign taxes that are based on taxable profits
taxes, such as withholding taxes, payable by a subsidiary, associate or joint venture on distributions to the reporting entity
IAS 12 does not address:
methods of accounting for government grants (see IAS 20, Accounting for Government Grants and Disclosure of Government Assistance), or
investment tax credits
However, it does address accounting for temporary differences that may arise from such grants or investment tax credits.
3. Key definitions
a. Accounting profit
Accounting profit is profit or loss for a period before deducting tax expense.
b. Taxable profit (or tax loss)
Taxable profit (or tax loss) is the profit (or loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which it will be determined whether income taxes are payable (or recoverable).
This is the profit or loss, as calculated by the tax authorities, at the end of a financial period based on the income and expenses that are included or excluded for tax purposes (e.g. accounting depreciation versus tax depreciation).
c. Tax expense (or tax income)
Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax.
i.e. Tax expense (or tax income) = current tax + deferred tax
d. Current tax
Current tax is the amount of income taxes payable (or recoverable) in respect of the taxable profit (or tax loss) for a period.
i.e. Current tax = taxable profit (or tax loss) x tax rate
It is the amount of tax due to or from the tax authorities for a period.
e. Tax base
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes, i.e. the value of an asset or liability in terms of the tax laws.
For example: an asset has a cost of 100, depreciation to date is 20 but tax depreciation is 25.
Therefore:
Carrying amount = 80 (accounting value)
Tax base = 75 (tax value)
f. Temporary differences
Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base, i.e. the difference between the accounting value (carrying amount) and the tax authority amount (tax base) due to the differences in treatment between the relevant tax legislation and the accounting policies of the entity.
Temporary differences may be either:
(a) taxable temporary differences - temporary differences that will result in taxable amounts in determining taxable profit (or tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled
or
(b) deductible temporary differences - temporary differences that will result in amounts that are deductible in determining taxable profit (or tax loss) of future periods, when the carrying amount of the asset or liability is recovered or settled
g. Deferred tax liabilities
Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences.
i.e. Deferred tax liabilities = taxable temporary differences x tax rate
h. Deferred tax assets
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences
(b) the carryforward of unused tax losses, and
(c) the carryforward of unused tax credits
i.e. deferred tax assets = deductible temporary differences * tax rate + unused tax losses * tax rate and tax credits
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