IAS 12 Income Taxes

IAS 12: INCOME TAXES
What is the objective of IAS 12?

The objective of IAS 12 is to prescribe the accounting treatment for income taxes.
The main issue here is how to account for the current and future consequences of
 The future recovery (settlement) of the carrying amount of assets (liabilities) recognized in the

entity’s financial statements.
Here, if the future recovery or settlement will make future tax payments larger or smaller
than they would be if such recovery or settlement were to have no tax consequences, then
an entity must recognize deferred tax liability or asset.
 Transactions and other events of the current period recognized in the entity’s financial
statements.
IAS 12 requires accounting for current and deferred income tax from certain transaction
or event exactly in the same way as the transaction or event itself.
Understand the differences

Almost in every country the accounting rules differ from the tax laws and regulations.
Sometimes, these differences are really significant and accountants must make lots of
adjustments to their accounting profit in order to arrive to the basis for calculation of income tax.
In order to understand the meaning and the rules of IAS 12 fully, you need to understand the
meaning of and differences between
 Accounting profit and taxable profit, and
 Current income tax and deferred income tax.
I. Accounting versus taxable profit

Accounting profit is profit or loss for a period before deducting tax expense. Please note that
IAS 12 defines accounting profit as a before-tax figure (not after tax as we normally do) in order
to be consistent with the definition of a taxable profit.
Taxable profit (tax loss) is the profit (loss) for a period determined in accordance with the rules
established by the taxation authorities upon which income taxes are payable (recoverable).
You can clearly see here that these 2 numbers can differ significantly because accounting and tax
rules are not the same. A number of differences can pop out between accounting profit and
taxable profit you have to make the following adjustments to your accounting profit:
 Add back the expenses recognized but non-deductible for tax purposes
 Add income not recognized but included under tax regulations
 Deduct expenses not recognized but deductible for tax purposes
 Deduct income recognized but not taxable under tax regulations.
II. Current tax versus deferred tax

Current income tax is the amount of income tax that you actually need to pay to your tax office.
Deferred income tax is an accounting measure used to match the tax effect of transactions with
their accounting impact and thereby produce less distorted results.
I have outlined the other differences between current and deferred income tax in the following
scheme:
Current income tax

Current tax is the amount of income tax payable (recoverable) in respect of the taxable profit
(loss) for a period.
Measurement of current tax liabilities (assets) is very straightforward. We need to use the tax
rates that have been enacted or substantively enacted by the end of the reporting period and apply
these rates to the taxable profit (loss).
Current income tax expense shall be recognized directly to profit or loss in most cases.
However, If the current tax arises from a transaction or event recognized outside profit or loss,
either in other comprehensive income or directly in equity, then current income tax shall be
recognized in the same way.
Deferred income tax

Deferred income tax is the income tax payable (recoverable) in future periods in respect of the
temporary differences, unused tax losses and unused tax credits.
Deferred tax liabilities result from taxable temporary differences and deferred tax assets result

from deductible temporary differences, unused tax losses and unused tax credits.
We can calculate deferred tax as temporary difference multiplied with the applicable tax rate.
Before you dig deeper in the concept of temporary differences, you need to understand the tax
base first.
What is a tax base

Tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
In my opinion, this definition does not say that much, so let’s explain it in a greater detail:
Tax base of an asset
Tax base of an asset is the amount that will be deductible for tax purposes against any taxable
economic benefits that will flow to an entity when it recovers the carrying amount of the asset.
For example, when you have an interest receivable and interest revenue is taxed on a cash basis,
then the tax base of interest receivable is 0. Why? Because when you actually receive the cash
and remove the interest receivable from your books, you will need to include full amount of cash
received into your tax return. At the same time you cannot deduct anything from this amount for
tax purposes.
Tax base of a liability
Tax base of a liability is its carrying amount, less any amount that will be deductible for tax
purposes in respect of that liability in future periods.
For example, when you accrue some expenses that will be deductible when paid, then the tax
base of a liability from accrued expenses is 0.
Careful about items not shown in your balance sheet!
If you review all your assets and liabilities calculating their tax bases, be careful! There could be
some items not recognized in your balance sheet that still do have a tax base.
For example, you might have incurred some research costs included in the profit or loss in the
past that you could not deduct for tax purposes until later periods. In such a case, the research
costs are not shown in your statement of financial position but they do have a tax base.
Temporary differences
Temporary differences are differences between the carrying amount of an asset or liability in the
statement of financial position and its tax base.
When the carrying amount of an asset or a liability is greater than its tax base, then there is
a taxable temporary difference and it gives rise to deferred tax liability.
In the opaque situation, when the carrying amount of an asset or a liability is lower than its tax
base, then there is a deductible temporary difference and it gives rise to deferred tax asset.
SOURCE: ifrsbox.com

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IAS 12: INCOME TAXES

What is the objective of IAS 12?

 The future recovery (settlement) of the carrying amount of assets (liabilities) recognized in the

Understand the differences

I. Accounting versus taxable profit

II. Current tax versus deferred tax

Current income tax

Deferred income tax

Deferred tax liabilities result from taxable temporary differences and deferred tax assets result

What is a tax base

Tax base of an asset

Tax base of a liability

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