ACCOUNTING FOR INCOME TAX (IAS 12 )

Key definitions

 Tax base
The tax base of an asset or liability is the amount attributed to that asset or liability for tax
purposes
 Temporary differences
Differences between the carrying amount of an asset or liability in the statement of financial
position and its tax bases
 Taxable temporary differences
Temporary differences that will result in taxable amounts in determining taxable profit (tax loss)
of future periods when the carrying amount of the asset or liability is recovered or settled
 Deductible temporary differences
Temporary differences that will result in amounts that are deductible in determining taxable
profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered
or settled
 Deferred tax liabilities
The amounts of income taxes payable in future periods in respect of taxable temporary
differences
 Deferred tax assets
The amounts of income taxes recoverable in future periods in respect of: deductible temporary
differences the carryforward of unused tax losses, and the carryforward of unused tax credits

Current tax

Current tax for the current and prior periods is recognized as a liability to the extent that it has not yet
been settled, and as an asset to the extent that the amounts already paid exceed the amount due. The
benefit of a tax loss which can be carried back to recover current tax of a prior period is recognised as an
asset.

Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from)
taxation authorities, using the rates/laws that have been enacted or substantively enacted by the
balance sheet date.

Calculation of deferred taxes

Deferred tax assets and deferred tax liabilities can be calculated using the following formulas:

Temporary difference = Carrying amount - Tax base

Deferred tax asset or liability = Temporary difference x Tax rate

The following formula can be used in the calculation of deferred taxes arising from unused tax losses or
unused tax credits:

Deferred tax asset = Unused tax loss or unused tax credits x Tax rate

Tax bases

The tax base of an item is crucial in determining the amount of any temporary difference, and effectively
represents the amount at which the asset or liability would be recorded in a tax-based balance sheet.
IAS 12 provides the following guidance on determining tax bases:

Assets. The tax base of an asset is the amount that will be deductible against taxable economic
benefits from recovering the carrying amount of the asset. Where recovery of an asset will have no tax
consequences, the tax base is equal to the carrying amount.

Revenue received in advance. The tax base of the recognised liability is its carrying amount, less
revenue that will not be taxable in future periods.

Other liabilities. The 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.

Unrecognised items. If items have a tax base but are not recognised in the statement of financial
position, the carrying amount is nil.

Tax bases not immediately apparent. If the tax base of an item is not immediately apparent, the
tax base should effectively be determined in such as manner to ensure the future tax consequences of
recovery or settlement of the item is recognised as a deferred tax amount.

Consolidated financial statements. In consolidated financial statements, the carrying amounts in

the consolidated financial statements are used, and the tax bases determined by reference to any
consolidated tax return (or otherwise from the tax returns of each entity in the group).

Property, plant and equipment. The tax base of property, plant and equipment that is depreciable
for tax purposes that is used in the entity's operations is the unclaimed tax depreciation permitted as
deduction in future periods.

Receivables. If receiving payment of the receivable has no tax consequences, its tax base is equal
to its carrying amount.

Goodwill. If goodwill is not recognised for tax purposes, its tax base is nil (no deductions are
available)
 Revenue in advance. If the revenue is taxed on receipt but deferred for accounting purposes, the
tax base of the liability is equal to its carrying amount (as there are no future taxable amounts).
Conversely, if the revenue is recognised for tax purposes when the goods or services are received, the
tax base will be equal to nil.

Loans. If there are no tax consequences from repayment of the loan, the tax base of the loan is
equal to its carrying amount. If the repayment has tax consequences (e.g. taxable amounts or
deductions on repayments of foreign currency loans recognised for tax purposes at the exchange rate
on the date the loan was drawn down), the tax consequence of repayment at carrying amount is
adjusted against the carrying amount to determine the tax base (which in the case of the
aforementioned foreign currency loan would result in the tax base of the loan being determined by
reference to the exchange rate on the draw down date).

Recognition and measurement of deferred taxes

Recognition of deferred tax liabilities

The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary
differences. There are three exceptions to the requirement to recognize a deferred tax liability, as
follows:

Liabilities arising from initial recognition of goodwill:

(a) liabilities arising from the initial recognition of an asset/liability other than in a business combination
which, at the time of the transaction, does not affect either the accounting or the taxable profit

(b) liabilities arising from temporary differences associated with investments in subsidiaries, branches,
and associates, and interests in joint arrangements, but only to the extent that the entity is able to
control the timing of the reversal of the differences and it is probable that the reversal will not occur in
the foreseeable future.

Recognition of deferred tax assets

A deferred tax asset is recognized for deductible temporary differences, unused tax losses and unused
tax credits to the extent that it is probable that taxable profit will be available against which the
deductible temporary differences can be utilized, unless the deferred tax asset arises from the initial
recognition of an asset or liability other than in a business combination which, at the time of the
transaction, does not affect accounting profit or taxable profit.

Deferred tax assets for deductible temporary differences arising from investments in subsidiaries,
branches and associates, and interests in joint arrangements, are only recognised to the extent that it is
probable that the temporary difference will reverse in the foreseeable future and that taxable profit will
be available against which the temporary difference will be utilized.
The carrying amount of deferred tax assets are reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow
the benefit of part or all of that deferred tax asset to be utilized. Any such reduction is subsequently
reversed to the extent that it becomes probable that sufficient taxable profit will be available.

A deferred tax asset is recognized for an unused tax loss carryforward or unused tax credit if, and only if,
it is considered probable that there will be sufficient future taxable profit against which the loss or credit
carryforward can be utilized.

Measurement of deferred tax

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period
when the asset is realized or the liability is settled, based on tax rates/laws that have been enacted or
substantively enacted by the end of the reporting period. The measurement reflects the entity's
expectations, at the end of the reporting period, as to the manner in which the carrying amount of its
assets and liabilities will be recovered or settled.

IAS 12 provides the following guidance on measuring deferred taxes:

 Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets
or settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred taxes
is consistent with the way in which an asset is recovered or liability settled.
 Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land), deferred
taxes reflect the tax consequences of selling the asset.
 Deferred taxes arising from investment property measured at fair value under IAS 40 Investment
Property reflect the rebuttable presumption that the investment property will be recovered
through sale.
 If dividends are paid to shareholders, and this causes income taxes to be payable at a higher or
lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are measured
using the tax rate applicable to undistributed profits.

Deferred tax assets and liabilities cannot be discounted.

Recognition of tax amounts for the period

Amount of income tax to recognise

The following formula summarizes the amount of tax to be recognized in an accounting period:
Tax to recognize for the period = Current tax for the period + Movement in deferred
tax balances for the period

Where to recognize income tax for the period

Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events
are recognized in the same way as the items giving rise to those tax consequences. Accordingly, current
and deferred tax is recognized as income or expense and included in profit or loss for the period, except
to the extent that the tax arises from:

 transactions or events that are recognized outside of profit or loss (other comprehensive income
or equity) - in which case the related tax amount is also recognised outside of profit or loss.
 a business combination - in which case the tax amounts are recognized as identifiable assets or
liabilities at the acquisition date, and accordingly effectively taken into account in the
determination of goodwill when applying IFRS 3 Business Combinations.

IAS 12 provides the following additional guidance on the recognition of income tax for the period:

 Where it is difficult to determine the amount of current and deferred tax relating to items
recognised outside of profit or loss (e.g. where there are graduated rates or tax), the amount of
income tax recognised outside of profit or loss is determined on a reasonable pro-rata
allocation, or using another more appropriate method.
 In the circumstances where the payment of dividends impacts the tax rate or results in taxable
amounts or refunds, the income tax consequences of dividends are considered to be more
directly linked to past transactions or events and so are recognised in profit or loss unless the
past transactions or events were recognised outside of profit or loss.
 The impact of business combinations on the recognition of pre-combination deferred tax assets
are not included in the determination of goodwill as part of the business combination, but are
separately recognized.
 The recognition of acquired deferred tax benefits subsequent to a business combination are
treated as 'measurement period' adjustments (see IFRS 3 Business Combinations) if they qualify
for that treatment, or otherwise are recognised in profit or loss.
 Tax benefits of equity settled share based payment transactions that exceed the tax effected
cumulative remuneration expense are considered to relate to an equity item and are recognised
directly in equity.

Presentation

Current tax assets and current tax liabilities can only be offset in the statement of financial position if the
entity has the legal right and the intention to settle on a net basis.
Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if
the entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts
are levied by the same taxing authority on the same entity or different entities that intend to realise the
asset and settle the liability at the same time.

The amount of tax expense (or income) related to profit or loss is required to be presented in the
statement(s) of profit or loss and other comprehensive income.

The tax effects of items included in other comprehensive income can either be shown net for each item,
or the items can be shown before tax effects with an aggregate amount of income tax for groups of
items (allocated between items that will and will not be reclassified to profit or loss in subsequent
periods).

Disclosure

IAS 12.80 requires the following disclosures:

 major components of tax expense (tax income). Examples include:

 current tax expense (income)
 any adjustments of taxes of prior periods amount of deferred tax expense (income) relating
to the origination and reversal of temporary differences
 amount of deferred tax expense (income) relating to changes in tax rates or the imposition
of new taxes amount of the benefit arising from a previously unrecognised tax loss, tax
credit or temporary difference of a prior period write down, or reversal of a previous write
down
 deferred tax asset amount of tax expense (income) relating to changes in accounting
policies and corrections of errors.

IAS 12.81 requires the following disclosures:

 aggregate current and deferred tax relating to items recognized directly in equity tax relating to
each component of other comprehensive income explanation of the relationship between tax
expense (income) and the tax that would be expected by applying the current tax rate to
accounting profit or loss (this can be presented as a reconciliation of amounts of tax or a
reconciliation of the rate of tax)
 changes in tax rates amounts and other details of deductible temporary differences,
 unused tax losses, and unused tax credits
 temporary differences associated with investments in subsidiaries, branches and associates, and
interests in joint arrangements for each type of temporary difference and unused tax loss and
credit,
 the amount of deferred tax assets or liabilities recognized in the statement of financial position
and the amount of deferred tax income or expense recognized in profit or loss tax relating to
 discontinued operations tax consequences of dividends declared after the end of the reporting
period
 information about the impacts of business combinations on an acquirer's deferred tax assets
 recognition of deferred tax assets of an acquiree after the acquisition date.

Other required disclosures:

 details of deferred tax assets [IAS 12.82] tax consequences of future dividend payments.

In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are required
by IAS 1 Presentation of Financial Statements, as follows:

 Disclosure on the face of the statement of financial position about current tax assets, current tax
liabilities, deferred tax assets, and deferred tax liabilities.
 Disclosure of tax expense (tax income) in the profit or loss section of the statement of profit or
loss and other comprehensive income (or separate statement if presented).