Objective: IAS 12 prescribes the accounting treatment for income taxes, including how to account for current and future tax consequences of transactions and events in financial statements.
- Applies to all income taxes including domestic and foreign taxes based on taxable profits
- Does not apply to government grants or investment tax credits
- Key issues: current tax liabilities/assets, deferred tax liabilities/assets, and tax expense recognition
Accounting Profit: Net profit or loss for a period before deducting tax expense.
Taxable Profit (Tax Loss): The profit (loss) for a period, determined in accordance with tax laws, upon which income taxes are payable (recoverable).
Temporary Differences: Differences between the carrying amount of an asset or liability and its tax base.
Tax Base: The amount attributed to an asset or liability for tax purposes.
Asset Tax Base: The tax deduction available in the future when the asset generates taxable economic benefits. If future benefits are not taxable, the tax base equals carrying value.
Liability Tax Base: Carrying value minus tax deduction available when liability is settled. For revenue received in advance, tax base is carrying value minus revenue not taxed in future.
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period:
| Element | Accounting Treatment |
|---|---|
| Current Tax Liability | Recognized for unpaid taxes on current period and prior periods |
| Current Tax Asset | Recognized for the benefit of tax losses that can be carried back |
| Measurement | Based on tax rates enacted or substantively enacted by reporting date |
Taxable Temporary Difference (DTL): Occurs when the subsequent settlement will generate taxable amounts.
Deductible Temporary Difference (DTA): Occurs when the subsequent settlement will result in an allowable deduction for tax purposes.
Asset with carrying amount of $1,000 and tax base of $800
Taxable temporary difference = $200
Tax rate = 30% → Deferred tax liability = $60
Deferred Tax Liabilities: Amounts of income taxes payable in future periods in respect of taxable temporary differences.
Deferred Tax Assets: Amounts of income taxes recoverable in future periods in respect of deductible temporary differences, unused tax losses, and unused tax credits.
Measurement Formula: Deferred tax = Temporary difference × Expected corporate tax rate
- Recognized for all temporary differences unless specific exceptions apply
- Measured using tax rates expected to apply when asset is realized/liability settled
- Deferred tax assets recognized only to extent that taxable profit will be available
- Use only enacted/substantively enacted tax rates by reporting period end
- Deferred tax liabilities recognized for all taxable temporary differences
- Deferred tax assets recognized for deductible temporary differences if probable sufficient taxable profit will be available
- Tax effects of transactions/events recognized in same way as transaction/event itself (P&L, OCI, or equity)
Key Exceptions:
- No deferred tax on initial recognition of goodwill
- No deferred tax on assets/liabilities that affect neither accounting nor taxable profit on initial recognition
- Special rules for investments in subsidiaries, associates and joint ventures
- Deferred tax assets from unused tax losses require convincing evidence of future profitability
| Requirement | Description |
|---|---|
| Balance Sheet | Current and non-current tax assets/liabilities presented separately |
| Income Statement | Tax expense related to profit/loss from ordinary activities shown separately |
| Disclosures | Major components of tax expense, reconciliation between accounting profit and tax expense, etc. |
- Compute temporary differences for each asset and liability
- Taxable temporary differences generate future taxable amounts
- Deductible temporary differences result in future allowable deductions
- Apply tax rates expected when temporary differences reverse
- Reassess unrecognized deferred tax assets at each reporting date
Formula: Temporary Difference = Carrying Amount - Tax Base
• Taxable Temporary Difference: will create a potential deferred tax liability and income tax expense.
• Deductible Temporary Difference: will create a potential deferred tax asset and tax gain.
Formula: Deferred tax = Temporary difference x Expected corporate tax rate.
• Deferred Tax Liabilities (DTLs): Are recognized for all taxable temporary differences.
• Deferred Tax Assets (DTAs): Are recognized for deductible temporary differences only if it is probable that future taxable profit will be available against which the deductible temporary difference can be utilized.
• The entity has a legally enforceable right to set off current tax assets and liabilities.
• The deferred tax balances relate to taxes levied by the same tax authority.
You cannot simply net a DTL from one jurisdiction against a DTA from another.
• Exception: If the tax relates to an item that was itself recognized in Other Comprehensive Income (OCI) or directly in equity (e.g., revaluation of property, actuarial gains/losses), then the related deferred tax is also recognized in OCI or equity.