IFRS

Financial Accounting and New

edition

Reporting Study Text 2019

IAS 12 Income Taxes

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Financial Accounting and Reporting
Study Text

IAS 12 Income Taxes

Our text is designed to help you study effectively and efficiently. In this edition we:

• Highlight the most important elements

• key skills you will need

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between topics

• Emphasize key points in section summaries

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 By looking at Statement of
Comprehensive Income

Tax Expense

Deferred Tax
Current Tax
Expense

It is the Income taxes Payable The income taxes that would be

(i.e. payable for the current payable/relief (i.e. in future
period) in respect of the taxable period) in respect of the taxable
profit/loss to the tax authorities. profit/loss to the tax authorities.

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 Calculation and Accounting
for Current Tax

• Tax is paid on Taxable profit/ Income.

• Accounting for current tax is simple forward calculation.
• When the financial statements are prepared, the tax charge on
accounting profits for the year is likely to be an estimate, which is
therefore not the amount of tax that will eventually be payable. The
actual tax charge (based on Taxable Profit), agreed with the tax
authorities is likely to be different.
❑ Accounting Profit is the profit/loss for a period before deducting
tax expense. A series of adjustments is made against a company's
accounting profit to arrive at its Taxable profit, adjustments involve:
- Adding back inadmissible deductions
- Deducting admissible deductions
• Then, current tax is calculated by applying a Tax rate provided by tax
authorities on taxable profit/income.
• Current tax is an Expense (a Debit) in statement of profit/loss, with the
other side a tax payable (a Credit, under current liabilities) in statement
of Financial Position.

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 Calculation and Accounting
for Deferred Tax

Accounting for deferred tax is based on the principle that tax

consequence of an item should be recognized in the same period as
the item is recognized i.e. matching concept.

Temporary
Tax Base
differences

Taxable Deduct able

Of Asset Of Liability Temporary Temporary
Differences Differences

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 Tax Base

Of Asset Of Liability

Charge to Convertible into Charge to Other

P/L Cash/other asset P/L Liability

The amount that The tax base

Tax base is the The tax base is its
would be received in is its
total amount of carrying amount
future but not taxable carrying
expense that will less the amount
by tax authorities. amount less
be allowed as that will be
For example, for the amount
expense in future. allowed as
Receivables; are on which no
For example, PPE Expense in future
taxed on received tax will be
will be charge in For example,
basis. So, the tax base imposed in
profit/loss as Payment to
is Zero (nil) for today, future.
expense over the Account payable.
as there would be For example,
period.
'zero amount' to be Revenue
received in future but received in
not taxable. advance.

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 Temporary
Differences

Deductible
Taxable Temporary Temporary
Differences Differences

• The difference which • The differences

results in taxable which results in
amounts in deductible amounts
determining taxable in determining
profit/loss of future taxable profit/loss of
periods. future periods.
• They caused by • They are caused by a
Debit balance in Credit balance in
carrying amount of carrying amount of
asset/liability as asset/liability in
compared to tax financial statement
base compared to tax
• They lead to base.
deferred tax • They lead to
liabilities. deferred tax assets.

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 Deferred Tax Recognition and
Measurement rules

Deferred tax Deferred Tax

Liability Asset

• These are the amounts of • These are the amounts of

income taxes payable in income taxes recoverable
future periods. in future periods in
• It must be recognized for respect of all deductible
ALL taxable temporary temporary differences:
difference, except; - A deferred tax asset must
- on initial recognition of be recognized for carry
forward unused tax
good will.
losses and credits.

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 Double Entry for
Deferred Tax

Deferred Tax Deferred Tax

Expense/Credit Liability/Asset

• Charged to Profit and Loss • Recorded as Balance sheet item.

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