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IAS 12 - Income Taxes
IAS 12 - Income Taxes
Overview
IAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of accounting for income taxes which
recognises both the current tax consequences of transactions and events and the future tax consequences of the future
recovery or settlement of the carrying amount of an entity's assets and liabilities. Differences between the carrying amount and
tax base of assets and liabilities, and carried forward tax losses and credits, are recognised, with limited exceptions, as deferred
tax liabilities or deferred tax assets, with the latter also being subject to a 'probable profits' test.
IAS 12 was reissued in October 1996 and is applicable to annual periods beginning on or after 1 January 1998.
History of IAS 12
Date Development Comments
April 1978 Exposure Draft E13 Accounting for Taxes on
Income published
July 1979 IAS 12 Accounting for Taxes on Income issued
January 1989 Exposure Draft E33 Accounting for Taxes on
Income published
1994 IAS 12 (1979) was reformatted
October 1994 Exposure Draft E49 Income Taxes published
October 1996 IAS 12 Income Taxes issued Operative for financial state-
ments covering periods
beginning on or after 1 January
1998
October 2000 Limited Revisions to IAS 12 published (tax con- Operative for financial state-
sequences of dividends) ments covering periods
beginning on or after 1 January
2001
31 March 2009 Exposure Draft ED/2009/2 Income Tax Comment deadline 31 July 2009
Summary of IAS 12
Objective of IAS 12
The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes.
[IAS 12.5]
Tax base The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes
Temporary differ- Differences between the carrying amount of an asset or liability in the statement of financial position and its
ences tax bases
Taxable Temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future
temporary differ- periods when the carrying amount of the asset or liability is recovered or settled
ences
Deductible Temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss)
temporary differ- of future periods when the carrying amount of the asset or liability is recovered or settled
ences
Deferred tax liabil- The amounts of income taxes payable in future periods in respect of taxable temporary differences
ities
Deferred tax The amounts of income taxes recoverable in future periods in respect of:
Current tax for the current and prior periods is recognised 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. [IAS 12.12] The benefit of a tax loss which can be
carried back to recover current tax of a prior period is recognised as an asset. [IAS 12.13]
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. [IAS 12.46]
Formulae
Deferred tax assets and deferred tax liabilities can be calculated using the following formulae:
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 deter-
mining tax bases:
Assets. The tax base of an asset is the amount that will be deductible against taxable economic benefits from recover-
ing 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. [IAS 12.7]
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 [IAS 12.8]
Other liabilit ies. 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 [IAS 12.8]
Unrecognised items. If items have a tax base but are not recognised in the statement of financial position, the carrying
amount is nil [IAS 12.9]
Tax bases not immediately apparent. If the tax base of an item is not immediately apparent, the tax base should ef-
fectively 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 [IAS 12.10]
Consolid
ated 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). [IAS 12.11]
Examples
The determination of the tax base will depend on the applicable tax laws and the entity's expectations as to recovery and settle-
ment of its assets and liabilities. The following are some basic examples:
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 recog-
nised 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 conse-
quence 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
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 recognise a deferred tax liability, as follows:
liabilities arising from initial recognition of goodwill [IAS 12.15(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 and at the time of the transaction, does not
give rise to equal taxable and deductible temporary differences. [IAS 12.15(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 dif-
ferences and it is probable that the reversal will not occur in the foreseeable future. [IAS 12.39]
Example
An entity undertaken a business combination which results in the recognition of goodwill in accordance with IFRS 3
(https://www.iasplus.com/en/standards/ifrs/ifrs3) Business Combinations. The goodwill is not tax depreciable or otherwise
recognised for tax purposes.
As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly, a taxable temporary differ-
ence arises in respect of the entire carrying amount of the goodwill. However, the taxable temporary difference does not result
in the recognition of a deferred tax liability because of the recognition exception for deferred tax liabilities arising from goodwill.
A deferred tax asset is recognised 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 utilised, unless
the deferred tax asset arises from: [IAS 12.24]
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 utilised. [IAS 12.44]
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
utilised. Any such reduction is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be
available. [IAS 12.37]
A deferred tax asset is recognised 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 utilised. [IAS 12.34]
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is
realised or the liability is settled, based on tax rates/laws that have been enacted or substantively enacted by the end of the
reporting period. [IAS 12.47] 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 12.51]
The following formula summarises the amount of tax to be recognised in an accounting period:
Tax to recognise for the period = Current tax for the period + Movement in deferred tax balances for the period
Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events are recognised in the
same way as the items giving rise to those tax consequences. Accordingly, current and deferred tax is recognised as income or
expense and included in profit or loss for the period, except to the extent that the tax arises from: [IAS 12.58]
transactions or events that are recognised 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 [IAS 12.61A]
a business combination - in which case the tax amounts are recognised as identifiable assets or liabilities at the acqui-
sition date, and accordingly effectively taken into account in the determination of goodwill when applying IFRS 3
(https://www.iasplus.com/en/standards/ifrs/ifrs3) Business Combinations. [IAS 12.66]
Example
An entity undertakes a capital raising and incurs incremental costs directly attributable to the equity transaction, including regu-
latory fees, legal costs and stamp duties. In accordance with the requirements of IAS 32
(https://www.iasplus.com/en/standards/ias/ias32) Financial Instruments: Presentation, the costs are accounted for as a
deduction from equity.
Assume that the costs incurred are immediately deductible for tax purposes, reducing the amount of current tax payable for the
period. When the tax benefit of the deductions is recognised, the current tax amount associated with the costs of the equity
transaction is recognised directly in equity, consistent with the treatment of the costs themselves.
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 de-
termined on a reasonable pro-rata allocation, or using another more appropriate method [IAS 12.63]
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 [IAS
12.52B]
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 recognised [IAS 12.68]
The recognition of acquired deferred tax benefits subsequent to a business combination are treated as 'measurement
period' adjustments (see IFRS 3 (https://www.iasplus.com/en/standards/ifrs/ifrs3) Business Combinations) if they
qualify for that treatment, or otherwise are recognised in profit or loss [IAS 12.68]
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. [IAS 12.68C]
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. [IAS 12.71]
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. [IAS 12.74]
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. [IAS 12.77]
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). [IAS 1.91]
Disclosure
In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are required by IAS 1
(https://www.iasplus.com/en/standards/ias/ias1) 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 [IAS 1.54(n) and (o)]
Disclosure of tax expense (tax income) in the profit or loss section of the statement of profit or loss and other compre-
hensive income (or separate statement if presented). [IAS 1.82(d)]
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