IAS 12 Income Taxes

Tax expense

Current tax

Deferred tax

2
Current tax
• Tax payable/receivable is accounted for according to the basic
principles of accounting for liabilities and assets

• Unpaid current tax is recognised as a liability

• If the amount paid exceeds the amount due, the excess is

recognised as an asset

• Any benefit relating to a tax loss that can be carried back to

recover current tax of a previous period is recognised as an
asset.
Question
In 20X8 Darton Co had taxable profits of $120,000. In the previous
year (20X7) income tax on 20X7 profits had been estimated as
$30,000. The corporate income tax rate is 30%.

Required:

Calculate tax payable and the charge for 20X8 if the tax due on
20X7 profits was subsequently agreed with the tax authorities as:

(a) $35,000; or
(b) $25,000.

Note: Any under or over payments are not settled until the following
year's tax payment is due.

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Answer

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Definitions

• Accounting profit (loss) – before deducting tax

expense

• Tax profit (loss) – profit/loss on which income

tax is payable/recoverable

• Tax expense/income – the aggregate of current

and deferred tax.
Definitions (contd)
• Current tax – the amount payable/recoverable for a
period

• Deferred tax liabilities – amounts payable in future

periods in respect of taxable temporary differences

• 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 and its tax base.
• Debit balances in the financial statements compared to
the tax computations  deferred tax credit balances
“taxable temporary differences”
• Credit balances in the financial statements compared
to the tax computations.  deferred tax debit
balances
“deductible temporary differences”
Deferred tax – the problem

• Tax rules differ from IFRS in arriving at taxable

profit
• Therefore accounting profit and taxable profit
differ
• The relationship between the accounting “profit
before tax” and the tax charge will be distorted
• Transactions recognised in one accounting
period, may have their tax effect deferred until a
later period.
Tax Base - Assets

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Answer – Tax Base Assets

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Tax Base - Liabilities

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Answer – Tax Base Liabilities

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Case study – Differences arising
Answer

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Answer continued..

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Answer continued…

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Example - Liability

Pargatha Co recognises a liability of $10,000 for accrued product

warranty costs on 31 December 20X7.

These product warranty costs will not be deductible for tax purposes
until the entity pays claims. The tax rate is 25%.

Required

State the deferred tax implications of this situation.

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Answer - Liability

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Temporary differences – sources

• Items taxed on a cash basis but accounted for on

an accruals basis
• Accounting depreciation not equal to tax
allowable depreciation
• Finance leases treated as operating leases for
tax purposes
• Asset revaluations, fair value adjustments.
Exclusion of non-taxable items

• The definition of temporary difference captures

items that should not result in deferred taxation
accounting (e.g. accruals for items which are not
taxed or do not attract tax relief).
• The standard includes provisions to exclude
such items:
“If those economic benefits will not be taxable,
the tax base of the asset is equal
to its carrying amount.”
Recognition of deferred tax assets

• A deferred tax asset should be recognised for all

deductible temporary differences

to the extent that it is probable that taxable

profit will be available against which the
deductible temporary difference can be utilised
…
Measurement issues – Tax rate

• The tax rate that is expected to apply to the period

when the asset is realised (or the liability is settled),
based on tax rates that have been enacted by the end
of reporting period.
• It should reflect the tax consequences of the manner in
which the entity expects to recover the carrying
amount of its assets (or settle its liabilities).
• The amount of deferred tax expense relating to change
in the tax rates, if any, must be disclosed.
Case Study – Deferred taxation
The following information relates to Boniek as at 31 December 2015:
Note Carrying value Tax base
Non-current assets $ $
Plant and equipment 200,000 175,000
Current Assets
Receivables
Trade receivables 1 50,000
Interest receivable 2 1,000
Current liabilities
Payables
Fine 3 10,000
Interest payable 2 2,000
Case Study – Further information
1. The doubtful debt allowance is $5,000 and is not deductible for tax purposes.
Bad debts are only deductible on application of a court order to a specific
amount.

2. Interest is taxed on a cash basis.

3. Fines are not tax deductible.

4. The tax rate is 30% for 2015. The government has not announced the tax rate
for 2016 but it is expected to rise to 31%.

5. The deferred tax balance as at 1 January 2015 was $1,200.

Solution – Temporary difference
Carrying Tax Temporary
value base difference
Non-current assets $ $ $
Plant and equipment 200,000 175,000 25,000

Receivables
Trade receivables 50,000 55,000 (5,000)
Interest receivable 1,000  1,000

Payables
Fine 10,000 10,000 
Interest payable 2,000  (2,000)
Solution – Deferred tax provision

Temporary Deferred
difference tax
@ 30%
Deferred tax liabilities 26,000 7,800
Deferred tax assets (7,000) (2,100)

5,700
Solution – Deferred tax expense

Deferred
tax
@ 30%
$

At 1 January 2015 1,200

Profit or loss Balancing figure 4,500

At 31 December 2015 5,700

Case Study – Revaluation
Carrying Tax
value base
$ $
At 1 January 2015 1,000 800
Depreciation (100) (150)
31 December 2015 900 650

At the year end the company revalued the asset to

$1,250. The tax base is not affected by this
revaluation. Tax rate is 30%.
Revaluation – Solution
Deferred
tax @ 30%
$
Deferred tax as at 1 January 2015
(1,000  800) 30% 60
To OCI 30% × (1,250  900) 105
Profit or loss Balancing figure 15

Deferred tax as at 31 December 2015 180

(1,250 – 650) × 30%
Question

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Answer

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Presentation

• Tax assets and tax liabilities should be presented

separately from other assets and liabilities

• Deferred tax assets and liabilities should be

distinguished from current tax assets and
liabilities

• Deferred tax assets/liabilities should not be

classified as current assets/liabilities
Presentation – Offsetting

• Current tax assets and liabilities if, and only if:

– a legally enforceable right to set off; and
– an intention to settle on a net basis, or to realise the
asset and settle the liability simultaneously.
Thank You!