FINANCIAL REPORTING: ACCA

Topic 13: IAS 12-Income Taxes

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 Learning Outcomes
1.Explain clearly the tax base of an asset and a liability.
2.Differentiate between taxable profit and accounting profit.
3.Differentiate between deferred tax asset and deferred tax liability.
4.Discuss the effect of deferred taxation on financial performance of an entity.
5.Differentiate between taxable temporary differences and deductible temporary
differences.

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 Objective
• The objective of this Standard is to prescribe the accounting treatment for income
taxes. The principal issue in accounting for income taxes is how to account for the
current and future tax consequences of:
a)The future recovery (settlement) of the carrying amount of assets (liabilities)
that are recognized in an entity’s statement of financial position; and
b)Transactions and other events of the current period that are recognized in an
entity’s financial statements.

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 Component of Income Tax
• Income tax is a component of three elements which include the following:
a)Estimate for the year.
b)Under or over provisions; this is adjusted for last in the current year.
c)Effect of changes in deferred taxation.

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 Definitions
• Accounting profit: Is profit or loss for a period before deducting tax expense.
• Taxable profit (tax loss): Is the profit (loss) for a period, determined in accordance
with the rules established by the taxation authorities, upon which income taxes are
payable (recoverable).
• Tax expense (tax income): Is the aggregate amount included in the determination
of profit or loss for the period in respect of current tax and deferred tax.
• Current tax: Is the amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period.
• Deferred tax liabilities: Are the amounts of income taxes payable in future periods
in respect of taxable temporary differences.

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 Definitions
• Deferred tax assets: Are the amounts of income taxes recoverable in future periods
in respect of:
a)Deductible temporary differences;
b)The carry forward of unused tax losses; and
c)The carry forward of unused tax credits.
• Temporary differences: Are differences between the carrying amount of an asset or
liability in the statement of financial position and its tax base. Temporary
differences may be either:
• Taxable temporary differences: which are 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; or

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 Definitions
• Deductible temporary differences: which are 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.
• The tax base of an asset or liability: Is the amount attributed to that asset or
liability for tax purposes.

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 Recognition of Current Tax
• Current tax for current and prior periods shall, to the extent unpaid, be recognized
as a liability. If the amount already paid in respect of current and prior periods
exceeds the amount due for those periods, the excess shall be recognized as an
asset.
• The benefit relating to a tax loss that can be carried back to recover current tax of
a previous period shall be recognized as an asset.

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 Review Questions

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 QUESTION ONE
Consider the following items and determine the tax base of each of the item
a)A machine cost 100. For tax purposes, depreciation of 30 has already been deducted
in the current and prior periods and the remaining cost will be deductible in future
periods, either as depreciation or through a deduction on disposal. Revenue
generated by using the machine is taxable, any gain on disposal of the machine will
be taxable and any loss on disposal will be deductible for tax purposes.
b)Interest receivable has a carrying amount of 100. The related interest revenue will
be taxed on a cash basis.
c)Trade receivables have a carrying amount of 100. The related revenue has already
been included in taxable profit (tax loss).
d)Dividends receivable from a subsidiary have a carrying amount of 100. The
dividends are not taxable.

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 QUESTION ONE: CONT’
Consider the following items and determine the tax base of each of the item
e)A loan receivable has a carrying amount of 100. The repayment of the loan will
have no tax consequences.
f)Current liabilities include accrued expenses with a carrying amount of 100. The
related expense will be deducted for tax purposes on a cash basis.
g)Current liabilities include interest revenue received in advance, with a carrying
amount of 100. The related interest revenue was taxed on a cash basis.
h)Current liabilities include accrued expenses with a carrying amount of 100. The
related expense has already been deducted for tax purposes.

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 QUESTION ONE: CONT’
Consider the following items and determine the tax base of each of the item
h)Current liabilities include accrued fines and penalties with a carrying amount of
100. Fines and penalties are not deductible for tax purposes.
i) A loan payable has a carrying amount of 100. The repayment of the loan will have
no tax consequences.

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 QUESTION TWO
In 2024 Seasons Co Ltd had taxable profits of Shs.120,000. In the previous year
2023 income tax on 2023 profits has been estimated at Shs.30,000.
Required:
Calculate Tax payable and the charge for 2024 if the tax due on 2023 profits was
subsequently agreed with the tax authorities as
Shs.35,000
Shs.25,000
Assume tax rate is 30% and any under or over payment are not settled until the
following year’s tax payment due.

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 QUESTION THREE
• Joyland Ltd prepares financial statements to 31st December each year. On 1st
January 2024, the entity purchased a non-current asset for Shs. 20m that had an
anticipated useful life of four years with no residue value. This asset qualified for
capital allowances as follows
Year 1 40% on cost
Year 2 30% on cost
Year 3 20% on cost
Year 4 10% on cost

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 QUESTION THREE: CONT’
Required:
a)Determine the transfer to or from the deferred tax account
assuming tax rate of 30%
b)Determine the profit after tax for the four years assuming
That no deferred tax was recognized (flow through or nil provision
method) and deferred tax is recognized (full provision method)
The profit for each of the four years is estimated to be Shs. 10m
after depreciation but before tax.

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 QUESTION FOUR
• A provision for income tax for the year ended 30 September 2024 of Shs.5·6
million is required. The under provision of the tax liability for the year ended 30
September 2023 was Shs.900,000. At 30 September 2024 the tax base of the
entity’s net assets was Shs.15 million less than their carrying amounts. The
movement on deferred tax should be taken to the income statement. The balance
on deferred tax for the year ending 30 September 2023 was Shs.4m. The income
tax rate of the entity is 25%.
Required:
Compute the income tax expense

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 QUESTION FIVE
• The directors have estimated the provision for income tax for the year ended 31
March 2024 at Shs.8 million. The deferred tax provision at 31 March 2024 is to be
adjusted (through the income statement) to reflect that the tax base of the
company’s net assets is Shs.12 million less than their carrying amounts. The
balance on deferred tax for the year ending 31 March 2023 was Shs.5.2m. The rate
of income tax is 30%.
Required:
Compute the income tax expense

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 Q&A
Recap

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