Skip to main content. Dawn Elliott and Jackie Hendley highlight some of the key challenges ahead. More often than not the two approaches give rise to the same answer; however, sometimes the different approaches give a different answer and this is often a material difference. IAS 12 uses the concept of temporary differences.
A temporary difference is the difference between the carrying amount of an asset or liability on the balance sheet and its tax base. Deferred tax should be provided under IAS 12 on all temporary differences subject to certain exceptions. Below, we discuss some of the areas which have caused the most problems on adoption of IFRS. However, there are also other items such as overseas subsidiaries, which may, and rolled over gains and revaluations, which will give rise to deferred tax provisions under IAS 12 and not FRS Degree of adoption Groups have three options available when adopting IFRS; the first is to adopt IFRS at a consolidated level only, the second is to adopt at a consolidated and parent company level, or thirdly adopting on consolidation, in the parent company and in all subsidiaries.
Areas with tax implications under IFRS Business combinations For purchased goodwill acquired post April , a current tax deduction can be claimed for amortisation on that goodwill which is charged to the profit and loss account of an individual entity. Share-based payments Companies with share-based payments may be congratulating themselves on having risen to the challenge of accounting for deferred tax in respect of FRS The deferred tax charges arise because the profit and loss expense in relation to share-based payments is disallowable for tax purposes with a deduction being allowed when the options are exercised.
In addition, under FRS 19 , tax adjustments are recognised in the profit and loss account although under IAS 12 some may be posted to equity reserves. The objective of IAS 12 is to prescribe the accounting treatment for income taxes. The main issue here is how to account for the current and future consequences of. Here, if the future recovery or settlement will make future tax payments larger or smaller than they would be if such recovery or settlement were to have no tax consequences, then an entity must recognize deferred tax liability or asset.
IAS 12 requires accounting for current and deferred income tax from certain transaction or event exactly in the same way as the transaction or event itself. Almost in every country the accounting rules differ from the tax laws and regulations. Sometimes, these differences are really significant and accountants must make lots of adjustments to their accounting profit in order to arrive to the basis for calculation of income tax.
In order to understand the meaning and the rules of IAS 12 fully, you need to understand the meaning of and differences between. Accounting profit is profit or loss for a period before deducting tax expense. Please note that IAS 12 defines accounting profit as a before-tax figure not after tax as we normally do in order to be consistent with the definition of a taxable profit. 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.
You can clearly see here that these 2 numbers can differ significantly because accounting and tax rules are not the same. A number of differences can pop out between accounting profit and taxable profit you have to make the following adjustments to your accounting profit:. Current income tax is the amount of income tax that you actually need to pay to your tax office.
Deferred income tax is an accounting measure used to match the tax effect of transactions with their accounting impact and thereby produce less distorted results. I have outlined the other differences between current and deferred income tax in the following scheme:. Current tax is the amount of income tax payable recoverable in respect of the taxable profit loss for a period.
Measurement of current tax liabilities assets is very straightforward.
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We need to use the tax rates that have been enacted or substantively enacted by the end of the reporting period and apply these rates to the taxable profit loss. Current income tax expense shall be recognized directly to profit or loss in most cases. However, If the current tax arises from a transaction or event recognized outside profit or loss, either in other comprehensive income or directly in equity, then current income tax shall be recognized in the same way. Deferred income tax is the income tax payable recoverable in future periods in respect of the temporary differences, unused tax losses and unused tax credits.
Deferred tax liabilities result from taxable temporary differences and deferred tax assets result from deductible temporary differences, unused tax losses and unused tax credits. Before you dig deeper in the concept of temporary differences, you need to understand the tax base first. Tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset.
For example, when you have an interest receivable and interest revenue is taxed on a cash basis, then the tax base of interest receivable is 0. Because when you actually receive the cash and remove the interest receivable from your books, you will need to include full amount of cash received into your tax return. At the same time you cannot deduct anything from this amount for tax purposes.
How to Calculate Deferred Tax in line with IFRS
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. For example, when you accrue some expenses that will be deductible when paid, then the tax base of a liability from accrued expenses is 0. If you review all your assets and liabilities calculating their tax bases, be careful! There could be some items not recognized in your balance sheet that still do have a tax base. For example, you might have incurred some research costs included in the profit or loss in the past that you could not deduct for tax purposes until later periods.
In such a case, the research costs are not shown in your statement of financial position but they do have a tax base.
If you are still unsure about the tax base, then this article will be for you. I described how to determine a tax base of your assets or liabilities in a very simple way. Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. When the carrying amount of an asset or a liability is greater than its tax base, then there is a taxable temporary difference and it gives rise to deferred tax liability.
In the opaque situation, when the carrying amount of an asset or a liability is lower than its tax base, then there is a deductible temporary difference and it gives rise to deferred tax asset. You need to recognize deferred tax liability for all taxable temporary differences you discovered, except for the following situations:. The most common examples of taxable temporary differences giving rise to deferred tax liabilities are:. While you need to recognize deferred tax liability for all taxable temporary differences, here the situation is different.
A deferred tax asset shall be recognized 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 utilized. No deferred tax asset shall be recognized from initial recognition of asset or liability in a transaction that is not a business combination and at the time of the transaction it affects neither accounting nor taxable profit loss.
The most common examples of deductible temporary differences giving rise to deferred tax assets are:. A deferred tax asset shall be recognized for the unused tax losses carried forward and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilized. Except for various kinds of temporary differences mentioned above, a number of them can arise at business combinations.
However, these expected rates need to be based on tax rates or tax laws that have been enacted or substantively enacted by the end of the reporting period. Let me also point out that the measurement of deferred tax should reflect the tax consequences that would follow from the manner of expected recovery or settlement. In almost all situations you would recognize deferred tax as an income or an expense in profit or loss for the period. There are just 2 exceptions of this rule:. The principal issue in presenting income taxes is offsetting. Can you present current or deferred income tax assets and liabilities as one net amount?
Or do you need to show them separately? Just be careful when making consolidated financial statements because often you just cannot simply combine deferred tax assets of a parent with deferred tax liabilities of a subsidiary and present them as 1 net amount. Want to dive deeper into IFRS?
Deferred tax and other tax impacts of IFRS
Please leave this field empty. Check your inbox or spam folder now to confirm your subscription. Please check your inbox to confirm your subscription. This is great for sure and your doing it just for free. Well organized, summarized and simplified.
IFRS: Income Taxes (IAS 12)
Your the best. Thank you for this topic, it has been very helpful in my studies and will surely help me in my ACCA F7 exam in December. Hi Silvia, Really I enjoy reading the article, appreciate your usual support, and many thanks for your free and helpful course in your website.
These days it is so difficult to find useful and free courses. Thanks alot for your free course. It is really helpful. That is awesome. Thanks a million, your lessons are just amazing. It really helped me a lot to better understand the concepts. Say, there is an outstanding expense of Rs. But, the same expense is deductible for tax only when cash is paid cash basis. In this case, carrying amount of the liability is Rs.
As mentioned in your note, Carrying amount is greater than Tax base of the liability and this should be temporary taxable difference that gives rise to deferred tax liability. But, I think deferred tax asset should be created as Rs. This would give rise to tax advantage in future which must be a deferred tax asset to the entity today. So, in my opinion, for items of liability side, if carrying amount exceeds tax base, it should be recognized as deferred tax asset, not deferred tax liability. Hi Raj, sorry, I somehow skipped your comment.
Dear, please use correct signs and everything will be OK. Sure, you can do it your way and say everything in absolute numbers, but you can generate mess easily, so I prefer to use PLUS for assets and MINUS for equity and liability accounts, and it this case, everything works. Hope it helps! Thank you so much silvia.. I was wondering, if I see a provision for prior year income taxes in the balance sheet, for example 6 GBP, and the tax authorities say it should be, say, 15 GBP, should I record deferred taxes in this case?
Transactions such as lease arrangements and decommissioning provisions give rise to both an asset and a liability. It is intended to narrow the IAS 12 initial recognition exemption such that it would not apply to such transactions, to the extent that amounts recognised in respect of taxable and deductible temporary differences are the same. Financial Reporting Faculty members get full access. Skip to content. IAS 12 Income Taxes IAS 12 Income Taxes prescribes the accounting treatment for income taxes, including how to account for the current and future tax consequences of assets, liabilities and transactions recognised in the financial statements.
Published October Effective 1 January Become a Financial Reporting Faculty member Find out more about the benefits of membership and joining details. Join now. Synopsis Current tax for the current and prior periods is recognised as a liability to the extent that it remains outstanding, or an asset, to the extent that amounts paid are in excess of that due. It should be recognised using the tax rates that have been enacted or substantively enacted by the reporting date.