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Objective of IAS 12

The objective of IAS 12 (1996) is to prescribe the accounting treatment for income
taxes.
In meeting this objective, IAS 12 notes the following:
o
It is inherent in the recognition of an asset or liability that that asset or
liability will be recovered or settled, and this recovery or settlement
may give rise to future tax consequences which should be recognised
at the same time as the asset or liability
o
An entity should account for the tax consequences of transactions and
other events in the same way it accounts for the transactions or other
events themselves.
Key definitions
[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
differences

Differences between the carrying amount of an asset


or liability in the statement of financial position and its
tax bases

Taxable
temporary
differences

Deductible
temporary
differences

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

Deferred tax
liabilities

The amounts of income taxes payable in future periods


in respect of taxable temporary differences

Deferred tax
assets

The amounts of income taxes recoverable in future


periods in respect of:
deductible temporary differences
the carryforward of unused tax losses, and
the carryforward of unused tax credits

Current tax
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]
Calculation of deferred taxes
Formulae
Deferred tax assets and deferred tax liabilities can be calculated using the following
Temporary difference

Carrying amount

Tax base

Deferred tax asset or liability

Temporary difference

Tax rate

formulae:

Deferred tax
asset

Unused tax loss or unused tax


credits

o
o
o
o

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

a.
b.
c.

Tax
rate

The following formula can be used in the calculation of deferred taxes arising from
unused tax losses or unused tax credits:

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
determining tax bases:

Assets. The tax base of an asset is the amount that will be deductible
against taxable economic benefits from recovering 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 liabilities. 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 effectively 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]
Consolidated 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 settlement of its assets and
liabilities. The following are some basic examples:
o
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
o
Receivables. If receiving payment of the receivable has no
tax consequences, its tax base is equal to its carrying amount
o
Goodwill. If goodwill is not recognised for tax purposes, its
tax base is nil (no deductions are available)
o
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 recognised for tax
purposes when the goods or services are received, the tax
base will be equal to nil
o
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 consequence 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
Recognition of deferred tax liabilities
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:
o
liabilities arising from initial recognition of goodwill [IAS 12.15(a)]
o
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
[IAS 12.15(b)]
o
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 differences 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 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 difference 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.
Recognition of deferred tax assets
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]
o
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]
Measurement of deferred tax
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]
IAS 12 provides the following guidance on measuring deferred taxes:
o
Where the tax rate or tax base is impacted by the manner in which the
entity recovers its assets or settles its liabilities (e.g. whether an asset
is sold or used), the measurement of deferred taxes is consistent with
the way in which an asset is recovered or liability settled [IAS 12.51A]
o
Where deferred taxes arise from revalued non-depreciable assets
(e.g. revalued land), deferred taxes reflect the tax consequences of
selling the asset [IAS 12.51B]
o
Deferred taxes arising from investment property measured at fair
value under IAS 40 Investment Property reflect the rebuttable
presumption that the investment property will be recovered through
sale [IAS 12.51C-51D]
o
If dividends are paid to shareholders, and this causes income taxes to
be payable at a higher or lower rate, or the entity pays additional taxes
or receives a refund, deferred taxes are measured using the tax rate
applicable to undistributed profits [IAS 12.52A]
Deferred tax assets and liabilities cannot be discounted. [IAS 12.53]
Recognition of tax amounts for the period
Amount of income tax to recognise
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

Where to recognise income tax 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]
o
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]
o
a business combination - in which case the tax amounts are
recognised as identifiable assets or liabilities at the acquisition date,
and accordingly effectively taken into account in the determination of
goodwill when applying IFRS 3 Business Combinations. [IAS 12.66]
Example
An entity undertakes a capital raising and incurs incremental costs directly

attributable to the equity transaction, including regulatory fees, legal costs and
stamp duties. In accordance with the requirements of IAS 32 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:
o
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 determined on a reasonable prorata allocation, or using another more appropriate method [IAS 12.63]
o
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]
o
The impact of business combinations on the recognition of precombination deferred tax assets are not included in the determination
of goodwill as part of the business combination, but are separately
recognised [IAS 12.68]
o
The recognition of acquired deferred tax benefits subsequent to a
business combination are treated as 'measurement period'
adjustments (see IFRS 3 Business Combinations) if they qualify for
that treatment, or otherwise are recognised in profit or loss [IAS 12.68]
o
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
IAS 12.80 requires the following disclosures:
o
major components of tax expense (tax income) [IAS 12.79] Examples include:
o
current tax expense (income)
o
any adjustments of taxes of prior periods
o
amount of deferred tax expense (income) relating to the
origination and reversal of temporary differences
o
amount of deferred tax expense (income) relating to changes
in tax rates or the imposition of new taxes
o
amount of the benefit arising from a previously unrecognised
tax loss, tax credit or temporary difference of a prior period
o
write down, or reversal of a previous write down, of a deferred
tax asset
o
amount of tax expense (income) relating to changes in
accounting policies and corrections of errors.
IAS 12.81 requires the following disclosures:
o
aggregate current and deferred tax relating to items recognised directly in equity
o
tax relating to each component of other comprehensive income
o
explanation of the relationship between tax expense (income) and the tax that
would be expected by applying the current tax rate to accounting profit or loss
(this can be presented as a reconciliation of amounts of tax or a reconciliation of
the rate of tax)
o
changes in tax rates
o
amounts and other details of deductible temporary differences, unused tax
losses, and unused tax credits
o
temporary differences associated with investments in subsidiaries, branches and
associates, and interests in joint arrangements

for each type of temporary difference and unused tax loss and credit, the
amount of deferred tax assets or liabilities recognised in the statement of
financial position and the amount of deferred tax income or expense recognised
in profit or loss
o
tax relating to discontinued operations
o
tax consequences of dividends declared after the end of the reporting period
o
information about the impacts of business combinations on an acquirer's
deferred tax assets
o
recognition of deferred tax assets of an acquiree after the acquisition date.
Other required disclosures:
o
details of deferred tax assets [IAS 12.82]
o

o
tax consequences of future dividend payments. [IAS 12.82A]
In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are
required by IAS 1 Presentation of Financial Statements, as follows:
o
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)]
o
Disclosure of tax expense (tax income) in the profit or loss section of the
statement of profit or loss and other comprehensive income (or separate
statement if presented). [IAS 1.82(d)]