IAS12 Income tax

Level1 Level 2 Optional

Current tax Y
Deferred tax – basic concept Y Y
Tax base – Asset Y Y
Temporary differences Y Y
Question Y Y
Revalued assets Y Y
Taxation in company accounts Y
Tax base of an liability Y
Current tax
Current tax is the amount payable to the tax authorities
in relation to the trading activities of the period. It is
generally straightforward.
You would calculate the amount of tax due to be paid on the
company's taxable profits and with this amount you would:
DEBIT Tax charge (statement of profit or loss)
CREDIT Tax liability (statement of financial position)
 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.
 Answer

(a)
$
Tax due on 20X8 profits ($120,000 ×30%) 36,000
Underpayment for 20X7 5,000
Tax charge and liability 41,000
(b)
$
Tax due on 20X8 profits (as above) 36,000
Overpayment for 20X7 (5,000)
Tax charge and liability 31,000
 Example: tax losses carried back
In 20X7 Eramu Co paid $50,000 in tax on its profits. In 20X8
the company made tax losses of $24,000. The local tax authority
rules allow losses to be carried back to offset against current tax
of prior years.
The tax rate is 30%.
Required
Show the tax charge and tax liability for 20X8.
 Solution

Tax repayment due on tax losses = 30% * $24,000 = $7,200.

The double entry will be:
DEBIT Tax receivable (statement of financial position) $7,200
CREDIT Tax repayment (statement of profit or loss) $7,200
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Deferred tax
Before we go any further, let us be clear about the difference between
current and deferred tax.
a) Current tax is the amount actually payable to the tax authorities in
relation to the trading activities of the entity during the period.
b) Deferred tax is an accounting measure, used to match the tax
effects of transactions with their accounting impact and thereby
produce less distorted results.
 Exam focus point
Deferred tax is an accounting measure used to match the tax
effects of transactions with their accounting impact. It is quite
complex.
Students invariably find deferred tax very confusing. You are
unlikely to be asked any very complicated questions on deferred
tax in F7, so concentrate on understanding and being able to
explain the purpose of deferred tax and to carry out basic
calculations
What is deferred tax?
 Key terms

Temporary differences are differences between the

carrying amount of an asset or liability in the statement of
financial position and its tax base.
The tax base of an asset or liability is the amount attributed
to that asset or liability for tax purposes.
Key terms
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
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
 Key terms

Deferred tax liabilities are the amounts of income taxes

payable in future periods in respect of taxable temporary
differences.
Deferred tax assets are the amounts of income taxes recoverable
in future periods in respect of:
• Deductible temporary differences
• The carry forward of unused tax losses
• The carry forward of unused tax credits
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Tax base - asset
The tax base of an asset is the amount that will be deductible for
tax purposes against any taxable economic benefits that will flow
to the entity when it recovers the carrying value of the asset.
Where those economic benefits are not taxable, the tax base of the
asset is the same as its carrying amount.
So where the carrying amount and the tax base of the asset are
different, a temporary difference exists.
 Tax base of an asset – Ex1
a) A machine cost $10,000 and has a carrying amount of
$8,000. For tax purposes, depreciation of $3,000 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.

a) The tax base of the machine is $7,000. The temporary

difference is $1,000.
 Tax base of an asset – Ex2
b) Interest receivable has a carrying amount of $1,000.
The related interest revenue will be taxed on a cash
basis.

b) The tax base of the interest receivable is nil. The

temporary difference is $1,000.
 Tax base of an asset – Ex3
c) Trade receivables have a carrying amount of
$10,000. The related revenue has already been
included in taxable profit (tax loss).

c) The tax base of the trade receivables is $10,000. No

temporary difference.
 Tax base of an asset – Ex4

d) A loan receivable has a carrying amount of $1m.

The repayment of the loan will have no tax
consequences.

d) The tax base of the loan is $1m. No temporary

difference.
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Temporary differences
 Permanent differences.

Permanent differences. These occur when certain items of

revenue or expense are excluded from the computation of
taxable profits (for example, entertainment expenses may not
be allowable for tax purposes).
 Temporary differences.
Temporary differences. These occur when items of revenue or
expense are included in both accounting profits and taxable
profits, but not for the same accounting period.
For example, an expense which is allowable as a deduction in
arriving at taxable profits for 20X7 might not be included in the
financial accounts until 20X8 or later.
In the long run, the total taxable profits and total accounting
profits will be the same (except for permanent differences) so
that timing differences originate in one period and are capable of
reversal in one or more subsequent periods.
Deferred tax is the tax attributable to temporary differences.
 Example: taxable temporary differences
A company purchased an asset costing $1,500. At the end
of 20X8 the carrying amount is $1,000. The cumulative
depreciation for tax purposes is $900 and the current tax
rate is 25%.
Required
Calculate the deferred tax liability for the asset.
 Solution
Firstly, what is the tax base of the asset? It is $1,500 – $900 =
$600.
In order to recover the carrying amount of $1,000, the entity
must earn taxable income of $1,000, but it will only be able to
deduct $600 as a taxable expense.
The entity must therefore pay income tax of $400 * 25% =
$100 when the carrying amount of the asset is recovered.
The entity must therefore recognise a deferred tax liability of
$400 * 25% = $100, recognising the difference between the
carrying amount of $1,000 and the tax base of $600 as a
taxable temporary difference.
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Question
 Question
Jonquil Co buys equipment for $50,000 on 1 January 20X1 and
depreciates it on a straight line basis over its expected useful life
of five years. It has no other non-current assets.
For tax purposes, the equipment is depreciated at 25% per annum
on a straight line basis.
Accounting profit before tax for the years 20X1 to 20X5 is
$20,000 per annum.
The tax rate is 40%.
Required:
Show the calculations of current and deferred tax for the years
20X1 to 20X5.
 Answer

The differences between accounting and tax depreciation on the equipment will be:
20X1 20X2 20X3 20X4 20X5
$ $ $ $ $
Accounting depreciation 10,000 10,000 10,000 10,000 10,000
Tax depreciation 12,500 12,500 12,500 12,500 -
Taxable difference 2,500 2,500 2,500 2,500 (10,000)
Cumulative difference 2,500 5,000 7,500 10,000 -
Note that the taxable difference reverses in 20X5, when the equipment is fully
depreciated for tax purposes.
This will give the following differences between the carrying amount and the tax base of the
asset at the end of each year.
20X1 20X2 20X3 20X4 20X5
$ $ $ $ $
Carrying amount at Y/E 40,000 30,000 20,000 10,000 -
Tax base at Y/E 37,500 25,000 12,500 - -
Cumulative difference 2,500 5,000 7,500 10,000
Deferred tax 40% 1,000 2,000 3,000 4,000 -
The tax charge to profit or loss will be as follows:
20X1 20X2 20X3 20X4 20X5
$ $ $ $ $
Profit for the year 20,000 20,000 20,000 20,000 20,000
Add back depreciation 10,000 10,000 10,000 10,000 10,000
Deduct tax depreciation (12,500) (12,500) (12,500) (12,500) -
Taxable amount 17,500 17,500 17,500 17,500 30,000
Tax charge 40% 7,000 7,000 7,000 7,000 12,000
Deferred tax adjustment* 1,000 1,000 1,000 1,000 (4,000)
Tax charge in profit or loss 8,000 8,000 8,000 8,000 8,000
*2,500 x 40%
The statements of financial position will show:
20X1 20X2 20X3 20X4 20X5
$ $ $ $ $
Non current liabilities
Deferred tax 1,000 2,000 3,000 4,000 -
Current liabilities
Income tax payable 7,000 7,000 7,000 7,000 12,000
 Recognition

Normally as with current tax, deferred tax should normally be

recognised as income or an expense and included in the net
profit or loss for the year in the statement of profit or loss.
Current and deferred tax will together make up the tax charge.
 Why do we recognise deferred tax?
Adjustments for deferred tax are made in accordance with the
accruals concept and in accordance with the definition of a
liability in the Conceptual Framework, ie a past event has given
rise to an obligation in the form of increased taxation which
will be payable in the future. The amount can be reliably
estimated. A deferred tax asset similarly meets the definition of
an asset.
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Revalued assets
 Recognition

Normally as with current tax, deferred tax should normally

be recognised as income or an expense and included in the
net profit or loss for the year in the statement of profit or
loss. Current and deferred tax will together make up the
tax charge.
The exception is where the tax arises from a transaction or
event which is recognised (in the same or a different
period) directly in equity such as a revaluation where the
surplus is credited to the revaluation surplus.
 Revalued assets

Under IAS 16 assets may be revalued. This changes the

carrying amount of the asset but the tax base of the asset is
not adjusted. Consequently, the taxable flow of economic
benefits to the entity as the carrying value of the asset is
recovered will differ from the amount that will be
deductible for tax purposes.
The difference between the carrying amount of a revalued
asset and its tax base is a temporary difference and gives
rise to a deferred tax liability.
 Example

Z Co owns a property which has a carrying amount at the

beginning of 20X9 of $1,500,000. At the year end it has
entered into a contract to sell the property for $1,800,000.
The tax rate is 30%. How will this be shown in the
financial statements?
 Solution

The amounts will be posted as follows:

Dr Cr
$'000 $'000
Property, plant and equipment 300
Deferred tax 90
Revaluation surplus 210
STATEMENT OF PROFIT OR LOSS AND OTHER
COMPREHENSIVE INCOME (EXTRACT)
$'000
Profit for the year X
Other comprehensive income:
Gains on property revaluation 300
Income tax relating to components of other comprehensive income
(300 ×30%) (90)
Other comprehensive income for the year net of tax 210
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Taxation in company accounts
 Taxation in the statement of profit or loss

The tax on profit on ordinary activities is calculated by

aggregating:
a) Income tax on taxable profits
b) Transfers to or from deferred taxation
c) Any under provision or overprovision of income tax on
profits of previous years
 Taxation in the statement of financial position

There will usually be a liability for tax assessed as due for

the current year. If no tax is payable (or very little), then
there might be an income tax recoverable asset disclosed in
current assets
We may also find a liability on the deferred taxation
account. Deferred taxation is shown under 'non-current
liabilities' in the statement of financial position.
 Ex1

The following trial balance relates to Highwood at 31 March 2011:

$’000 $’000
Current tax (note (iv)) 800
Deferred tax (note (iv)) 2,600
(iv) The balance on current tax represents the under/over provision
of the tax liability for the year ended 31 March 2010. The required
provision for income tax for the year ended 31 March 2011 is $19·4
million. The difference between the carrying amounts of the net
assets of Highwood and their (lower) tax base at 31 March 2011 is
$27 million. Highwood’s rate of income tax is 25%.
Statement of comprehensive income for the year ended 31 March 2011

Income tax expense (19,400 – 800 + 4150 (w (iv))) (22,750)

Statement of financial position as at 31 March 2011
Non-current liabilities
Deferred tax (w (iv)) 6,750

Current liabilities
Current tax payable 19,400
Deferred tax
balance at 1 April 2010 2,600

charge to income statement Balance figure 4,150

at 31 March 2011 27,000 x 25% 6,750
 Ex2

The following trial balance relates to Highwood at 31 March 2011:

$’000 $’000
Current tax (note (iv)) 800
Deferred tax (note (iv)) 2,600
(iv) The balance on current tax represents the under/over
provision of the tax liability for the year ended 31 March 2010.
The required provision for income tax for the year ended 31
March 2011 is $19·4 million. The difference between the
carrying amounts of the net assets of Highwood and their
(lower) tax base at 31 March 2011 is $27 million. Highwood’s
rate of income tax is 25%.
Statement of comprehensive income for the year ended 31 March 2011

Income tax expense (19,400 + 800 + 4150 (w (iv))) (24,350)

Statement of financial position as at 31 March 2011
Non-current liabilities
Deferred tax (w (iv)) 6,750

Current liabilities
Current tax payable 19,400
Deferred tax
balance at 1 April 2010 2,600

charge to income statement Balance figure 4,150

at 31 March 2011 27,000 x 25% 6,750
 Ex3

The following trial balance relates to Highwood at 31 March 2011:

$’000 $’000
Current tax (note (iv)) 800
Deferred tax (note (iv)) 2,600
(iv) The balance on current tax represents the under/over
provision of the tax liability for the year ended 31 March 2010.
The required provision for income tax for the year ended 31
March 2011 is $19·4 million. The difference between the
carrying amounts of the net assets of Highwood (including the
revaluation of the property 15,000) and their (lower) tax base at
31 March 2011 is $27 million. Highwood’s rate of income tax is
25%.
Statement of comprehensive income for the year ended 31 March 2011

Income tax expense (19,400 – 800 + 400 (w (iv))) (19,000)

Other comprehensive income:

Gain on revaluation of property (w (i)) 15,000
Deferred tax on revaluation (w (i)) (3,750)
Statement of financial position as at 31 March 2011
Non-current liabilities
Deferred tax (w (iv)) 6,750

Current liabilities
Current tax payable 19,400
Deferred tax
balance at 1 April 2010 2600
revaluation of property 15,000 x 25% 3750
charge to income statement Balance figure 400
at 31 March 2011 27,000 x 25% 6,750
 Ex4

The following trial balance relates to Highwood at 31 March 2011:

$’000 $’000
Current tax (note (iv)) 800
Deferred tax (note (iv)) 2,600
(iv) The balance on current tax represents the under/over
provision of the tax liability for the year ended 31 March 2010.
The required provision for income tax for the year ended 31
March 2011 is $19·4 million. The difference between the carrying
amounts of the net assets of Highwood (excluding the revaluation
of the property 15,000) and their (lower) tax base at 31 March
2011 is $27 million. Highwood’s rate of income tax is 25%.
Statement of comprehensive income for the year ended 31 March 2011

Income tax expense (19,400 – 800 + 4150 (w (iv))) (22,750)

Other comprehensive income:

Gain on revaluation of property (w (i)) 15,000
Deferred tax on revaluation (w (i)) (3,750)
Statement of financial position as at 31 March 2011
Non-current liabilities
Deferred tax (w (iv)) 10,500

Current liabilities
Current tax payable 19,400
Deferred tax
balance at 1 April 2010 2600
revaluation of property 15,000 x 25% 3750
charge to income statement Balance figure 4150
at 31 March 2011 27,000 x 25%+ 10,500
15,000 x 25%
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Tax base of an liability
In the case of a liability, the tax base will be its
carrying amount, less any amount that will be
deducted for tax purposes in relation to the liability
in future periods.
 Tax base of an liability – Ex1

(a) Current liabilities include accrued expenses with a

carrying amount of $1,000. The related expense will be
deducted for tax purposes on a cash basis.

(a) The tax base of the accrued expenses is nil. The

temporary difference is $1,000.
 Tax base of an liability – Ex2
(b) Current liabilities include accrued expenses with a
carrying amount of $2,000. The related expense has
already been deducted for tax purposes.

(b) The tax base of the accrued expenses is $2,000. No

temporary difference.
 Tax base of an liability – Ex3
(c) Current liabilities include interest revenue received in
advance, with a carrying amount of $10,000. The related
interest revenue was taxed on a cash basis.

(c) The tax base of the interest received in advance is nil. The
temporary difference is $10,000.
 Tax base of an liability – Ex4
(d) Current liabilities include accrued fines and penalties
with a carrying amount of $100. Fines and penalties are
not deductible for tax purposes.

(d) The tax base of the accrued fines and penalties is $100.
No temporary difference.
 Tax base of an liability – Ex5

(e) A loan payable has a carrying amount of $1m. The repayment

of the loan will have no tax consequences.

(e) The tax base of the loan is $1m. No temporary difference.

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OT1
Accounting for taxation
 B189
A company's trial balance shows a debit balance of $2.1 million
brought forward on current tax and a credit balance of $5.4 million on
deferred tax. The tax charge for the current year is estimated at $16.2
million and the carrying amounts of net assets are $13 million in excess
of their tax base. The income tax rate is 30%
What amount will be shown as income tax in the statement of profit
or loss for the year?
A. $15.6 million
B. $12.6 million
C. $16.8 million
D. $18.3 million (2 marks)
 B189
Answer C
$'000
Charge for year 16,200
Under provision 2,100
Adjust deferred tax (W) (1,500)
Profit or loss charge 16,800
Working
Provision needed (13m × 30%) 3,900
Provision b/f (5,400)
Reduce provision (1,500)
 B190
A company's trial balance at 31 December 20X3 shows a debit balance
of $700,000 on current tax and a credit balance of $8,400,000 on
deferred tax. The directors have estimated the provision for income tax
for the year at $4.5 million and the required deferred tax provision is
$5.6 million, $1.2 million of which relates to a property revaluation.
What is the profit or loss income tax charge for the year ended 31
December 20X3?
A. $1 million
B. $2.4 million
C. $1.2 million
D. $3.6 million (2 marks)
 B190
Answer C
$'000
Prior year underprovision 700
Current provision 4,500
Movement of deferred tax (8.4 – 5.6) (2,800)
Deferred tax on revaluation surplus (1,200)
Tax charge for the year 1,200
 B191~~~~
The following information relates to an entity.
(i) At 1 January 20X8 the carrying amount of non-current assets
exceeded their tax written down value by $850,000.
(ii) For the year to 31 December 20X8 the entity claimed depreciation
for tax purposes of $500,000 and charged depreciation of
$450,000 in the financial statements.
(iii) During the year ended 31 December 20X8 the entity revalued a
property. The revaluation surplus was $250,000. There are no
current plans to sell the property.
(iv) The tax rate was 30% throughout the year.
 B191
What is the provision for deferred tax required by IAS 12 Income
Taxes at 31 December 20X8?
A. $240,000
B. $270,000
C. $315,000
D. $345,000 (2 marks)
 B191
Answer
$'000
B/f 850
Year to 31.12.X8 (500 – 450) 50
Revaluation surplus 250
1,150
× 30% 345
 B192
The statements of financial position of Nedburg include the following
extracts:
Statements of financial position as at 30 September
20X2 20X1
$m $m
Non-current liabilities
Deferred tax 310 140
Current liabilities
Taxation 130 160
The tax charge in the statement of profit or loss for the year ended 30
September 20X2 is $270 million.
What amount of tax was paid during the year to 30 September 20X2?
$ (2 marks)
 B192
Answer $130 million
$m
B/f (140 + 160) 300
Charge for year 270
C/f (310 + 130) (440)
Tax paid 130
 B193
The trial balance of Highwood at 31 March 20X6 showed credit balances
of $800,000 on current tax and $2.6 million on deferred tax. A property
was revalued during the year giving rise to deferred tax of $3.75 million.
This has been included in the deferred tax provision of $6.75 million at 31
March 20X6.
The income tax charge for the year ended 31 March 20X6 is estimated at
$19.4 million.
What will be shown as the income tax charge in the statement of profit
or loss of Highwood at 31 March 20X6?
$ (2 marks)
 B193
Answer $19 million
$'000
Current charge 19,400
Overprovision (800)
Deferred tax (W) 400
19,000
Working
Required provision 6,750
Less revaluation (3,750)
3,000
Balance b/f (2,600)
Charge to income tax 400
OT2
Section B
 Information relevant to questions B194-B198
The carrying amount of Julian's property, plant and equipment at 31 December
20X3 was $310,000 and the tax written down value was $230,000.
The following data relates to the year ended 31 December 20X4:
(i) At the end of the year the carrying amount of property, plant and equipment
was $460,000 and the tax written down value was $270,000. During the
year some items were revalued by $90,000. No items had previously
required revaluation. In the tax jurisdiction in which Julian operates
revaluations of assets do not affect the tax base of an asset or taxable profit.
Gains due to revaluations are taxable on sale.
(ii) Julian began development of a new product during the year and capitalised
$60,000 in accordance with IAS 38. The expenditure was deducted for tax
purposes as it was incurred. None of the expenditure had been amortised by
the year end.
The corporate income tax rate is 30%. The current tax charge was calculated for
the year as $45,000.
 B194
Julian's accountant is confused by the term 'tax base'. What is
meant by 'tax base'?
A. The amount of tax payable in a future period
B. The tax regime under which an entity is assessed for tax
C. The amount attributed to an asset or liability for tax purposes
D. The amount of tax deductible in a future period
 B194
Answer C
The amount attributed to an asset or liability for tax purposes
 B195
What is the taxable temporary difference to be accounted for at
31 December 20X4 in relation to property, plant and equipment
and development expenditure?
Property, plant and Development
equipment expenditure
A. $270,000 $60,000
B. $270,000 Nil
C. $190,000 $60,000
D. $190,000 Nil
 B195
Answer C
PPE (460 – 270)
 B196
What amount should be charged to the revaluation surplus at 31
December 20X4 in respect of deferred tax?
A. $60,000
B. $90,000
C. $18,000
D. $27,000
 B196
Answer D
(90,000 × 30%) will go to the revaluation surplus
 B197
What amount will be shown as tax payable in the statement of
financial position of Julian at 31 December 20X4?
A. $45,000
B. $72,000
C. $63,000
D. $75,000
 B197
Answer A $45,000.
The tax charge for the year.
 B198
Deferred tax assets and liabilities arise from taxable and deductible
temporary differences.
Which one of the following is not a circumstance giving rise to a
temporary difference?
A. Depreciation accelerated for tax purposes
B. Development costs amortised in profit or loss but tax was
deductible in full when incurred
C. Accrued expenses which have already been deducted for tax
purposes
D. Revenue included in accounting profit when invoiced but only
liable for tax when the cash is received.
 B198
Answer C
Accrued expenses which have already been deducted for tax
purposes will not give rise to a temporary difference.
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