IAS 12

Income Taxes

1Objective and scope

IAS 12 prescribes the accounting treatment for income taxes: both the current tax consequences of transactions and events, and the future tax consequences of recovering or settling the carrying amount of an entity's assets and liabilities (deferred tax).

2Key definitions

Current tax

The amount of income taxes payable (or recoverable) in respect of the taxable profit (tax loss) for a period, measured using tax rates enacted or substantively enacted by the reporting date.

Tax base

The amount attributed to an asset or liability for tax purposes; for an asset, the amount deductible against future taxable income; for a liability, its carrying amount less any amount deductible for tax in future periods.

Taxable temporary difference

A temporary difference that will result in taxable amounts in future periods when the carrying amount is recovered or settled - gives rise to a deferred tax LIABILITY.

Deductible temporary difference

A temporary difference that will result in deductible amounts in future periods - gives rise to a deferred tax ASSET, but only to the extent it is probable future taxable profit will be available.

3Recognising and measuring deferred tax

Deferred tax is recognised for temporary differences between the carrying amount of an asset or liability and its tax base, with limited exceptions (the initial recognition exemption for a transaction that is not a business combination and affects neither accounting profit nor taxable profit, and goodwill arising on a business combination). A deferred tax asset for unused tax losses or unused tax credits is recognised to the extent it is probable that future taxable profit will be available against which they can be utilised.

A common temporary difference: accelerated tax depreciation

Plant carrying amount (accounting) = 800; tax written-down value (tax base) = 500

Taxable temporary difference = 800 - 500 = 300

Deferred tax liability = 300 x applicable tax rate

Deferred tax is measured at the tax rates expected to apply in the period the asset is realised or the liability settled, based on rates (and tax laws) enacted or substantively enacted by the reporting date, and is NOT discounted to present value. It is recognised in profit or loss, except to the extent it relates to a transaction recognised outside profit or loss (in other comprehensive income or directly in equity) - for example, deferred tax on a revaluation surplus under IAS 16 is itself taken to OCI.

4Presentation and disclosure

The major components of tax expense (current tax, deferred tax, adjustments for prior periods) shown separately
A reconciliation between tax expense and the amount that would result from applying the applicable statutory tax rate to accounting profit (the tax rate reconciliation)
The amount of deferred tax assets and liabilities recognised, and the deductible temporary differences, unused tax losses and unused tax credits for which no deferred tax asset is recognised

5Examinable focus

What KASNEB tests

Computing the deferred tax liability or asset from the carrying amount vs tax base of PPE (accelerated capital allowances vs accounting depreciation), provisions not yet tax-deductible, and revaluation surpluses (with the deferred tax charged to OCI, not profit or loss) is a heavily and consistently examined numerical topic across every KASNEB financial reporting paper.