1. IAS 12: Income Taxes
Roshankumar Pimpalkar
roshankumar.2007@rediffmail.com

2. Objective:
The objective of this standard is to prescribe accounting treatment for income taxes.
Scope:
IAS 12 should be applied in accounting for income taxes.
Income taxes include:
All domestic and foreign taxes the based on taxable profits
Taxes, such as withholding taxes, payable by a subsidiary, associate or joint venture
on distributions to reporting company
IAS 12 does not address:
Investment tax credit
Methods of accounting for government grant
However it does address the accounting for temporary differences arising due to above.
Key Definitions
Accounting Profit is profit or loss for a period before deducting tax expense.
Taxable Profit (or tax loss) is profit (or loss) for a period, determined in accordance with the
rules established by the taxation authorities, upon which it will be determined whether
income taxes are payable (or recoverable).
Tax Expense (or tax income) is the aggregate amount included in the determination of profit
or loss for the period in respect of current and deferred tax.
i.e. tax expense (tax income) = current tax + deferred tax
Current tax is the amount of income taxes payable (or recoverable) in respect of taxable
profit (or tax loss) for a period.
i.e. current tax = taxable profit (or tax loss) * tax rate
Tax Base of an asset or liability is the amount attributed to the asset or liability for tax
purposes. For e.g. Cost of an asset is 100 and depreciation is 20 but tax depreciation is 25
then carrying value of that asset is 80 and tax base is 75.
Tax base of an asset is equal to the amount that will be deductible for tax purposes
against any taxable economic benefits that will flow to the entity when the carrying
value of such asset will be recovered. If those economic benefits are not taxable then
the tax base is equal to the carrying amount of asset.
Tax base of a liability is its carrying amount less any amount that will be deductible
for tax purposes in respect that liability in future periods.
In simple words in respect of assets we need to determine the amount which is
deductible/not taxable when it is recovered in future and in respect of liabilities
we need to determine the amount which will not be deductible when the
liability is actually paid off.
roshankumar.2007@rediffmail.com

3. Exception:
Some items have tax base but are not recognised as asset or liability in the
statement of financial position.
Tax base is not immediately apparent. In such case just remember that when there is
difference in treatment between accounting policy and tax laws affecting tax
payments made, a deferred tax asset or liability is likely to exists.
Consolidated financial statements. In this case tax base is determined by either:
o Reference to consolidated tax return in those jurisdiction in which such a
return is filed; or
o By reference to tax return of each entity of the group (in all other jurisdiction)
Temporary differences are the differences between carrying amounts of assets or liabilities
in the statement of financial position and its tax base. It may be taxable or deductible.
Taxable temporary difference are the differences that will result in deferred tax
liability
Deductible temporary difference are the difference that will result in deferred tax
asset
Asset in statement of financial Liability in statement of
position financial position
Carrying amount < Deductible temporary difference Taxable temporary difference
tax base
Carrying amount > Taxable temporary difference Deductible temporary
tax base difference
Temporary differences also arises when an income or expense item is included in
accounting profit in one period but is included in taxable profit in different period.
Temporary difference also arises:
When the cost of business combination is allocated to the identifiable assets and
liabilities acquired by reference to their fair values but no equivalent adjustment is
made for tax purposes.
When there is revaluation of assets and no equivalent adjustment is made for tax
purposes.
Deferred tax liabilities are the amounts of income taxes payable in future periods in respect
of taxable temporary differences
i.e. deferred tax liabilities = taxable temporary difference * tax rate
Deferred tax assets are the amounts of income taxes recoverable in future periods in respect
of:
Deductible temporary difference
The carryforward of unused tax losses, and
roshankumar.2007@rediffmail.com

4. Carryforward of unused tax credits
i.e. deferred tax Assets = deductible temporary difference * tax rate + unused tax losses *
tax rate and tax credits
Deferred Tax:
Sometimes carrying amounts of assets and liabilities may be recovered or settled at an
amount or at a time different than that considered for tax purposes. In such case IAS 12
requires an entity to recognise deferred tax liability or deferred tax asset so as to recognise
the deferred tax effects in the current financial statements as if those differences did not
exists.
This standard also deals with:
The recognition of deferred tax assets arising from unused tax losses and unused tax
credits
The presentation of income taxes in financial statements, and
Disclosure of information relating to income taxes
Special Points:
When any transaction gives rise to any asset or liability, but does not affect either accounting
profit or taxable profit at the time of transaction then IAS 12 does not permit an entity to
recognise deferred tax asset or deferred tax liability.
A deferred tax liability should not be recognised when it arises from
The initial recognition of Goodwill or
Initial recognition of asset or liability in transaction which:
Is not a business combination, and
at the time of transaction, affects neither accounting nor taxable profit (or tax loss)
Financial instrument:
The issuer of compound financial instruments are classified in two parts-
The liability component as a liability, and
The equity component as equity.
In some jurisdictions, the tax base of the liability component on initial recognition is equal to
the initial carrying amount of the sum of liability and equity components.
The resulting taxable temporary difference from initial recognition of equity component
separately from liability (and not the initial recognition of asset or liability) hence any resulting
deferred tax liability should be recognised.
The deferred tax is charged directly to carrying amount of equity component. Subsequent
changes in deferred tax liability are recognised in statement of comprehensive income as
deferred tax expense (or income)
roshankumar.2007@rediffmail.com

5. Recognition of Deferred Tax Asset:
A deferred tax asset should be recognised (from the initial recognition and not difference that
arise from subsequent difference) for all deductible temporary differences arising from
change in carrying amount of an asset to fair value.
The reversal of deductible temporary difference means that there will be deductions in
determining taxable profits of future periods.
A deferred tax asset should be recognised for all deductible temporary differences to the
extent that it is probable that taxable profit will be available against which the deductible
temporary can be utilised when there are sufficient taxable temporary differences relating to
same taxation authority and the same taxable entity which are expected to reverse:
In the same period as the expected reversal of deductible temporary difference. Or
In the periods in which tax loss arising from deferred tax asset can be carried back or
forward.
When there are insufficient taxable temporary differences relating to same taxation authority
and the same taxable entity, the entity should recognise the deferred tax assets to the extent
that:
It is probable that the entity will have sufficient taxable profit relating to same
taxation authority and the same taxable entity in the same period as the expected
reversal of deductible temporary difference or in the periods in which tax loss arising
from deferred tax asset can be carried back or forward and
Tax planning opportunities are available to the entity that will create taxable profits in
appropriate period.
Unused Tax losses and Unused Tax credits
The criteria for recognising the deferred tax asset from carry forward of unused tax losses or
unused tax credits is same as above. However the existence of unused tax losses is a
strong evidence that future taxable profit may not be available, so entity recognises deferred
tax assets arising from unused tax losses and unused tax credits only to the extent the
entity has sufficient taxable temporary differences, or there is convincing other evidence
that the sufficient taxable temporary differences will be available against which the unused
tax losses or tax credit can be utilised. Disclosure of amount of deferred tax asset and the
nature of evidence is required.
Subsidiary, Branches and Associates and Joint Venture
Temporary differences arises when the carrying amount of investment in Subsidiary,
Branches and Associates or interest in Joint Venture (i.e. in consolidated accounts, the net
assets including the carrying amount of goodwill) becomes different from the tax base
(which is often cost).
Recognise the deferred tax liability associated with of investment in Subsidiary, Branches
and Associates and interest in Joint Venture except to the extent that both the following
conditions are satisfied
roshankumar.2007@rediffmail.com

6. The parent, investor or venturer is able to control the timing of reversal of temporary
difference
It is probable that the temporary difference will not reverse in foreseeable future.
A parent controls the timing of reversal of temporary difference by controlling the dividend
policy of Subsidiary (and Branch operations).
An investor in an associate:
1. Does not control that entity, and
2. Is usually not in a position to determine its dividend policy
Therefore, in the absence of an agreement requiring that the profits of the associate will not
be distributed for the foreseeable future, investor recognises the deferred tax liability
arising from taxable temporary differences associated with its investment in Associate.
An arrangement between the joint venture parties usually deals with the receipt of the
profits.
A deferred tax liability is not recognised when:
The venture can control the sharing of profits, and
It is probable that the profits will not be distributed in the foreseeable future.
Deferred tax liability/Asset should also be recognised when the tax base of non-monetary
assets in a foreign entity is calculated in a foreign currency that is different from the entity’s
functional currency. Deductible/taxable temporary differences arise from exchange rates
affecting those non-monetary assets.
Measurement:
Tax rates which have been enacted for the purpose of calculation of deferred tax
asset/liability. When different tax rates apply to different levels of taxable income or loss
deferred tax assets/liabilities are measured using average rates (weighted average) that are
expected to apply to taxable profit of the periods in which the temporary differences are
expected.
The measurement of deferred tax asset/liability should reflect the manner in which the entity
expects to recover (or settle) the asset (or liability) at the end of reporting period.
For e.g. If the entity intends to recover the asset through use, then the tax rate used is the
rate at which taxable profit is taxed. If however the entity intends to recover the asset
through sale and different tax rate is applicable on sale of asset then that rate should be
used.
Dividend to the shareholder may have following tax effects if part or all of net profit or
retained earnings is paid out:
Income tax is payable at higher or lower rate; or
Income tax may be payable or refundable
roshankumar.2007@rediffmail.com

7. In these circumstances, current and deferred tax assets and liabilities are measured at the
tax rates applicable to undistributed profits. The income tax consequences of dividends
should be recognised in statement of comprehensive income for the period except
where:
Taxes arise from a transaction/event that is recognised directly in equity, or
Temporary differences arise from business combination
Accounting for Current and Deferred Tax Effects
Accounting for current and deferred tax effects should be same as the accounting for the
transaction or event itself. i.e. if the accounting of transaction affects the statement of
comprehensive income, so will the tax transaction.
Current and deferred tax should be recognised as income or an expense and included in the
profit and loss for the period, expect to the extent that tax arises from:
A transaction or an event which is recognised in the same or the different period
outside profit or loss either in other comprehensive income; or
Directly in equity; or
Business combination.
The carrying amount of deferred tax may change even though there is no change in relative
temporary differences. For example when there is a:
Change in tax rates or tax laws
Re-assessment of recoverability of deferred tax asset, or
Change in expected manner of recovery of asset
The resulting deferred tax is recognised in the statement of comprehensive income,
except to the extent that it relates to items previously charged or credited to equity.
Presentation
Current tax assets and liabilities can be offset only if there is:
A legally enforceable right to set off the recognised amounts i.e. when the current
taxes relate to income taxes levied by same taxation authority and taxation authority
permits the entity to make or receive single payment, and
An intention either to settle on a net basis, or to realise the asset and settle the
liability simultaneously.
For presentation of deferred tax asset same criteria as above should be followed.
However Current and Deferred tax assets/liabilities can never be offset against each other.
The opposite debit/credit of the deferred tax journal for following items should be recognised
in Profit or Loss:
Held for trading
Trade and other receivables
Retirement benefit cost
roshankumar.2007@rediffmail.com

8. The opposite debit/credit of the deferred tax journal for following items should be recognised
in Other Comprehensive income:
Available for sale
Machinery
The opposite debit/credit of the deferred tax journal for following items should be recognised
in Goodwill:
Business Combination
Example:
Land with a cost of 100 and a carrying amount of 90 is revalued to 150. For tax purposes,
deprecation of 20 has been deducted in the current and prior periods and the remaining
costs will be deductible in future periods through depreciation. Revenue generated from use
of land is taxable.
The tax base of lease hold land is: 80 i.e. 100 - 20
roshankumar.2007@rediffmail.com