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IAS 12 — Income Taxes

Overview

IAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of accounting for income taxes which recognises both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity's assets and liabilities. Differences between the carrying amount and tax base of assets and liabilities, and carried forward tax losses and credits, are recognised, with limited exceptions, as deferred tax liabilities or deferred tax assets, with the latter also being subject to a 'probable profits' test.

IAS 12 was reissued in October 1996 and is applicable to annual periods beginning on or after 1 January 1998.

History of IAS 12

Date Development Comments
April 1978 Exposure Draft E13 Accounting for Taxes on Income published
July 1979 IAS 12 Accounting for Taxes on Income issued
January 1989 Exposure Draft E33 Accounting for Taxes on Income published
1994 IAS 12 (1979) was reformatted
October 1994 Exposure Draft E49 Income Taxes published
October 1996 IAS 12 Income Taxes issued Operative for financial statements covering periods beginning on or after 1 January 1988
October 2000 Limited Revisions to IAS 12 published (tax consequences of dividends) Operative for financial statements covering periods beginning on or after 1 January 2001
31 March 2009 Exposure Draft ED/2009/2 Income Tax published Comment deadline 31 July 2009
(proposals were not finalised)
10 September 2010 Exposure Draft ED/2010/11 Deferred Tax: Recovery of Underlying Assets (Proposed amendments to IAS 12) published Comment deadline 9 November 2010
20 December 2010 Amended by Deferred Tax: Recovery of Underlying Assets Effective for annual periods beginning on or after 1 January 2012

Related Interpretations

  • IFRIC 7 Applying the Restatement Approach under IAS 29 'Financial Reporting in Hyperinflationary Economies'
  • SIC-21 Income Taxes – Recovery of Revalued Non-Depreciable Assets (SIC-21 was incorporated into IAS 12 and withdrawn by the December 2010 amendments made by Deferred Tax: Recovery of Underlying Assets)
  • SIC-25 Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders

Amendments under consideration by the IASB

Summary of IAS 12

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:

  • 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
  • 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 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 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:
  1. deductible temporary differences
  2. the carryforward of unused tax losses, and
  3. 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 formulae:


Temporary difference  =  Carrying amount  -  Tax base
Deferred tax asset or liability  =  Temporary difference  x  Tax rate

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


Deferred tax asset  =  Unused tax loss or unused tax credits  x  Tax rate

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:

  • 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
  • Receivables. If receiving payment of the receivable has no tax consequences, its tax base is equal to its carrying amount
  • Goodwill. If goodwill is not recognised for tax purposes, its tax base is nil (no deductions are available)
  • 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
  • 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:

  • liabilities arising from initial recognition of goodwill [IAS 12.15(a)]
  • 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)]
  • 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]

  • 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:

  • 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]
  • 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]
  • 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]
  • 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  +  Movement in deferred tax balances 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]

  • 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]
  • 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:

  • 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 pro-rata allocation, or using another more appropriate method [IAS 12.63]
  • 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]
  • The impact of business combinations on the recognition of pre-combination deferred tax assets are not included in the determination of goodwill as part of the business combination, but are separately recognised [IAS 12.68]
  • 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]
  • 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:

  • major components of tax expense (tax income) [IAS 12.79] Examples include:
    • current tax expense (income)
    • any adjustments of taxes of prior periods
    • amount of deferred tax expense (income) relating to the origination and reversal of temporary differences
    • amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new taxes
    • amount of the benefit arising from a previously unrecognised tax loss, tax credit or temporary difference of a prior period
    • write down, or reversal of a previous write down, of a deferred tax asset
    • amount of tax expense (income) relating to changes in accounting policies and corrections of errors.

IAS 12.81 requires the following disclosures:

  • aggregate current and deferred tax relating to items recognised directly in equity
  • tax relating to each component of other comprehensive income
  • 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)
  • changes in tax rates
  • amounts and other details of deductible temporary differences, unused tax losses, and unused tax credits
  • 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
  • tax relating to discontinued operations
  • tax consequences of dividends declared after the end of the reporting period
  • information about the impacts of business combinations on an acquirer's deferred tax assets
  • recognition of deferred tax assets of an acquiree after the acquisition date.

Other required disclosures:

  • details of deferred tax assets [IAS 12.82]
  • 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:

  • 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)]
  • 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)]

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.