Objectives

Define current tax and temporary differences

Ias 12 income taxes Explain the meaning of Tax base

Calculate and account for the deferred tax assets and

liabilities

State the disclosure requirements of IAS 12

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Scope
Contents

Scope • IAS 12
Disclosure
• Apply to income taxes
Deferred
Definitions
• Does not apply to government grant (IAS 20)
tax

Current tax Tax base

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 Definitions
Definitions • Accounting profit: profit or loss for a
period before deducting tax expense.
Accounting profit:
• Taxable profit (tax loss): the profit (loss)
for a period, determined in accordance + Expense recognised but not-deductible for tax purpose
with the rules established by the taxation + Income not recognised but included for tax purpose
authorities - Expense not recognised but deductible for tax purpose
- Income recognised but not taxable
= Taxable profit (tax loss)

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Example 1:
• Current tax
A company with an issued share capital of 1,000,000 ordinary shares
✓The amount of income taxes payable
has the following results for the three year to 31 December (in $000):
Definitions (recoverable) in respect of the taxable
profit (tax loss).
20X0 20X1 20X2
Profit before tax 800 800 800 • Deferred tax
Depreciation charged in the year 200 200 200 ✓Deferred tax liabilities: the amounts of
Depreciation for tax purposes 400 150 50 income taxes payable in future periods in
respect of taxable temporary differences.
Assuming that there are no other permanent or temporary differences
✓Deferred tax assets: the amounts of
and that the rate of tax is 20%, compute the company’s profit after
income taxes recoverable in future
tax for each of the three years. Also, calculate the earnings per share
periods.
ratio for each year.

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 Tax base

• Asset: amount deductible against taxable benefit when recover

the carrying amount
Tax base • Examples:
• A machine cost 100. For tax purposes, depreciation of 30
Amount attributed to asset/liability for tax purpose 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. The tax
base of the machine is 70.

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Tax base
Tax base
Liability: carrying amount less amount deductible for tax purpose in the
future period.
• Examples:
Examples:
• Interest receivable has a carrying amount of 100. The related
interest revenue will be taxed on a cash basis. The tax base • Current liabilities include accrued expenses with a carrying amount
of the interest receivable is nil. of 100. The related expense has already been deducted for tax
• Trade receivables have a carrying amount of 100. The purposes. The tax base of the accrued expenses is 100.
related revenue has already been included in taxable profit • Current liabilities include accrued expenses with a carrying amount
(tax loss). The tax base of the trade receivables is 100. of 100. The related expense will be deducted for tax purposes on a
cash basis. The tax base of the accrued expenses is nil.
• A loan payable has a carrying amount of 100. The repayment of the
loan will have no tax consequences. The tax base of the loan is 100.

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 • Current tax liabilities (assets) for
Current tax the current and prior periods shall
be measured at the amount
• Current tax liability and current tax expected to be paid to (recovered
asset Current from) the taxation authorities,
using the tax rates (and tax laws)
• Current tax for current and prior
periods shall, to the extent unpaid, be
recognised as a liability. If the amount
tax that have been enacted or
substantively enacted by the
end of the reporting period. (IAS
already paid in respect of current and 12_46)
prior periods exceeds the amount due
for those periods, the excess shall be
recognised as an asset. (IAS 12_12)

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Deferred tax
The difference between
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Carrying amount > Tax Carrying amount < Tax
carrying amount and tax base base base
• Taxable temporary • Deductible temporary
difference (deferred tax difference (deferred tax
Temporary liability) asset)
differences
Taxable Deductible
temporary
temporary
differences differences Deferred tax

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 Deferred tax Example 2:
A company with an issued share capital of 1,000,000 ordinary
shares has the following results for the three year to 31
December (in $):
20X0 20X1 20X2
Profit before tax 800 800 800
Depreciation charged in the year 200 200 200
Depreciation for tax purposes 400 150 50
Assuming that the depreciation charges relates to an asset
acquired for $600,000 on 1 January 20X0, using straight-line
basis over three year and estimated residual value is 0. Show
the necessary transfers to and from the company’s deferred tax
account. Tax rate is 20%.

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Deferred tax
Deferred tax
• Deferred tax assets and liabilities shall not be
• Deferred tax assets and liabilities shall be measured at discounted.
the tax rates that are expected to apply to the period • The carrying amount of a deferred tax asset shall
when the asset is realised or the liability is settled, based be reviewed at the end of each reporting period. An
on tax rates (and tax laws) that have been enacted or entity shall reduce the carrying amount of a
substantively enacted by the end of the reporting period. deferred tax asset 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 shall be reversed to the extent that it
becomes probable that sufficient taxable profit will
be available.

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 ➢Current tax expense (income);

• A deferred tax asset shall be ➢Any adjustments recognised in the

recognised for the carry-forward of period for current tax of prior periods;
unused tax losses and unused tax ➢The amount of deferred tax expense;
Deferred tax credits to the extent that it is probable ➢The amount of the benefit arising from a
that future taxable profit will be
available against which the unused
disclosure previously unrecognised tax loss, tax
credit or temporary difference of a prior
tax losses and unused tax credits can period that is used to reduce current tax
be utilised. expense/ deferred tax expense

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