Objective of IAS 12

The objective of IAS 12 (Revised 1996) is to prescribe the accounting treatment for income taxes.

Key Definitions [IAS 12.5]

Temporary difference: A difference between the carrying amount of an asset or liability and its tax base.

Taxable temporary difference: A temporary difference that will result in taxable amounts in the future when the carrying amount of the asset is recovered or the liability is settled.

Deductible temporary difference: A temporary difference that will result in amounts that are tax deductible in the future when the carrying amount of the asset is recovered or the liability is settled.

Current Tax

Current tax for the current and prior periods should be 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 should be recognised as an asset. [IAS 12.13] Current tax assets and liabilities should be 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]

Recognition of Deferred Tax Liabilities

The general principle in IAS 12 is that deferred tax liabilities should be recognised for all taxable temporary differences. There are 3 exceptions to the requirement to recognise a deferred tax liability, as follows: [IAS 12.15]

• liabilities arising from goodwill for which amortisation is not deductible for tax purposes;
• 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; and
• liabilities arising from undistributed profits from investments where the enterprise is able to control the timing of the reversal of the difference and it is probable that the reversal will not occur in the foreseeable future.

Recognition of Deferred Tax Assets

A deferred tax asset should be 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]

• negative goodwill which was treated as deferred income under IAS 22 Business Combinations; or
• the initial recognition of an asset/liability other than in a business combination which, at the time of the transaction, does not affect the accounting or the taxable profit.

The carrying amount of deferred tax assets should be reviewed at each balance sheet date 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 should be subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available. [IAS 12.37]

A deferred tax asset should be 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 carryforwards can be utilised. [IAS 12.34]

Measurement of Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities should be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled (liability method), based on tax rates/laws that have been enacted or substantively enacted by the balance sheet date. [IAS 12.47] The measurement should reflect the entity's expectations, at the balance sheet date, as to the manner in which the carrying amount of its assets and liabilities will be recovered or settled. [IAS 12.51]

Deferred tax assets and liabilities should not be discounted. [IAS 12.53]

Recognition of Tax Expense or Income

Current and deferred tax should be recognised as income or expense and included in net profit or loss for the period, except to the extent that the tax arises from: [IAS 12.58]

• a transaction or event that is recognised directly in equity; or
• a business combination accounted for as an acquisition.

If the tax arises from a business combination that is an acquisition, it should be recognised as an identifiable asset or liability at the date of acquisition in accordance with IFRS 3 Business Combinations (thus affecting goodwill or negative goodwill).

Tax Consequences of Dividends

In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend. In other jurisdictions, income taxes may be refundable if part or all of the net profit or retained earnings is paid out as a dividend. Possible future dividend distributions or tax refunds should not be anticipated in measuring deferred tax assets and liabilities. [IAS 12.52A]

IAS 10, Events after the Balance Sheet Date, requires disclosure, and prohibits accrual, of a dividend that is proposed or declared after the end of the reporting period but before the financial statements were authorised for issue. IAS 12 requires disclosure of the tax consequences of such dividends as well as disclosure of the nature and amounts of the potential income tax consequences of dividends. [IAS 12.82A]

Presentation

Current tax assets and current tax liabilities should be offset on the balance sheet only if the enterprise has the legal right and the intention to settle on a net basis. [IAS 12.71]

Deferred tax assets and deferred tax liabilities should be offset on the balance sheet only if the enterprise has the legal right to settle on a net basis and they 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]

Disclosure

• current tax assets [IAS 12.69]
• current tax liabilities [IAS 12.69]
• deferred tax assets (always classified as noncurrent) [IAS 12.69-70]
• deferred tax liabilities (always classified as noncurrent) [IAS 12.69-70]
• tax expense (tax income) relating to profit or loss from ordinary activities (must be shown on the face of the income statement) [IAS 12.77]
• major components of tax expense (tax income) [IAS 12.79]
• aggregate current and deferred tax relating to items reported directly in equity [IAS 12.81]
• tax relating to extraordinary items [IAS 12.81]
• 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) [IAS 12.81]
• changes in tax rates [IAS 12.81]
• amounts and other details of deductible temporary differences, unused tax losses, and unused tax credits [IAS 12.81]
• temporary differences associated with investments in subsidiaries, associates, branches, and joint ventures [IAS 12.81]
• for each type of temporary difference and unused tax loss and credit, the amount of deferred tax assets or liabilities recognised in the balance sheet and the amount of deferred tax income or expense recognised in the income statement [IAS 12.81]
• tax relating to discontinuing operations [IAS 12.81]
• tax consequences of post-balance-sheet dividends [IAS 12.81]
• details of deferred tax assets [IAS 12.82]