Overview of IAS 12
IAS 12 deals with taxes on income, comprising current tax and deferred tax.
Current tax expense for a period is based on the taxable and deductible amounts that will be shown on the tax return for the current year. An entity recognises a liability in the balance sheet in respect of current tax expense for the current and prior periods to the extent that it is unpaid. It recognises an asset if current tax has been overpaid.
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
Tax payable, based on taxable profit, seldom matches the tax expense that might be expected, based on pre-tax accounting profit. Tax laws and financial accounting standards recognise and measure income, expenditure, assets and liabilities in different ways.
Deferred tax accounting seeks to deal with this mismatch. It is based on the temporary differences between the tax base of an asset or liability and its carrying amount in the financial statements. For example, where an asset is revalued upwards but not sold, the revaluation creates a temporary difference (if the carrying amount of the
asset in the financial statements is greater than the tax base of the asset), and the tax consequence is a deferred tax liability.
Deferred tax is provided in full for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except where the temporary difference arises from:
- Initial recognition of goodwill (for deferred tax liabilities only);
- Initial recognition of an asset or liability in a transaction that is not a business combination and that affects neither accounting profit nor taxable profit; and
- Investments in subsidiaries, branches, associates and joint ventures, but only where certain criteria apply.
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 (and tax laws) that have been enacted or substantively enacted by the balance sheet date. The discounting of deferred tax assets and liabilities is not permitted.
Generally, the measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the entity expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. The carrying amount of a non-depreciable asset (such as land) can only be recovered through sale. For other assets, the manner in which management expects to recover the asset (that is, through use or through sale, or through a combination of both) is considered at each balance sheet date. An exception has been introduced for investment property measured using the fair value model in IAS 40, with a rebuttable presumption that such investment property is recovered entirely through sale.
Management only recognises a deferred tax asset for deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. This also applies to deferred tax assets for unused tax losses carried forward.
Current and deferred tax is recognised in profit or loss for the period, unless the tax arises from a business combination or a transaction or event that is recognised outside profit or loss, either in other comprehensive income or directly in equity, in the same or different period. The tax consequences that accompany, for example, a change in tax rates or tax laws, a reassessment of the recoverability of deferred tax assets or a change in the expected manner of recovery of an asset are recognised in profit
Presentation of IAS 12
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]
Disclosures of IAS 12
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]