IAS 12 provides guidance on accounting for income taxes, including how to identify and account for current and deferred taxes. It specifies that income taxes should include all taxes based on taxable profits and excludes taxes not based on income. The standard also defines key terms such as current tax, deferred tax, temporary differences, and tax base which are important for identifying whether items will result in current or deferred tax amounts.

1. Income Taxes IAS 12
 Aims
Understand the concepts, principles and rules for:
 Identifying and Accounting for income taxes
 Accounting for deferred income tax

2. Scope of IAS 12 Income Taxes
the requirements
 Includes all taxes that are based on taxable income
 “Taxable Income" shall mean the amount of income subject to tax
after deduction of all expenses and other deductible items allowed
under Income Tax Proclamation, its amendments, regulations,
directives and related circulars.
 Excludes taxes that are not based on income tax

3. Current tax
definition
» Accounting profit. Net profit or loss for a period before deducting tax expense.
» Taxable profit (tax loss). The profit (loss) for a period, determined in accordance with the rules of
ERCA on which income taxes are payable
» Tax expense (tax income). The aggregate amount included in the determination of net profit or loss
for the period in respect of current tax and deferred tax.
» Current tax. The amount of income taxes payable (recoverable) in respect of the taxable profit (tax
loss) for a period.

4. Current tax
overview of the recognition and measurement
requirements
»Recognise a current tax liability for
» tax payable on taxable profit for the current and past periods (current
tax)
»Measure current tax liability (asset) at
» The amount the entity expects to pay (recover) using substantively
enacted tax rates

5. Current tax: permanent differences and tax loss carried
back
test your understanding
»Government A specifies that:
» entities must each year pay a tax = 30% of taxable profit for the year
» taxable profit is determined in accordance with IFRS adjusted for specified
expenses that are excluded from the calculation of taxable income (ie
donations and entertainment)
» If the determination of taxable business income results in a loss in a tax
period, that loss may be set off against taxable income in the next five (5) tax
periods, earlier losses being set off before later losses.
»Entity A determines, accounting profit in accordance with IFRS:
» profit for 2014 to be $900,000 (donation expense = $100,000)
» loss for 2015 to be $400,000 (entertainment expense = $100,000)
Continued…

6. Current tax: permanent differences and tax loss carried
back
test your understanding
»Entity A’s current tax expense for 2014 is? (choose one of):
1) $1,000,000; 2) $900,000; 3) $800,000; 4) $300,000; 5) $230,000; or
6) $200,000.
»Entity A’s current tax income for 2015 is? (choose one of):
1) $500,000; 2) $400,000; 3) $300,000; 4) $130,000; 5) $100,000;
6) $90,000; or 7) nil.

7. Current tax: penalties and interest on unpaid taxes
test your understanding
On 30/12/2015 Entity A pays $330,000 to the tax authorities in
respect of taxes payable for 2014 arising due to management’s
misunderstanding of the tax law:
»additional taxable income $1,000,000:
»tax = $300,000;
»penalty = $20,000; and
»interest = $10,000
Entity A presents the amounts in its 31/12/2015 financial
statements as? (choose one of):

8. Deferred tax

9. Deferred tax
definitions
» Deferred tax = income tax payable (recoverable) in respect of the taxable profit (tax loss)
for future periods as a result of past transactions or events.
» Deferred tax is an accounting measure, used to match the tax effects of transactions with
their accounting impact and thereby produce less distorted results.
» Temporary differences = differences between the carrying amount of an asset or liability
in the statement of financial position and its tax base.
» The tax base of an asset or liability is the amount attributed to that asset or liability for tax
purposes.

10. Deferred tax
definitions cont.’
»Deferred tax liabilities are the amounts of income taxes payable in
future periods in respect of taxable temporary differences.
»Deferred tax assets are the amounts of income taxes recoverable in
future periods in respect of:
 Deductible temporary differences
 The carry forward of unused tax losses
Temporary differences are differences between the carrying amount of
an asset or liability in the statement of financial position and its tax
base.

11. Deferred tax
definitions cont.’
»Temporary differences may be either:
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, which are 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

12. Tax Base
»tax base of an asset is the amount that will be deductible for tax
purposes when it recovers the carrying value of the asset. Where
those economic benefits are not taxable, the tax base of the asset is
the same as its carrying amount.
Example -A machine cost $10,000. For tax purposes, depreciation of $3,000 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.
»tax base of a liability is its carrying amount, less any amount that will
be deducted for tax purposes. Where those economic outflows are
not taxable, the tax base of the liability is the same as its carrying
amount.
Example -Current liabilities include accrued expenses with a carrying amount of $1,000. The
related expense will be deducted for tax purposes on a cash basis.

13. More Examples Tax Base
1. Interest receivable has a carrying amount of $1,000. The related interest revenue will be
taxed on a cash basis.
2. Trade receivables have a carrying amount of $10,000. The related revenue has already
been included in taxable profit (tax loss).
3. A loan receivable has a carrying amount of $1m. The repayment of the loan will have no
tax consequences.

14. More Examples Tax Base
1. Current liabilities include interest revenue received in advance, with a carrying amount of $10,000.The
related interest revenue was taxed on a cash basis.
2. Current liabilities include accrued expenses with a carrying amount of $2,000. The related expense
has already been deducted for tax purposes.
3. Current liabilities include accrued fines and penalties with a carrying amount of $100. Fines and
penalties are not deductible for tax purposes.
4. A loan payable has a carrying amount of $1m. The repayment of the loan will have no tax
consequences.

15. 16
Easy guide
» When the CA of an asset is GREATER THAN its TB, then there will be a taxable temporary difference
resulting in a Differed tax liability
» When the CA of an asset is LESS THAN its TB, then there will be a deductible temporary difference
resulting in a Differed tax Asset
» When the CA of an liability is GREATER THAN its TB, then there will be a deductible temporary
difference resulting in a Differed tax Asset
» When the CA of an liability is GREATER THAN its TB, then there will be a taxable temporary difference
resulting in a Differed tax liability
» When a revenue item is recognized in an IFRS statement earlier than TAX statement, there will be
taxable temporary difference resulting in a Differed tax liability
» When an expense item is recognized in an IFRS statement earlier than TAX statement, there will
deductible temporary difference resulting in a Differed tax Asset

16. Temporary Differences-Examples-D
» Retirement benefit costs (pension costs) are deducted from accounting profit as service is provided by
the employee. They are not deducted in determining taxable profit until the entity pays either retirement
benefits or contributions to a fund. (This may also apply to similar expenses.)
» Accumulated depreciation of an asset in the financial statements is greater than the accumulated
depreciation allowed for tax purposes up to the end of the reporting period.
» The cost of inventories sold before the end of the reporting period is deducted from accounting profit
when goods/services are delivered, but is deducted from taxable profit when the cash is received.
» Impairment

17. Temporary Difference- Example - T
» Sale of goods revenue is included in accounting profit when the goods are delivered, but only included in taxable
profit when cash is received.
» Depreciation of an asset is accelerated for tax purposes. When new assets are purchased, allowances may be
available against taxable profits which exceed the amount of depreciation chargeable on the assets in the
financial accounts for the year of purchase.
» Development costs which have been capitalised will be amortised in the statement of profit or loss, but they
were deducted in full from taxable profit in the period in which they were incurred.
» Fair value Adjustments

18. Example- ACCA DipIFR

19. Example- ACCA DipIFR