This document provides an overview of IAS 12 Income Taxes. It discusses key definitions such as deferred tax liabilities and assets. It explains the reasons for recognizing deferred tax and the methods of accounting for deferred tax, including examples of temporary differences. The disclosure requirements of IAS 12 are outlined. Worked examples are provided to illustrate the calculation of deferred tax liabilities and the accounting for deferred tax on asset revaluations. Upon reviewing this document, one should be able to apply IAS 12 to determine deferred tax balances and tax expense/income in financial statements.

1. GROUP 8

2. FINANCIALACCOUNTING II
BACT 304
IAS 12 INCOME TAX PRESENTATION

3. IAS 12: INCOME TAX
Overview of IAS 12: Income Taxes
o Objective and scope
o Definition of Terms
o Reasons for Recognizing Deferred Tax
o Methods of Accounting for Deferred Tax
o Disclosure Requirements
IAS 12 INCOME TAX PRESENTATION

4. IAS 12: INCOME TAX (cont)
Upon the completion of this presentation one should be able to:
• Apply and discuss the recognition and measurement of deferred tax liabilities and
deferred tax assets including the exception to recognition.
• Determine the recognition of tax expense or income and its inclusion in the
financial statements.
• Income taxes include all domestic and foreign taxes which are based on taxable
profits.
IAS 12 INCOME TAX PRESENTATION

5. IAS 12: INCOME TAX (cont)
• Income taxes include taxes such as withholding taxes, which are payable by a subsidiary, associate
or joint venture on distributions to the reporting entity.
• Accounting for deferred tax is necessitated by the fact that taxable profit differs from accounting
profit (in most cases).
• Because accounting standards are quite different from tax laws creating timing differences.
• The fact that accounting profit may differ from taxable profit may create differences in taxable
profit is due to temporary difference or permanent difference.
IAS 12 INCOME TAX PRESENTATION

6. IAS 12: INCOME TAX (cont.)
• A permanent difference occurs when the cause (the difference) cannot be reversed.
• For example, where an expense charged against the income statement for accounting
purpose (like general provision for doubtful debts, and other expenses such as court fines
and penalties, political donations etc., are disallowed for tax purpose).
• There is no way such a cause can be reversed (unless there is a change in legislation).
IAS 12 INCOME TAX PRESENTATION

7. IAS 12: INCOME TAX (cont.)
• A temporary difference arises when an expense is allowed for both tax and
accounting purposes caused timing difference in allowance.
• Example, if capital allowance is granted at a rate different from depreciation rate,
the tax charged per the accounting profit may differ from tax charged per the
taxable profit but the difference will subsequently be reversed.
• It is the incidence of temporary difference that gives rise to deferred tax.
IAS 12 INCOME TAX PRESENTATION

8. IAS 12: INCOME TAX (cont.)
Definition of Terms
• Deferred Tax Liabilities: These are the amounts of income taxes payable in future periods in respect of
taxable temporary differences.
• Deferred Tax Assets: These are the amounts of income taxes recoverable in future periods in respect of
deductible temporary difference, the carry forward of unused tax losses, and the carry forward of unused tax
credit.
• Tax base: It is the value in the standard that assumes that each asset and liability has for tax purposes.
IAS 12 INCOME TAX PRESENTATION

9. IAS 12: INCOME TAX (cont.)
• Temporary differences: These are the differences between the
carrying amount of an asset and liability and its tax base.
IAS 12 INCOME TAX PRESENTATION

10. REASONS FOR RECOGNISING DEFERRED TAX
• If the deferred tax liability is ignored, profits will be inflated and the obligation to pay an increased amount of tax in future is also
ignored.
• The accrual concept required tax to be matched to profit as they are earned.
• The deferred tax will eventually become an actual tax liability.
• Ignoring deferred tax overstates profits, which may result in:
o Over-optimistic dividend payment base on inflated profits.
o Distorted of Earning Per Share and Price/Earning Ratio which are important indicators of an entity’s performance.
o Finally, shareholders may be misled.
IAS 12 INCOME TAX PRESENTATION

11. METHODS OF ACCOUNTING DEFERRED TAX
Examples of temporary difference
• Tax deductions for the cost of non-current assets that have a different pattern to the write-
off of the asset in the Financial Statements (i.e., accelerated capital allowances).
• Pension liabilities that are accrued in the Financial Statements, but are allowed for tax
only when the contributions are made to the pension fund at a later date.
• Intra-group profit in inventory that are unrealized for consideration purposes yet taxable
in the computation of group entity that made the unrealized profit.
IAS 12 INCOME TAX PRESENTATION

12. METHODS OF ACCOUNTING DEFERRED TAX (cont.)
• A loss is reported in the Financial Statements and the related tax relief is
only available by carry forward against future taxable profits.
• Assets are revalued upwards in the Financial Statements, but no adjustment
is made for tax purpose.
• Development costs are capitalized and amortized to profit or loss in future
period, but were deducted for tax purpose as incurred.
IAS 12 INCOME TAX PRESENTATION

13. IAS 12- ILLUSTRATION
• An entity acquired plant and equipment for Ghc1,000,000 on January 1, 2015.
• The asset is depreciated at 25% a year on straight line basis. The local tax legislation
permits the management to depreciate the asset at 30% a year for tax purpose.
• Required to calculate any deferred tax liability that might arise on the plant and
equipment as at December 31, 2015.
• Assume tax rate is 25%
IAS 12 INCOME TAX PRESENTATION

14. SOLUTION
• Calculating the temporary difference:
• Deferred tax = 25% x 50,000 = Ghc12,500.
Calculation Amount
Tax Depreciation 30% x 1,000,000 300,000
Accounting Depreciation 25% x 1,000,000 250,000
Timing Difference 50,000
IAS 12 INCOME TAX PRESENTATION

15. IAS 12 – ILLUSTRATION 2
An entity has the following assets and liabilities recorded in its SOFP at December 31, 2016:
The value for tax purposes of property and plant and equipment are GH₵ 7 million and GH₵ 4
million respectively.
The entity has made a provision for inventory obsolescence of GH₵2 million, which is not allowable
for tax purposes until the inventory is sold.
Further, an impairment charge against trade receivables of GH₵1 million has been made.
Assets Carrying Value (GH¢ million)
Property 10
Plant and Machinery 5
Inventory 4
Trade Receivables 3
Trade payables 6
Cash 2
IAS 12 INCOME TAX PRESENTATION

16. IAS 12 – ILLUSTRATION 2
This charge does not relate to any specific trade receivable but to the entity’s
assessment of the overall collectability of the amount.
This charge will not be allowed in the current year for tax purposes but will be allowed
in the future. Income tax paid is at 25%.
Required
Calculate the deferred tax provision at December 31, 2016.
IAS 12 INCOME TAX PRESENTATION

17. SOLUTION
• Solution
The deferred tax provision will be GH₵1 million × 25%, or GH₵250,000.
Because the provision against inventory and the impairment charge are not currently allowed, the tax base will be
higher than the carrying value by the respective amounts.
Asset Carry Value (GH¢) Tax Base (GH¢) Temporary GH¢
Property 10 7 3
Plant and Machinery 5 4 1
Inventory 4 6 (2)
Trade Receivables 3 4 (1)
Trade payables 6 (6) 0
Cash 2 2 0
Total 18 17 1
IAS 12 INCOME TAX PRESENTATION

18. ACCOUNTING FOR DEFERRED TAX ON REVALUATION
Deferred tax should be recognised on revaluation gain even if:
• There is no intention to sell the asset
• Any tax due on the gain made on any sale of the asset can be deferred by being ‘rolled over’ against
the cost of a replacement.
Illustration
During 2016, JohLex revalued some land from GH₵50m to GH₵100m its profit before tax for the year
ended 31st December 2016, was GH₵40m, on which it pays corporate tax of 25%. The opening balance
on the retained earnings reserve was GH₵220m, and there were no deferred tax balances brought forward.
Required to prepare the relevant extract from the JohLex’s financial statements for the year ended 31st
December 2016.
IAS 12 INCOME TAX PRESENTATION

19. SOLUTION
Income statement for the year ended 31st December 2016
GH₵’000
Profit before tax 40,000
Income tax expense (25%) (10,000)
Profit for the period 30,000
Statement of other comprehensive income
GH₵’000
Profit for the period 30,000
Gain on revaluation 50,000
Tax relating to revaluation (25% x GH₵50m) (12,500)
Other comprehensive income net of tax 37,500
Total comprehensive income 67,500
IAS 12 INCOME TAX PRESENTATION

20. SOLUTION (cont.)
Statement of financial position as at 31st December 2016
GH₵’000
Non-current asset
PPE 100,000
Non-current liability – Deferred tax 12,500
Current liability – Current tax 10,000
IAS 12 INCOME TAX PRESENTATION

21. IAS 12: DISCLOSURE REQUIREMENTS
• The aggregate current and deferred tax relating to items that are charged or
credited directly to equity
• The amount of income tax relating to each component of other comprehensive
income.
• An explanation of the relationship between tax expense (income) and
accounting profit in either or both of the following forms:
IAS 12 INCOME TAX PRESENTATION

22. IAS 12: DISCLOSURE REQUIREMENTS (cont.)
• An explanation of changes in the applicable tax rate(s) compared to
the previous accounting period;
• The amount (and expiry date, if any) of deductible temporary
differences, unused tax losses, and unused tax credits for which no
deferred tax asset is recognised in the statement of financial position.
IAS 12 INCOME TAX PRESENTATION