This document discusses accounting for income taxes according to IAS 12. It covers current tax liabilities and assets, deferred taxes, and timing differences between accounting and taxable profits. Examples are provided to illustrate accounting entries for current tax, deferred tax liabilities and assets from temporary differences, and the calculation of tax base amounts. The key concepts of permanent and temporary differences that affect the tax base are also explained.

1. INCOME TAXES
IAS 12

2. LEARNING OUTCOMES
• Account for current tax liabilities and assets
• Taxable temporary differences on accounting & taxable
profits
• Calculate & record deferred tax amounts in financial
statements
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3. CURRENT TAX LIABILITIES AND
ASSETS
• Current tax is the amount of income tax payable
(recoverable) in respect of the taxable profits (tax loss) for
a period. For the purposes of this Standard, income taxes
include all domestic and foreign taxes which are based on
taxable profits.
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4. EXAMPLE
• K Ltd earns profit of $100,000 and a tax is payable @
30% on profits. During the previous year, it had provided
for $50,000 as tax payable. However, upon assessment,
the amount of tax payable came as $55,000 and was paid
during the current year
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5. EXAMPLE
• K Ltd earns realised profits of $100,000 during the year
2010. It also has a revaluation gain of $50,000 on
revaluation of its PPE. The company pays taxes on both
realised and unrealised gains @ 30%. Previous year’s
figures of retained earnings and revaluation gain in the
SOFP are $65,000 and $10,000 respectively. Show the
extracts of SOCI and SOCIE.
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6. CONCEPT OF DEFERRED TAXES
• There are instances when you may have earned the income
today but you required to pay taxes only later. This means
that the income has been earned but tax payment been
deferred, for example, in case of revaluation gains on
assets.
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7. EXAMPLE
• K Ltd re-values its assets on 1st January 2011. The carrying
amount of assets is $100,000. The fair value of the assets is
$300,000. This means that there is an unrealised profit of
$200,000 and an increase in the value of assets by the same
amount. This means that if K Ltd were to sell this asset,
cash received is $300,000. However, there may be some tax
applicable, say @ 25% on this gain of $200,000 ($300,000
- $100,000) which is paid at the time of sale. Let us assume
that the asset is sold on 1 st January 2012.
• Ignoring depreciation or impairment, draft the profit and
loss account of K Ltd.
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8. ACCOUNTING TREATMENT FOR
DEFERRED TAXES
The entry for deferred tax is calculated as under:
For tax expense (tax payable in future)
Debit tax expense xx
Credit deferred tax liability xx
For tax income (tax refundable in future)
Debit deferred tax asset xx
Credit tax expense xx
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9. EXAMPLE
K Ltd earns interest income of $50,000 during 2011 on the
fixed deposits made. However, the tax is payable only on
receipt of the interest income and not when these accrue. The
money is receivable in 2012. Tax rate is 30%.
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10. EXAMPLE
K Ltd has created a provision for warranty expenses of
$10,000 in 2011. This provision is charged to the SOCI and
a current liability amounting to this provision is created.
However, the tax authorities do not permit a provision for
warranty, and will only give a deduction when these costs are
actually incurred.
K Ltd incurs warrant expenses of $10,000 in 2012. In 2011,
K Ltd earned $50,000 before creating this provision. The
profit amount is same also in 2012.
The tax rate is 20%.
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11. TIMING DIFFERENCES
Permanent differences
• These differences are permanent in nature and would remain. There does not arise any
deferred tax concept on these differences.
• Example
K Ltd has incurred a cost of $50,000 on employing people from the minority section
of the society. The government gives a tax rebate on 125% on the amount spent on
such activities. Hence, the deduction from tax is on a permanent basis. The accounting
profit would not be affected later. In this case, there is no deferred tax applicable.
Temporary differences
• Temporary differences are differences which arise due to timing when tax payment
happens and when it is created in financial statements. For this reason, temporary
differences are also called as timing differences.
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12. TEMPORARY DIFFERENCES
Taxable temporary differences
• Where the temporary differences result in a tax liability in
the future, that difference is considered as taxable temporary
difference.
Deductible temporary differences
• Where the temporary differences result in a tax deduction in
the future, that difference is considered as deductible
temporary difference.
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13. TAX BASE
• Tax base is used to identify the temporary differences. In
fact, under IAS 12 (Income Taxes), temporary differences
are defined as under:
Temporary Difference
= Carrying amount of asset / liability – Tax base.
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14. TAX BASE
Temporary difference
= Carrying amount of asset / liability – tax base
Or, Tax base
= Carrying amount of asset / liability – temporary difference
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15. TAX BASE
• K Ltd has accrued rental income in books of $500. The
rent is not yet received. However, rental income is taxable
on a receipt basis.
• K Ltd has received $500 as rent in advance. This rent is
taxed on receipt basis.
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16. THANKS
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