IAS 12 – INCOME TAXES
OBJECTIVE
The
objective of IAS 12 is to prescribe the accounting treatment for income taxes.
IAS
12 notes the following in order to achieve this objective:
1.
It is inherent in the recognition of an asset or liability that that asset or
liability will be recovered or settled, and this recovery or settlement may
give rise to future tax consequences which should be recognised at the same
time as the asset or liability
2.
An entity should account for the tax consequences of transactions and other
events in the same way it accounts for the transactions or other events
themselves.
ACCOUNTING AND TAXABLE PROFIT
Accounting profit
is the profit for a period before deducting tax expense. Accounting profit is
the profit before tax figure.
Taxable profit
is the profit for a period determined in accordance with the rules established
by the taxation authorities upon which income taxes are payable.
There
is always the need to change accounting profit to taxable profit since current
tax is estimated on the taxable profit.
Adjustment of Accounting Profit to
Taxable Profit
|
Accounting
Profit Add: Expenses
recorded but not taxable Income taxable but not recorded Less: Expenses
taxable but not recorded Income not taxable but recorded Taxable Profit |
XXX XX XX (XX) (XX) XXX |
CURRENT INCOME TAX
Current
tax is the amount of income tax payable or recoverable in respect of taxable
profit or loss for a period.
Measurement of Current tax
Current
tax = Taxable profit/ loss × Tax rate (%)
DEFERRED INCOME TAX
Deferred
tax is the income tax payable or recoverable in future periods in respect of
the temporary differences, unused tax losses and unused tax credits.
There
are two types of deferred tax. These are:
1. Deferred tax liability
is a deferred tax that arises from taxable temporary differences.
2. Deferred tax asset is
a deferred tax that arises from deductible temporary differences, unused tax
losses and unused tax credits.
Measurement of Deferred tax
Deferred
tax = Temporary difference × Tax rate (%)
Temporary
difference = Carrying Amount – Tax Base
Carrying
Amount = Cost – Accumulated depreciation – Accumulated Impairment
Tax
Base = Cost – Accumulated capital allowance
TEMPORARY DIFFERENCE
Temporary
differences are the differences between the carrying amount of an asset or a
liability in the statement of financial position and its tax base.
Note:
·
When the carrying amount is greater than
its tax base, then there is a taxable
temporary difference and it gives rise to deferred tax liability.
·
When the carrying amount is lesser than
its tax base, then there is a deductible
temporary difference and it gives rise to deferred tax asset.
DEFERRED TAX LIABILITY
Recognise
deferred tax liability for all taxable temporary differences with the exception
of
1.
initial recognition of goodwill
2.
initial recognition of asset or liability in a transaction that is not a
business combination and at the time of the transaction it affects neither accounting
nor taxable profit.
3.
liabilities arising from undistributed profit from investment
Examples
of taxable temporary differences are
1.
Timing differences
2.
Business combinations
3.
Assets carried at fair value (upward revaluation of PPE)
4.
Initial recognition of an asset or a liability
DEFERRED TAX ASSET
Recognise
deferred tax asset for all deductible temporary differences to the extent that
it is probable that taxable profit will be available against which the
deductible temporary difference can be utilized.
Note: No
deferred tax asset shall be recognised for initial recognition of asset or
liability with no business combination.
Examples
of deductible temporary differences are
1.
Timing differences
2.
Business combinations
3.
Assets carried at fair value (asset revalued downwards)
4.
Initial recognition of an asset or a liability
Unused tax losses and tax credits
A
deferred tax asset shall be recognised for the unused tax losses carried
forward and unused tax credits to the extent that it is probable that future
taxable profit will be available against which the unused tax losses and unused
tax credits can be utilized.
Investments in subsidiaries,
branches and associates and interest in joint ventures
The
rules that apply for recognition of deferred tax are:
1.
An entity shall recognize a deferred tax liability for all taxable temporary
differences associated with Investments in subsidiaries, branches and
associates and interest in joint ventures, except to the extent that both of
the following conditions are satisfied
a. the
parent or the investor is able to control the timing of the reversal of
temporary difference
b. it
is probable that the temporary difference will not reverse in the foreseeable
future.
2.
An entity shall recognize a deferred tax asset for all deductible temporary
difference arising from Investments in subsidiaries, branches and associates
and interest in joint ventures to the extent that it is probable that
a. the
temporary difference will be reverse in the foreseeable future
b. taxable
profit will be available against which temporary difference can be utilized.
Treatment of deferred taxes
Deferred
tax is recognized as an income or expense in Statement of Profit or Loss for the period under review. However
there exceptions to this treatment, these are:
1.
If deferred taxes arise from a transaction outside profit or loss, then you
need to recognise deferred tax in that direction for instance deferred tax
incurred on revaluation will be recognise in Statement of Other Comprehensive
income.
2.
If deferred taxes arise in a business combination, deferred tax affects
goodwill or gin on bargain purchase but no deferred tax will be charged on
initial goodwill.
Offsetting the current income tax
Offset
current tax assets and liabilities if the following conditions prevail:
1.
when there is a legally enforceable right to set off the recognized amount, and
2.
when there is the intention to settle either on a net basis or to realize the
asset and settle the liability simultaneously.
Offsetting the deferred income tax
Offset
deferred tax assets and liabilities if the following conditions prevail:
1.
when there is a legally enforceable right to set off the recognized amount, and
2.
when deferred tax assets and liabilities relate to income tax levied by the same
taxation authority on either the same taxable entity or different taxable
entities which intend to settle current tax assets and liabilities on a net
basis or realise the assets and settle the liabilities simultaneously.
DISCLOSURES
An
entity should disclose:
1.
major components of tax expense or income such as current tax expense or income
and any adjustments of taxes of prior periods.
2.
tax relating to discontinued operations.
3.
changes in tax rates.
4.
details of deferred tax assets.
5.
tax consequences of future dividend payments.