Income Taxes IAS 12

 Aims

Understand the concepts, principles and rules for:

 Identifying and Accounting for income taxes
 Accounting for deferred income tax

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 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

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 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.

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 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

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 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…

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 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.

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 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):
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Deferred tax
 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.

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 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.

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 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

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 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.

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 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.

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 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.

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 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

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 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

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 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

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Example- ACCA DipIFR

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Example- ACCA DipIFR

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