IAS 12 Income Tax
Income Tax
IAS 12 income taxes states that there are two elements of tax that will need to be accounted for:
(1)Current tax ( the amount of income taxes payable/recoverable in respect of the taxable profit/loss for a period);
(2)Deferred tax ( an accounting adjustment aimed to match the tax effects of transactions to the relevant accounting period).
Income Tax and Current Tax
Income Tax:
| Year End estimate | x |
| Under/over provision | x/(x) |
| Increase/decrease in deferred tax | x/(x) |
| Charge to record in the statement of profit or loss | x |
To introduce tax payable by the company:
Dr. Income Tax expenses ( in statement of profit or loss)
Cr. Income tax payable ( in SFP as current liability)
Deferred tax is the estimated future tax consequences of transactions and events recongized in the financial statements of the current and previous periods.
Deferred taxation….in the two quite different concepts of profit:
–The accounting profit ,which is the figure of profit before tax, reported to the shareholders in the published accounts.
–The taxable profit, which is the figure of profit on which the taxation authorities base their tax calculation.
Accounting profit and taxable profit is caused by:
–Permanent differences (e.g. not allowable expense for tax purpose such as client entertaining expenses or fines).
–Temporary differences arises when an expense is allowed for both tax and accounting profit purposes, but the timing of the allowance differs. Example: certain types of income and expenditure on cash rather than an accrual basis (e.g. certain provision), tax allowance and actual allowance for depreciation.
| Carrying value of non-current asset ( via accounting) | x |
| Tax base (CV) | x |
| Temporary difference | x |
| Deferred tax = temporary difference x tax rate | |
| Increase/Decrease in deferred tax: | |
| Balance b/f | x |
| Balance c/f ( to SOFP) (temporary difference x tax rate) | x |
| Increase/decrease in deferred tax ( to either statement of profit or loss or equity) | x/(x) |
Increase in deferred tax provision:
Dr. Income tax expense
Cr. Deferred tax (SFP)
Decrease in deferred tax provision:
Dr. Deferred tax (SFP)
Cr. Income tax expense
Deferred Tax
Deferred Tax
1.Deferred tax asset
-Deductible temporary difference arises where the tax base of an asset exceeds its carrying value.
– If company making loss previously, they must be able to demonstrate that sufficient forecasted profits, so taxable profit will be available against.
2.Deferred tax liabilities
-A taxable temporary difference arises where the carrying value of an asset is greater than its tax base.
-Revaluation gain from non-current assets because tax base of asset remain unaffected from revaluation.
Reference:
-ACCA, F7 Financial Reporting by KAPLAN PUBLISHING
-ACCA, F7 Financial Reporting by BPP