Objective
IAS 12 prescribes how to account for income taxes, including both:
-
Current tax (taxes payable or recoverable for the current year); and
-
Deferred tax (taxes payable or recoverable in future periods due to temporary differences).
1. Key Definitions
| Term | Meaning |
|---|---|
| Accounting Profit | Profit before tax, as per financial statements. |
| Taxable Profit | Profit according to tax laws, on which income tax is payable. |
| Current Tax | Amount of income tax payable (or recoverable) for the current period. |
| Deferred Tax | Tax payable (liability) or recoverable (asset) in future due to temporary differences. |
| Temporary Differences | Differences between the carrying amount of an asset/liability and its tax base. |
2. Types of Temporary Differences
(a) Taxable Temporary Differences
→ Lead to Deferred Tax Liability (DTL)
→ When future taxable income will increase.
Example:
-
Equipment cost: $100,000
-
Accounting depreciation: $20,000
-
Tax depreciation: $30,000
→ Carrying amount = $80,000
→ Tax base = $70,000
Difference = $10,000 → DTL
Because future taxable income will increase (you’ve taken more tax depreciation now).
(b) Deductible Temporary Differences
→ Lead to Deferred Tax Asset (DTA)
→ When future taxable income will decrease.
Example:
-
Provision for warranty (allowed for accounting, not tax yet): $5,000
→ Carrying amount = liability $5,000
→ Tax base = $0
Difference = $5,000 → DTA
Because future tax deductions will be available when warranty costs are paid.
3. Current Tax Recognition
-
Recognize current tax as a liability (tax payable) for the amount due to tax authorities.
-
If tax paid in advance or refundable → current tax asset.
Example:
Taxable profit for 2025 = $100,000
Tax rate = 25%
→ Current tax expense = $25,000
→ Record:
4. Deferred Tax Recognition
Recognize deferred tax for all temporary differences, except:
-
Initial recognition of goodwill
-
Initial recognition of assets/liabilities in transactions that are not business combinations and affect neither accounting nor taxable profit.
Example:
Taxable temporary difference = $10,000
Tax rate = 30%
→ DTL = $3,000
Deductible temporary difference = $5,000
Tax rate = 30%
→ DTA = $1,500
5. Measurement
-
Use tax rates that are enacted or substantively enacted at the reporting date.
-
Deferred tax assets and liabilities are not discounted to present value.
6. Recognition of Deferred Tax Asset
Recognize DTA only if it is probable that future taxable profits will be available to use the deductible differences.
Example:
Company has a tax loss of $100,000 and expects future taxable profit.
Tax rate = 25%
→ Deferred Tax Asset = $25,000
(Recognize only if future profits are probable.)
7. Presentation in Financial Statements
| Financial Statement | Item |
|---|---|
| Statement of Financial Position | Show deferred tax assets and liabilities separately (non-current items). |
| Statement of Profit or Loss | Show income tax expense, comprising: • Current tax • Deferred tax |
| Statement of Comprehensive Income | Deferred tax related to items recognized in OCI (e.g., revaluation surplus) is also recognized in OCI. |
Example:
-
Revaluation gain on building = $100,000
-
Tax rate = 20%
→ Deferred Tax Liability = $20,000
→ Recognized in OCI, not P&L.
8. Offsetting
-
Deferred tax assets and liabilities can be offset only if:
-
Entity has a legally enforceable right to offset current tax assets and liabilities, and
-
They relate to taxes levied by the same tax authority.
-
9. Disclosure Requirements
Entities must disclose:
-
Major components of tax expense (current & deferred)
-
Reconciliation between accounting profit and taxable profit
-
Details of unrecognized deferred tax assets
-
Movements in deferred tax balances
10. Summary Table
| Item | Accounting Treatment | Example |
|---|---|---|
| Current Tax | Based on current year taxable profit | 25% × $100,000 = $25,000 |
| Deferred Tax Liability | Future taxable amounts | Tax depreciation > accounting depreciation |
| Deferred Tax Asset | Future deductible amounts | Provision for warranty |
| Recognition | Probable future benefit or obligation | DTA recognized if probable profits |
| Presentation | Separate in BS; tax expense in P&L | Deferred tax on OCI → OCI |
✅ In short:
IAS 12 ensures that the tax effects of all transactions are recognized in the same period as the underlying transactions — whether current or deferred.