IAS 12 – Income Tax

Prepared by: Sir Hamza Abdul Haq

Overview
Income Tax

Current Tax Deferred Tax

Current Year Prior Year

Current Tax – Current Year

Any change in estimate will
Accounting Profit xx be treated prospectively as
Add: Disallowed expense / Taxable income xx a prior year adjustment in
Less: Exempt income / Tax allowable expense xx the year when the change
has been identified.
Taxable Profit xx
Tax Rate %
Dr. Tax Expense
Current Tax – Current Year xx Cr. Tax payable
Deferred Tax

Accounting Profit ≠ Taxable Profit

Temporary Difference Non-Temporary

Would Result in No Deferred Tax

recognition of Deferred Implication
Tax
Concept of Deferred Tax
A company purchased an asset for $100m with a useful life of 5 years. Tax authority allow
depreciation at 25% straight line method. Calculate the deferred tax impact if tax applicable
rate is 30%.

Year Accounting Dep. Tax Dep. Difference Tax Impact

1 20 25 5 1.5 Lower taxable profits, lower tax
2 20 25 5 1.5 Lower taxable profits, lower tax
3 20 25 5 1.5 Lower taxable profits, lower tax
4 20 25 5 1.5 Lower taxable profits, lower tax
5 20 - (20) (6) Higher taxable profits, higher tax
100 100 - -

Income Statement Approach

Deferred Tax – Balance Sheet Approach
A company purchased an asset for $100m with a useful life of 5 years. Tax authority allow
depreciation at 25% straight line method. Calculate the deferred tax impact if tax applicable
rate is 30%.

Asset Carrying Amount Tax Base Temporary Difference Deferred Tax

 Deferred Tax

Calculating Deferred Tax Positive value is a Deductible

Temporary Difference

Temporary Difference = Tax Base – Carrying amount Negative value is a Taxable

Temporary Difference

Positive value is a Deferred

Tax Asset
Deferred Tax = Temporary Difference x Tax Rate

Negative value is a Deferred

Tax Liability
Example 1 – IAS 16 (Depreciation)
Cost = $120m
Life = 5 years
Tax Depreciation Rate = 25% reducing balance method
Tax Rate = 30%

Asset Carrying Amount Tax Base Temporary Difference Deferred Tax

Example 2 – IAS 16 (Revaluation)
Plant (Cost) = $100m
Life = 5 years
Tax depreciation = 25% reducing balance method
FV after 1 year = $120m
Tax Rate = 30%

Asset Carrying Amount Tax Base Temporary Difference Deferred Tax

Example 3 – IAS 16 (Dismantling)
Plant (Cost) = $600m
Asset C.A T.B
Dismantling cost = $161.051m
Life = 5 years
Tax depreciation = 25% reducing balance method
Tax Rate = 30%
Discount factor = 10%

C.A T.B T.D D.T

Provision C.A T.B
 IAS 20 – Government Grant
Grant to meet capital Grant to meet revenue
Government Grant
expenses expenses

Capital Grant Revenue Grant

Deferred Income Netting Off

Recognised an income
Dr. Asset
Cr. Bank Dr. Asset Example
Cr. Deferred Income Cr. Bank Fair value = $200m

Dr. Depreciation expense Life = 5 years

Dr. Depreciation expense
Cr. Asset Cr. Asset Government Grant = 40%
Company paid = 60%
Dr. Deferred Income
Cr. Other income
Deferred Tax Impact on Government Grant

Government Grant

Taxable Exempt

Tax base = Cost paid by the company Non-Temporary Difference

Example 4 – IAS 20 (Capital Grant)
Fair value = $200m
Asset C.A T.B
Life = 5 years
Tax Depreciation = 25% reducing balance method
Government Grant = 40%
Company paid = 60%
Note: Government grant is taxable in this jurisdiction

C.A T.B T.D D.T

G.G C.A T.B
Deferred Tax Impact on IFRS 2 – Equity SBPT
 Equity settled share based payment transaction will always result in a Deferred Tax Asset.
 Tax authorities allow expense at intrinsic value of shares at the time of issuance.
 DTA = Expense using intrinsic value x tax rate

Expense using Intrinsic Value > Accounting expense

Yes No

the excess multiples by the tax rate is The entire deferred tax impact is
recorded in equity with the balancing taken to profit and loss account.
figure taken to profit and loss account
Example 5 – IFRS 2
Employees: 300
Number of shares: 500
Vesting Condition: 3 years service

Grant Date Year 1 Year 2 Year 3

Expected no. of employees to vest 75% 80% 90% 1,000
FV of equity instrument granted $15 $16 $17 $18
Intrinsic Value $10 $13 $15 $18
 Answer to Example 5
Expense for Accumulated
Year
the year expense
1
2
3
Expense for Accumulated
Year
the year expense
1
2
3
 Example 6 – IAS 12 with IFRS 9
An entity purchased shares of another entity on 1st January 2014 for $100m and classified the
financial asset as held for trading purpose. The fair value of the financial asset at 31st December
2014 was $140m. Tax applicable rate is 34%.

C.A T.B T.D D.T

 Example 7 – IAS 12 with IFRS 9
An entity purchased 6% loan notes of another company having a par value of $100m. The loan
notes ’s were issues at a discount of $12m and the transaction cost incurred to purchase the loan
notes was $2m. The loan notes will be redeemed after 4 years at a premium of $3.923m.

Year b/d Interest Income Interest Received Amortisation c/d

C.A T.B T.D D.T

 Example 8 – IAS 12 with IAS 32/IFRS 9
An entity issued 8% convertible loan notes with a par value of $100m. The loan notes were issues
at a discount of $2m and are redeemed at the end of 3 years at a premium of $1.1296m or
convertible into 5m ordinary shares at the option of the loan note holder.

Discount Present
Year Cash flow
Factor Value
Example 8 – IAS 12 with IFRS 9

Year b/d Interest Income Interest Received Amortisation c/d

C.A T.B T.D D.T

Deferred Tax Asset
 Deferred tax asset is only recorded when there are sufficient future taxable profits
 Deferred tax asset is reassessed at each year end with any change accounted for
prospectively as a change in accounting estimate.
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