IAS 12 Income Tax

Tax Expense= Current tax +/- Movement in Deferred tax Liability or Asset

Deferred tax
Current tax Deferred tax is a tool to follow matching concept
the income xe Arises on temporary difference
payable e o e in e h taxable SOCI -Approach SOFP- Approach
e i
Income/Exp Difference b/w carrying
Difference b/w recognition value & tax base of asset
Entry Year and application year or liability
Taxable profit Taxable loss
Dr.Tax expense ** Dr. tax receivable
Cr. Tax payable Cr. Tax Exp Calculation of current tax

Follow the treatment of line item

Accounting profit before tax
Line Item Tax will be charged Add: Provision of gratuity
Donations
P/L P/L Accounting depreciation
OCI OCI Tax gain
SOCIE SOCIE Amortization of development cost
Amortization of long term debts
Provision for doubtful debts
Accrued expenses
Stock at NRV
Employee benefits
Current Tax computation format
Advance income
Rs. Provision for penalty
Accounting profits before tax X interest paid on leases
Depreciation on leases
Add back: Inadmissible deductions X Expenses disallowed
Less: Admissible deductions (X)
Less: Dividend income
Less Exempt Income (X) Capital gain
Income with different tax (X) Tax depreciation
Accounting gain on disposal
Taxable profit XX
Depreciation for PPE
Tax rate x% Prepaid expenses
Income under FTR - Dividends
Tax payables (current tax) X
Lease rentals paid
Bad debts written off/ recovered
payment for gratuity
Expenses allowed
Expenses partially allowed
Corporate dividend
Zubair Saleem Lecture Notes -FR-II Finance cost paid 1
 Types of Temporary Difference
Taxable temporary difference Deductible temporary difference

1). Difference which will increase future taxable 1). Difference which will decrease future
taxable Profits. When related asset/liability realized or Profits. When related asset/liability
realized settled or settled

2). TTD will generate DTL 2) .DTD will generate DTA (subject to
availability of future taxable profit
Recognized D.T. Liability for all TTD Except
a). Initial recognition of goodwill
b). Initial recognition of A/L which
-Affects neither accounting nor taxable profit
- Is not a business combination

3). Deferred tax liability =TTD * %age 3). Deferred tax Asset =DTD * % age

4). Dr. Tax expense xx 4). Dr. DTA xx

Cr. DTL xx Cr. Tax income xx

Future changes in DTL Future changes in DTA

Increase in liability Decrease in liability Increase in asset Decrease in asset
Dr. Tax Expense xx Dr. Def. tax liability xx Dr. Def. tax asset xx Dr. Tax Expense xx
Cr. Def. tax liability xx Cr. Tax income xx Cr. Tax income xx Cr. Def. tax asset xx
(net settlement as (Reversal of entry)
reversal entry)

Balance Sheet approach

TTD DTD

Carrying value of asset carrying value of asset

Vs. Vs.
Tax base of asset Tax base of asset

Carrying value of liability Carrying value of liability

Vs. Vs.
Tax base of liability Tax base of liability

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Income statement approach
Current year future year Generate
Income /gain recognized Tax will pay TTD
Expense/loss recognize Tax relief DTD
Tax will pay income/gain recognize DTD
Tax relief Expense/loss recognize TTD

Example (Taxable temporary difference)

Each of the following is a taxable temporary difference leading to the recognition of a deferred tax
liability.

Carrying Temporary tax liability

amount Tax base difference (30%)
Non-current asset 1,000 800 200 60
Inventory 650 600 50 15
Receivable 800 500 300 90
Receivable (note 1) 500 nil 500 150
Payable (note 2) (1,000) (1,200) 200 60

Note 1:

This implies that an item accounted for using the accruals basis in the financial statements is being taxed
on a cash bases.
If an item is taxed on cash basis the tax base would be zero as no receivable would be recognized under
the tax rules

Note 2:

The credit balance in the financial statements is Rs. 1,000 and the tax base is a credit of Rs. 1,200.
Therefore, the financial statements show a debit balance of 200 compared to the tax base. This leads to a
deferred tax liability.

Example (Why is it necessary to calculate tax base)

Carrying Tax
Particulars value base TTD/(DTT)
Property, plant & equipment 200 120 80
Intangible assets 300 185 115
Investments 200 150 50

Zubair Saleem Lecture Notes -FR-II 3

 Inventory 200 220 (20)
Receivables 100 110 (10)
Cash 50 50 -
Equity:
Share capital
Share Premium
Loan 200 180 (20)
Deferred tax liability 80 80 -
payables 100 125 25
Interest payable 120 110 (10)

Tax rate 40%

Deferred tax liability?

Solution:

Deferred tax liability = 210 x 40% = 84 Deferred Tax Computation

O/B of Def. tax liability 80 Line Item Carrying value Tax base TTD/(DTD)
C/B of deferred tax liability 84
Rs. Rs. Rs.
4
PPE xx xx xx(xx)
Dr. Expense 4
Intangibles xx xx x(x)
Cr. Deferred tax liability 4
Inventory xx xx x/(x)
Equity
Loan xx xx x(x)
How to calculate “tax base”? Payable xx xx x(x)
Net Taxable/Deductible x(x)
Value of asset or liability under tax rules Tax rate %
Deferred tax Asset or liability xx
1. Depreciable asset

➢ IN accounting IN tax
Cost ** Cost **
Less: Acc. Dep. (**) Less: Capital allowance (**) dep under tax rules
Carrying value ** Tax base/ Tax WDV **

2. Asset /Liability Tax rules

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 Income/expense are taxable/allowable when receipt/paid (cash
basis)

In cash basis; tax base of asset or liability will nil

3. Exempt or Permanent Disallowable or No Tax Consequence

If asset/liability or income/expense has no consequences then

carrying value of asset/liability would be equal to tax base of
asset/liability

4. Non-Depreciable land Cost

5. Lease Contracts

Right-of-use assets Zero

Lease receivable Zero
Lease Liability Zero
6. NRV adjustments

Inventory Cost [If NRV write down is not tax allowable]

Carrying amount [If NRV write down is tax allowable
7. Debtors

Taxation on cash basis - Zero

Taxation on accrual basis - Gross carrying amount (i.e. before deducting provision for
bad debts)

8. Prepaid expenses:

Taxation on cash basis - Zero

Taxation on accrual basis - Carrying amount
9. Accrued income:

Zubair Saleem Lecture Notes -FR-II 5

 Taxation on cash basis Zero
Taxation on accrual basis C.value
10. Cash/Bank

- Carrying amount
11. Share Based Payment

Intrinsic value
12. Compound Instrument

Total Value of Compound Instrument

13. Revenue Received in Advance

Taxation on cash basis - Zero

Taxation on accrual basis Carrying value

14. Provision Allowable when expense incurred

Tax Base Zero

15. Development cost

Development cost is allowable when incurred

Tax Base Zero

Examples of Taxable Temporary Difference

Accounting rule Tax rule

1. Fair value Adjustments

Fair value adjustment (Upward) Gains are taxable in future (at disposal)
Recognize when increase

IAS 16, Revaluation Gain (OCI)

IAS 40, Fair Value Gain (P&L)

IFRS 9: FVTPL & FVTOCI

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 2. Prepayment (expense of future)
Expenses are allowable on cash basis
C.value of asset excess than
tax base therefore TTD

Relief would be available in

current year but expense would charge in future

3. Loan note issued with issue cost

Issue cost is allowable expense as incurred
Less issue cost from loan notes

Example:

Loan note of $100 for 4 year, issue cost 10.

Years O/B Finance Interest Rollover C/B Tax TTD @ 30% DTL
Cost Base

1 90 0 0 0 91 100 9 x 30% 2.7

2 91 0 0 0 93 100 7 x 30% 2.1

3 93 0 0 0 96 100 4 x 30% 1.2

4 96 0 0 0 100 100 0 x 30% 0

Tax (expense)/ Income:

Difference of previous year deferred tax liability and current year

Years Tax (exp)/income

0 -
1 (2.7)
2 0.6
3 0.9
4 1.2

Double Entries:
Year 1: Dr. Tax expense $2.7
Cr. Def. tax liability $2.7

Year 2: Dr. Def. tax liability $0.6

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 Cr. Tax income $0.6

Year 3: Dr. Def. tax liability $0.9

Cr. Tax income $0.9

Year 4: Dr. Def. tax liability $1.2

Cr. Tax Income $1.2

4. Accelerated capital allowance

E.g. Cost 100, Depreciation 25%

at straight line method Tax rule:

Capital Allowance Y1 60% of cost

Capital Allowance Y2 30% of cost

Capital Allowance Y3 10% of cost

Solution:

Particulars Carrying Tax Base TTD @ DTL Expense/

Value 30% Income

Y1 Cost 100 100

Dep/ Capital Allowance (25) (60)

Net 75 40 35 10.5 (10.5)

Y2 Dep/ CA (25) (20)

Net 50 10 40 12 (2.5)

Y3 Dep/ CA (25) (10)

Net 25 0 25 7.5 4.5

Y4 Dep/ CA (25) 0
Net 0 0 0 0 7.5

5. Compound instrument

Convertible loan $100, Liability This instrument will be treated as liability

component $90 and the residual value is 10.

Solution:

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 Years O/B F.Cost Int Paid Rollover C/B Tax Base TTD DTL @ 30%

1 90 0 0 0 92 100 8 2.4 Exp

2 92 0 0 0 95.5 100 4.5 1.35 Inc

3 95.5 0 0 0 100 100 0 0

6. Income accrued but not yet received

Income is taxable on cash basis
Dr. Interest Receivable $xxx
Cr. Interest Income $xxx

Record when incurred

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Examples of Deductible Temporary Difference

Recognize Deferred Tax Asset up to the availability of “future taxable profits”

Accounting rules Tax rules

1. Carry Forward Losses

2. Fair value adjustment (decrease) Losses are taxable in future (at disposal)

Recognize when decrease

IAS 16 ( Revaluation loss); Profit and loss account

IAS 40 ( Fair value increase); Profit and loss account

IFRS 9; FVTOCI; Other comprehensive income

IFRS 9; FVTPL; Profit and loss account

3. Impairment losses
Relief is available at disposal
i. IAS - 36

Charge at the time of impairment

Carrying value xxx

Recoverable value (xxx) Higher off:

Impairment Loss xxx a) Value in use

b) Net selling price
ii.

4. Accruals (expense pay in future)

Expenses are allowable on cash
C.value of liability excess than
tax base therefore DTD

5. lease (IFRS 16) Leases rentals are allowable expenses when paid

6. Revenue received in advance

Recognized as liability Related income is taxable on cash basis

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Measurement
❖ At tax rates enacted or substantively enacted by the end of the reporting period. Deferred tax is
measured using a tax rate that reflects the manner to recover carrying amount.
❖ When tax rate will be revised, then revised tax rate will be used with prospective effect
❖ Manners of recovery will also affect tax rate
For example; benefits arise due to use or sale of asset
❖ IAS 12 does not account for time value of money (ultimately ignore) because it will create more
complexity and cost benefit analysis don’t permit

Framework
❖ but it is consistent with other standards as it follows SOFP approach
❖ Deferred tax asset and liability does not meet the definition of asset and liability, it is written in
SOFP to follow matching concept,

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