IAS 

12
Objective of IAS 12

The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes.

In meeting this objective, IAS 12 notes the following:

 It is inherent in the recognition of an asset or liability that that asset or liability will be recovered
or settled, and this recovery or settlement may give rise to future tax consequences which
should be recognised at the same time as the asset or liability

 An entity should account for the tax consequences of transactions and other events in the same
way it accounts for the transactions or other events themselves.

Key definitions

Tax base The tax base of an asset or liability is the amount attributed to that asset
or liability for tax purposes

Temporary Differences between the carrying amount of an asset or liability in the

differences statement of financial position and its tax bases

Taxable Temporary differences that will result in taxable amounts in determining

temporary taxable profit (tax loss) of future periods when the carrying amount of the
differences asset or liability is recovered or settled

Deductible Temporary differences that will result in amounts that are deductible in
temporary determining taxable profit (tax loss) of future periods when the carrying
differences amount of the asset or liability is recovered or settled

Deferred tax The amounts of income taxes payable in future periods in respect of
liabilities taxable temporary differences

Deferred tax The amounts of income taxes recoverable in future periods in respect of:
assets

a. deductible temporary differences

b. the carryforward of unused tax losses, and

  

c. the carryforward of unused tax credits

Current tax

Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet
been settled, and as an asset to the extent that the amounts already paid exceed the amount due. The
benefit of a tax loss which can be carried back to recover current tax of a prior period is recognised as an
asset.

Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from)
taxation authorities, using the rates/laws that have been enacted or substantively enacted by the
balance sheet date.

Calculation of deferred taxes

Formulae

Deferred tax assets and deferred tax liabilities can be calculated using the following formulae:

Temporary difference (Carrying amount – Tax base )

Deferred tax asset or liability (Temporary Difference * Tax rate )

The following formula can be used in the calculation of deferred taxes arising from unused tax losses or
unused tax credits:

Deferred tax asset  =  Unused tax loss or unused tax credits * tax rate

Tax bases

The tax base of an item is crucial in determining the amount of any temporary difference, and effectively
represents the amount at which the asset or liability would be recorded in a tax-based balance sheet.
IAS 12 provides the following guidance on determining tax bases:

 Assets. The tax base of an asset is the amount that will be deductible against taxable economic
benefits from recovering the carrying amount of the asset. Where recovery of an asset will have
no tax consequences, the tax base is equal to the carrying amount.

 
  Revenue received in advance. The tax base of the recognised liability is its carrying amount, less
revenue that will not be taxable in future periods  

 Other liabilities. The tax base of a liability is its carrying amount, less any amount that will be
deductible for tax purposes in respect of that liability in future periods

 Unrecognised items. If items have a tax base but are not recognised in the statement of
financial position, the carrying amount is nil

 Tax bases not immediately apparent. If the tax base of an item is not immediately apparent, the
tax base should effectively be determined in such as manner to ensure the future tax
consequences of recovery or settlement of the item is recognised as a deferred tax amount

 Consolidated financial statements. In consolidated financial statements, the carrying amounts

in the consolidated financial statements are used, and the tax bases determined by reference to
any consolidated tax return (or otherwise from the tax returns of each entity in the group).

Examples

The determination of the tax base will depend on the applicable tax laws and the entity's
expectations as to recovery and settlement of its assets and liabilities. The following are some
basic examples:

 Property, plant and equipment. The tax base of property, plant and equipment that is
depreciable for tax purposes that is used in the entity's operations is the unclaimed tax
depreciation permitted as deduction in future periods

 Receivables. If receiving payment of the receivable has no tax consequences, its tax base is
equal to its carrying amount

 Goodwill. If goodwill is not recognised for tax purposes, its tax base is nil (no deductions
are available)

 Revenue in advance. If the revenue is taxed on receipt but deferred for accounting
purposes, the tax base of the liability is equal to equal to nil (as there are no future taxable
amounts). Conversely, if the revenue is recognised for tax purposes when the goods or
services are received, the tax base will be equal its carrying amount

 Loans. If there are no tax consequences from repayment of the loan, the tax base of the
loan is equal to its carrying amount. If the repayment has tax consequences (e.g. taxable
amounts or deductions on repayments of foreign currency loans recognised for tax
purposes at the exchange rate on the date the loan was drawn down), the tax
consequence of repayment at carrying amount is adjusted against the carrying amount to
determine the tax base (which in the case of the aforementioned foreign currency loan
would result in the tax base of the loan being determined by reference to the exchange
rate on the draw down date).

 
Recognition and measurement of deferred taxes

Recognition of deferred tax liabilities

The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary
differences. There are three exceptions to the requirement to recognise a deferred tax liability, as
follows:

 liabilities arising from initial recognition of goodwill

 liabilities arising from the initial recognition of an asset/liability other than in a business
combination which, at the time of the transaction, does not affect either the accounting or the
taxable profit and at the time of the transaction, does not give rise to equal taxable and
deductible temporary differences.

 liabilities arising from temporary differences associated with investments in subsidiaries,

branches, and associates, and interests in joint arrangements, but only to the extent that the
entity is able to control the timing of the reversal of the differences and it is probable that the
reversal will not occur in the foreseeable future.

Example

An entity undertaken a business combination which results in the recognition of goodwill in

accordance with IFRS 3 Business Combinations. The goodwill is not tax depreciable or otherwise
recognised for tax purposes.

As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly,
a taxable temporary difference arises in respect of the entire carrying amount of the goodwill.
However, the taxable temporary difference does not result in the recognition of a deferred tax
liability because of the recognition exception for deferred tax liabilities arising from goodwill.

Recognition of deferred tax assets

A deferred tax asset is recognised for deductible temporary differences, unused tax losses and unused
tax credits to the extent that it is probable that taxable profit will be available against which the
deductible temporary differences can be utilised, unless the deferred tax asset arises from:

 the initial recognition of an asset or liability other than in a business combination which, at the
time of the transaction, does not affect accounting profit or taxable profit.

Deferred tax assets for deductible temporary differences arising from investments in subsidiaries,
branches and associates, and interests in joint arrangements, are only recognised to the extent that it is
probable that the temporary difference will reverse in the foreseeable future and that taxable profit will
be available against which the temporary difference will be utilised.

The carrying amount of deferred tax assets are reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow
the benefit of part or all of that deferred tax asset to be utilised. Any such reduction is subsequently
reversed to the extent that it becomes probable that sufficient taxable profit will be available.

A deferred tax asset is recognised for an unused tax loss carryforward or unused tax credit if, and only if,
it is considered probable that there will be sufficient future taxable profit against which the loss or credit
carryforward can be utilised.

Measurement of deferred tax

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period
when the asset is realised or the liability is settled, based on tax rates/laws that have been enacted or
substantively enacted by the end of the reporting period. The measurement reflects the entity's
expectations, at the end of the reporting period, as to the manner in which the carrying amount of its
assets and liabilities will be recovered or settled.

IAS 12 provides the following guidance on measuring deferred taxes:

 Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets
or settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred taxes
is consistent with the way in which an asset is recovered or liability settled  

 Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land), deferred
taxes reflect the tax consequences of selling the asset

 Deferred taxes arising from investment property measured at fair value

under IAS 40 Investment Property reflect the rebuttable presumption that the investment
property will be recovered through sale

 If dividends are paid to shareholders, and this causes income taxes to be payable at a higher or
lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are measured
using the tax rate applicable to undistributed profits

Deferred tax assets and liabilities cannot be discounted.

Recognition of tax amounts for the period

Amount of income tax to recognise

The following formula summarises the amount of tax to be recognised in an accounting period:

Tax to recognise for the period  =  Current tax for the period

Where to recognise income tax for the period

Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events
are recognised in the same way as the items giving rise to those tax consequences. Accordingly, current
and deferred tax is recognised as income or expense and included in profit or loss for the period, except
to the extent that the tax arises from:

 transactions or events that are recognised outside of profit or loss (other comprehensive income
or equity) - in which case the related tax amount is also recognised outside of profit or loss

 a business combination - in which case the tax amounts are recognised as identifiable assets or
liabilities at the acquisition date, and accordingly effectively taken into account in the
determination of goodwill when applying IFRS 3 Business Combinations.

Example

An entity undertakes a capital raising and incurs incremental costs directly attributable to the
equity transaction, including regulatory fees, legal costs and stamp duties. In accordance with the
requirements of IAS 32 Financial Instruments: Presentation, the costs are accounted for as a
deduction from equity.

Assume that the costs incurred are immediately deductible for tax purposes, reducing the amount
of current tax payable for the period. When the tax benefit of the deductions is recognised, the
current tax amount associated with the costs of the equity transaction is recognised directly in
equity, consistent with the treatment of the costs themselves.

IAS 12 provides the following additional guidance on the recognition of income tax for the period:

 Where it is difficult to determine the amount of current and deferred tax relating to items
recognised outside of profit or loss (e.g. where there are graduated rates or tax), the amount of
income tax recognised outside of profit or loss is determined on a reasonable pro-rata
allocation, or using another more appropriate method

 In the circumstances where the payment of dividends impacts the tax rate or results in taxable
amounts or refunds, the income tax consequences of dividends are considered to be more
directly linked to past transactions or events and so are recognised in profit or loss unless the
past transactions or events were recognised outside of profit or loss

 The impact of business combinations on the recognition of pre-combination deferred tax assets
are not included in the determination of goodwill as part of the business combination, but are
separately recognised

 The recognition of acquired deferred tax benefits subsequent to a business combination are
treated as 'measurement period' adjustments (see IFRS 3 Business Combinations) if they qualify
for that treatment, or otherwise are recognised in profit or loss

 Tax benefits of equity settled share based payment transactions that exceed the tax effected
cumulative remuneration expense are considered to relate to an equity item and are recognised
directly in equity.
Presentation

Current tax assets and current tax liabilities can only be offset in the statement of financial position if the
entity has the legal right and the intention to settle on a net basis.

Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if
the entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts
are levied by the same taxing authority on the same entity or different entities that intend to realise the
asset and settle the liability at the same time.

The amount of tax expense (or income) related to profit or loss is required to be presented in the
statement(s) of profit or loss and other comprehensive income.

The tax effects of items included in other comprehensive income can either be shown net for each item,
or the items can be shown before tax effects with an aggregate amount of income tax for groups of
items (allocated between items that will and will not be reclassified to profit or loss in subsequent
periods).