Accounting for

Taxation

IAS12 INCOME TAXES

 Overview

IAS 12 Income
Taxes

Deferred Tax
Accounting
(temporary Current Tax
Entries
differences)

DT Liabilities DT Assets
 Objective of IAS 12

►How to account for current and future tax

consequences of:
►Current Tax: Transactions and other events of current
period that are recognised in an entity’s accounts
►Deferred Tax: Future recovery (settlement) of
carrying amount of assets (liabilities) recognised in an
entity’s financial statements
 Accounting Entries

►Journal for tax charge:

Dr Income tax expense (Income Statement)
Cr Income tax payable (SoFP current liability)
►Over-provision in prior year reduces tax charge
►Under-provision prior year increases tax charge
 Accounting Entries –
Tax Expense

►Estimated tax liability 31 Dec 20X8 = £180,000

►20X7 estimate was £150,000

►Required: Tax expense (Income Statement) 31

December 20X8, if 20X7 actual tax liability
a) £165,000
b) £140,000
Accounting Entries –
Tax Expense

a) £165,000 = under-provision of £15,000

£
20X8 year end estimate 180,000
Under provision 20X7 15,000
Tax expense 195,000
Accounting Entries –
Tax Expense

b) £140,000 = over-provision of £10,000

£
20X8 year end estimate 180,000
Over provision 20X7 (10,000)
Tax expense 170,000
Permanent and Temporary Differences

►TaxableProfit does not equal

Accounting Profit
►Permanent Differences
Caused
► by certain items not being taxable or allowable
(e.g. entertaining)
Only
► impact on current year accounts
Will
► not reverse over time
Current
► tax credit or charge
 Permanent and Temporary Differences

►Temporary Differences
►Caused by timing differences between tax
and accounting allowances
►Will impact on future years’ accounts
►Will reverse over time
►Deferred tax charge
 Temporary Difference

►Difference between carrying value CV in

accounts and tax base
►If tax base is greater than CV then we have a
deferred tax asset
►If tax base is less than CV then we have a
deferred tax liability
 Temporary Difference

►Common examples:
►Non-current assets
(depreciation vs capital allowances)
►Provisions – bad debts, inventory
►Tax losses carried forward
 Deferred Tax Liabilities-Recognition
► IAS 12 requires:

►A deferred tax liability to be recognised for all

taxable temporary differences
►A taxable temporary difference arises where carrying
value of asset is greater than its tax base [liability
method]
►Liability calculated using full provision
►No discounting
 Deferred Tax Assets - Recognition
► IAS 12 requires:

►A deferred tax asset to be recognised for all

deductible temporary differences
►Arises where carrying value of asset is less than
its tax base
►To extent that it is probable that taxable profit will
be available against which deductible temporary
difference can be utilised
►No discounting
 Accounting for Deferred Tax

►Step one: calculate temporary difference

►Carrying value vs tax base
►Step two: calculate deferred tax
►Temporary difference x future tax rate
►Step three: calculate movement in DT provision
►CY provision less PY provision
Accounting for Deferred Tax

Increase in DT provision:
Dr Income Tax expense
Cr Deferred Tax
Reduction in DT provision:
Dr Deferred Tax
Cr Income Tax expense
 Example 1 Data –
Ignore Deferred Tax

Year 1 Year 2 Year 3

Profit before 1,000 1,000 1,000
depreciation
Depreciation (200) (200) (200)

Profit before 800 800 800

taxation
Asset tax 240 210 150
allowance
Income tax 30% 30% 30%
rate
Working: Calculate Income Tax

Working 1 Year 1 Year 2 Year 3

Accounting 1,000 1,000 1,000
profits
Depreciation 200 200 200

Capital (240) (210) (150)

allowance
Taxable 960 990 1,050
profits
Income tax 288 297 315
@ 30%
 Suggested Solution –
Income Statement

Year 1 Year 2 Year 3

Profit before 1,000 1,000 1,000
tax
Income tax (288) (297) (315)
expense W1
Profit after 712 703 685
taxation
 Example 2 Data –
Including Deferred Tax

Year 1 Year 2 Year 3

Profit before 1,000 1,000 1,000
depreciation
Depreciation (200) (200) (200)
(asset cost £600)

Profit before 800 800 800

taxation
Asset tax 240 210 150
allowance
Income tax 30% 30% 30%
rate
Working 1:
Calculate Income Tax (as before)

Working 1 Year 1 Year 2 Year 3

Accounting 1,000 1,000 1,000
profits
Depreciation 200 200 200

Capital (240) (210) (150)

allowance
Taxable 960 990 1,050
profits
Income tax 288 297 315
@ 30%
 Working 2:
Calculate Deferred Tax

Working 2 Year 1 Year 2 Year 3

Carrying [600 – 200] [400-200] [200-200]

amount 400 200 0
Tax base [600-240] [600-240-210] [600-240-210-150]
360 150 0
Temporary 40 50 0
difference
Deferred tax @ 12 15 0
30%
Increase 12 3 (15)
(Decrease)
 Working 3:
Calculate Income Tax

Working 3 Year 1 Year 2 Year 3

Income tax W1 288 297 315

Deferred tax 12 3 (15)

W2
Income tax 300 300 300
expense
 Suggested Solution –
Income Statement

Year 1 Year 2 Year 3

Profit before 1,000 1,000 1,000
tax
Income tax (300) (300) (300)
expense W3
Profit after 700 700 700
taxation