Purpose and core idea
The objective of IAS 12 is to prescribe the accounting treatment for income taxes. The principal issue is how to account for the current and future tax consequences of:
- The future recovery (or settlement) of the carrying amount of assets (or liabilities) that are recognized in an entity's statement of financial position; and
- Transactions and other events of the current period that are recognized in an entity's financial statements.
IAS 12 deals with two connected tax effects.
Current tax reflects income tax payable or recoverable in respect of taxable profit or tax loss for the current and prior periods.
Deferred tax reflects future income tax consequences that have already been created by assets, liabilities, transactions and events recognised in the financial statements.
The reason both are needed is that IFRS Accounting Standards and tax law do not always recognise income, expenses, assets and liabilities in the same amount or in the same period.
The overall tax expense recognised in the financial statements therefore includes both current tax and deferred tax.
Scope
IAS 12 applies to income taxes, meaning domestic and foreign taxes that are based on taxable profits.
It also includes certain withholding taxes payable by a subsidiary, associate or joint arrangement on distributions to the reporting entity.
The key scope question is whether the tax is based on a net taxable profit measure rather than, for example, gross revenue, production volumes or another non-profit measure.
IAS 12 does not prescribe the accounting for government grants or investment tax credits themselves, although it applies to temporary differences arising from them.
Interest and penalties associated with income taxes require judgement as to whether the particular amount is itself an income tax within IAS 12 or falls under another Standard.
The IAS 12 model at a glance
The core process can be viewed as follows:
1. Calculate current tax from taxable profit or tax loss under the applicable tax law.
2. Determine the tax base of recognised assets and liabilities.
3. Compare carrying amount and tax base to identify temporary differences.
4. Determine whether the temporary difference is taxable or deductible, then apply the recognition requirements and exceptions.
5. Measure recognised deferred tax using the tax rate and tax consequences expected when the asset is recovered or the liability is settled.
6. Recognise the tax effect in the same place as the underlying transaction or event, and then apply the presentation, offsetting and disclosure requirements.
The central deferred-tax logic is:
Future taxable amount → taxable temporary difference → deferred tax liability.
Future tax deduction → deductible temporary difference → potential deferred tax asset.
Current tax
Recognition and measurement
Current tax is based on taxable profit or tax loss, which is determined under the rules established by the taxation authorities rather than under IFRS Accounting Standards.
Current tax liabilities for the current and prior periods are recognised to the extent that tax remains unpaid.
If amounts already paid exceed the amount due, the excess is recognised as a current tax asset.
If a tax loss can be carried back to recover current tax paid in an earlier period, the resulting benefit is recognised as an asset in the period in which the tax loss occurs.
Current tax assets and liabilities are measured at the amount expected to be paid to or recovered from the taxation authorities, using tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.
Accounting profit and taxable profit
Accounting profit and taxable profit can differ because tax law may recognise income or deductions differently from IFRS Accounting Standards.
Typical differences include accounting depreciation versus tax depreciation, provisions that become deductible only when paid, income taxed on a cash basis, non-deductible expenses and non-taxable income.
Current tax is therefore determined from the tax computation, not simply by applying the tax rate to accounting profit.
Why deferred tax arises
Deferred tax is an accounting adjustment. It is not a tax which is currently payable to the tax authorities.
When an entity recognises an asset, it expects to recover its carrying amount.
When it recognises a liability, it expects to settle that liability.
If recovery or settlement will make future tax payments higher or lower than they would be if there were no tax consequences, IAS 12 generally recognises that future tax effect now.
Deferred tax therefore connects the amounts recognised in the statement of financial position with the future tax consequences of recovering or settling those amounts.
Tax base
The tax base is the amount attributed to an asset or liability for tax purposes.
It can be viewed as the tax-law counterpart of the IFRS carrying amount.
Table may be scrolled horizontally on smaller screens.| Item | Practical tax-base question | General result |
|---|---|---|
| Asset | How much of the asset's carrying amount will be deductible for tax purposes when the asset is recovered? | Tax base is generally the future deductible amount. |
| Liability | How much of the liability will generate a tax deduction when it is settled? | Tax base is generally carrying amount less future deductible amounts. |
If recovery of an asset will not be taxable, its tax base is generally equal to its carrying amount.
For revenue received in advance, the tax base of the resulting liability reflects the amount that will not be taxable in future periods.
Compact tax-base examples
Table may be scrolled horizontally on smaller screens.| Item | Carrying amount | Tax treatment | Tax base |
|---|---|---|---|
| PPE with cost 100, accounting depreciation 20 and cumulative tax depreciation 25 | 80 | 75 remains deductible for tax | 75 |
| Interest receivable of 100 taxed only when cash is received | 100 | Full 100 will be taxable on collection | 0 |
| Accrued expense of 100 deductible only when paid | 100 liability | Future deduction of 100 | 0 |
| Accrued expense of 100 already deducted for tax | 100 liability | No future deduction remains | 100 |
Temporary differences
A temporary difference is the difference between the carrying amount of an asset or liability and its tax base.
The deferred tax analysis is a statement-of-financial-position approach because it focuses on carrying amounts and tax bases rather than only on differences between accounting profit and taxable profit for the current period.
A temporary difference is classified by asking what will happen when the related asset is recovered or liability is settled.
Table may be scrolled horizontally on smaller screens.| Carrying amount > tax base | Carrying amount < tax base | |
|---|---|---|
| Asset | Taxable temporary difference → DTL | Deductible temporary difference → potential DTA |
| Liability | Deductible temporary difference → potential DTA | Taxable temporary difference → DTL |
The table is a useful check, but the stronger conceptual test is the future consequence.
If the difference creates future taxable amounts, it is taxable.
If it creates future deductions, it is deductible.
Temporary versus permanent differences
Not every difference between accounting and tax creates deferred tax.
A temporary difference creates a future taxable or deductible amount and ultimately reverses.
A difference that will never create a future taxable or deductible amount is commonly described as a permanent difference and does not create deferred tax.
Examples can include income that is permanently non-taxable or expenses that are permanently non-deductible.
Recognition of deferred tax
Taxable temporary differences
A deferred tax liability is recognised for all taxable temporary differences, unless a specific IAS 12 exception applies.
Deductible temporary differences and deferred tax assets
A deferred tax asset is only recognised to the extent that it is probable that future taxable profits will be available to utilise the benefit.
A deductible temporary difference identifies a potential future tax benefit, but the mathematical tax benefit is not automatically recognised as an asset.
The DTA is recognised only to the extent that sufficient taxable profit is probable.
Sources of taxable profit can include the reversal of existing taxable temporary differences, future taxable profits and qualifying tax-planning opportunities, subject to the applicable tax law.
Unrecognised DTAs are reassessed at each reporting date and recognised later if recovery becomes probable.
Unused tax losses and unused tax credits
A DTA is recognised for carried-forward unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which they can be utilised.
A history of recent tax losses is important negative evidence and may require convincing evidence before recognition is appropriate.
Important recognition exceptions and special cases
Initial recognition of goodwill
IAS 12 does not recognise a deferred tax liability arising from the initial recognition of goodwill.
Non-deductible goodwill may have a carrying amount with a tax base of nil and therefore create a taxable temporary difference, but the DTL arising from the initial recognition of that goodwill is excluded.
Later taxable temporary differences associated with goodwill can require recognition where they do not arise from the initial recognition of goodwill.
Initial recognition of other assets and liabilities
A DTA or DTL is not recognised for a temporary difference arising on the initial recognition of an asset or liability when all of the following conditions apply:
- the transaction is not a business combination;
- at the time of the transaction, it affects neither accounting profit nor taxable profit; and
- at the time of the transaction, it does not give rise to equal taxable and deductible temporary differences.
The final condition is important.
The initial recognition exemption does not apply to transactions that create equal taxable and deductible temporary differences, such as certain leases and decommissioning obligations.
Investments in subsidiaries, branches, associates and joint arrangements
Special recognition rules apply to temporary differences associated with investments in subsidiaries, branches and associates and interests in joint arrangements.
For a taxable temporary difference, a DTL is not recognised only when the investor can control the timing of reversal and it is probable that the difference will not reverse in the foreseeable future.
For a deductible temporary difference, a DTA is recognised only to the extent that it is probable that the difference will reverse in the foreseeable future and taxable profit will be available against which it can be utilised.
Business combinations
Business combinations can create temporary differences because identifiable assets acquired and liabilities assumed are recognised at amounts that may differ from their tax bases.
Resulting DTAs and DTLs that meet the IAS 12 recognition criteria are recognised as identifiable assets and liabilities at the acquisition date and generally affect the amount of goodwill or a bargain purchase gain.
This is separate from the prohibition on recognising a DTL arising from the initial recognition of goodwill itself.
Measuring deferred tax
Once a temporary difference qualifies for recognition, deferred tax is measured using:
The rate used is the tax rate expected to apply when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the reporting date.
Measurement also reflects the tax consequences of the expected manner of recovery or settlement.
If different tax consequences apply depending on whether an asset is recovered through use or sale, the expected manner of recovery can change the measured DTA or DTL.
Investment property measured at fair value
For investment property measured using the IAS 40 fair value model, IAS 12 contains a rebuttable presumption that the carrying amount will be recovered through sale.
The presumption is rebutted when the property is depreciable and is held within a business model whose objective is to consume substantially all of its economic benefits over time rather than through sale.
Deferred taxes are not discounted.
Accounting for movements in deferred tax
The deferred tax calculation establishes the required closing DTA or DTL.
The amount recognised during the period is generally the movement needed to bring the opening deferred tax balance to the closing balance, subject to the requirement to recognise that movement in the same place as the underlying transaction or event.
Where the tax effect is recognised
This principle applies to both current and deferred tax.
For example, if an asset revaluation is recognised in OCI and creates an additional taxable temporary difference, the related deferred tax effect is also recognised in OCI.
Presentation and offsetting
Presentation
Current tax assets and liabilities are presented separately from deferred tax assets and liabilities.
When a classified statement of financial position is presented, deferred tax assets and liabilities are classified as non-current, even if some amounts are expected to reverse within 12 months.
Current tax and deferred tax are not offset against each other.
Offsetting current tax
Current tax assets and liabilities are offset only when the entity:
- has a legally enforceable right to set off the recognised amounts; and
- intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.
Offsetting deferred tax
Deferred tax assets and liabilities are offset only when:
- the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
- the deferred tax balances relate to income taxes levied by the same taxation authority on the same taxable entity, or on different taxable entities that meet IAS 12's net or simultaneous settlement conditions.
Offsetting is therefore a presentation issue considered after the underlying tax balances have been calculated and recognised.
Uncertain tax treatments — IFRIC 23
IFRIC 23 explains how the IAS 12 recognition and measurement requirements are applied when there is uncertainty over whether a taxation authority will accept a tax treatment.
The entity assumes that the taxation authority will examine the treatment and will have full knowledge of all relevant information, so detection risk is ignored.
If it is probable that the taxation authority will accept the treatment, current and deferred tax are measured consistently with that tax treatment.
If acceptance is not probable, the entity reflects the uncertainty using whichever method better predicts the resolution:
- the most likely amount; or
- the expected value of probability-weighted outcomes.
The judgements and estimates are reassessed when facts and circumstances change or new information becomes available.
Pillar Two income taxes
IAS 12 includes specific requirements arising from the OECD Pillar Two model rules.
For Pillar Two income taxes within the scope of IAS 12, there is a mandatory temporary exception from recognising and disclosing information about related deferred tax assets and liabilities.
An entity discloses that it has applied this exception.
When Pillar Two legislation is effective and the entity has related current tax expense or income, that amount is disclosed separately.
When relevant Pillar Two legislation is enacted or substantively enacted but not yet effective, the entity discloses known or reasonably estimable qualitative and quantitative information that helps users understand its exposure.
If that information is not known or cannot be reasonably estimated, the entity states that fact and describes its progress in assessing the exposure.
Disclosures
IAS 12's disclosures are intended to explain both the tax charge recognised for the period and the tax consequences that remain in the statement of financial position.
The principal disclosure areas include:
- major components of tax expense or tax income, including current and deferred tax components;
- the relationship between tax expense and accounting profit, usually through a tax or effective-tax-rate reconciliation;
- recognised DTAs and DTLs by type of temporary difference and by unused tax losses or credits;
- deductible temporary differences, unused tax losses and unused tax credits for which no DTA is recognised, including expiry information where relevant;
- the amount of a recognised DTA and the evidence supporting recognition when recoverability depends on future taxable profits and the entity has a recent history of tax losses;
- relevant tax effects relating to items recognised outside profit or loss and to certain investments; and
- the specific Pillar Two disclosures described above.
Overall accounting outcome
IAS 12 is not limited to calculating the tax currently payable to the taxation authority.
It also identifies future tax consequences embedded in the assets and liabilities already recognised at the reporting date.
The overall accounting outcome can be summarised as:
Taxable profit or loss → current tax.
Carrying amount versus tax base → temporary differences → deferred tax.
Recognition rules and exceptions determine whether the deferred tax balance is recognised.
Enacted or substantively enacted tax law and the expected manner of recovery or settlement determine measurement.
The tax effect follows the underlying transaction into profit or loss, OCI, equity or acquisition accounting.
This produces a tax expense and tax position that reflect both the current tax consequence of the period and the future tax consequences of transactions and balances already recognised in the financial statements.