IAS 12 Income Taxes: Accounting Treatment and Rules

IAS 12 Income Taxes: Objective and Scope

The purpose of International Accounting Standard No. 12 (IAS 12) is to prescribe the accounting treatment for income taxes. The main issue in accounting for income taxes is how to account for the current and future tax consequences of:

• The future recovery (settlement) of the carrying amount of assets (liabilities) that are recognized in an entity's balance sheet; and
• Transactions and other events of the current period that are recognized in the entity's financial statements.

Scope and Key Definitions

This Standard shall be applied in accounting for income taxes.

Key terms used in this Standard are defined as follows:

• Accounting profit: The net profit or loss for a period before deducting tax expense.
• Taxable profit (tax loss): The profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable).
• Tax expense (tax income): The aggregate amount included in the determination of the profit or loss for the period in respect of current tax and deferred tax.
• Current tax: The amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.
• Deferred tax liabilities: The amounts of income taxes payable in future periods in respect of taxable temporary differences.
• Deferred tax assets: The amounts of income taxes recoverable in future periods related to deductible temporary differences, the carryforward of unused tax losses, and the carryforward of unused tax credits.

Recognition of Current Tax Liabilities and Assets

Current tax for current and prior periods shall, to the extent unpaid, be recognized as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess shall be recognized as an asset.

An entity shall recognize a deferred tax liability for all taxable temporary differences associated with investments in subsidiaries, branches and associates, or interests in joint ventures, except to the extent that both of the following conditions are met:

1. The parent, investor, or joint venturer is able to control the timing of the reversal of the temporary difference; and
2. It is probable that the temporary difference will not reverse in the foreseeable future.

An entity shall recognize a deferred tax asset for all deductible temporary differences arising from investments in subsidiaries, branches and associates, or interests in joint ventures, only to the extent that:

1. The temporary difference will reverse in the foreseeable future; and
2. Taxable profit will be available against which the temporary difference can be utilized.

Income Tax Expense Presentation

Tax Expense on Profit or Loss from Ordinary Activities

The tax expense (income) related to the profit or loss from ordinary activities shall be presented in the main body of the statement of profit or loss and other comprehensive income.