IAS 12

INCOME TAXES

LEARNING OUTCOMES

KAPP EDGE SOLUTIONS

• Account for current tax liabilities and assets

• Taxable temporary differences on accounting & taxable

profits

• Calculate & record deferred tax amounts in financial

statements

CURRENT TAX LIABILITIES AND

ASSETS

KAPP EDGE SOLUTIONS

• Current tax is the amount of income tax payable

(recoverable) in respect of the taxable profits (tax loss) for

a period. For the purposes of this Standard, income taxes

include all domestic and foreign taxes which are based on

taxable profits.

EXAMPLE

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• K Ltd earns profit of $100,000 and a tax is payable @

30% on profits. During the previous year, it had provided

for $50,000 as tax payable. However, upon assessment,

the amount of tax payable came as $55,000 and was paid

during the current year

EXAMPLE

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• K Ltd earns realised profits of $100,000 during the year

2010. It also has a revaluation gain of $50,000 on

revaluation of its PPE. The company pays taxes on both

realised and unrealised gains @ 30%. Previous year’s

figures of retained earnings and revaluation gain in the

SOFP are $65,000 and $10,000 respectively. Show the

extracts of SOCI and SOCIE.

CONCEPT OF DEFERRED TAXES

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• There are instances when you may have earned the income

today but you required to pay taxes only later. This means

that the income has been earned but tax payment been

deferred, for example, in case of revaluation gains on

assets.

EXAMPLE

KAPP EDGE SOLUTIONS

• K Ltd re-values its assets on 1st January 2011. The carrying

amount of assets is $100,000. The fair value of the assets is

$300,000. This means that there is an unrealised profit of

$200,000 and an increase in the value of assets by the same

amount. This means that if K Ltd were to sell this asset,

cash received is $300,000. However, there may be some tax

applicable, say @ 25% on this gain of $200,000 ($300,000

- $100,000) which is paid at the time of sale. Let us assume

that the asset is sold on 1st January 2012.

• Ignoring depreciation or impairment, draft the profit and

loss account of K Ltd.

ACCOUNTING TREATMENT FOR

DEFERRED TAXES

KAPP EDGE SOLUTIONS

The entry for deferred tax is calculated as under:

For tax expense (tax payable in future)

Debit tax expense xx

Credit deferred tax liability xx

For tax income (tax refundable in future)

Debit deferred tax asset xx

Credit tax expense xx

EXAMPLE

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K Ltd earns interest income of $50,000 during 2011 on the

fixed deposits made. However, the tax is payable only on

receipt of the interest income and not when these accrue. The

money is receivable in 2012. Tax rate is 30%.

EXAMPLE

KAPP EDGE SOLUTIONS

K Ltd has created a provision for warranty expenses of

$10,000 in 2011. This provision is charged to the SOCI and

a current liability amounting to this provision is created.

However, the tax authorities do not permit a provision for

warranty, and will only give a deduction when these costs are

actually incurred.

K Ltd incurs warrant expenses of $10,000 in 2012. In 2011,

K Ltd earned $50,000 before creating this provision. The

profit amount is same also in 2012.

The tax rate is 20%.

TIMING DIFFERENCES

KAPP EDGE SOLUTIONS

Permanent differences

• These differences are permanent in nature and would remain. There does not arise any deferred tax concept on these differences.

• Example K Ltd has incurred a cost of $50,000 on employing people from the minority section of the society. The government gives a tax rebate on 125% on the amount spent on such activities. Hence, the deduction from tax is on a permanent basis. The accounting profit would not be affected later. In this case, there is no deferred tax applicable.

Temporary differences

• Temporary differences are differences which arise due to timing when tax payment happens and when it is created in financial statements. For this reason, temporary differences are also called as timing differences.

TEMPORARY DIFFERENCES

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Taxable temporary differences

• Where the temporary differences result in a tax liability in

the future, that difference is considered as taxable temporary

difference.

Deductible temporary differences

• Where the temporary differences result in a tax deduction in

the future, that difference is considered as deductible

temporary difference.

TAX BASE

KAPP EDGE SOLUTIONS

• Tax base is used to identify the temporary differences. In

fact, under IAS 12 (Income Taxes), temporary differences

are defined as under:

Temporary Difference

= Carrying amount of asset / liability – Tax base.

TAX BASE

KAPP EDGE SOLUTIONS

Temporary difference

= Carrying amount of asset / liability – tax base

Or, Tax base

= Carrying amount of asset / liability – temporary difference

TAX BASE

KAPP EDGE SOLUTIONS

• K Ltd has accrued rental income in books of $500. The

rent is not yet received. However, rental income is taxable

on a receipt basis.

• K Ltd has received $500 as rent in advance. This rent is

taxed on receipt basis.

THANKS

KAPP EDGE SOLUTIONS

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