IAS 12 - Income Taxes

IAS 12 – Income Taxes – Script Consultants

IAS 12 Income Taxes deals with both current and deferred taxes on income. Various exceptions and non-ability to reflect the economies of transactions may create difficulty for the users to understand the complex nature of income tax accounting. To solve such a problem, the accounting treatment for taxes is prescribed in International accounting standards 12.

Current Tax

The deductible and taxable amounts for the current year are considered as the current tax expense. The amount to be paid or recovered by the tax authorities can be treated as current tax assets and liabilities for the current period. The authorities refer to the tax rates and laws that have been enacted by the date of financial statements.

Deferred Taxes

The items treated as income and expenses under tax law can be different from International Financial Reporting Standards (IFRS). Deferred taxation came into account to solve this mismatch. The difference between the carrying amount and the tax base is the taxable temporary difference. When this temporary difference is multiplied by the tax rate, you obtain deferred tax or liability. The unused tax loss or credits at a particular tax rate provides us the value of deferred tax assets.

Must Read: IAS 11 Proposes Accounting for Construction Contracts

Tax Bases

The amount of Asset or liability that is recorded on the tax-based balance sheet is known as tax base of an item. It is used to calculate the temporary difference.

1. Asset

The amount which is deductible against taxable economic benefits (carrying amount of asset) is the tax base of an asset.

2. Revenue Received in Advance

Carrying amount which is the tax base of liability less the revenue which is not taxable in future.

3. Other Liabilities

Carrying less any amount that is deducted for some tax purpose.

4. Unrecognized Items

The carrying amount is nil if the tax base of any item is not recognised in the financial statement.

5. Tax Bases That Are Not Apparent Immediately

The tax base should be calculated in such a way that in future it is recognised as a deferred tax amount.

Deferred Tax Liabilities

According to IAS 12, for all the temporary differences deferred tax liability is recognised. Some exceptions are:

  • Liabilities from goodwill.
  • Liabilities from the asset or liability which is other than a business combination.
  • Liabilities that are created due to temporary differences caused by investments in subsidiaries and interests in joint arrangements.

Deferred Tax Assets

For the deductible temporary differences, unused tax credits and tax losses, the deferred tax asset is recognised. The carrying amount is always reviewed and reduced at the end of the reporting period to ensure taxable profit.

How Deferred Tax is Measured?

The tax rates are used to determine deferred tax assets and liabilities. Tax rates are applied to the period when assets are realised and liabilities are settled.

IAS 12 has prescribed the following points related to the measurement of deferred taxes:

  • When the manner in which the company recovers the assets and settles the liabilities has an impact on the tax rate, then the measurement is also consistent with it.
  • When it comes to non-depreciable assets such as revalued land, the deferred tax determines the tax consequences after selling the assets.
  • Fair value is used to calculate the deferred taxes that arise from investment property.
  • In case the payable income taxes are higher or lower because the dividends are paid to shareholders, then the tax rate is used to measure deferred taxes.

Recognition of Income Tax

Annual tax to recognise for the period is the current tax for the period and the movement in deferred tax balances.

The tax consequences of transactions and events are the same as the tax consequences of items.

Mostly all the current and deferred taxes are considered as profit or loss except:

  • Transactions and events that come outside the scope of profit or loss.
  • The business combination where the tax amounts are treated as identifiable assets or liabilities.

Additional Guidance on IAS 12 Income Taxes Recognition

  • The income tax amount that cannot be recognised as profit or loss is determined on pro-rata allocation. [IAS 12.63]
  • If there is any impact on the tax rate due to payment of dividends, then the tax consequences are assumed to be related to the past transactions. [12.52 B]
  • The pre-combination deferred tax assets are recognised separately and are not included in the determination of goodwill. [IAS 12.68]
  • The acquired deferred tax benefits after the business combination are considered as measurement period adjustments. [IAS 12.68]

Also Read About: IAS 7 – Statement of Cash Flows


If the entity has the right and intention to settle the assets and liabilities, then-current tax assets and liabilities can be balanced in the financial statement [IAS 12.71]. The offset of deferred tax and deferred liabilities can be done in the financial statement only if the entity has the right to the current tax amount and deferred tax amount by the same tax authority.

The tax expense or income amount related to profit or loss should be presented in the profit or loss financial statement. [IAS 12.77]


According to IAS 12.80, the following disclosures are necessary:

  • Current tax income.
  • Adjustments done in earlier periods.
  • Deferred tax expense arising from the reversal of temporary differences.
  • Deferred tax expense arising due to change in the tax rate.
  • Benefits through an unrecognized tax credit or tax loss from the prior period.
  • Write down a tax asset.
  • Tax expenses caused due to changes in accounting policies.

As per IAS 12.81, the following disclosures are required:

  • Combined current and deferred tax.
  • Tax related to other comprehensive income.
  • The relationship between tax expense and the expected tax based on the current tax.
  • Changes occurred in the tax rates.
  • All the relevant amounts and necessary details related to temporary differences, unused tax credits and tax losses.
  • Tax related to discontinued operations.
  • If there are any tax consequences arising due to dividends at the end of the reporting period.
  • If there are any impacts of the business combinations on deferred tax assets.

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