IAS 12 Income Taxes - Summary

IAS 12 Income Taxes

IFRS Summaries by Imad Uddin, FRM

Objective

Prescribes the accounting treatment for income taxes (both current and deferred).

Addresses how to account for the current and future tax consequences of:

The future recovery (settlement) of the carrying amount of assets (liabilities) recognized in the statement of financial position.

Transactions and other events of the current period that are recognized in the financial statements.

Types of Income Taxes

Type	Definition	Recognition Basis
Current Tax	The amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.	Calculated using tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.
Deferred Tax	The amount of income taxes payable (recoverable) in future periods as a result of past transactions or events. Arises from temporary differences.	Based on the temporary difference between the carrying amount (accounting base) and the tax base of assets and liabilities.

The core principle is the balance sheet liability method: recognize deferred tax for nearly all temporary differences between the tax base and accounting base of assets/liabilities.

Key Concepts

Tax Base:

Tax Base of an Asset: The amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If benefits are not taxable, tax base = carrying amount.

Tax Base of a Liability: Its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability in future periods. For revenue received in advance, tax base = carrying amount - amount of revenue not taxable in future.

Temporary Differences:

Differences between the carrying amount of an asset or liability in the statement of financial position and its tax base.

Type	Definition	Examples
Taxable Temporary Difference (TTD)	Temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. Leads to a Deferred Tax Liability (DTL).	Accelerated tax depreciation (Carrying Amount > Tax Base for PPE). Development costs capitalized for accounting but expensed for tax. Revaluation of assets upwards (creates difference if revaluation not taxed until sale). Prepaid expenses (deductible for tax when paid, expensed later for accounting).
Deductible Temporary Difference (DTD)	Temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled. Leads to a Deferred Tax Asset (DTA).	Warranty provision recognized for accounting but only deductible for tax when paid. Employee benefits accrued (e.g., leave pay) but only deductible when paid. Research costs expensed for accounting but deductible later for tax. Fair value losses on financial assets recognized in P&L but not deductible until realised.

Recognition Principles

Deferred Tax Liabilities (DTL):

Recognize a DTL for all Taxable Temporary Differences (TTDs), subject to limited exceptions.

Exceptions (Do NOT recognize DTL for TTD arising from):

Initial recognition of goodwill acquired in a business combination.

Initial recognition of an asset or liability in a transaction which:

Is not a business combination; AND

At the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Temporary differences associated with investments in subsidiaries, branches, associates, and JVs, if the parent can control the timing of reversal and it is probable the difference will not reverse in the foreseeable future.

Deferred Tax Assets (DTA):

Recognize a DTA for all Deductible Temporary Differences (DTDs)...

...to the extent that it is probable that taxable profit will be available against which the DTD can be utilized.

Exception: Do NOT recognize DTA for DTD arising from initial recognition of asset/liability in non-business combination not affecting accounting/taxable profit.

The carrying amount of DTA must be reviewed at each reporting date and reduced if it's no longer probable that sufficient taxable profit will be available.

Probability assessment involves judgment about future profitability, considering reversing TTDs and tax planning opportunities.

Measurement of Current and Deferred Tax

Measurement Rules:

Measure current and deferred tax liabilities/assets using the tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date.

"Substantively enacted" means future enactment is virtually certain (e.g., final legislative stage passed).

Deferred tax assets and liabilities should not be discounted to their present value.

Measurement must reflect the tax consequences that would follow from the manner in which the entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Special Considerations (Manner of Recovery):

Investment Property (IAS 40 Fair Value Model): Rebuttable presumption that recovery will be through sale. Measure deferred tax based on tax consequences of sale, unless evidence supports recovery through use.

Non-depreciable Assets (measured using Revaluation Model - IAS 16): Recovery is always presumed to be through sale.

Recognition in Profit or Loss vs OCI vs Equity

General Rule:

Current and deferred tax shall be recognized as income or expense and included in profit or loss for the period.

Exceptions – Recognize Outside Profit or Loss:

If the tax arises from a transaction or event which is recognized, in the same or a different period, directly in Other Comprehensive Income (OCI), the related tax effect is also recognized in OCI. Examples:

Changes in revaluation surplus (IAS 16/IAS 38).

Gains/losses on remeasuring available-for-sale financial assets (under older standards, now FVOCI equity).

Effective portion of gains/losses on cash flow hedges (IFRS 9).

Exchange differences on translating foreign operations (IAS 21).

If the tax arises from a transaction or event which is recognized, in the same or a different period, directly in Equity, the related tax effect is also recognized directly in equity. Examples:

Adjustment to opening retained earnings resulting from a change in accounting policy (retrospective) or correction of error (IAS 8).

Amounts arising on initial recognition of compound financial instruments (IAS 32).

Tax effects related to share-based payment transactions (IFRS 2).

Unused Tax Losses and Tax Credits

Recognition of Deferred Tax Asset (DTA):

Recognize a DTA for the carryforward of unused tax losses and unused tax credits only to the extent that it is probable that future taxable profit will be available against which they can be utilized.

Assessing probability involves considering:

Whether sufficient taxable temporary differences exist relating to the same authority/entity.

Probability of future taxable profits before expiry of losses/credits.

Whether losses resulted from identifiable causes unlikely to recur.

Availability of tax planning opportunities to create taxable profit.

Disclosure:

The amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and credits for which no DTA is recognized.

The nature of the evidence supporting the recognition of DTAs if utilization depends on future taxable profits exceeding profits from reversing existing taxable temporary differences, especially if entity has recent history of losses.

Offsetting

Conditions to Offset Tax Assets and Liabilities:

An entity shall offset current tax assets and liabilities if, and only if, the entity:

Has a legally enforceable right to set off the recognized amounts; AND

Intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

An entity shall offset deferred tax assets and liabilities if, and only if:

It has a legally enforceable right to set off current tax assets against current tax liabilities; AND

The deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either:

The same taxable entity; OR

Different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period expected for settlement/recovery.

Disclosures Required

Disclosure Item	Required?
Major components of tax expense (income) separately disclosed (e.g., current tax, deferred tax origination/reversal, adjustments).	Yes
Aggregate current and deferred tax relating to items charged or credited directly to equity.	Yes
Aggregate current and deferred tax relating to items recognized in OCI.	Yes
Explanation of the relationship between tax expense (income) and accounting profit (Tax Rate Reconciliation). Usually shows numerical reconciliation between average effective rate and applicable rate OR between accounting profit * rate and tax expense.	Yes
Changes in applicable tax rate(s) compared to previous period.	Yes
Amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and credits for which no DTA is recognized.	Yes
Aggregate amount of temporary differences associated with investments in subsidiaries, branches, associates, JVs, for which DTLs have not been recognized.	Yes
For each type of temporary difference and unused tax loss/credit: Amount of DTAs/DTLs recognized in statement of financial position & amount of deferred tax income/expense recognized in P&L.	Yes
Tax relating to discontinued operations.	Yes
Nature of evidence supporting recognition of DTAs based on future profitability (if applicable).	Yes

Quick Summary Table – Key Treatments

Item	Temporary Difference Type	Deferred Tax?	Recognize Where?
Accelerated tax depreciation (Acc C/A > Tax Base)	Taxable (TTD)	DTL	P&L (Generally)
Warranty provision (Acc C/A > Tax Base)	Deductible (DTD)	DTA	P&L (If probable)
Goodwill (Initial recognition in B.C.)	(Exception)	No	N/A
Revaluation surplus (Asset C/A > Tax Base)	Taxable (TTD)	DTL	OCI
Tax loss carryforwards	Deductible (DTD equivalent)	DTA	P&L (If probable)
Interest received in advance (Acc C/A < Tax Base=0)	Taxable (TTD)	DTL	P&L
Development costs capitalized (Acc C/A > Tax Base=0)	Taxable (TTD)	DTL	P&L

Practical Application Checklist

End-of-Period Checks:

Identify all assets and liabilities where Carrying Amount ≠ Tax Base. Calculate temporary differences.

Evaluate the probability of future taxable profits to support recognition of DTAs (especially for tax losses and DTDs).

Apply the correct enacted or substantively enacted tax rates expected to apply when the differences reverse. Consider different rates for different types of income/jurisdictions.

Determine whether the tax expense/income (current & deferred) should be recognized in P&L, OCI, or Equity based on the underlying transaction.

Assess whether offsetting criteria are met for current tax and deferred tax balances.

Ensure all required disclosures are included in the notes.

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_{Imad Uddin is deeply passionate about IFRS and has founded Analyqt, a consulting firm dedicated to helping clients navigate complex accounting and financial reporting challenges. In addition to his advisory work, Imad is committed to education and knowledge-sharing, which led to the creation of IFRSMasterclass.com, a platform offering high-quality IFRS training and resources.}

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