IAS 12

ACCOUNTING FOR
INCOME TAX
1
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must be
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Learning Objectives
At the completion of studying this
chapter, you will be able to:

Define tax base and carrying amount

Explain the difference between taxable income
and accounting income
Determine
the
temporary
taxable
and
deductible difference
Calculate the deferred taxes
Identify the presentation and disclosure
requirements related to income taxes
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IFRS requires an entity to recognize, at each

reporting date, the tax consequences expected
to arise in future periods in respect of:
the recovery of its assets,
settlement of its liabilities, and
other transactions and events
of current period recognized at that date.

Basic Concepts
Income tax: It includes all domestic and
foreign taxes which are based on taxable
profits.
Accounting profit: It is profit or loss for a
period determined in accordance with IFRS
Taxable profit (tax loss): It is the profit
(loss) for a period, determined in
accordance with income tax law

Difference
between AI
and TI
Permanent

Temporary

Deductible

Taxable
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Balance Sheet Approach

IAS 12 considers deferred tax by taking a
balance sheet approach to the accounting
problem
It considers temporary differences between
the carrying values and the tax base of
assets and liabilities.

The tax base: The amount attributed to

that asset or liability for tax purposes
Carrying amount: The amount attributed
to that asset or liability as per IFRS

Carryin
Tax
g
Base
Amoun

t
Asset A
10
8

Asset B

10

Liability
A

10

Liability
B

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Assessment

There is taxable temporary

difference (i.e., the entity
recognizes a deferred tax
liability).
There is deductible
temporary difference (i.e.,
the entity recognizes a
deferred tax asset).
There is deductible
temporary difference (i.e.,
the entity recognizes a
deferred tax asset).
There is taxable temporary
difference (i.e., the entity
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recognizes a deferred tax

 Current

tax:
income taxes payable (current tax
expense)or
the amount of income taxes
recoverable (current tax income) in
respect of the tax loss for a period
Tax expense (tax income): It is a
combination of
current

tax expense (current tax

income) and
deferred tax expense (deferred
tax income).
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Example 1
An asset that costs Br 600,000 has a
carrying amount of Br 430,000.
Cumulative depreciation for tax purposes
is Br 200,000 and the tax rate is 30%.
1. What is the tax base of the asset?
2. What is the temporary difference?
3. Is it taxable or deductible temporary
difference?
4. What is the deferred tax?
5. Is it a deferred tax asset or liability?
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Example 1 Solution
1.
2.
3.
4.
5.

TB= Br 600,000- Br 200,000=400,000

TD= Br 430,000- Br 400,000= 30,000
Taxable temporary difference
DT= Br 30,000 x 30%= 9,000
Deferred tax liability

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Example 2
At the beginning of 2013, GK Company
purchased equipment for Br 200,000. The
equipment had a carrying amount of Br
180,000 at the beginning of 2014 and Br
160,000 at the end of 2014. The
accumulated depreciation of the item as per
the income tax law is Br 50,000 at the
beginning of 2014 and Br 80,000 at the end
of 2014. The tax rate is 30%. The accounting
income before tax is Br 700,000 for 2013
and Br 900,000 for 2014.
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1.

2.

3.

4.

5.

What was the tax base of the equipment

for 2013 and 2014?
What is the taxable income for 2013 and
2014?
What is the temporary difference for 2013
and 2014? Is it taxable or deductible
temporary difference?
What is the deferred tax for 2013 and
2014? Is it deferred tax asset or deferred
tax liability?
What is the current tax expense for 2013
and 2014?
What is the deferred tax expense for 2013
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6.

Example 2 Solutions
End of 2013
End of 2014
Carrying value
Br 180,000
Br 160,000
Tax base
150,000
120,000
Taxable temporary difference
30,000
40,000
Deferred tax liability (30%)
9,000
12,000
Taxable income
670,000
860,000

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Journal entry at the end of 2013

Income tax expenseCurrent . 201,000
Income tax expenseDeferred ... 9,000
Deferred tax liability.
.... 9,000
Income taxes payable
201,000

Journal entry at the end of 2014

Income tax expenseCurrent 258,000
Income tax expenseDeferred ......
3,000
Deferred tax
liability.... 3,000
Income taxes payable
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258,000

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Example 3
In 2014, its first year of operation, North
Company has pretax financial income of Br
250,000, a total of Br 28,000 of taxable
temporary differences, and a total of Br
8,000 of deductible temporary differences.
The tax rate is 30%.
In 2015, North Company has pretax
financial income of Br 450,000, aggregate
taxable and deductible temporary
differences of Br 75,000 and Br 36,000,
respectively, and the tax rate remains
30%.
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Required:
1. Determine the taxable income for
2014
2. Make the necessary journal entries for
2014 to record the deferred taxes
3. Determine the taxable income for
2015
4. Make the necessary journal entries for
2015 to record the deferred taxes

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Example 3 Solution
Taxable income for 2014 is computed as
follows:
Pretax financial income
Br 250,000
Taxable temporary differences
(28,000)
Deductible temporary differences
8,000
Taxable income
Br 230,000

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The journal entry to record required amounts

for 2014 is:
Income tax expenseCurrent. 69,000
Income tax expenseDeferred .. 6,000
Deferred tax asset... 2,400
Deferred tax liability.
..8,400
Income taxes payable .
69,000

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Taxable income for 2015 is computed as

follows:
Pretax financial income
Br 450,000
Taxable temporary differences
(75,000)
Deductible temporary differences
36,000
Taxable income
Br 411,000

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For 2015
Deferred tax liability
Required balance at Dec 31, 2015 (Br 75,000
30%)..Br 22,500 Balances at Dec 31,
2014..
8,400
Adjustment required
.. Br 14,100
Deferred tax asset
Required balance at Dec 31, 2015 (Br 36,000
30%)..Br 10,800
Balances at Dec 31,
2014. 2,400
Adjustment required
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Br 8,400

The journal entry to record the deferred

amounts for 2015 is:
Income tax expenseCurrent. 123,300
Income tax expensedeferred.. 5,700
Deferred tax asset.
8,400
Deferred tax liability
14,100
Income taxes payable .
123,300
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Example 4
Loan receivables has a carrying amount of
Br 8 million for which general bad debt
provisions amounting to Br 100,000 have
been made. These provisions have not yet
been deducted for tax purposes but are
expected to give rise to future deductible
amounts.
1.
2.

What is the tax base of the receivable?

Is the temporary difference taxable or
deductible?
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Example 4 Solution
The tax base of the loan receivable is
Br 8.1 million which results in a
deductible temporary difference of Br
100,000.

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Example 5
Current liabilities include accrued fines and
penalties with a carrying amount of Br
500,000. What is the tax base of such
liabilities?

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Example 5 Solution
Since it represents permanent
difference (as fines and penalties are
not deductible for tax purposes), the
tax base of the accrued fines and
penalties is the carrying amount itself
which yields zero difference.

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Assets carried at fair value: The

difference between the carrying amount of a
revalued asset and its tax base is a
temporary difference and gives rise to a
deferred tax liability or asset
Example 6
A company has revalued its property on
December 31, 2015. The revalued amount
was Br 10 million. The carrying value of the
property before revaluation was Br 8 million
and the tax base of the property was Br 6
million. The profit tax rate is 30%.
What is the deferred tax liability on the
property as of that date?
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Example 6 Solution
The carrying value after revaluation is
Br 10 million, the tax base is Br 6
million, and the income tax is 30%;
therefore, the deferred tax liability is
Br 1.2 million (i.e., Br 10 million minus
Br 6 million multiplied by 30%).

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Loss carry-forward
A deferred tax asset shall be
recognized for the carry forward of
unused tax losses if it is probable
(more likely than not) that future
taxable profit will be available against
which the unused tax losses can be
utilized.

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Example 4
An entity has a tax loss of Br 8 million which
can be carried forward for 5 years. The
estimated cumulative taxable profits for the
next five years are Br 6 million. It is
estimated that Br 2 million of the tax loss
will expire unused. The tax rate is 30%.
1. What is the deferred tax asset?
2. What is the journal entry?

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Example 4 Solution
The entity recognizes a deferred tax
asset of Br 1.8 million (Br 6 million x
30%)
Deferred Tax Asset
1,800,000
Deferred Tax Income
1,800,000
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Presentation
Current tax payable is always shown as a
current liability.
Deferred tax items cannot be shown as
current assets or current liabilities.
Current and deferred tax balances are to
be shown as separate items (offsetting is
not allowed).
Deferred tax assets or liabilities should not
be discounted

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Disclosure
current

tax expense (or income);

any adjustments recognized in the period:
for current tax of prior periods;
from a previously unrecognized tax loss
from a previously unrecognized temporary
difference
the amount of deferred tax expense (or
income)
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 an

explanation of the relationship between

tax expense (or income) and accounting
profit
a numerical reconciliation between the
average effective tax rate and the applicable
tax rate

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Questions
&
Comments
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