IAS 12 | Income Taxes

1

Scope

This standard shall be applied in accounting for income taxes, which include all domestic and foreign taxes based on taxable profits, including withholding taxes payable on distributions.

2

Exclusions

The standard does not deal with government grants (IAS 20) or investment tax credits, but it does deal with temporary differences arising from them.

4A

Pillar Two Exception

This standard applies to income taxes arising from tax law enacted to implement Pillar Two model rules (global minimum tax). As an exception, an entity shall neither recognise nor disclose information about deferred tax assets and liabilities related to Pillar Two income taxes.

5

Definitions

Key terms are defined. Accounting profit is profit or loss before tax. Taxable profit is the profit for a period determined by tax rules. Tax expense is the aggregate amount included in profit or loss for current and deferred tax. Temporary differences are differences between the carrying amount of an asset/liability and its tax base.

6

Tax Expense

Tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income).

7

Tax Base of Asset

The tax base of an asset is 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 those benefits are not taxable, the tax base equals the carrying amount.

8

Tax Base of Liability

The tax base of a liability is 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, the tax base is the carrying amount less any amount of revenue not taxable in future periods.

10

Fundamental Principle

Where the tax base is not immediately apparent, the entity should consider the principle that a deferred tax liability (asset) is recognised whenever recovery or settlement of the carrying amount would make future tax payments larger (smaller) than if such recovery had no tax consequences.

11

Consolidated Tax Base

In consolidated statements, temporary differences are determined by comparing carrying amounts in the consolidated statements with the appropriate tax base (determined by reference to a consolidated tax return or separate entity returns, depending on jurisdiction).

12

Current Tax Liability

Current tax for current and prior periods shall, to the extent unpaid, be recognised as a liability.

13

Current Tax Asset

If the amount already paid in respect of current and prior periods exceeds the amount due, the excess shall be recognised as an asset.

15

Deferred Tax Liability

A deferred tax liability shall be recognised for all taxable temporary differences, unless it arises from the initial recognition of goodwill or the initial recognition of an asset/liability in a transaction that is not a business combination and affects neither accounting nor taxable profit (and does not give rise to equal taxable/deductible differences).

16

Rationale for Liability

It is inherent in recognising an asset that its carrying amount will be recovered. If the carrying amount exceeds the tax base, taxable economic benefits will exceed tax deductions, creating a taxable temporary difference and a mandatory deferred tax liability (with limited exceptions).

19

Business Combinations

In a business combination, assets and liabilities are recognised at fair value. If the tax base remains at cost to the previous owner, a temporary difference arises. The resulting deferred tax liability affects goodwill.

20

Assets at Fair Value

Revaluing an asset to fair value (e.g., under IAS 16 or IFRS 9) creates a temporary difference if the tax base is not adjusted, resulting in a deferred tax liability or asset.

21

Goodwill Exception

Goodwill amortisation is often not deductible. The difference between the carrying amount of goodwill and its nil tax base is a taxable temporary difference. However, IAS 12 prohibits recognising the resulting deferred tax liability because goodwill is a residual and recognising the liability would increase the carrying amount of goodwill.

22

Initial Recognition

A temporary difference may arise on initial recognition of an asset or liability (e.g., if cost is not deductible). If this is not a business combination and affects neither accounting nor taxable profit, the entity does not recognise the resulting deferred tax (the initial recognition exemption), to avoid adjusting the carrying amount of the asset/liability.

22A

Lease/Decommissioning

The initial recognition exemption does not apply to transactions that give rise to equal taxable and deductible temporary differences (e.g., recognising a lease liability and right-of-use asset). The entity must recognise the resulting deferred tax liability and asset.

24

Deferred Tax Assets

A deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the difference can be utilised, subject to the initial recognition exemption.

26

Deductible Difference

Examples include retirement benefit costs deducted for tax when paid rather than when accrued, or warranty liabilities deductible on a cash basis. These create deferred tax assets because future settlement will result in tax deductions.

27

Probable Profit

Deferred tax assets are only recognised when it is probable that taxable profits will be available. This requires assessing if tax law restricts sources of taxable profits.

28

Utilisation of Assets

It is probable that taxable profit will be available when there are sufficient taxable temporary differences relating to the same authority and entity which are expected to reverse in the same period.

29

Insufficient Differences

If there are insufficient taxable temporary differences, the asset is recognised only if it is probable the entity will have sufficient taxable profit in the future (ignoring the reversal of the deductible difference itself) or if tax planning opportunities are available.

34

Unused Tax Losses

A deferred tax asset shall be recognised for the carryforward of unused tax losses and credits to the extent that it is probable that future taxable profit will be available against which they can be utilised.

35

History of Losses

The existence of unused tax losses is strong evidence that future taxable profit may not be available. When an entity has a history of recent losses, it recognises a deferred tax asset only if there is convincing other evidence that sufficient taxable profit will be available.

37

Reassessment

At the end of each reporting period, an entity reassesses unrecognised deferred tax assets and recognises them if it has become probable that future taxable profit will allow recovery.

39

Subsidiaries & Associates

An entity recognises a deferred tax liability for taxable temporary differences associated with investments in subsidiaries, branches, associates, and joint arrangements, unless the parent/investor controls the timing of the reversal and it is probable the difference will not reverse in the foreseeable future.

44

Assets from Investments

A deferred tax asset is recognised for deductible temporary differences from investments only to the extent that it is probable the difference will reverse in the foreseeable future and taxable profit will be available.

46

Measurement (Current)

Current tax liabilities/assets are measured at the amount expected to be paid/recovered using tax rates enacted or substantively enacted by the end of the reporting period.

47

Measurement (Deferred)

Deferred tax assets/liabilities are measured at the tax rates expected to apply to the period when the asset is realised or liability settled, based on rates enacted or substantively enacted by the end of the reporting period.

51

Manner of Recovery

Measurement must reflect the tax consequences that would follow from the manner in which the entity expects to recover or settle the carrying amount of its assets and liabilities (e.g., through use or sale, if different rates apply).

51C

Investment Property

For investment property measured at fair value (IAS 40), there is a rebuttable presumption that the carrying amount will be recovered through sale. If not rebutted, deferred tax is measured based on the tax consequences of sale.

53

No Discounting

Deferred tax assets and liabilities shall not be discounted.

56

Review of Assets

The carrying amount of a deferred tax asset is reviewed at the end of each reporting period and reduced to the extent it is no longer probable that sufficient taxable profit will be available.

58

Recognition in P&L

Current and deferred tax are recognised as income or expense in profit or loss, except when the tax arises from a transaction recognised outside profit or loss or a business combination.

61A

Recognition Outside P&L

Current and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised, in the same or different period, outside profit or loss (either in other comprehensive income or directly in equity).

66

Business Combinations

Temporary differences in a business combination affect the amount of goodwill or bargain purchase gain recognised. However, no deferred tax liability is recognised for the initial recognition of goodwill.

68

Acquired Tax Benefits

If acquired deferred tax benefits are not recognised at the acquisition date but are realised later, they are applied to reduce goodwill if recognised within the measurement period due to new facts; otherwise, they are recognised in profit or loss.

68A

Share-Based Payment

If the tax deduction for share-based payments exceeds the cumulative remuneration expense, the excess tax benefit is recognised directly in equity.

71

Offsetting Current

An entity shall offset current tax assets and liabilities if it has a legally enforceable right to set off and intends to settle on a net basis.

74

Offsetting Deferred

An entity shall offset deferred tax assets and liabilities if it has a legally enforceable right to set off current tax and they relate to income taxes levied by the same taxation authority on the same taxable entity (or different entities intending to settle net).

77

Tax Expense Presentation

Tax expense related to profit or loss from continuing operations is presented in the statement of profit or loss.

81

Disclosure Components

Major components of tax expense (e.g., current tax, deferred tax, effect of rate changes) must be disclosed separately.

81c

Reconciliation

An entity must disclose an explanation of the relationship between tax expense and accounting profit, usually via a numerical reconciliation between tax expense and the product of accounting profit multiplied by the applicable tax rate.

88A

Pillar Two Disclosure

An entity must disclose that it has applied the exception regarding Pillar Two income taxes and disclose separately its current tax expense related to Pillar Two.

89

Effective Date

The standard became operative for periods beginning on or after 1 January 1998, with various subsequent amendments affecting specific paragraphs.