Day 16: IAS 12 – Income Taxes
International Accounting Standard 12 (IAS 12) deals with the accounting treatment of income taxes. The standard provides guidance on how to recognize and measure current and deferred tax assets and liabilities, as well as how to account for tax expenses and benefits.
Current Tax vs. Deferred Tax
Current tax refers to the amount of tax payable or refundable in respect of the taxable profit or loss for the current period. It is calculated based on the taxable profit or loss for the period, using the tax rates and laws that apply to the entity.
Deferred tax, on the other hand, refers to the tax effects of transactions and events that are recognized in the financial statements in one period, but are not expected to be settled until a future period. Deferred tax assets and liabilities are recognized and measured based on the expected future tax consequences of the recovery or settlement of the carrying amount of assets and liabilities.
Recognition of Tax Assets and Liabilities
A tax asset is recognized when it is probable that the future economic benefit will flow to the entity, and the asset can be measured reliably. A tax liability is recognized when it is probable that the future economic outflow will be required to settle the obligation, and the liability can be measured reliably.
The recognition of tax assets and liabilities is based on the following principles:
- Tax assets and liabilities are recognized when they meet the definition of an asset or liability in the Conceptual Framework.
- Tax assets and liabilities are measured based on the expected future tax consequences of the recovery or settlement of the carrying amount of assets and liabilities.
- Tax assets and liabilities are recognized and measured using the tax rates and laws that apply to the entity.
Measurement of Tax Assets and Liabilities
The measurement of tax assets and liabilities is based on the expected future tax consequences of the recovery or settlement of the carrying amount of assets and liabilities. The measurement is done using the tax rates and laws that apply to the entity.
The following are the key considerations in measuring tax assets and liabilities:
- Tax rates: The tax rates used to measure tax assets and liabilities are the rates that apply to the entity in the jurisdiction in which it operates.
- Tax laws: The tax laws used to measure tax assets and liabilities are the laws that apply to the entity in the jurisdiction in which it operates.
- Expected future tax consequences: The expected future tax consequences of the recovery or settlement of the carrying amount of assets and liabilities are based on the entity’s expectations of future events and transactions.
Presentation and Disclosure
The presentation and disclosure of tax assets and liabilities are important aspects of financial reporting. The following are the key considerations:
- Presentation: Tax assets and liabilities are presented separately in the balance sheet, with a clear distinction between current and deferred tax assets and liabilities.
- Disclosure: The entity discloses information about its tax assets and liabilities, including the amount of tax assets and liabilities, the tax rates used to measure them, and the expected future tax consequences of the recovery or settlement of the carrying amount of assets and liabilities.
Example
Suppose an entity has a taxable profit of $100,000 for the current period, and the tax rate is 25%. The entity also has a deferred tax asset of $20,000, which is expected to be recovered in the next period.
The current tax payable would be $25,000 (25% of $100,000), and the deferred tax asset would be recognized and measured based on the expected future tax consequences of the recovery or settlement of the carrying amount of the asset.
The entity would present the current tax payable and the deferred tax asset separately in the balance sheet, and disclose information about the tax rates used to measure them, and the expected future tax consequences of the recovery or settlement of the carrying amount of the asset.
Conclusion
In conclusion, IAS 12 provides guidance on the accounting treatment of income taxes, including recognizing and measuring current and deferred tax assets and liabilities. The standard requires entities to recognize and measure tax assets and liabilities based on the expected future tax consequences of the recovery or settlement of the carrying amount of assets and liabilities, using the tax rates and laws that apply to the entity.
The presentation and disclosure of tax assets and liabilities are important aspects of financial reporting. Entities must disclose information about their tax assets and liabilities, including the amount of tax assets and liabilities, the tax rates used to measure them, and the expected future tax consequences of the recovery or settlement of the carrying amount of assets and liabilities.
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