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are recognised in an entity’s statement of financial position; and
(b) transactions and other events of the current period that are recognised in an
entity’s financial statements.’ [IAS 12 Objective].
IAS 12 asserts that it is inherent in the recognition of an asset or liability that the
reporting entity expects to recover or settle the carrying amount of that asset or liability.
The Standard requires an entity to consider whether it is probable that recovery or
settlement of that carrying amount will make future tax payments larger (or smaller)
than they would be if such recovery or settlement had no tax consequences.
[IAS 12 Objective]. If it is probable that such a larger or smaller tax payment will arise, IAS 12
requires an entity, with certain limited exceptions, to recognise a deferred tax liability
or deferred tax asset. [IAS 12.10, 16, 25]. This is often referred to as the ‘temporary
difference approach’ and is discussed further at 3 to 9 and 11 below.
IAS 12 also requires an entity to account for the tax consequences of transactions and
other events in a manner consistent with the accounting treatment of the transactions
and other events themselves. [IAS 12 Objective]. In other words:
• tax effects of transactions and other events recognised in profit or loss are also
recognised in profit or loss;
• tax effects of transactions and other events recognised in other comprehensive
income are also recognised in other comprehensive income;
• tax effects of transactions and other events recognised directly in equity are also
recognised directly in equity; and
• deferred tax assets and liabilities recognised in a business combination affect:
• the amount of goodwill arising in that business combination; or
• the amount of the bargain purchase gain recognised.
This is discussed in more detail at 10 and 12 below.
The standard also deals with:
• the recognition of deferred tax assets arising for unused tax losses or unused tax
credits (see 7.4.6 below);
• the presentation of income taxes in financial statements (see 13 below); and
• the disclosure of information relating to income taxes (see 14 below).
IAS 12 requires an entity to account for the tax consequences of recovering assets or
settling liabilities at their carrying amount in the statement of financial position, not for
the total tax expected to be paid (which will reflect the amount at which the asset or
liability is actually settled, not its carrying amount at the reporting date).
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IAS 12 may require an entity to recognise tax even on an accounting transaction that is
not itself directly taxable, where the transaction gives rise to an asset (or liability) whose
recovery (or settlement) will have tax consequences. For example, an entity might revalue
a property. If (as is the case in many tax jurisdictions) no tax is payable on the revaluation,
one might conclude that it has no tax effect. However, this is not the correct analysis
under IAS 12, which focuses not on whether the revaluation itself is directly taxed, but
rather on whether the profits out of which the increased carrying value of the property
will be recovered will be subsequently taxed. This is discussed further at 8.4 below.
2.2 Overview
The overall requirements of IAS 12 can be summarised as follows:
• determine whether a tax is an ‘income tax’ (see 4 below);
• recognise income tax due or receivable in respect of the current and prior periods
(current tax), measured using enacted or substantively enacted legislation (see 5
below), and having regard to any uncertain tax treatments (see 9 below);
• determine whether there are temporary differences between the carrying amount
of assets and liabilities and their tax bases (see 6 below), having regard to the
expected manner of recovery of assets or settlement of liabilities (see 8 below);
• determine whether there are unused tax losses or investment tax credits;
• determine whether IAS 12 prohibits or restricts recognition of deferred tax on any
temporary differences or unused tax losses or investment tax credits (see 7 below);
• recognise deferred tax on all temporary differences, unused tax losses or
investment tax credits not subject to such a prohibition or restriction (see 7 below),
measured using enacted or substantively enacted legislation (see 8 below), and
having regard to:
• the expected manner of recovery of assets and settlement of liabilities
(see 8 below); and
• any uncertain tax treatments (see 9 below);
• allocate any income tax charge or credit for the period to profit or loss, other
comprehensive income and equity (see 10 below);
• present income tax in the financial statements as required by IAS 12 (see 13 below);
and
• make the disclosures required by IAS 12 (see 14 below).
3 DEFINITIONS
IAS 12 uses the following terms with the meanings specified below. [IAS 12.2, 5].
Income taxes include all domestic and foreign taxes which are based on taxable profits.
Income taxes also include taxes, such as withholding taxes, which are payable by a
subsidiary, associate or joint arrangement on distributions to the reporting entity.
Accounting profit is profit or loss for a period before deducting tax expense.
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Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with
the rules established by the taxation authorities, upon which income taxes are payable
(recoverable).
Tax expense (tax income) is the aggregate amount included in the determination of
profit or loss for the period in respect of current tax and deferred tax.
Current tax is the amount of income taxes payable (recoverable) in respect of the
taxable profit (tax loss) for a period.
Deferred tax liabilities are the amounts of income taxes payable in future periods in
respect of taxable temporary differences (see below).
Deferred tax assets are the amounts of income taxes recoverable in future periods in
respect of deductible temporary differences (see below), together with the
carryforward of unused tax losses and unused tax credits.
Temporary differences are differences between the carrying amount of an asset or
liability in the statement of financial position and its tax base. Temporary differences
may be either:
• taxable temporary differences, which are 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; or
• deductible temporary differences, which are 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.
The tax base of an asset or liability is the amount attributed to that asset or liability for
tax purposes.
IFRIC 23 uses the following terms in addition to those defined in IAS 12: [IFRIC 23.3]
Tax treatments refers to the treatments used or planned to be used by the entity in its
in
come tax filings.
Taxation authority is the body or bodies that decide whether tax treatments are
acceptable under the law. This might include a court.
Uncertain tax treatment is a tax treatment over which there is uncertainty concerning
its acceptance under the law by the relevant taxation authority. For example, an entity’s
decision not to submit any tax filing in a particular tax jurisdiction or not to include
specific income in taxable profit would be an uncertain tax treatment, if its acceptability
is unclear under tax law.
4 SCOPE
IAS 12 should be applied in accounting for income taxes, defined as including:
• all domestic and foreign taxes which are based on taxable profits; and
• taxes, such as withholding taxes, which are payable by a subsidiary, associate or
joint arrangement on distributions to the reporting entity. [IAS 12.1-2].
IAS 12 does not apply to accounting for government grants, which fall within the scope of
IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance,
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or investment tax credits. However, it does deal with the accounting for any temporary
differences that may arise from grants or investment tax credits. [IAS 12.4].
A tax classified as an income tax is accounted for under IAS 12. Taxes other than income
taxes are accounted for under IAS 37 and, in particular, IFRIC 21 or by reference to the
accounting standard most closely related to the item subject to such a non-income tax
(such as IAS 19, in the case of payroll taxes). The classification of a tax as an income tax
affects its accounting treatment in several key respects:
• Deferred tax
IAS 12 requires an entity to account for deferred tax in respect of income taxes.
IAS 37 has no equivalent requirement for other taxes, recognising only legal or
constructive obligations.
• Recognition and measurement
IAS 12 requires tax to be recognised and measured according to a relatively tightly-
defined accounting model. IAS 37 requires a provision to be recognised only
where it is more likely than not that an outflow of resources will occur as a result
of a past obligating event, and measured at the best estimate of the amount
expected to be paid. In the case of uncertain tax treatments (discussed at 9 below)
an approach distinct from that in IAS 37 is required when IFRIC 23 is applied.
• Presentation
IAS 1 – Presentation of Financial Statements – requires income tax assets,
liabilities, income and expense to be presented in separate headings in profit or
loss and the statement of financial position. There is no requirement for separate
presentation of other taxes, but neither can they be included within the captions
for ‘income taxes’.
• Disclosure
IAS 12 requires disclosures for income taxes significantly more detailed than those
required by IAS 37 for other taxes.
4.1
What is an ‘income tax’?
This is not as clear as might be expected, since the definition is circular. Income tax is
defined as a tax based on ‘taxable profits’, which are in turn defined as profits ‘upon
which income taxes are payable’ (see 3 above).
It seems clear that those taxes that take as their starting profit the reported net profit or
loss are income taxes. However, several jurisdictions raise ‘taxes’ on sub-components
of net profit. These include:
• sales taxes;
• goods and services taxes;
• value added taxes;
• levies on the sale or extraction of minerals and other natural resources;
• taxes on certain goods as they reach a given state of production or are moved from
one location to another; or
• taxes on gross production margins.
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Taxes that are simply collected by the entity from one third party (generally a customer
or employee) on behalf of another third party (generally local or national government)
are generally not regarded as ‘income taxes’ for the purposes of IAS 12. This view is
supported by the requirement of IFRS 15 – Revenue from Contracts with Customers –
that amounts which are collected from customers by the entity on behalf of third parties
(for example, some sales taxes) do not form part of the entity’s revenue, [IFRS 15.47], (and,
by implication, are not an expense of the entity either).
In cases where such taxes are a liability of the entity, they may often have some
characteristics both of production or sales taxes (in that they are payable at a particular
stage in the production or extraction process and may well be allowed as an expense in
arriving at the tax on net profits) and of income taxes (in that they may be determined
after deduction of certain allowable expenditure). This makes the classification of such
taxes (as income taxes or not) difficult.
In March 2006 the Interpretations Committee considered whether to give guidance on
which taxes are within the scope of IAS 12. The Committee noted that the definition of
‘income tax’ in IAS 12 (i.e. taxes that are based on taxable profit) implies that:
• not all taxes are within the scope of IAS 12; but
• because taxable profit is not the same as accounting profit, taxes do not need to be
based on a figure that is exactly accounting profit to be within the scope of IAS 12.
The latter point is also implied by the requirement in IAS 12 to disclose an explanation
of the relationship between tax expense and accounting profit – see 14.2 below.
[IAS 12.81(c)]. The Interpretations Committee further noted that the term ‘taxable profit’
implies a notion of a net rather than gross amount, and that any taxes that are not in the
scope of IAS 12 are in the scope of IAS 37 (see Chapter 27).
The Interpretations Committee drew attention to the variety of taxes that exist across
the world and the need for judgement in determining whether some taxes are income
taxes. The Committee therefore believed that guidance beyond the observations noted
above could not be developed in a reasonable period of time and decided not to take a
project on this issue onto its agenda.3 This decision was confirmed in May 2009, when
the Committee concluded that taxes based on tonnage transported or tonnage capacity
or on notional income derived from tonnage capacity, being based on a gross amount,
are not based on ‘taxable profit’ and, consequently, would not be considered income
taxes in accordance with IAS 12.4
The Interpretations Committee’s deliberations reinforce the difficulty of formulating a
single view as to the treatment of taxes. The appropriate treatment will need to be
addressed on a case-by-case basis depending on the particular terms of the tax
concerned and the entity’s own circumstances.
Where a tax is levied on multiple components of net income, it is more likely that the
tax should be viewed as substantially a tax on income and therefore subject to IAS 12.
Even where such taxes are not income taxes, if they are deductible against current or
future income taxes, they may nevertheless give rise to tax assets which do fall within
the scope of IAS 12.
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4.1.1 Levies
A number of governments have introduced levies on certain types of entity, particularly
those in the financial services sector. In many cases the levies are expressed as a
percentage of a measure of revenue or net assets, or some component(s) of revenue or
net assets, at a particular date. Such levies are not income taxes and should be
accounted for in accordance with IAS 37 and IFRIC 21 (see Chapter 27 at 6.8).
4.1.2
Hybrid taxes (including minimum taxes)
Some jurisdictions impose income taxes which are charged as a percentage of taxable
profits in the normal way, but are subject to a requirement that a minimum amount of
tax must be paid. This minimum may be an absolute amount or a proportion of one or
more components of the statement of financial position – for example, total equity as
reported in the financial statements, or total share capital and additional paid-in capital
(share premium). Another form of hybrid arrangement is where the amount of tax
payable is the higher of one measure (based on profits) and another (for example based
on net assets or on total debt and equity).
Such taxes raise the issue of how they should be accounted for. One view would be that
the fixed minimum element is not an income tax and should be accounted for under
IAS 37 and IFRIC 21, but any excess above the fixed minimum element is an income tax
which should be accounted for under IAS 12. Where the hybrid is the higher of a profit
measure and a non-profit measure, only the excess over the liability determined by the
non-profit measure is accounted for as an income tax.
An alternative analysis would be to consider the overall substance of the tax. If it is
apparent that the overall intention of the legislation is to levy taxes based on income,
but subject to a floor, the tax should be accounted for as an income tax in its entirety,
even if the floor would not be an income tax if considered in isolation.
This second approach has a number of advantages over the other. Having established
the overall intention of the legislation, a consistent basis can be applied from period to
period. Under the first view, an entity might have to account for current and deferred
tax in periods where net profit results in a higher liability than the non-profit measure,
and apply a different basis when taxable profits give an assessment lower than the non-