Overview

IAS 12 Income Taxes implements a so-called 'comprehensive balance sheet method' of

accounting for income taxes which recognises both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the
carrying amount of an entity's assets and liabilities. Differences between the carrying amount
and tax base of assets and liabilities, and carried forward tax losses and credits, are recognised,
with limited exceptions, as deferred tax liabilities or deferred tax assets, with the latter also being
subject to a 'probable profits' test.
IAS 12 was reissued in October 1996 and is applicable to annual periods beginning on or after 1
January 1998.

History of IAS 12
Date

Development

Comments

April 1978

Exposure Draft E13 Accounting for Taxes

on Income published

July 1979

IAS 12 Accounting for Taxes on

Incomeissued

January 1989

Exposure Draft E33 Accounting for Taxes

on Income published

1994

IAS 12 (1979) was reformatted

October 1994

Exposure Draft E49 Income

Taxespublished

October 1996

IAS 12 Income Taxes issued

Operative for financial

statements covering periods
beginning on or after 1
January 1988

October 2000

Limited Revisions to IAS 12 published

(tax consequences of dividends)

Operative for financial

statements covering periods
beginning on or after 1
January 2001

31 March 2009

Exposure Draft ED/2009/2 Income

Taxpublished

Comment deadline 31 July

2009
(proposals were not finalised)

10 September 201

Exposure Draft ED/2010/11 Deferred Tax:

Comment deadline 9

Recovery of Underlying Assets (Proposed

amendments to IAS 12)published

November 2010

20 December 201
0

Amended by Deferred Tax: Recovery of

Underlying Assets

Effective for annual periods

beginning on or after 1
January 2012

19 January 2016

Amended by Recognition of Deferred Tax

Assets for Unrealised Losses

Effective for annual periods

beginning on or after 1
January 2017

Related Interpretations
o

IFRIC 7 Applying the Restatement Approach under IAS 29 'Financial Reporting in Hyperinflationary Economies'

SIC-21 Income Taxes Recovery of Revalued Non-Depreciable Assets (SIC-21 was

incorporated into IAS 12 and withdrawn by the December 2010 amendments made
by Deferred Tax: Recovery of Underlying Assets)

SIC-25 Income Taxes Changes in the Tax Status of an Enterprise or its Shareholders

Amendments under consideration by the IASB

o

IAS 12 Accounting for uncertainties in income taxes

Research project Income taxes (longer term)

Summary of IAS 12
Objective of IAS 12
The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes.
In meeting this objective, IAS 12 notes the following:
o

It is inherent in the recognition of an asset or liability that that asset or liability will be
recovered or settled, and this recovery or settlement may give rise to future tax consequences which should be recognised at the same time as the asset or liability

An entity should account for the tax consequences of transactions and other events in
the same way it accounts for the transactions or other events themselves.

Key definitions
[IAS 12.5]
Tax base

The tax base of an asset or liability is the amount attributed to that asset or

liability for tax purposes

Temporary differences

Differences between the carrying amount of an asset or liability in the

statement of financial position and its tax bases

Taxable
temporary differences

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

Deductible
temporary differences

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

Deferred tax liabilities

The amounts of income taxes payable in future periods in respect of taxable

temporary differences

Deferred tax
assets

The amounts of income taxes recoverable in future periods in respect of:

a.

deductible temporary differences

b.

the carryforward of unused tax losses, and

c.

the carryforward of unused tax credits

Current tax
Current tax for the current and prior periods is recognised as a liability to the extent that it has
not yet been settled, and as an asset to the extent that the amounts already paid exceed the
amount due. [IAS 12.12] The benefit of a tax loss which can be carried back to recover current
tax of a prior period is recognised as an asset. [IAS 12.13]
Current tax assets and liabilities are measured at the amount expected to be paid to (recovered
from) taxation authorities, using the rates/laws that have been enacted or substantively enacted
by the balance sheet date. [IAS 12.46]
Calculation of deferred taxes
Formulae
Deferred tax assets and deferred tax liabilities can be calculated using the following formulae:

Temporary difference

Carrying amount

Tax base

Deferred tax asset or liability

Temporary difference

Tax rate

The following formula can be used in the calculation of deferred taxes arising from unused tax
losses or unused tax credits:

Deferred tax asset

Unused tax loss or unused tax credits

Tax rate

Tax bases
The tax base of an item is crucial in determining the amount of any temporary difference, and effectively represents the amount at which the asset or liability would be recorded in a tax-based
balance sheet. IAS 12 provides the following guidance on determining tax bases:
o

Assets. The tax base of an asset is the amount that will be deductible against taxable
economic benefits from recovering the carrying amount of the asset. Where recovery
of an asset will have no tax consequences, the tax base is equal to the carrying
amount. [IAS 12.7]

Revenue received in advance. The tax base of the recognised liability is its carrying
amount, less revenue that will not be taxable in future periods [IAS 12.8]

Other liabilities. 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 [IAS
12.8]

Unrecognised items. If items have a tax base but are not recognised in the statement
of financial position, the carrying amount is nil [IAS 12.9]

Tax bases not immediately apparent. If the tax base of an item is not immediately
apparent, the tax base should effectively be determined in such as manner to ensure
the future tax consequences of recovery or settlement of the item is recognised as a
deferred tax amount [IAS 12.10]

Consolidated financial statements. In consolidated financial statements, the

carrying amounts in the consolidated financial statements are used, and the tax bases
determined by reference to any consolidated tax return (or otherwise from the tax
returns of each entity in the group). [IAS 12.11]

Examples
The determination of the tax base will depend on the applicable tax laws and the entity's expecta-

tions as to recovery and settlement of its assets and liabilities. The following are some basic
examples:
Property, plant and equipment. The tax base of property, plant and equipment that is

depreciable for tax purposes that is used in the entity's operations is the unclaimed tax depreciation permitted as deduction in future periods
Receivables. If receiving payment of the receivable has no tax consequences, its tax base

is equal to its carrying amount

Goodwill. If goodwill is not recognised for tax purposes, its tax base is nil (no deductions

are available)
Revenue in advance. If the revenue is taxed on receipt but deferred for accounting

purposes, the tax base of the liability is equal to its carrying amount (as there are no
future taxable amounts). Conversely, if the revenue is recognised for tax purposes when
the goods or services are received, the tax base will be equal to nil
Loans. If there are no tax consequences from repayment of the loan, the tax base of the

loan is equal to its carrying amount. If the repayment has tax consequences (e.g. taxable
amounts or deductions on repayments of foreign currency loans recognised for tax
purposes at the exchange rate on the date the loan was drawn down), the tax consequence
of repayment at carrying amount is adjusted against the carrying amount to determine the
tax base (which in the case of the aforementioned foreign currency loan would result in
the tax base of the loan being determined by reference to the exchange rate on the draw
down date).

Recognition and measurement of deferred taxes

Recognition of deferred tax liabilities
The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable
temporary differences. There are three exceptions to the requirement to recognise a deferred
tax liability, as follows:
o

liabilities arising from initial recognition of goodwill [IAS 12.15(a)]

liabilities arising from the initial recognition of an asset/liability other than in a business
combination which, at the time of the transaction, does not affect either the accounting
or the taxable profit [IAS 12.15(b)]

liabilities arising from temporary differences associated with investments in subsidiaries, branches, and associates, and interests in joint arrangements, but only to the

extent that the entity is able to control the timing of the reversal of the differences and
it is probable that the reversal will not occur in the foreseeable future. [IAS 12.39]
Example
An entity undertaken a business combination which results in the recognition of goodwill in accordance with IFRS 3 Business Combinations. The goodwill is not tax depreciable or otherwise recognised for tax purposes.
As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly,
a taxable temporary difference arises in respect of the entire carrying amount of the goodwill.
However, the taxable temporary difference does not result in the recognition of a deferred tax
liability because of the recognition exception for deferred tax liabilities arising from goodwill.
Recognition of deferred tax assets
A deferred tax asset is recognised for deductible temporary differences, unused tax losses and
unused tax credits to the extent that it is probable that taxable profit will be available against
which the deductible temporary differences can be utilised, unless the deferred tax asset arises
from: [IAS 12.24]
o

the initial recognition of an asset or liability other than in a business combination

which, at the time of the transaction, does not affect accounting profit or taxable profit.

Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, are only recognised to
the extent that it is probable that the temporary difference will reverse in the foreseeable future
and that taxable profit will be available against which the temporary difference will be utilised.
[IAS 12.44]
The carrying amount of deferred tax assets are reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to
allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be
available. [IAS 12.37]
A deferred tax asset is recognised for an unused tax loss carryforward or unused tax credit if,
and only if, it is considered probable that there will be sufficient future taxable profit against
which the loss or credit carryforward can be utilised. [IAS 12.34]
Measurement of deferred tax
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the
period when the asset is realised or the liability is settled, based on tax rates/laws that have
been enacted or substantively enacted by the end of the reporting period. [IAS 12.47] The measurement reflects the entity's expectations, at the end of the reporting period, as to the manner
in which the carrying amount of its assets and liabilities will be recovered or settled. [IAS 12.51]

IAS 12 provides the following guidance on measuring deferred taxes:

o

Where the tax rate or tax base is impacted by the manner in which the entity recovers
its assets or settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred taxes is consistent with the way in which an asset is recovered or
liability settled [IAS 12.51A]

Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land),
deferred taxes reflect the tax consequences of selling the asset [IAS 12.51B]

Deferred taxes arising from investment property measured at fair value

under IAS 40 Investment Property reflect the rebuttable presumption that the investment property will be recovered through sale [IAS 12.51C-51D]

If dividends are paid to shareholders, and this causes income taxes to be payable at a
higher or lower rate, or the entity pays additional taxes or receives a refund, deferred
taxes are measured using the tax rate applicable to undistributed profits [IAS 12.52A]

Deferred tax assets and liabilities cannot be discounted. [IAS 12.53]

Recognition of tax amounts for the period
Amount of income tax to recognise
The following formula summarises the amount of tax to be recognised in an accounting period:

Tax to recognise for the

period

Current tax for the

period

Movement in deferred tax balances for the

period

Where to recognise income tax for the period

Consistent with the principles underlying IAS 12, the tax consequences of transactions and
other events are recognised in the same way as the items giving rise to those tax consequences. Accordingly, current and deferred tax is recognised as income or expense and
included in profit or loss for the period, except to the extent that the tax arises from: [IAS 12.58]
o

transactions or events that are recognised outside of profit or loss (other comprehensive income or equity) - in which case the related tax amount is also recognised
outside of profit or loss [IAS 12.61A]

a business combination - in which case the tax amounts are recognised as identifiable
assets or liabilities at the acquisition date, and accordingly effectively taken into

account in the determination of goodwill when applying IFRS 3 Business Combinations. [IAS 12.66]
Example
An entity undertakes a capital raising and incurs incremental costs directly attributable to the equity
transaction, including regulatory fees, legal costs and stamp duties. In accordance with the requirements of IAS 32 Financial Instruments: Presentation, the costs are accounted for as a deduction
from equity.
Assume that the costs incurred are immediately deductible for tax purposes, reducing the amount of
current tax payable for the period. When the tax benefit of the deductions is recognised, the current
tax amount associated with the costs of the equity transaction is recognised directly in equity, consistent with the treatment of the costs themselves.
IAS 12 provides the following additional guidance on the recognition of income tax for the
period:
o

Where it is difficult to determine the amount of current and deferred tax relating to
items recognised outside of profit or loss (e.g. where there are graduated rates or tax),
the amount of income tax recognised outside of profit or loss is determined on a reasonable pro-rata allocation, or using another more appropriate method [IAS 12.63]

In the circumstances where the payment of dividends impacts the tax rate or results in
taxable amounts or refunds, the income tax consequences of dividends are considered to be more directly linked to past transactions or events and so are recognised in
profit or loss unless the past transactions or events were recognised outside of profit
or loss [IAS 12.52B]

The impact of business combinations on the recognition of pre-combination deferred

tax assets are not included in the determination of goodwill as part of the business
combination, but are separately recognised [IAS 12.68]

The recognition of acquired deferred tax benefits subsequent to a business combination are treated as 'measurement period' adjustments (see IFRS 3 Business Combinations) if they qualify for that treatment, or otherwise are recognised in profit or loss [IAS
12.68]

Tax benefits of equity settled share based payment transactions that exceed the tax
effected cumulative remuneration expense are considered to relate to an equity item
and are recognised directly in equity. [IAS 12.68C]

Presentation
Current tax assets and current tax liabilities can only be offset in the statement of financial
position if the entity has the legal right and the intention to settle on a net basis. [IAS 12.71]

Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial
position if the entity has the legal right to settle current tax amounts on a net basis and the
deferred tax amounts are levied by the same taxing authority on the same entity or different
entities that intend to realise the asset and settle the liability at the same time. [IAS 12.74]
The amount of tax expense (or income) related to profit or loss is required to be presented in the
statement(s) of profit or loss and other comprehensive income. [IAS 12.77]
The tax effects of items included in other comprehensive income can either be shown net for
each item, or the items can be shown before tax effects with an aggregate amount of income tax
for groups of items (allocated between items that will and will not be reclassified to profit or loss
in subsequent periods). [IAS 1.91]
Disclosure
IAS 12.80 requires the following disclosures:
o

major components of tax expense (tax income) [IAS 12.79] Examples include:
o

current tax expense (income)

any adjustments of taxes of prior periods

amount of deferred tax expense (income) relating to the origination and

reversal of temporary differences

amount of deferred tax expense (income) relating to changes in tax rates or

the imposition of new taxes

amount of the benefit arising from a previously unrecognised tax loss, tax
credit or temporary difference of a prior period

write down, or reversal of a previous write down, of a deferred tax asset

amount of tax expense (income) relating to changes in accounting policies

and corrections of errors.

IAS 12.81 requires the following disclosures:

o

aggregate current and deferred tax relating to items recognised directly in equity

tax relating to each component of other comprehensive income

explanation of the relationship between tax expense (income) and the tax that would
be expected by applying the current tax rate to accounting profit or loss (this can be
presented as a reconciliation of amounts of tax or a reconciliation of the rate of tax)

changes in tax rates

amounts and other details of deductible temporary differences, unused tax losses, and
unused tax credits

temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint arrangements

for each type of temporary difference and unused tax loss and credit, the amount of
deferred tax assets or liabilities recognised in the statement of financial position and
the amount of deferred tax income or expense recognised in profit or loss

tax relating to discontinued operations

tax consequences of dividends declared after the end of the reporting period

information about the impacts of business combinations on an acquirer's deferred tax

assets

recognition of deferred tax assets of an acquiree after the acquisition date.

Other required disclosures:

o

details of deferred tax assets [IAS 12.82]

tax consequences of future dividend payments. [IAS 12.82A]

In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are
required by IAS 1 Presentation of Financial Statements, as follows:
o

Disclosure on the face of the statement of financial position about current tax assets,
current tax liabilities, deferred tax assets, and deferred tax liabilities [IAS 1.54(n) and
(o)]

Disclosure of tax expense (tax income) in the profit or loss section of the statement of
profit or loss and other comprehensive income (or separate statement if presented).
[IAS 1.82(d)]