IAS 12 INCOME TAXES. Overview

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Milton Wilcox
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1 IAS 12 INCOME TAXES 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 History of IAS 12April 1978 Exposure Draft E13 Accounting for Taxes on Income July 1979 IAS 12 Accounting for Taxes on Income January 1989 Exposure Draft E33 Accounting for Taxes on Income 1994 IAS 12 (1979) was reformatted October 1994 Modified and re-exposed as Exposure Draft E49 Income Taxes October 1996 IAS 12 Income Taxes 1 January 1998 Effective date of IAS 12 (1996) October 2000 Limited Revisions to IAS 12 1 January 2001 Effective date of the October 2000 revisions March 2009 Exposure Draft of a Revised IAS December 2010 IAS 12 amended in Deferred Tax: Recovery of Underlying Assets. Click for More Information 1 January 2012 Effective date of the December 2010 revisions Related Interpretations IFRIC 7 Applying the Restatement Approach under IAS 29 'Financial Reporting in Hyperinflationary Economies' SIC 21 Income Taxes Recovery of Revalued Non-Depreciable Assets (withdrawn by December 2010 amendments) SIC 25 Income Taxes Changes in the Tax Status of an Enterprise or its Shareholders Amendments under consideration by IASB Convergence topics: Income taxes Summary of IAS 12 Objective of IAS 12 The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes. Key definitions [IAS 12.5] Temporary difference: a difference between the carrying amount of an asset or liability and its tax base.

2 Taxable temporary difference: a temporary difference that will result in taxable amounts in the future when the carrying amount of the asset is recovered or the liability is settled. Deductible temporary difference: a temporary difference that will result in amounts that are tax deductible in the future when the carrying amount of the asset is recovered or the liability is settled. 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] Recognition of deferred tax liabilities The general principle in IAS 12 is that deferred tax liabilities should be recognised for all taxable temporary differences. There are three exceptions to the requirement to recognise a deferred tax liability, as follows: [IAS 12.15] liabilities arising from initial recognition of goodwill for which amortisation is not deductible for tax purposes; 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; and liabilities arising from undistributed profits from investments where the entity is able to control the timing of the reversal of the difference and it is probable that the reversal will not occur in the foreseeable future. [IAS 12.39] Recognition of deferred tax assets A deferred tax asset should be 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] the initial recognition of an asset or liability other than in a business combination which, at the time of the transaction, does not affect the accounting or the taxable profit. Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, associates, branches and joint ventures should be 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 should be 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

3 to be utilised. Any such reduction should be subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available. [IAS 12.37] A deferred tax asset should be 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 carryforwards can be utilised. [IAS 12.34] Measurement of deferred tax assets and liabilities Deferred tax assets and liabilities should be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled (liability method), based on tax rates/laws that have been enacted or substantively enacted by the end of the reporting period. [IAS 12.47] The measurement should reflect the entity's expectations, at the balance sheet date, as to the manner in which the carrying amount of its assets and liabilities will be recovered or settled. [IAS 12.51] Deferred tax assets and liabilities should not be discounted. [IAS 12.53] Recognition of tax expense or income Current and deferred tax should be 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] a transaction or event that is recognised directly in equity; or a business combination accounted for as an acquisition. If the tax relates to items that are credited or charged directly to equity, the tax should also be charged or credited directly to equity. [IAS 12.61] If the tax arises from a business combination that is an acquisition, it should be recognised as an identifiable asset or liability at the date of acquisition in accordance with IFRS 3 Business Combinations (thus affecting goodwill). Tax consequences of dividends In some jurisdictions, income taxes are payable at a higher or lower rate if part or all of the net profit or retained earnings is paid out as a dividend. In other jurisdictions, income taxes may be refundable if part or all of the net profit or retained earnings is paid out as a dividend. Possible future dividend distributions or tax refunds should not be anticipated in measuring deferred tax assets and liabilities. [IAS 12.52A] IAS 10 Events after the Reporting Period, requires disclosure, and prohibits accrual, of a dividend that is proposed or declared after the end of the reporting period but before the financial statements were authorised for issue. IAS 12 requires disclosure of the tax consequences of such dividends as well as disclosure of the nature and amounts of the potential income tax consequences of dividends. [IAS 12.82A] Presentation Current tax assets and current tax liabilities should be offset on the balance sheet only if the entity has the legal right and the intention to settle on a net basis. [IAS 12.71]

4 Deferred tax assets and deferred tax liabilities should be offset on the balance sheet only if the entity has the legal right to settle on a net basis and they 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] Disclosure In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are required by IAS 1, as follows: IAS 1 requires disclosures 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)] IAS 1 requires disclosure of tax expense (tax income) on the face of the statement of comprehensive income [IAS 1.82(d)]. IAS 12 requires disclosure of tax expense (tax income) relating to ordinary activities on the face of the statement of comprehensive income [IAS 12.77]. IAS 12 requires that if an entity presents a statement of income, in addition to a statement of comprehensive income, tax expense (income) from ordinary activities should be presented in the statement of income. [IAS 12.77A] IAS requires the following disclosures: major components of tax expense (tax income) [IAS 12.79] Examples include: 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 requires the following disclosures: aggregate current and deferred tax relating to items reported 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, associates, branches, and joint ventures

5 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 the income statement tax relating to discontinued operations tax consequences of dividends declared after the end of the reporting period Other required disclosures: details of deferred tax assets [IAS 12.82] tax consequences of future dividend payments [IAS 12.82A

International Financial Reporting Standards (IFRS)

International Financial Reporting Standards (IFRS) FACT SHEET February 2010 IAS 12 Income Taxes (This fact sheet is based on the standard as at 1 January 2010.) Important note: This fact sheet is based on the requirements of the International Financial