International Accounting Standard 12
In April 2001 the International Accounting Standards Board (IASB) adopted IAS 12 Income Taxes, which had originally been issued by the International Accounting Standards Committee in October 1996. IAS 12 Income Taxes replaced parts of IAS 12 Accounting for Income Taxes (issued in July 1979).
In December 2010, the IASB amended IAS 12 to address an issue that arises when entities
apply the measurement principle in IAS 12 to temporary differences relating to investment properties that are measured at fair value. That amendment also incorporated some guidance from a related Interpretation (SIC-21 Income Taxes—Recovery of Revalued Non-Depreciable Assets).
Other IFRSs have made minor consequential amendments to IAS 12. They include IFRS 9
Financial Instruments (issued November 2009 and October 2010), IFRS 11 Joint Arrangements (issued May 2011), Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (issued June 2011), Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (issued October 2012) and IFRS 9 Financial Instruments (Hedge Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013).
INTERNATIONAL ACCOUNTING STANDARD 12
RECOGNITION OF CURRENT TAX LIABILITIES AND CURRENT TAX ASSETS
RECOGNITION OF DEFERRED TAX LIABILITIES AND DEFERRED TAX
Taxable temporary differences
Assets carried at fair value
Initial recognition of an asset or liability
Deductible temporary differences
Initial recognition of an asset or liability
Unused tax losses and unused tax credits
Reassessment of unrecognised deferred tax assets
Investments in subsidiaries, branches and associates and interests in joint
RECOGNITION OF CURRENT AND DEFERRED TAX
Items recognised in profit or loss
Items recognised outside profit or loss
Deferred tax arising from a business combination
Current and deferred tax arising from share-based payment transactions
Tax assets and tax liabilities
Tax expense (income) related to profit or loss from ordinary activities
Exchange differences on deferred foreign tax liabilities or assets
WITHDRAWAL OF SIC-21
FOR THE ACCOMPANYING DOCUMENTS LISTED BELOW, SEE PART B OF THIS
APPROVAL BY THE BOARD OF DEFERRED TAX: RECOVERY OF
UNDERLYING ASSETS (AMENDMENTS TO IAS 12) ISSUED IN DECEMBER
BASIS FOR CONCLUSIONS ILLUSTRATIVE EXAMPLES
Examples of temporary differences
Illustrative computations and presentation
International Accounting Standard 12 Income Taxes (IAS 12) is set out in paragraphs 1-99. All the paragraphs have equal authority but retain the IASC format of the Standard when it was adopted by the IASB. IAS 12 should be read in the context of its objective and the Basis for Conclusions, the Preface to International Financial Reporting Standards and the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors provides a basis for selecting and applying accounting policies in the absence of explicit guidance.
This Standard ('IAS 12 (revised)') replaces IAS 12 Accounting for Taxes on Income ('the original IAS 12'). IAS 12 (revised) is effective for accounting periods beginning on or after 1 January 1998. The major changes from the original IAS 12 are as follows.
The original IAS 12 required an entity to account for deferred tax using either the deferral method or a liability method which is sometimes known as the income statement liability method. IAS 12 (revised) prohibits the deferral method and requires another liability method which is sometimes known as the balance sheet liability method.
The income statement liability method focuses on timing differences, whereas
the balance sheet liability method focuses on temporary differences. Timing differences are differences between taxable profit and accounting profit that originate in one period and reverse in one or more subsequent periods. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
All timing differences are temporary differences. Temporary differences also arise in the following circumstances, which do not give rise to timing differences, although the original IAS 12 treated them in the same way as
transactions that do give rise to timing differences:
subsidiaries, associates or joint arrangements have not distributed their
entire profits to the parent, investor, joint venturer or joint operator;
assets are revalued and no equivalent adjustment is made for tax
the identifiable assets acquired and liabilities assumed in a business combination are generally recognised at their fair values in accordance with IFRS 3 Business Combinations, but no equivalent adjustment is made
for tax purposes.
Furthermore, there are some temporary differences which are not timing
differences, for example those temporary differences that arise when:
the non-monetary assets and liabilities of an entity are measured in its functional currency but the taxable profit or tax loss (and, hence, the tax base of its non-monetary assets and liabilities) is determined in a
non-monetary assets and liabilities are restated under IAS 29 Financial
Reporting in Hyperinflationary Economies; or
the carrying amount of an asset or liability on initial recognition differs
from its initial tax base.
The original IAS 12 permitted an entity not to recognise deferred tax assets and
liabilities where there was reasonable evidence that timing differences would not reverse for some considerable period ahead. IAS 12 (revised) requires an
entity to recognise a deferred tax liability or (subject to certain conditions) asset for all temporary differences, with certain exceptions noted below.
The original IAS 12 required that:
deferred tax assets arising from timing differences should be recognised
when there was a reasonable expectation of realisation; and
deferred tax assets arising from tax losses should be recognised as an asset only where there was assurance beyond any reasonable doubt that future taxable income would be sufficient to allow the benefit of the loss to be realised. The original IAS 12 permitted (but did not require) an entity to defer recognition of the benefit of tax losses until the period of realisation.
IAS 12 (revised) requires that deferred tax assets should be recognised when it is
probable that taxable profits will be available against which the deferred tax asset can be utilised. Where an entity has a history of tax losses, the entity recognises a deferred tax asset only to the extent that the entity has sufficient taxable temporary differences or there is convincing other evidence that sufficient taxable profit will be available.
As an exception to the general requirement set out in paragraph IN3 above, IAS 12 (revised) prohibits the recognition of deferred tax liabilities and deferred tax assets arising from certain assets or liabilities whose carrying amount differs on initial recognition from their initial tax base. Because such circumstances do not give rise to timing differences, they did not result in deferred tax assets or liabilities under the original IAS 12.
The original IAS 12 required that taxes payable on undistributed profits of subsidiaries and associates should be recognised unless it was reasonable to assume that those profits will not be distributed or that a distribution would not give rise to a tax liability. However, IAS 12 (revised) prohibits the recognition of such deferred tax liabilities (and those arising from any related cumulative
translation adjustment) to the extent that:
the parent, investor, joint venturer or joint operator is able to control the
timing of the reversal of the temporary difference; and
it is probable that the temporary difference will not reverse in the
Where this prohibition has the result that no deferred tax liabilities have been
recognised, IAS 12 (revised) requires an entity to disclose the aggregate amount of the temporary differences concerned.
The original IAS 12 did not refer explicitly to fair value adjustments made on a business combination. Such adjustments give rise to temporary differences and IAS 12 (revised) requires an entity to recognise the resulting deferred tax liability or (subject to the probability criterion for recognition) deferred tax asset with a corresponding effect on the determination of the amount of goodwill or bargain purchase gain recognised. However, IAS 12 (revised) prohibits the recognition of deferred tax liabilities arising from the initial recognition of goodwill.
The original IAS 12 permitted, but did not require, an entity to recognise a deferred tax liability in respect of asset revaluations. IAS 12 (revised) requires an entity to recognise a deferred tax liability in respect of asset revaluations.
The tax consequences of recovering the carrying amount of certain assets or
liabilities may depend on the manner of recovery or settlement, for example:
in certain countries, capital gains are not taxed at the same rate as other
taxable income; and
in some countries, the amount that is deducted for tax purposes on sale
of an asset is greater than the amount that may be deducted as depreciation.
The original IAS 12 gave no guidance on the measurement of deferred tax assets
and liabilities in such cases. IAS 12 (revised) requires that the measurement of deferred tax liabilities and deferred tax assets should be based on 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.
The original IAS 12 did not state explicitly whether deferred tax assets and liabilities may be discounted. IAS 12 (revised) prohibits discounting of deferred tax assets and liabilities.
The original IAS 12 did not specify whether an entity should classify deferred tax balances as current assets and liabilities or as non-current assets and liabilities. IAS 12 (revised) requires that an entity which makes the current/non-current distinction should not classify deferred tax assets and liabilities as current assets
The original IAS 12 stated that debit and credit balances representing deferred taxes may be offset. IAS 12 (revised) establishes more restrictive conditions on offsetting, based largely on those for financial assets and liabilities in IAS 32
Financial Instruments: Disclosure and Presentation.2
The original IAS 12 required disclosure of an explanation of the relationship between tax expense and accounting profit if not explained by the tax rates effective in the reporting entity's country. IAS 12 (revised) requires this
explanation to take either or both of the following forms:
a numerical reconciliation between tax expense (income) and the
product of accounting profit multiplied by the applicable tax rate(s); or
a numerical reconciliation between the average effective tax rate and the
applicable tax rate.
IAS 12 (revised) also requires an explanation of changes in the applicable tax rate(s) compared to the previous accounting period.
New disclosures required by IAS 12 (revised) include:
This requirement has been moved to paragraph 56 of IAS 1 Presentation of Financial Statements (as
revised in 2007).
In 2005 the IASB amended IAS 32 as Financial Instruments: Presentation.
in respect of each type of temporary difference, unused tax losses and
unused tax credits:
the amount of deferred tax assets and liabilities recognised; and
the amount of the deferred tax income or expense recognised in
profit or loss, if this is not apparent from the changes in the
amounts recognised in the statement of financial position;
in respect of discontinued operations, the tax expense relating to:
the gain or loss on discontinuance; and
the profit or loss from the ordinary activities of the discontinued
the amount of a deferred tax asset and the nature of the evidence
supporting its recognition, when:
the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the profits arising from the reversal of
existing taxable temporary differences; and
the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to which the deferred tax asset relates.
International Accounting Standard 12
The objective of this Standard is to prescribe the accounting treatment for income taxes. The principal issue in accounting for income taxes is how to
account for the current and future tax consequences of:
the future recovery (settlement) of the carrying amount of assets
(liabilities) that are recognised in an entity's statement of financial
transactions and other events of the current period that are recognised
in an entity's financial statements.
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. If it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, this Standard requires an entity to recognise
a deferred tax liability (deferred tax asset), with certain limited exceptions.
This Standard requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognised in profit or loss, any related tax effects are also recognised in profit or loss. For transactions and other events recognised outside profit or loss (either in other comprehensive income or directly in equity), any related tax effects are also recognised outside profit or loss (either in other comprehensive income or directly in equity, respectively). Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill arising in that business combination or the amount of the bargain
purchase gain recognised
This Standard also deals with the recognition of deferred tax assets arising from unused tax losses or unused tax credits, the presentation of income taxes in the financial statements and the disclosure of information relating to income taxes.
This Standard shall be applied in accounting for income taxes.
For the purposes of this Standard, 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.
This Standard does not deal with the methods of accounting for government grants (see IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance) or investment tax credits. However, this Standard does deal with the accounting for temporary differences that may arise from such grants or investment tax credits.
The following terms are used in this Standard with the meanings
Accounting profit is profit or loss for a period before deducting tax
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.
Deferred tax assets are the amounts of income taxes recoverable in future
periods in respect of:
deductible temporary differences;
the carryforward of unused tax losses; and
the carryforward of 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:
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