IAS 12 - Khasif Adeel With Examples

IAS 12 Summary Notes
IAS 12 Income Taxes
CURRENT TAX
DEFINITIONS
Accounting
is profit or loss for a period before deducting tax expense.
profit
is the profit (loss) for a period, determined in accordance with the rules
Taxable profit
established by the taxation authorities, upon which income taxes are payable
(tax loss)
(recoverable).
Tax expense is the aggregate amount included in the determination of profit or loss for the
(tax income) period in respect of current tax and deferred tax (net).
is the amount of income taxes payable (recoverable) in respect of the taxable
Current tax
profit (tax loss) for a period.
CURRENT TAX LIABILITY / ASSET

Current tax for current and prior periods shall, to the extent unpaid, be
Liability
recognised as a liability.
If the amount already paid in respect of current and prior periods exceeds the
Asset
amount due for those periods, the excess shall be recognised as an asset.
Asset – due The benefit relating to a tax loss that can be carried back to recover current tax of
to carry back a previous period shall be recognised as an asset.
Current tax liabilities (assets) for the current and prior periods shall be measured
at the amount expected to be paid to (recovered from) the taxation authorities,
Measurement
using the tax rates (and tax laws) that have been enacted or substantively
enacted by the end of the reporting period.
EXAMPLE 12A
(a) Falcon Limited (FL) taxable profits for year 2011 are $80,000. The tax for the year 2010
was under provided by $4,000 (being shown in trial balance as Income tax (debit)).
(b) Eagle Limited (EL) taxable profits for year 2011 are $100,000. The tax for the year 2010
was over provided by $6,000 (being shown in trial balance as Income tax (credit)).
The tax rate is 30%.
Required:
Calculate the current tax payable (for SFP) and relevant current tax expense (for SPL) for the year
2011.
Page 1 of 15 (kashifadeel.com)
EXAMPLE 12B
(c) Falcon Limited (FL) taxable profits for year 2011 are $ 80,000. During the year 2011, FL
paid $ 15,000 as advance tax and $ 4,000 extra paid due to under provision of tax for the
year 2010.
(d) Eagle Limited (EL) taxable profits for year 2011 are $ 100,000. During the year 2011, EL
paid $ 43,000 as advance tax and $ 3,000 were paid less due to over provision of tax for
the year 2010.
(e) Shaheen Limited (SL) taxable losses for year 2011 are $ 50,000. During the year 2010, SL
paid tax of $ 14,000 on taxable profits of $ 40,000.
Applicable tax rate is 35% in all of the above cases. Assume that under the relevant tax jurisdiction
the carry back of tax losses is allowed.
Required:
Calculate the current tax payable / receivable and relevant current tax expense / income for the
year 2011.
DEFERRED TAX
TAX BASE
The tax base of an asset or liability is the amount attributed to that asset or liability for
Definition
tax purposes.
Some items have a tax base but are not recognised as assets and liabilities in the
Important statement of financial position. For example, research costs are expensed and
point charged to profit or loss in the period in which they are incurred (IAS 38) but the tax
law may allow these as expense over a longer period.
TAX BASE CALCULATION
Carrying amount XXX

Less: Future taxable benefits (from recovery of carrying value) (XX)
For all
Add: Future deductible amounts XX
assets
Tax base XXX
Carrying amount XXX

For un-
Less: revenue not taxable in future (XX)
earned
Tax base XXX
revenue
Carrying amount XXX

For other Less: future deductible amount (XX)
liabilities Tax base XXX
EXAMPLE 12C
Calculate the tax base for each of the following asset, separately:
(a) A machine cost $100. For tax and accounting purposes, depreciation of $30 has already
been deducted in the current prior periods and the remaining cost will be deductible in
future periods, either as depreciation or through a deduction on disposal. Revenue
generating by using the machine is taxable, any gain on disposal of the machine will be
taxable and any loss on disposal will be deductible for tax purposes.
(b) Interest receivable has a carrying amount of $100. The related interest revenue will be
taxed on a cash basis.
(c) Trade receivables have carrying amount of $100. The related revenue has already been
included in taxable profit (tax loss).
(d) Dividends receivables from a subsidiary have a carrying amount of $100. The dividends are
not taxable.
(e) A loan receivable has a carrying amount of $100. The repayment of the loan will have no
tax consequences.
EXAMPLE 12D
Calculate the tax base for each of the following liability, separately:
(a) Current liabilities include accrued expenses with a carrying amount of $100. The related
expenses will be deducted for tax purposes on a cash basis.
(b) Current liabilities include interest revenue received in advance, with a carrying amount of
$100. The related interest revenue was taxed on a cash basis.
(c) Current liabilities include accrued expenses with a carrying amount of $100. The related
expense has already been deducted for tax purposes.
(d) Current liabilities include accrued fines and penalties with a carrying amount of $100. Fines
and penalties are not deductible for tax purposes.
(e) A loan payable has a carrying amount of $100. The repayment of the loan will have no tax
consequences.
TEMPORARY DIFFERENCES
Temporary differences are differences between the carrying amount of an asset or
Definition liability in the statement of financial position and its tax base. Temporary differences
may be either taxable or deductible.
Taxable Resulting in more tax in future, giving rise to a liability.
Deductible Resulting in tax saving in future, giving rise to an asset.
GUIDE
CA > TB Taxable temporary differences Deferred Tax Liability
Assets
CA < TB Deductible temporary differences Deferred Tax Asset
CA > TB Deductible temporary differences Deferred Tax Asset
Liabilities
CA < TB Taxable temporary differences Deferred Tax Liability
MEASUREMENT – TAX RATE

Deferred tax assets and liabilities shall be 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 (and tax laws)
that have been enacted or substantively enacted by the end of the reporting period.
Deferred tax assets and liabilities shall NOT be discounted.
This is called liability method and is allowed under IAS 12. Another method is deferral method,
which is not allowed under IAS 12 in which tax rates are taken when the temporary difference
arises.
DEFERRED TAX LIABILITIES

Deferred tax liabilities are the amounts of income taxes payable in future periods in
Definition
respect of taxable temporary differences.
A deferred tax liability shall be recognised for all taxable temporary differences,
except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
Recognition (b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).
DEFERRED TAX ASSETS

are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences;
Definition
(b) the carry forward of unused tax losses; and
(c) the carry forward of unused tax credits.
A deferred tax asset shall be recognised for all deductible temporary differences
unless the deferred tax asset arises from the initial recognition of an asset or
liability in a transaction that:
Recognition
(a) is not a business combination; and
(b) at the time of the transaction, affects neither accounting profit nor taxable
profit (tax loss).
A deferred tax asset is recognised to the extent that it is probable that taxable
Limit profit will be available against which the deductible temporary difference, unused
tax losses or tax credit can be utilized.
At the end of each reporting period, an entity reassesses un-recognised deferred
Reassessment tax assets. The entity recognises a previously un-recognised deferred tax asset
of to the extent that it has become probable that future taxable profit will allow the
unrecognized deferred tax asset to be recovered. For example, an improvement in trading
deferred tax conditions may make it more probable that the entity will be able to generate
assets sufficient taxable profit in the future for the deferred tax asset to meet the
recognition criteria.
EXAMPLE 12E
King Limited’s first statement of financial position since incorporation for the year ended December
31, 2011 is as follows (after current tax but before any effects of deferred tax):
Non-current assets $
Land 100
Building 100
Plant 100
300
Current assets
Inventory 50
Trade receivables 40
Cash 20
110
410
Equity
Share capital 200
Reserves (all) 50
250
Non-current liabilities
Long term loan 35
Current liabilities
Trade payables 55
Provision 20
Other payables 50
125
410
(a) The building was purchased for $150 and till now accumulated tax depreciation of $120 has
been charged.
(b) The land is freehold and was purchased for $80 and revalued to $100 during the year. Tax
authorities do not consider revaluation of any asset.
(c) The tax base of provision is nil and of inventories is $60.
(d) Tax base of all other assets and liabilities is equal to their carrying amount.
(e) Unused tax losses are of $20 and applicable tax rate is 20%
Required:
Calculate the deferred tax liability / asset.
EXAMPLE 12F
King Limited’s first statement of financial position since incorporation for the year ended December
31, 2011 is as follows (after current tax but before any effects of deferred tax):
Land 100
Building 100
Plant 100
Luxurious car 100
400
Current assets
Inventory 50
Trade receivables 40
Cash 30
120
520
Equity
Share capital 200
Reserves (all) 50
250
Long term loan 120
Current liabilities
Trade payables 55
Provision 20
Government grant 25
Other payables 50
150
520
(a) The building was purchased for $ 150 and till now accumulated tax depreciation of $ 60 has
been charged.
(b) The land is freehold and was purchased for $ 80 and revalued to $ 100 during the year. Tax
authorities do not consider revaluation of any asset.
(c) The luxurious car was purchased at start of the year for $ 125 and KL intends to use this
throughout its useful life of 5 years and then dispose of it for a residual value of nil.
Depreciation of car is not deductible for tax purposes. On disposal, any capital gain would
not be taxable and any capital loss would not be deductible.
(d) The provision relates to accrued product warranty costs. For tax purposes, the product
warranty costs will not be deductible until the entity pays claims.
(e) The government grant is not taxable, neither when received nor when it will be charged to
profit or loss. The depreciation of related asset is considered as if no grant was received,
for tax purposes.
(f) Inventories have been written down by $ 10 to their NRV.
(g) Tax base of all other assets and liabilities is equal to their carrying amount.
(h) Unused tax losses are of $ 20
(i) Unused tax credit are $ 5
(j) Applicable tax rate is 20%
Required:
Calculate the deferred tax liability / asset.
MEASUREMENT - ADVANCED
Different tax When different tax rates apply to different levels of taxable income, measure
rates using average rates that are expected to apply.
The measurement of deferred tax liabilities and deferred tax assets shall reflect
Reflect the tax the tax consequences that would follow from the manner in which the entity
consequences expects, at the end of the reporting period, to recover or settle the carrying
amount of its assets and liabilities
Present value Deferred tax assets and liabilities shall NOT be discounted.
EXAMPLE 12G
A plant has a carrying amount of $ 100 and a tax base of $ 60. A tax rate of 20% would apply if the
asset were sold and a tax rate of 30% would apply to other income.
Required:
Calculate the amount of deferred tax liability/asset for each of the following cases:
(a) entity expects to sell the asset without further use
(b) entity expects to retain the asset and recover its carrying amount through use.
CURRENT AND DEFERRED TAX CHARGE
Related to Charge to
Items recognised in other Other comprehensive income e.g. tax related to gain or loss on
comprehensive income revaluation should be charged to “revaluation surplus”.
Directly in equity e.g. transfer of incremental depreciation from
“revaluation surplus” to “retained earnings” is made net of
Items recognised directly in deferred tax. Further, change in accounting policy and prior
equity period errors are sometimes adjusted directly in equity and in
such cases the related tax should also be charged directly to
equity.
Business combination Goodwill
Remaining (balancing figure) Profit or loss
EXAMPLE 12H
Sohail Limited (SL) had balance of deferred tax liability on 1 January 2011 of $ 15,000.
During the year 2011, the following transaction occurred:
 SL revalued its freehold land and created a revaluation surplus of $ 20,000. Tax authorities
ignore the revaluation exercise.
 SL corrected a prior period error in its financial statements by adjusting opening retained
earnings by $ 10,000. The corresponding intangible assets were also increased by $
10,000. Tax authorities do not allow such type of intangible assets and allow deduction of
the expense in the period expenditure was made.
 SL acquired a business near year end for $ 1,000,000. The acquired business had net
assets of $ 800,000 (carrying amount and tax base). The fair value of the assets was $
900,000 at the date of acquisition. The assets acquired have been included in SL financial
at fair value.
In addition to above transactions, SL had taxable temporary differences of $ 80,000 and

deductible temporary differences of $ 40,000 as at December 31, 2011. The applicable tax rate is
20%.
Required:
Deferred tax liability as at December 31, 2011 including movements for the year
PRESENTATION
Offset of
current tax Only if entity has legally enforceable right and intention to settle on net (or
assets and simultaneous) basis.
liabilities
Offset of
Only if entity has legally enforceable right and asset / liability relates to income
deferred tax
tax levied by same taxation authority on either the same taxable entity or
assets and
different taxable entities who intend to settle on net (or simultaneous) basis.
liabilities
SHARE OPTION SCHEMES
Accounting for share options schemes involves recognising a remuneration

Tax relief on
expense in the income statement throughout the vesting period. However, tax
share option
relief is normally granted at a later date when the options are actually exercised
schemes
giving rise to a deferred tax asset until tax relief is obtained.
IFRS 2 requires that at each reporting period date, an estimate of the future tax
IFRS 2
relief available should be based upon the intrinsic value of the option (= fair
requirement
value – exercise price.)
If the amount of the tax deduction (or estimated future tax deduction) exceeds
the amount of the related cumulative remuneration expense, this indicates that
the tax deduction relates also to an equity item.
Charge
The amount up to related cumulative remuneration expense is charged to profit
or loss and the excess is charged to equity.
EXAMPLE 12I
On 1 January 2002, an entity granted 5,000 share options to an employee vesting two years later
on 31 December 2003. The fair value of each option measured at the grant date was $3.
Tax law in the jurisdiction in which the entity operates allows a tax deduction of the intrinsic value
of the options on exercise. The intrinsic value of the share options was $1.20 at 31 December
2002 and $3.40 at 31 December 2003 on which date the options were exercised.
Assume a tax rate of 30%.
Required
Show the deferred tax accounting treatment of the above transaction at 31 December 2002, 31
December 2003 (before exercise), and on exercise.
UNREMITTED EARNINGS
A temporary difference arises when the carrying amount of investments in

subsidiaries, branches, associates or joint ventures is different from the tax base.
The carrying amount in consolidated financial statements is the investor’s share of

Issue the net assets of the investee, plus purchased goodwill, but the tax base is usually
the cost of the investment.
Unremitted earnings (i.e. undistributed profits) in the accounts of subsidiaries,

branches, associates or joint ventures, will lead to a temporary difference.
Deferred tax should be recognised on these temporary differences unless:
 the parent, investor or venturer is able to control the timing of the reversal of
Treatment the temporary difference
 it is probable that the temporary difference will not reverse in the foreseeable
future.
ANSWER 12A
(a) FL
Current tax payable (in SFP) $24,000 (i.e. $80,000 x 30%)
Current tax expense (in IS) $28,000 (i.e. $24,000 + 4,000)
(b) EL
Current tax payable (in SFP) $30,000 (i.e. $100,000 x 30%)
Current tax expense (in IS) $24,000 (i.e. $30,000 – 6,000)
ANSWER 12B
Under /
Current Current
Taxable (over) Current tax
Tax period Advance tax
Sr.# profit / provision payable /
rate expense / tax expense /
(loss) prior (receivable)
(income) (income)
years
$ % $ $ $ $ $
(a) 80,000 35% 28,000 4,000 15,000 13,000 32,000
(b) 100,000 35% 35,000 (3,000) 43,000 (7,000) 32,000
(c) (40,000)* 35% (14,000) - - (14,000) (14,000)
*Maximum loss that can be carried back is $ 40,000. The remaining loss of $10,000 shall be
carried forwarded.
ANSWER 12C
(a) (b) (c) (d) (e)

Carrying amount 70 100 100 100 100
Less: Future taxable benefits (70) (100) 0 0 0
Add: Future Deductible amounts 70 0 0 0 0
Tax base 70 Nil 100 100 100
ANSWER 12D
(a) (b) (c) (d) (e)

Carrying amount 100 100 100 100 100
Less: Future deductible amount (100) 0 0 0 0
Less: Revenue not taxable in future 0 (100) 0 0 0
Tax base Nil Nil 100 100 100
ANSWER 12E
Carrying Tax Temp. Tax Deferred Liab. /

T/(D)
Asset / Liab. amount base Diff. rate tax (Asset)
$ $ $ % $
Land 100 80 20 T 20% 4 Liability
Building 100 30 70 T 20% 14 Liability
Plant 100 100 0
Inventory 50 60 10 D 20% (2) Asset
Receivable 40 40 0
Cash 20 20 0
Long term loan 35 35 0
Trade payable 55 55 0
Provision 20 0 20 D 20% (4) Asset
Other payables 50 50 0
Unused tax losses 20 20% (4) Asset
Net Deferred tax liability as at December 31, 2011 8
The $4 shall be charged to other comprehensive income (revaluation surplus) and the remaining
$4 shall be charged to profit or loss.
ANSWER 12F
Carrying Tax Temp. Tax Deferred Liab. /

T/(D)
Asset / Liab. amount base Diff. rate tax (Asset)
$ $ $ % $
Land 100 80 20 T 20% 4 Liability
Building 100 90 10 T 20% 2 Liability
Plant 100 100 0
Luxurious car 100 0 100 T 20% Note
Inventory 50 60 10 D 20% (2) Asset
Receivable 40 40 0
Cash 30 30 0
Long term loan 120 120 0
Trade payable 55 55 0
Provision 20 0 20 D 20% (4) Asset
Grant 25 0 25 D 20% Note
Other payables 50 50 0
Unused tax losses 20 20% (4) Asset

Unused tax credit (5) Asset
Total DT asset as at December 31, 2011 (15)

Total DT liability as at December 31, 2011 6
Net Deferred tax asset as at December 31, 2011 (9)
Tax base calculation:

Assets
Building $ 100 – 100 + 90 = $ 90 or $ 150 cost – $ 60 accumulated depreciation = $ 90
Land $ 100 – 100 + 80 = $ 80
Luxurious car $ 100 – 100 + 0 = $ 0
Inventory $ 50 – 50 + 60 = $ 60
Liabilities – unearned revenue

Grant $ 25 – $ 25 = $ 0
Liabilities – others
Provision $ 20 – $ 20 = $ 0
Note: Temporary differences arising from the initial recognition of asset or liability are not taken
into account while recognising deferred tax asset or liability.
ANSWER 12G
Part (a)
Temporary difference = $ 100 – $ 60 = $ 40 Taxable
Applicable tax rate = 20%
Deferred tax liability = $ 40 x 20% = $ 8
Part (b)
Temporary difference = $ 100 – $ 60 = $ 40 Taxable
Applicable tax rate = 30%
Deferred tax liability = $ 40 x 30% = $ 12
ANSWER 12H
Carryin
Tax Temp. Tax Deferred
g T/(D) Liab. / (Asset)
Asset / Liab. base Diff. rate tax
amount
$ $ $ % $
Land 20,000 T 20% 4,000 Liability – RS
Intangible assets 10,000 0 10,000 T 20% 2,000 Liability – RE
Goodwill 100,000 0 100,000 Note
Acquired assets 900,000 800,000 100,000 T 20% 20,000 Liability – GW
Other 80,000 T 20% 16,000 Liability
Other 40,000 D 20% (8,000) Asset
Net Deferred tax liability as at December 31, 2011 34,000
Deferred tax liability

Date Particulars $ Date Particulars $
31.12.11 Profit or loss (β) 7,000 01.01.11 Balance b/d 15,000
31.12.11 OCI (Revaluation) 4,000
31.12.11 Retained earnings 2,000
31.12.11 Balance c/d 34,000 31.12.11 Goodwill 20,000
41,000 41,000
ANSWER 12I
On 31/12/2002
Carrying amount $ Nil
Tax base of liability (5,000 options x $1.2 intrinsic value x ½ years [tax deduction] $3,000
Temporary difference – deductible $3,000
Tax rate 30%
Deferred tax asset $900
Cumulative remuneration expense 5,000 options x $3 FV at grant date x ½ years 7,500

Excess of tax deduction over cumulative remuneration expense 0
Journal entry
Dr. Deferred tax asset $900
Cr. P&L $900
On 31/12/2003 (before exercise)

Carrying amount $ Nil
Tax base of liability (5,000 options x $3.40 intrinsic value x 2/2 years [tax deduction] $17,000
Temporary difference – deductible $17,000
Tax rate 30%
Deferred tax asset $5,100
Cumulative remuneration expense 5,000 options x $3 FV at grant date x 2/2 years 15,000
Excess of tax deduction over cumulative remuneration expense 2,000
Tax on excess $2,000 x 30% - to be charged to equity 600

Journal entry
Dr. Deferred tax asset $4,200 <$5,100 - $900>
Cr. Equity $600
Cr. P&L $3,600
On exercise, the deferred tax asset shall become current tax asset.
Dr. Current tax asset $5,100
Cr. Deferred tax asset $5,100
Dated: 17 August 2016
IAS 12 Question 1
QUESTION 1: IAS 12 INCOME TAXES
On 30 June 2014 Francesca Company had a credit balance on its deferred tax account of
$1,340,600 all in respect of the difference between depreciation and capital allowances. During
the year ended 30 June 2015 the following transactions took place.
(1) $45 million was charged against profit in respect of depreciation. The tax computation
showed capital allowances of $50 million.
(2) Interest receivable of $50,000 was reflected in profit for the period. However, only $45,000
of interest was actually received during the year. Interest is not taxed until it is received.
(3) Interest payable of $32,000 was treated as an expense for the period. However, only
$28,000 of interest was actually paid during the year. Interest is not an allowable expense
for tax purposes until it is paid.
(4) During the year Francesca incurred development costs of $ 500,600, which it has
capitalized. Development costs are an allowable expense for tax purposes in the period in
which they are paid.
(5) Land and buildings with a net book value of $4,900,500 were revalued to $6 million.
The tax rate is 30%. Francesca has a right of offset between its deferred tax liabilities and its
deferred tax assets.
Required:
Calculate the deferred tax liability on 30 June 2015. Show where the increase or decrease in the
liability in the year would be charged or credited.
IAS 12 Question 1
ANSWER – QUESTION 1: IAS 12 INCOME TAXES
Particulars CA TB TD Rate DT L/A Charge

$000 $000 $000 % $000
Opening balance 1,340.6 L
Accumulated depreciation 45,000 50,000 5,000 T 30% 1,500 L PL
Interest receivable 5 0 5T 30% 1.5 L PL
Interest payable 4 0 4D 30% 1.2 A PL
Development costs 500.6 0 500.6 T 30% 150.18 L PL
Land & Building 6,000 4,900.5 1,099.5 30% 329.85 L OCI
Closing Balance 3,320.93 L
IAS 12 Question 2
Year 2015
Shep was incorporated on 1 January 2015. In the year ended 31 December 2015 the company
made a profit before taxation of $ 121,000 during the period Shep made the following capital
additions.
$
Plant 48,000
Motor vehicles 12,000
During the period:

Accounting depreciation 11,000
Tax depreciation 15,000
Tax is chargeable at a rate of 30%.
Required:
(a) Calculate the corporate income tax liability for the year ended 31st December 2015.
(b) Calculate the deferred tax balance that is required in the statement of financial position as
at 31st December 2015.
(c) Prepare a note showing the movement on the deferred tax account and thus calculate the
deferred tax charge for the year ended 31st December 2015
(d) Prepare the statement of profit or loss note which shows the compilation of the tax expense
for the year ended 31st December 2015
Year 2016
The following information is relevant for the year ended 31st December 2016.
(a) Capital transactions

$
Depreciation charged 14,000
Tax allowances 16,000
(b) Interest payable

On 1st April 2016 the company issued $25,000 of 8% convertible loan stock. Interest is paid
in arrears on 30th September and 30th March. Assume that tax relief on interest expense is
only given when the interest is paid.
(c) Interest receivable

On 1st April Shep purchased debentures having a nominal value of $4,000. Interest at 15%
pa is receivable on 30th September and 30th March. Assume that interest income is not
taxed until the cash is actually received.
(d) Provision for warranty

In preparing the financial statements for the year to 31st December 2016, Shep has
recognized a provision for warranty payments in the amount of $1,200. This has been
correctly recognized in accordance with IAS 37 and the amount has been expensed.
Assume that tax relief on the warranty cost is only given when the expense is paid.
IAS 12 Question 2
(e) Fine
During the period Shep has paid a fine of $6,000. The fine is not tax deductible.
(f) Further information

The accounting profit before tax for the year was $125,000.
Required:
for the year ended 31st December 2016.
(e) Prepare a note to reconcile the product of the accounting profit and the tax rate to the tax
expense for year ended 31st December 2016.
Year 2017
The following information is relevant for the year ended 31st December 2017.
(a) Interest payable/Interest receivable

Shep still has $25,000 of 8% convertible loan stack in issue and still retains its holding in
the debentures purchased in 2004.
(b) Provision for warranty

During the year Shep had paid out $500 in warranty claims and provided for a further
$2,000.
(c) Development costs

During 2017 Shep has capitalized development expenditure of $17,800 in accordance with
the provisions of IAS 38. Assume that tax relief on this expenditure is taken in full in the
period in which it is incurred.
(d) Further information

$
Profit before taxation 175,000
Depreciation charged 18,500
Tax allowable depreciation 24,700
(e) Entertainment
Shep paid for a large office party during 2017 to celebrate a successful first two years of the
business. This cost $20,000. Assume that this expenditure is not tax deductible.
IAS 12 Question 2
Required
expense for year ended 31st December 2017
Year 2017 (Rate Change)

Using the information provided for “Year 2017” and assumes that Shep is subject to a higher tax
rate of 34% in 2017.
Required:
expense for year ended 31st December 2017.
IAS 12 Question 2
Year 2015
Part (a)
Corporate income tax liability – year ended December 31, 2015 $
Accounting profit 121,000
Add: accounting depreciation 11,000
133,000
Less: tax depreciation (15,000)
Taxable profit 117,000
Tax payable @ 30% 35,100
Part (b& c)

$
Assets 49,000 45,000 4,000 T 30% 1,200 L PL
Closing Balance 1,200 L
Opening Balance 0L
Charge to PL for the year 1,200
Part (d)
Statement of profit or loss note $
Current tax 35,100
Deferred tax 1,200
36,300
Year 2016
Part (a)
Add: Accounting depreciation 14,000
Interest payable 500
Provision 1,200
Fine 6,000
146,700
Less: Tax allowance (16,000)
Interest receivable (150)
IAS 12 Question 2
Part (b& c)
$
Tangible Assets 35,000 29,000 6,000 T 30% 1,800 L PL
Interest payable 500 0 500 D 30% 150 A PL
Interest receivable 150 0 150 T 30% 45 L PL
Provision 1,200 0 1,200 D 30% 360 A PL
Opening balance 1,200 L
Charge to PL for the year 135
Part (d)
Current tax 39,165
Deferred tax 135
39,300
Part (e)
Tax reconciliation $
Tax @ 30% on accounting profit 37,500
Tax effect of the fine (6,000 x 30%) 1,800
Tax expense 39,300
Year 2017
Part (a)
Add: Accounting depreciation 18,500
Interest payableN1 -
Provision 2,000
Entertainment 20,000
215,500
Less: Tax allowance (24,700)
Interest receivableN1 -
Development costs (17,800)
Provision (500)
N1: There is no adjustment to profit for the interest paid and the interest receivable. Consider
the interest payable. The tax authority will disallow the closing accrual but will allow last
year’s accrual (that has been paid in this year) as a deduction. These amounts are equal so
there is no net effect. Similar comments can be made about the interest receivable.
IAS 12 Question 2
Part (b & c)
$
Provision 2,700 0 2,700 D 30% 810 A PL
Development expenditure 17,800 0 17,800 T 30% 5,340 L PL
Charge to PL for the year 6,750
Part (d)
Current tax 51,750
Deferred tax 6,750
58,500
Part (e)
Tax effect of entertainment (20,000 x 30%) 6,000
Tax expense 58,500
Year 2017 (Rate Change)
Part (a)
Taxable profit (as before) 172,500
Part (b& c)
$
Provision 2,700 0 2,700 D 34% 918 A PL
Development expenditure 17,800 0 17,800 T 34% 6,052 L PL
Adjustment due to change in rate (1,335 x 4/30) 178 L
Opening balance restated 1,513 L
Charge to PL for the year due to temporary difference 7,650
IAS 12 Question 2
Part (d)

Current tax 58,650
Deferred tax due to temporary difference 7,650
Deferred tax due to change in tax rate 178
7,828
66,478
Part (e)
Tax effect of entertainment (20,000 x 34%) 6,800
Increase in opening deferred tax due to change of tax rate 178
Tax expense 66,478
IAS 12 Question 3
Waqar Limited has provided you the following information for determining its tax and deferred tax
expense for the year 2014 and 2015:
(i) During the year ended December 31, 2015, the company’s accounting profit before tax
amounted to $40 million (2014: $30 million). The profit includes capital gains amounting to
$10 million (2014: $8 million) which are exempt from tax.
(ii) The accounting written down values of the fixed assets, as at December 31, 2013 were as
follows:
Accumulated Written
Cost
Depreciation down value
$m $m $m
Machinery 200 25 175
Furniture and fittings 50 10 40
No additions or disposals of fixed assets were made in the years 2014 and 2015.
(i) Machinery was acquired on January 1, 2013 and is being depreciated on straight- line basis
over its estimated useful life of 8 years. The tax base of machinery as at December 31,
2013 was $90 million.
(ii) Furniture and fittings are also depreciated on the straight line basis at the rate of 10% per
annum. The tax base of furniture and fittings as at December 31, 2013 was $40.5 million.
(iii) Normal rate of tax depreciation on both types of assets is 10% on written down value.
(iv) The tax rates for 2013, 2014 and 2015 were 35%, 35% and 30% respectively
Required:
For each year:
(a) Calculate the corporate income tax liability for the year.
at the year end.
deferred tax charge for the year.
(d) Prepare the statement of profit or loss note which shows the compilation of the tax
expense.
expense.
IAS 12 Question 3
Part (a)
2015 2014
$ in million
Accounting profit before tax 40.00 30.00
Add: Accounting depreciation 30.00 30.00
Less: Exempt capital gain (10.00) (8.00)
Tax depreciation (11.75) (13.05)
Taxable profits 48.25 38.95
Tax rate X 30% X 35%
Current tax @ 30% ; 35% 14.475 13.6325
Part (b) and (c)

CA TB Temp. Diff Tax DTL / DTA
$m $m $m rate $m
2013 Property, plant and equipment 215 130.50 84.50 T 35% 29.575 L
Difference – Deferred tax income 5.9325
Difference – Deferred tax income 8.8525
Part (d)
2015 2014
$ in million
Profit before tax 40.00 30.00
Tax Current tax 14.475 13.6325
Deferred tax (8.8525) (5.9325)
(5.6225) (7.70)
34.3775 22.30
Part (e)
2015 2014
$ in million
Profit before tax x tax rate 12 10.50
Less: effect of exempt income [10 x 30%] ; [8 x 35%] (3) (2.80)
Less: effect of change in tax rates [23.6425 x 5/35] (3.3775)
Tax expense (part d) 5.6225 7.70
Working 1
Accounting Tax
Property, plant and equipment Machine F&F Total Machine F&F Total
$ in million
As at 31 December 2013 175 40 215 90 40.50 130.50
Depreciation – 2014 (25) (5) (30) (9) (4.05) (13.05)
As at 31 December 2014 150 35 185 81 36.45 117.45
Depreciation – 2015 (25) (5) (30) (8.1) (3.65) (11.75)
As at 31 December 2015 125 30 155 72.9 32.80 105.70
IAS 12 Question 4

Given below is the statement of profit or loss of Shakir Industries for the year ended December 31,
2015:
2015
$m
Sales 143.00
Cost of goods sold (96.60)
Gross profit 46.40
Operating expenses (28.70)
Operating profit 17.70
Other income 3.40
Profit before interest and tax 21.10
Financial charges (5.30)
Profit before tax 15.80
Following information is available:

(i) Operating expenses include an amount of $0.7 million paid as penalty to SECP on non-
compliance of certain requirements of the Companies Ordinance, 1984.
(ii) During the year, the company made a provision of $2.4 million for gratuity. The actual
payment on account of gratuity to outgoing members was $1.6 million.
(iii) Lease payments made during the year amounted to $0.65 million which include financial
charges of $0.15 million. As at December 31, 2015, obligations against assets subject to
finance lease stood at $1.2 million.
The movement in assets held under finance lease is as follows:

$m
Opening balance – 01/01/2015 2.50
Depreciation for the year (0.7)
Closing balance – 31/12/2015 1.80
The details of owned fixed assets are as follows:

Accounting Tax
$m $m
Opening balance – 01/01/2015 12.50 10.20
Purchased during the year 5.3 5.3
Depreciation for the year (1.1) (1.65)
Closing balance – 31/12/2015 16.70 13.85
(iv) Capital work-in-progress as on December 31, 2015 includes financial charge of $2.3 million
which have been capitalized in accordance with IAS-23 “Borrowing Costs”. However, the
entire financial charges are admissible, under the Income Tax Ordinance, 2001.
(v) Deferred tax liability and provision for gratuity as at January 1, 2015 was $0.55 million and
$0.7 million respectively.
(vi) Applicable income tax rate is 35%.
Required:
Based on the available information, compute the current and deferred tax expenses for the year
ended December 31, 2015.
IAS 12 Question 4

$ in million
Accounting profit before tax 15.80
Add: Penalty to SECP – disallowed 0.70
Provision for gratuity for the year 2.40
Interest on lease 0.15
Accounting depreciation – leased assets 0.70
Accounting depreciation – other assets 1.10
Less: Lease payments (0.65)
Tax depreciation – other assets (1.65)
Interest included in capital work in progress (2.30)
Gratuity paid (1.60)
Taxable profits 14.65
Current tax @ 35% 5.13
CA TB Temp. Diff
$m $m $m
Assets held under finance lease 1.80 0 1.80 T
Assets – owned 16.70 13.85 2.85 T
Interest element in CWIP 2.30 0 2.30 T
Provision for gratuity [b/d 0.7 + PL 2.4 – Cash 1.6] 1.50 0 1.50 D
Liability under finance lease 1.20 0 1.20 D
Net 4.25 T
Deferred tax Liability @ 35% 1.4875

Deferred tax expense $1.4875 – 0.55 opening 0.9375
IAS 12 Question 5
Mars Limited (ML) is engaged in the manufacturing of chemicals. On July 1, 2014 it obtained a
motor vehicle on lease from a bank. Details of the lease agreement are as follows:
(i) Cost of motor vehicle is $1,600,000.
(ii) Installments of $480,000 are to be paid annually in advance.
(iii) The lease term and useful life is 4 years and 5 years respectively.
(iv) The interest rate implicit in the lease is 13.701%.
ML follows a policy of depreciating the motor vehicles over their useful life, on the straight-line
method. However, the tax department allows only the lease payments as a deduction from taxable
profits.
The tax rate applicable to the company is 30%. ML’s accounting profit before tax for the year
ended June 30, 2015 is $4,900,000.
There are no temporary differences other than those evident from the information provided above.
Required:
(a) Prepare journal entries in the books of Mars Limited for the year ended June 30, 2015 to
record the above transactions including tax and deferred tax.
(b) Prepare a note to the financial statements related to disclosure of finance lease liability, in
accordance with the requirements of IFRS.
(Ignore comparative figures.)
IAS 12 Question 5

Part (a)
Date Particulars Dr. $ Cr. $
01.07.14 Motor vehicle – cost 1,600,000
Liability under finance lease 1,600,000
(capitalize the leased asset and corresponding liability)
01.07. 14 Liability under finance lease 480,000
Bank 480,000
(Recording of first lease payment)
30.06. 15 Interest expense 153,451
Interest payable 153,451
(W3)
30.06.15 Depreciation 400,000
Accumulated depreciation 400,000
(Rs. 1,600,000 / 4 years assuming that ownership is not be
transferred)
30.06.15 Tax expense 1,492,035
Current tax payable 1,492,035
(W1)
30.06.15 Deferred tax asset 22,035
Tax expense 22,035
(W2)
W1 Current tax $
Accounting profit 4,900,000
Add: Depreciation on leased motor vehicle 400,000
Add: Interest expense on lease 153,451
Less: Lease payment (480,000)
Taxable profit 4,973,451
Currrent tax @ 30% 1,492,035
CA TB Temp. Diff
W2 Deffered tax $ $ $
Motor Vehicle 1,200,000 0 1,200,000 T
Obligation under finance lease (Non current + Current) 1,120,000 0 1,120,000 D
Interest payable 153,451 0 153,451 D
Net 73,451 D
Deferred tax asset @30% 22,035
IAS 12 Question 5
Part (b)
Statement of comprehensive Income (extracts) 2015
$
Depreciation expense 400,000
Interest expense 153,451
Statement of financial position (extracts) 2015

Motor Vehicle under finance lease 1,600,000
Accumulated depreciation (400,000)
1,200,000
Liability under finance lease 793,451
Current liabilities
Liability under finance lease 326,549
Interest payable 153,451
Disclosure (Reconciliation) 2015

MLP Interest PV
Up to 1 year 480,000 153,451 326,549
2-5 years 960,000 β166,549 793,451
More than 5 year -
Total 1,440,000 320,000 1,120,000
Working 3 Finance Lease (Payments in advance) Schedule

Liability
Payment Principal Liability after Interest @
at Rental
time Element payment 13.701%
beginning
T $
01.07.14 1,600,000 480,000 (480,000) 1,120,000 153,451
01.07.15 1,120,000 480,000 (326,549) 793,451
IAS 12 Question 6
Bilal Engineering Limited earned profit before tax amounting to $50 million during the year ended
December 31, 2015. The accountant of the company has submitted draft accounts to the Finance
Manager along with the following information which he believes could be useful in determining the
amount of taxation:
(i) Accounting deprecation for the year is $10 million which includes $1 million charged on the
difference between cost and revalued amount.
(ii) A motor vehicle costing $1 million was taken on lease in 2014. Related clauses of the lease
agreement are as under:
 Annual installment of $0.3 million is payable annually in advance.
 The lease term and useful life is 4 years and 5 years respectively.
 The interest rate implicit in the lease is 13.701% per annum.
 Accounting depreciation on the leased vehicle is included in the depreciation referred
to in para (i) above.
(iii) Tax depreciation on the assets owned by the company is $7 million.
(iv) Research and development expenses of $15 million were incurred in 2013 and are being
amortized over a period of 15 years. For tax purposes research and development expenses
are allowed to be written off in 10 years. However, 10% of these expenses were not
verifiable and have not been claimed.
(v) Expenses amounting to $0.25 million were disallowed in 2012.Out of these $0.15 million
were allowed in appeal, during the current year. The company had initially expected that the
full amount would be allowed but has decided not to file a further appeal.
(vi) The applicable tax rate is 35%.
Required:
(a) Prepare journal entries in respect of taxation, for the year ended December 31, 2015.
(b) Prepare a reconciliation to explain the relationship between tax expense and accounting
profit as is required to be disclosed under IAS 12 Income Taxes.
IAS 12 Question 6
Date Particulars Dr. $m Cr. $m

31.12.15 Tax expense 18.392
Current tax payable 18.392
(W1)
31.12.15 Deferred tax asset 0.857
Tax expense 0.857
(W2)
Working 1 $ in million
Add: Accounting depreciation 10.000
Interest on lease W3 0.096
Accounting amortization of R & D 1.000
Less: Tax depreciation (7.000)
Lease payment (0.300)
Tax amortization of R &D (1.350)
Taxable profits 52.446
Current tax @ 35% - Current year 18.357

Current tax @35% - prior year on $0.100 (not appealed) 0.035
Total 18.392
Working 2 CA TB Temp. Diff

$m $m $m
Accumulated depreciation 10.000 7.000 3.000 D
Interest payable 0.096 0.000 0.096 D
Liability under finance lease 0.700 0.000 0.700 D
Accumulated amortisation 1.000 1.350 0.350 T
Leased asset 1.000 0 1.000 T
2.446 D
Deferred tax asset @ 35% 0.857
Working 3 Finance Lease (Payments in advance) Schedule

Payment Liability at Principal Liability after Interest @
Rental
time beginning Element payment 13.701%
T $
01.01.14 1.000 0.300 (0.300) 0.700 0.096
Relationship between tax charge and accounting profit $m

Tax on accounting profit @ 35% 17.500
Tax on expenses disallowed 0.035
Actual tax charge Rs. 18.392 – 0.857 17.535
IAS 12 Question 7

The following information relates to Galaxy International (GI), a listed company, which was
incorporated on January 1, 2014.
(i) The (loss) / profit before taxation for the years ended December 31, 2014 and 2015
amounted to ($1.75 million) and $23.5 million respectively.
(ii)
(iii) The details of accounting and tax depreciation on fixed assets is as follows:
2015 2014
$m $m
Accounting depreciation 15 15
Tax depreciation 6 45
(iv) In 2014, GI accrued certain expenses amounting to $2 million which were disallowed by the
tax authorities. However, these expenses are expected to be allowed on the basis of
payment in 2015.
(v) GI earned interest on Special Investment Bonds amounting to $1.0 million and $1.25 million
in the years 2014 and 2015 respectively. This income is exempt from tax.
(vi) GI operates an unfunded gratuity scheme. The provision during the years 2014 and 2015
amounted to $. 1.7 million and $. 2.2 million Respectively. No payment has so far been
made on account of gratuity.
(vii) The applicable tax rate is 35%.
Required:
Prepare a note on taxation for inclusion in the company’s financial statements for the year ended
December 31, 2015 giving appropriate disclosures relating to current and deferred tax expenses
including a reconciliation to explain the relationship between tax expenses and accounting profit.
IAS 12 Question 7

Taxation 2015
$M
Current tax expense W2 0.84
Deferred tax expense W1 6.948
Charge to income statement 7.788
Reconciliation 2015
$M
Expected tax Rs 23.5m x 35% 8.225
Effect of exempt income Rs. 1.25 x 35% (0.437)
Actual tax (current + deferred) 7.788
W1 CA TB Temp. Diff Tax DTL / DTA

2014 $m $m $m Rate $M
Accumulated depreciation 15 45 30 T 35% 10.5 L
Accrued expenses 2 0 2D 35% 0.70 A
Provision for gratuity 1.7 0 1.7 D 35% 0.595 A
9.205 L
Unused tax losses Rs. 29.05 x 35% 10.168 A
Deferred tax asset 0.963 A
2015
Accumulated depreciation 30 51 21 T 35% 7.35 L
Provision for gratuity 1.7 + 2.2 0 3.9 D 35% 1.365 A
Deferred tax liability 5.985 L
Deferred tax expense 6.948
W2 Current tax 2015 2014

$m $m
Accounting profit / (loss) before tax 23.5 (1.75)
Add: Accounting depreciation 15 15
Provision for the gratuity 2.2 1.7
Accrued expenses disallowed - 2
Less: Tax depreciation (6) (45)
Accrued expenses paid (2)
Exempt interest income (1.25) (1.00)
Tax profit / (loss) 31.45 (29.05)
Tax loss adjusted (29.05)
2.40
Current tax expense @ 35% 0.84 Nil
IAS 12 Question 8
The following information relates to Apricot Limited (AL), a listed company, for the financial
year ended 31 December 2015:
(i) The profit before tax for the year amounted to Rs. 60 million (2014: $45 million).
(ii) The accounting and tax written down value of fixed assets as on 31 December 2014
was $95 million and $90 million respectively. Accounting depreciation for the year is $10
million (2014: $9 million) whereas tax depreciation for the year is $8 million (2014: $7
million).
(iii) During the year, AL sold a machine for $. 3 million and recognized a profit of $0.5
million. The tax written down value of the machine as on 31 December 2014 was $2
million. There were no other additions/disposals of fixed assets in 2014 and 2015.
(iv) AL earned capital gain of $6 million (2014: Nil) on sale of shares of a listed company.
This income is exempt from tax.
(v) Bad debt expenses recognized during the year was $5 million (2014: $7 million).
(vi) Bad debts written off during the year amounted to $3 million (2014: $4 million).
(vii) Deferred tax liability and provision for bad debts as on 31 December 2011 was $18.90
million and $9 million respectively.
(viii) The company’s assessed brought forward losses up to 31 December 2011 amounted to
$19.25 million.
(ix) Applicable tax rate is 35%.
Required:
Prepare a note on taxation for inclusion in AL’s financial statements for the year ended 31
December 2015 giving appropriate disclosures relating to current and deferred tax expenses
including comparative figures for 2014 and a reconciliation to explain the relationship between
2015 tax expense and 2015 accounting profit.
IAS 12 Question 8

Taxation 2015 2014
$M $M
Current W1 20.48 10.76
Deferred (21.35)W2 &(1.58)W3 (1.58) (21.35)
18.90 (10.59)
Relationship between tax expense and accounting profit 2015

Profit before taxation 60
Tax at the applicable rate of 35% 21
Less: Tax effect of exempt income (2.10)
18.90
W1 – Computation of Current Tax 2015 2014

$M $M
Profit before tax as per books 60 45
Add: Allowable income / Disallowed expenses
Accounting depreciation 10 9
Tax profit on sale of fixed assets 1 -
Bad debt expense 5 7
Less: Disallowed income / Allowable expenses
Tax depreciation (8) (7)
Accounting profit on sale of fixed assets (0.5) -
Capital gain (6) -
Bad debts written off (3) (4)
Taxable income 58.5 50
Brought forward losses - (19.25)
58.5 30.75
Tax liability (@ 35%) 20.48 10.76
W2 – Computation of Deferred Tax - 2014

$M
Fixed Assets W4 95 90 5T 35% 1.75 L PL
Provision for bad debts W5 12 0 12 D 35% 4.2 A PL
Closing Balance 2.45 A
Opening Balance 18.9 L
Charge to PL for the year (21.35)
W3 – Computation of Deferred Tax - 2015

$M
Fixed Assets W4 82.5 80 2.5 T 35% 0.87 L PL
Provision for bad debts W5 14 0 14 D 35% 4.9 A PL
Closing Balance 4.03 A
Opening Balance 2.45 A
Charge to PL for the year 1.58
IAS 12 Question 8
W4 – Movement of Fixed Assets

Accounting Tax
Opening balance 95 90
Disposal during the year (2.5) (2)
Depreciation for the year – 2015 (10) (8)
Closing balance 82.5 80
W5 – Movement of Provisions for Bad Debts

2015 2014
Opening balance 12 9
Provision for the year 5 7
Write off during the year – 2015 (3) (4)
Closing balance 14 12

IAS 12 - Khasif Adeel With Examples

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IAS 12 Summary Notes

IAS 12 Income Taxes

CURRENT TAX LIABILITY / ASSET

The tax rate is 30%.

TAX BASE CALCULATION

Carrying amount XXX

Carrying amount XXX

Carrying amount XXX

MEASUREMENT – TAX RATE

Deferred tax assets and liabilities shall NOT be discounted.

DEFERRED TAX LIABILITIES

DEFERRED TAX ASSETS

CURRENT AND DEFERRED TAX CHARGE

In addition to above transactions, SL had taxable temporary differences of $ 80,000 and

SHARE OPTION SCHEMES

Accounting for share options schemes involves recognising a remuneration

Assume a tax rate of 30%.

A temporary difference arises when the carrying amount of investments in

The carrying amount in consolidated financial statements is the investor’s share of

Unremitted earnings (i.e. undistributed profits) in the accounts of subsidiaries,

(a) (b) (c) (d) (e)

(a) (b) (c) (d) (e)

Carrying Tax Temp. Tax Deferred Liab. /

Unused tax losses 20 20% (4) Asset

Net Deferred tax liability as at December 31, 2011 8

Carrying Tax Temp. Tax Deferred Liab. /

Unused tax losses 20 20% (4) Asset

Total DT asset as at December 31, 2011 (15)

Tax base calculation:

Liabilities – unearned revenue

Deferred tax liability

Cumulative remuneration expense 5,000 options x $3 FV at grant date x ½ years 7,500

On 31/12/2003 (before exercise)

Tax on excess $2,000 x 30% - to be charged to equity 600

Dated: 17 August 2016

QUESTION 1: IAS 12 INCOME TAXES

ANSWER – QUESTION 1: IAS 12 INCOME TAXES

Particulars CA TB TD Rate DT L/A Charge

QUESTION 2: IAS 12 INCOME TAXES

During the period:

Tax is chargeable at a rate of 30%.

(a) Capital transactions

(b) Interest payable

(c) Interest receivable

(d) Provision for warranty

(f) Further information

Tax is chargeable at a rate of 30%.

(a) Interest payable/Interest receivable

(b) Provision for warranty

(c) Development costs

(d) Further information

Tax is chargeable at a rate of 30%.

Year 2017 (Rate Change)

ANSWER – QUESTION 2: IAS 12 INCOME TAXES

Particulars CA TB TD Rate DT L/A Charge

Year 2017 (Rate Change)

Statement of profit or loss note $

QUESTION 3: IAS 12 INCOME TAXES

ANSWER – QUESTION 3: IAS 12 INCOME TAXES

Part (b) and (c)