Betsegaw (AFA I assignment)

COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE
INDIVIDUAL ASSIGNMENT
Course Title: Advanced Financial Accounting I

Course Code: AcFn 4101
Name: BETSEGAW TADESSE

ID NO: SSR/0285/14
Submitted to: Mr. Melese Z.
Submission Date: 02/03/2017 E.C.

ACCOUNTING FOR INCOME TAX (IAS 12)
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.
Objective of IAS 12
The objective of IAS 12 is to prescribe the accounting treatment for income taxes. 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.
Recognition
Current Tax:
An entity recognizes a current tax liability or asset for the amount of income taxes payable or
recoverable for the current period and any prior periods. 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. The benefit of a tax loss
which can be carried back to recover current tax of a prior period is recognised as an asset.
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.
Deferred Tax:
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:
· liabilities arising from initial recognition of goodwill.
· 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 at the time of the transaction, does not give rise to equal
taxable and deductible temporary differences.
· 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.
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:
· 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.
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.
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.
Measurement
Measurement of Current Tax:

Current tax is measured at the amount expected to be paid to (or recovered from) the taxation
authorities, using tax rates enacted or substantively enacted by the end of the reporting period.
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.
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.
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.
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.
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).
Disclosure
Major components of tax expense (tax income) 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.
Other required disclosures:
· Details of deferred tax assets
· Tax consequences of future dividend payments.

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COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Course Title: Advanced Financial Accounting I

Name: BETSEGAW TADESSE

Submitted to: Mr. Melese Z.

Submission Date: 02/03/2017 E.C.

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

Recognition of deferred tax liabilities

· liabilities arising from initial recognition of goodwill.

· liabilities arising from temporary differences associated with investments in

Recognition of deferred tax assets

Measurement of Current Tax:

Measurement of deferred tax

· Current tax expense (income)

· Any adjustments of taxes of prior periods

· Write down, of a deferred tax asset

· Amount of tax expense (income) relating to changes in accounting policies and

Other required disclosures:

· Details of deferred tax assets

· Tax consequences of future dividend payments.

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