Income Taxes: Prepared by Kent Wilson

Chapter 6
Income taxes
Prepared by
Kent Wilson
Objectives
1. Understand the nature of income tax
2. Understand the differences in accounting and

taxation treatments
3. Explain the concept of tax effect accounting
4. Calculation, recognition & payment of current

tax
Objectives
5. Calculation and recognition of deferred tax

liabilities & deferred tax assets
6. Account for amendments to prior year taxes
7. Presentation and disclosure requirements of

IAS 12
The Nature of Income Tax
Income taxes are levied by governments on

income earned by individuals and entities
The percentage payable and the determination

of taxable income are governed by legislation
IAS 12 deals with accounting for tax
Chapter assumption: Company tax rate is 30%

Differences Between Accounting
Profit & Taxable Profit
Accounting profit defined:

profit or loss for a period before deducting tax expense
Taxable profit defined:

the profit for a period determined in accordance with the rules
established by the taxation authorities, upon which income taxes
are payable
As Accounting profit and taxable profit are determined

by different principles it is unlikely that they will be the
same figure in any one period
Permanent & Temporary
Differences
Permanent differences:
Arise when amounts recognised as part of accounting profit are not
recognised as part of taxable profit (or vice versa)
Temporary differences:
Arise when the period in which revenues and expenses are recognised
for accounting purposes is different from the period in which such
revenues and expenses are treated as taxable income and allowable
deductions for tax purposes
Accounting For Income Taxes
IAS 12 requires the tax consequences and other events to

be accounted for in the same manner and the same period
as the transactions themselves
Need to recognise both current and future tax consequences

of current year transactions
Two separate calculations are performed each year:

1. Current tax liability
2. Movements in deferred tax balances
Calculation of Current Tax
Accounting Profit (Loss)
+ (-) accounting expenses not deductible for tax

+ (-) accounting expenses where the amount differs from deductible amounts
+ (-) taxable income where the amount differs from accounting revenue
- (+) accounting revenues not subject to taxation
- (+) accounting revenues where the amount differs from taxable income
- (+) accounting revenues where the amount differs from accounting expense
= Taxable profit
x tax rate %
= Current Tax Payable
(Refer Illustrative Example 6.2)

Recognition & Payment of Tax
Recognition of current tax

Refer IAS 12 para 12 & 58
Payment of tax
Determined by legislation
Some jurisdictions require payments in advance
Tax Losses
Tax losses are created when allowable deductions

exceed taxable income
IAS 12 envisages three possible treatments for tax

losses
Carried forward
Carried back
Lost
Tax legislation may impose some limitations and

restrictions
Refer Illustrative Example 6.3

Calculation of Deferred Tax
The existence of temporary differences results in the

carrying amounts of an entitys assets and liabilities
being different from the amounts that would arise if a
balance sheet was prepared for tax authorities
Carrying amount - net asset and liability balances based

on accounting balance sheet
Tax base (TB)- asset and liability balances that would

appear in a tax balance sheet
Refer IAS 12 para 7 & 8
Calculating The Tax Base
Calculating the tax base for an asset

CA
future taxable amounts
+ future deductible amounts
= TB
Calculating the tax base for a liability

CA
+ future taxable amounts
- future deductible amounts
= TB
Calculating Temporary
Differences
When the carrying amount of an asset or liability

is different from its tax base a temporary
difference exists
Taxable temporary difference

Deductible temporary difference

Calculating DTLs & DTAs
IAS 12 paras 15 & 24 require that DTLs and

DTAs be recognised for temporary differences
Measurement to be made on basis of expected

tax rates (IAS 12 para 47)
Consideration must be given to recognition

criteria
Excluded Differences
Certain temporary differences are excluded from

being recognised
IAS 12 prohibits temporary differences from being

recognised in relation to:
Goodwill
The initial recognition of assets and liabilities:
That do not arise from a business combination
That do not affect accounting or taxable profit
Recognition of DTLs and DTAs
Deferred tax liabilities

Deferred tax liabilities must always be recognised
Deferred tax assets

Deferred tax assets relating to temporary differences and
tax losses are recognised only if:
There are sufficient taxable temporary differences for the entity
to use against the deductible temporary differences; OR
If it is probable that the entity will have sufficient future taxable
profit (against which the tax benefit can be offset)
Change Of Tax Rates
When a new tax rate is enacted, that new rate

should be applied:
When calculating current tax liability

When calculating adjustments to deferred tax accounts
To carried forward deferred tax balances from previous
years
Disclosures
IAS 12 paras 79 82A provide requirements
Tax assets & liabilities must be classified as current or

non-current on the face of the statement of financial
position
Current and deferred tax assets and liabilities can be

offset in most cases
Tax expense on the statement of profit or loss and

other comprehensive income

Income Taxes: Prepared by Kent Wilson

Uploaded by

Copyright:

Available Formats

Income Taxes: Prepared by Kent Wilson

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Income Taxes: Prepared by Kent Wilson

Uploaded by

Copyright:

Available Formats

Chapter 6

2. Understand the differences in accounting and

3. Explain the concept of tax effect accounting

4. Calculation, recognition & payment of current

5. Calculation and recognition of deferred tax

6. Account for amendments to prior year taxes

7. Presentation and disclosure requirements of

Income taxes are levied by governments on

The percentage payable and the determination

IAS 12 deals with accounting for tax

Chapter assumption: Company tax rate is 30%

Accounting profit defined:

Taxable profit defined:

As Accounting profit and taxable profit are determined

IAS 12 requires the tax consequences and other events to

Need to recognise both current and future tax consequences

Two separate calculations are performed each year:

Accounting Profit (Loss)

+ (-) accounting expenses not deductible for tax

(Refer Illustrative Example 6.2)

Recognition of current tax

Tax losses are created when allowable deductions

IAS 12 envisages three possible treatments for tax

Tax legislation may impose some limitations and

Refer Illustrative Example 6.3

The existence of temporary differences results in the

Carrying amount - net asset and liability balances based

Tax base (TB)- asset and liability balances that would

Calculating the tax base for an asset

Calculating the tax base for a liability

When the carrying amount of an asset or liability

Taxable temporary difference

Deductible temporary difference

IAS 12 paras 15 & 24 require that DTLs and

Measurement to be made on basis of expected

Consideration must be given to recognition

Certain temporary differences are excluded from

IAS 12 prohibits temporary differences from being

Deferred tax liabilities

Deferred tax assets

When a new tax rate is enacted, that new rate

When calculating current tax liability

IAS 12 paras 79 82A provide requirements

Tax assets & liabilities must be classified as current or

Current and deferred tax assets and liabilities can be

Tax expense on the statement of profit or loss and

You might also like