Alan Melville

Chapter 15

Taxation in Financial
Statements
Eight Edition

Present By MBF II Batch Group 10

 1. Mg Sai Tun Lwin
Group 10
Members 2. Mg Pyae Ko Ko Myint Sein

3. Ma Hnin Myat Thida

4. Ma Pan Su Pyae Kyaw

5. Ma Nwe Nwe Wai

6. Ma Kay Zar Chit Su Zin

7. Ma Swe Swe Aye

8. Ma Yin Yin Htwe

Table of 1. Introduction
2. Objective
Contents 3. Current Tax
4. Deferred Tax
• Permanent Differences
• Temporary Differences
5. Accounting for deferred tax
6. The Tax Base Concept
7. IAS 12 Requirements for Deferred Tax
8. Disclosure Requirements
9. Summary
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Introduction
What to Expect
● This presentation covers key aspects of accounting for income
taxes in financial statements. We will explore definitions,
regulations, and practical applications.
● Our focus is on IAS12 Income Taxes, which sets the standards for
tax accounting. Understanding IAS12 is essential for compliance
and accurate financial reporting.
● We will define key terms such as current tax and deferred tax. We
will also distinguish between taxable and deductible temporary
differences.
● By the end, you should be able to calculate and account for both
current and deferred taxes according to IAS12 guidelines.
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• define the term "current tax" and account for current tax
in accordance with the requirements of IAS12 Income
Taxes

Objective • define the term "temporary differences" and distinguish

between taxable temporary differences and deductible
temporary differences
• explain the meaning of the "tax base" of an asset or
liability
• calculate the deferred tax assets and liabilities arising
from deductible and taxable temporary differences
• account for deferred tax in accordance with the
requirements of IAS12.
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Current Tax
Definition & Accounting
• Current tax refers to the amount of income taxes payable or refundable
for the current year. It is based on taxable profit or loss originating in
that year.
• To account for current tax, financial statements must include the tax
expense or income. This reflects the company’s tax obligations or
benefits for the period.
• Compliance with IAS12 ensures that current tax amounts are
accurately reported. This includes all applicable adjustments and
recognition of assets or liabilities.
• Understanding how to compute and report current tax is the first step
in adhering to IAS12 regulations, ensuring transparency and accuracy
in financial reporting.
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Current Tax Examples

EXAMPLE 1 The following information relates to a company which prepares accounts to 30 June each year and is now
completing its financial statements for the year to 30 June 2023:
(a) The company estimates that current tax for the year to 30 June 2023 is £750,000. This figure takes into account
some new tax rates which were announced in March 2023 and which are confidently expected to be enacted in
August 2023. If the new tax rates were disregarded, the amount due would be £810,000.
(b) Payments on account totalling £390,000 have been made during the year to 30 June 2023 in relation to the current
tax for the year.
(c) Current tax for the year to 30 June 2022 was overestimated by £30,000. Calculate the amount of the current tax
expense which should be shown in the statement of comprehensive income for the year to 30 June 2023 and the
amount of the current tax liability which should be shown in the statement of financial position at that date

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Deferred Tax
The amount of current tax payable by an entity for an
accounting period depends upon the entity's taxable
profit for that period. However, this taxable profit will
often be different from the profit shown in the financial
statements (the "accounting profit"). There are two main
reasons for this discrepancy:
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 Permanent differences

Deferred Tax Some of the income shown in the financial statements may not be
chargeable to tax and some of the expenses shown in the financial
statements may not be deductible for tax purposes. In such cases, there
will be a "permanent difference" between the accounting profit and the
taxable profit
 Temporary differences
Some of the income or expenses shown in the financial statements for an
accounting period may be dealt with for tax purposes in a different
accounting period. Total depreciation charges will usually equal total
capital allowances over the entire lifespan of the entity, but there might
be a significant difference between depreciation and capital allowances
in any one period. This is an example of a "temporary difference"
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Temporary Differences Example

EXAMPLE 2
A company with an issued share capital of 2,000,000 ordinary shares has the following results for the
three years to 31 December 2023: 2021 2022 2023 £000 £000 £000 Profit before tax 1,600 1,600 1,600
Depreciation charged in the year 400 400 400 Depreciation for tax purposes 800 300 100 Assuming
that there are no other permanent or temporary differences and that the rate of tax is 20% throughout,
compute the company's profit after tax for each of the three years. Also calculate the earnings per share
ratio for each year. (This ratio is equal to the profit after tax divided by the number of issued ordinary
shares
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Temporary Differences Example

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Accounting for deferred tax

Definition & Calculation

IAS12 solves the problem illustrated above by requiring entities to account

for "deferred tax“.
(a) In an accounting period in which temporary differences cause taxable
profits to be lower than accounting profits, the tax expense which is
shown in the statement of comprehensive income is increased by a
transfer to a deferred tax account.
(b) In an accounting period in which temporary differences cause taxable
profits to be higher than accounting profits, the tax expense which is
shown in the statement of comprehensive income is reduced by a
transfer from the deferred tax account
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Deferred Tax Examples
EXAMPLE 3 Rework Example 2, showing the necessary transfers to and from the company's deferred tax account. As
before, assume that the applicable rate of tax is 20% in all years

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The Tax Base Concept
Meaning & Importance
● The approach adopted by IAS12 in relation to deferred tax requires that
the "tax base" of each asset and liability at the end of the reporting
period should be calculated and then compared with its "carrying
amount“
● IAS12 defines the tax base of an asset or liability as "the amount
attributed to that asset or liability for tax purposes"A liability’s tax base
is its carrying amount,
● The tax base of an asset is "the amount that will be deductible for tax
purposes against any taxable economic benefits that will flow to an
entity when it recovers the carrying amount of the asset. If those
economic benefits will not be taxable, the tax base of the asset is equal
to its carrying amount".
● The tax base of a liability is "its carrying amount, less any amount that
will be deductible for tax purposes in respect of that liability in future
periods"
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The Tax Base Concept
Meaning & Importance

IAS12 defines temporary differences as "differences between the carrying

amount of an asset or liability in the statement of financial position and its
tax base". The definition continues by stating that:
(a) Taxable temporary differences are temporary differences "that will result
in taxable amounts in determining taxable profit … of future periods
when the carrying amount of the asset or liability is recovered or
settled". Taxable temporary differences result in deferred tax liabilities.
(b) Deductible temporary differences are temporary differences "that will
result in amounts that are deductible in determining taxable profit … of
future periods when the carrying amount of the asset or liability is
recovered or settled". Deductible temporary differences result in deferred
tax assets.

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 IAS12 requirements with regard
13

to deferred tax
Requirements

IAS12 makes a number of detailed requirements with regard to deferred

tax. Broadly, the main points are as follows:
(a) A deferred tax liability must be recognised for all taxable temporary
differences.
(b) (b) A deferred tax asset must be recognised for all deductible temporary
differences to the extent that it is probable that taxable profits will be
available in the future against which these deductible temporary
differences can be utilised.
(c) (c) The carrying amount of deferred tax assets must be reviewed at the
end of each reporting period and reduced to the extent that it is no
longer probable that taxable profits will arise against which they can be
utilised.
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IAS12 requirements with regard

to deferred tax
Requirements

(d) A deferred tax asset or liability must be measured at the tax rates that are expected to
apply to the period in which the asset is realised or the liability is settled. These tax rates
should be based upon tax rates and laws that have been enacted or substantively enacted
by the end of the reporting period

(e) Deferred tax assets and liabilities must not be discounted, even though they might not
be realised or settled for many years. IAS12 regards it as inappropriate to require or
permit discounting because of the uncertain timing of the reversal of each temporary
difference.

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 IAS12 requirements with regard
15

to deferred tax
Requirements

(f) Transfers to or from the deferred tax account should generally be

recognised in the calculation of profit or loss. However, a deferred tax
transfer that arises from an item that is recognised in other comprehensive
income or directly in equity should also be recognised in other
comprehensive income or directly in equity.

(g) Deferred tax assets and liabilities should not be offset in the statement
of financial position unless the entity has a legally enforceable right to do
so

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Disclosure 16
Requirements

The disclosure requirements of IAS12 are very extensive. A brief summary

of the main disclosures that must be made in the notes to the financial
statements is as follows:
(a) The tax expense shown in the calculation of profit or loss for the
accounting period must be analysed into its main components. These
may include:
(i) the current tax expense (or income) for the period
(ii) any adjustments relating to underestimates or overestimates of
current tax in previous accounting periods
(iii) the amount of any transfers to or from the deferred tax account
relating to the origination or reversal of temporary differences
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Disclosure
Requirements

(b) The following must also be disclosed separately:

(i) the amounts of current and deferred tax relating to items that are
recognised in other comprehensive income or directly in equity
(ii) an explanation of the relationship between accounting profit
and the tax expense for the period (iii) for each type of
temporary difference, the amount of the deferred tax asset or
liability recognised in the statement of financial position and the
amount of the deferred tax expense or income recognised in the
period
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Summary
 Current tax is the amount of tax payable or recoverable in respect of
the taxable profit or loss for an accounting period. Current tax is
generally shown as an expense in the statement of comprehensive
income. Any amount which remains unpaid at the end of the reporting
period is shown as a liability in the statement of financial position.
 The current tax expense may be adjusted so as to reflect any
underestimates or overestimates of current tax in previous periods.
 A temporary difference arises if an item of income or expense is
recognised in the financial statements in one accounting period but is
dealt with for tax purposes in a different period. Temporary differences
would distort the reported figures for profit after tax and earnings per
share if deferred tax were not taken into account.
 In general, transfers to the deferred tax account are made in periods in
which taxable profits are lower than accounting profits. Transfers from
the deferred tax account are made in periods in which taxable profits
exceed accounting profit
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Summary
 IAS12 deals with deferred tax by comparing the tax base of each asset
and liability at the end of the reporting period with its carrying amount.
The tax base of an item is the amount attributed to that item for tax
purposes.
 Temporary differences arise if the tax base of an asset or liability is
different from its carrying amount. Taxable temporary differences result
in deferred tax liabilities. Deductible taxable differences result in
deferred tax assets.
 In general, IAS12 requires that deferred tax liabilities should be
recognised for all taxable temporary differencesThe tax laws and rates
used when accounting for taxation should be those which have been
enacted or substantively enacted by the end of the reporting period

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 20
Summary
 IAS12 deals with deferred tax by comparing the tax base of each asset
and liability at the end of the reporting period with its carrying amount.
The tax base of an item is the amount attributed to that item for tax
purposes.
 Temporary differences arise if the tax base of an asset or liability is
different from its carrying amount. Taxable temporary differences result
in deferred tax liabilities. Deductible taxable differences result in
deferred tax assets.
 In general, IAS12 requires that deferred tax liabilities should be
recognised for all taxable temporary differencesThe tax laws and rates
used when accounting for taxation should be those which have been
enacted or substantively enacted by the end of the reporting period

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