IAS 12 Income Taxes

IAS 12 Income Taxes



Contents


Introduction
Objective
Scope
Definitions
Recognition of Current Tax Liabilities and Current TaxAssets
Recognition of Deferred Tax Liabilities and Deferred TaxAssets
Measurement
Recognition of Current and Deferred Tax
Presentation
Disclosure
Effective Date
Appendix A - Examples of Temporary Differences
Appendix B - Illustrative Computations and Presentation

This Standard is effective for financial statementscovering periods beginning on or after 1 January 1998.
In May 1999, IAS 10 (revised 1999), Events After theBalance Sheet Date, amended paragraph 88. The amended text became effective forannual financial statements covering periods beginning on or after 1 January2000.
In April 2000, paragraphs 20, 62(a), 64 and Appendix A,paragraphs A10, A11 and B8 were amended to revise cross-references andterminology as a result of the issuance of IAS 40, Investment Property.
In October 2000, the Board approved amendments to IAS 12which added paragraphs 52A, 52B, 65A, 81(i), 82A, 87A, 87B, 87C and 91 anddeleted paragraphs 3 and 50. The limited revisions specify the accountingtreatment for income tax consequences of dividends. The revised text waseffective for annual financial statements covering periods beginning on orafter 1 January 2001.
The following SIC Interpretations relate to IAS 12:
SIC-21, Income Taxes - Recovery ofRevalued Non-Depreciable Assets; and
SIC-25, Income Taxes - Changes in the TaxStatus of an Enterprise or its Shareholders.

Introduction


This Standard ('IAS 12 (revised)') replaces IAS 12,Accounting for Taxes on Income ('the original IAS 12'). IAS 12 (revised) iseffective for accounting periods beginning on or after 1 January 1998. Themajor changes from the original IAS 12 are as follows.
1    The original IAS 12required an enterprise to account for deferred tax using either the deferralmethod or a liability method which is sometimes known as the income statementliability method. IAS 12 (revised) prohibits the deferral method and requiresanother liability method which is sometimes known as the balance sheetliability method.
The income statement liability methodfocuses on timing differences, whereas the balance sheet liability methodfocuses on temporary differences. Timing differences are differences betweentaxable profit and accounting profit that originate in one period and reversein one or more subsequent periods. Temporary differences are differencesbetween the tax base of an asset or liability and its carrying amount in thebalance sheet. The tax base of an asset or liability is the amount attributedto that asset or liability for tax purposes.
All timing differences are temporarydifferences. Temporary differences also arise in the following circumstances,which do not give rise to timing differences, although the original IAS 12treated them in the same way as transactions that do give rise to timingdifferences:
(a) subsidiaries, associates or jointventures have not distributed their entire profits to the parent or investor;
(b) assets are revalued and no equivalentadjustment is made for tax purposes; and
(c) the cost of a business combination isallocated to the identifiable assets acquired and liabilities assumed byreference to their fair values, but no equivalent adjustment is made for taxpurposes.
Furthermore, there are some temporarydifferences which are not timing differences, for example those temporarydifferences that arise when:
(a) the non-monetary assets and liabilitiesof an entity are measured in its functional currency but the taxable profit ortax loss (and, hence, the tax base of its non-monetary assets and liabilities)is determined in a different currency;
(b) non-monetary assets and liabilities arerestated under IAS 29, Financial Reporting in Hyperinflationary Economies; or
(c) the carrying amount of an asset orliability on initial recognition differs from its initial tax base.
Editorial note: Sub-paragraph (a) substituted by IAS 21 (as amended by CorrectionsList 9, May 2004) Previously "(a) the non-monetary assets and liabilitiesof a foreign operation that is integral to the operations of the reportingentity are translated at historical exchange rates;"

Sub-paragraph (c) substituted by IFRS 3 with effect for business combinationsfor which the agreement date is on or after 31 March 2004, subject to furthertransitional provisions. Previously "(c) the cost of a businesscombination that is an acquisition is allocated to the identifiable assets andliabilities acquired, by reference to their fair values but no equivalent adjustmentis made for tax purposes."
2    The original IAS 12permitted an enterprise not to recognise deferred tax assets and liabilitieswhere there was reasonable evidence that timing differences would not reversefor some considerable period ahead. IAS 12 (revised) requires an enterprise torecognise a deferred tax liability or (subject to certain conditions) asset forall temporary differences, with certain exceptions noted below.
3    The original IAS 12required that:
(a) deferred tax assets arising from timingdifferences should be recognised when there was a reasonable expectation ofrealisation; and
(b) deferred tax assets arising from taxlosses should be recognised as an asset only where there was assurance beyondany reasonable doubt that future taxable income would be sufficient to allowthe benefit of the loss to be realised. The original IAS 12 permitted (but didnot require) an enterprise to defer recognition of the benefit of tax lossesuntil the period of realisation.
IAS 12 (revised) requires that deferredtax assets should be recognised when it is probable that taxable profits willbe available against which the deferred tax asset can be utilised. Where anenterprise has a history of tax losses, the enterprise recognises a deferredtax asset only to the extent that the enterprise has sufficient taxabletemporary differences or there is convincing other evidence that sufficienttaxable profit will be available.
4    As an exception to thegeneral requirement set out in paragraph 2 above, IAS 12 (revised) prohibitsthe recognition of deferred tax liabilities and deferred tax assets arisingfrom certain assets or liabilities whose carrying amount differs on initialrecognition from their initial tax base. Because such circumstances do not giverise to timing differences, they did not result in deferred tax assets orliabilities under the original IAS 12.
5    The original IAS 12required that taxes payable on undistributed profits of subsidiaries andassociates should be recognised unless it was reasonable to assume that thoseprofits will not be distributed or that a distribution would not give rise to atax liability. However, IAS 12 (revised) prohibits the recognition of suchdeferred tax liabilities (and those arising from any related cumulativetranslation adjustment) to the extent that:
(a) the parent, investor or venturer is ableto control the timing of the reversal of the temporary difference; and
(b) it is probable that the temporarydifference will not reverse in the foreseeable future.
Where this prohibition has the result thatno deferred tax liabilities have been recognised, IAS 12 (revised) requires anenterprise to disclose the aggregate amount of the temporary differencesconcerned.
6    The original IAS 12 didnot 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 witha corresponding effect on the determination of the amount of goodwill or anyexcess of the acquirer's interest in the net fair value of the acquiree'sidentifiable assets, liabilities and contingent liabilities over the cost ofthe combination. However, IAS 12 (revised) prohibits the recognition ofdeferred tax liabilities arising from the initial recognition of goodwill.

Editorial note: Paragraph 6 substituted by IFRS 3 with effect for business combinations for which the agreement date is on or after 31 March 2004, subject to further transitional provisions. Previously "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 enterprise 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 negative goodwill. However, IAS 12 (revised) prohibits the recognition of deferred tax liabilities arising from goodwill itself (if amortisation of the goodwill is not deductible for tax purposes) and of deferred tax assets arising from negative goodwill that is treated as deferred income."
7    The original IAS 12 permitted, but did not require, an enterprise to recognise a deferred tax liability in respect of asset revaluations. IAS 12 (revised) requires an enterprise to recognise a deferred tax liability in respect of asset revaluations.
8    The tax consequences of recovering the carrying amount of certain assets or liabilities may depend on the manner of recovery or settlement, for example:
(a) in certain countries, capital gains are not taxed at the same rate as other taxable income; and
(b) 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 enterprise expects to recover or settle the carrying amount of its assets and liabilities.
9    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. Paragraph B16(i) of IFRS 3 Business Combinations prohibits discounting of deferred tax assets acquired and deferred tax liabilities assumed in a business combination.

Editorial note: Paragraph 9 substituted by IFRS 3 with effect for business combinations for which the agreement date is on or after 31 March 2004, subject to further transitional provisions. Previously "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. An amendment to paragraph 39(i) of IAS 22, Business Combinations, prohibits discounting of deferred tax assets and liabilities acquired in a business combination. Previously, paragraph 39(i) of IAS 22 neither prohibited nor required discounting of deferred tax assets and liabilities resulting from a business combination."
10 The original IAS 12 did not specify whether an enterprise should classify deferred tax balances as current assets and liabilities or as non-current assets and liabilities. IAS 12 (revised) requires that an enterprise which makes the current/non-current distinction should not classify deferred tax assets and liabilities as current assets and liabilities.
11 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.
12 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 enterprise's country. IAS 12 (revised) requires this explanation to take either or both of the following forms:
(i) a numerical reconciliation between tax expense (income) and the product of accounting profit multiplied by the applicable tax rate(s); or
(ii) 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.

13 New disclosures required by IAS 12 (revised) include:
(a) in respect of each type of temporary difference, unused tax losses and unused tax credits:
(i) the amount of deferred tax assets and liabilities recognised; and
(ii) the amount of the deferred tax income or expense recognised in the income statement, if this is not apparent from the changes in the amounts recognised in the balance sheet;
(b) in respect of discontinued operations, the tax expense relating to:
(i) the gain or loss on discontinuance; and
(ii) the profit or loss from the ordinary activities of the discontinued operation; and
(c) the amount of a deferred tax asset and the nature of the evidence supporting its recognition, when:
(i) 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
(ii) the enterprise 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 Income Taxes (IAS 12) is set out in paragraphs 1-91 and Appendices A and B. 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, the Preface to International Financial Reporting Standards and the Framework for the Preparation and Presentation of Financial Statements. These provide a basis for selecting and applying accounting policies in the absence of explicit guidance.

Objective
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:
(a) the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognised in an enterprise's balance sheet; and
(b) transactions and other events of the current period that are recognised in an enterprise's financial statements.
It is inherent in the recognition of an asset or liability that the reporting enterprise 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 enterprise 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 directly in equity, any related tax effects are also recognised directly in equity. 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 any excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over the cost of the combination.
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.

Editorial note: Third paragraph substituted by IFRS 3 with effect for business combinations for which the agreement date is on or after 31 March 2004, subject to further transitional provisions. Previously "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. An amendment to paragraph 39(i) of IAS 22, Business Combinations, prohibits discounting of deferred tax assets and liabilities acquired in a business combination. Previously "This Standard requires an enterprise 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 the income statement, any related tax effects are also recognised in the income statement. For transactions and other events recognised directly in equity, any related tax effects are also recognised directly in equity. Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill or negative goodwill arising in that business combination."
Scope
1    This Standard should be applied in accounting for income taxes.
2    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 venture on distributions to the reporting enterprise.
3    [Deleted]
4    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.

Definitions
5    The following terms are used in this Standard with the meanings specified:
Accounting profit is net profit or loss for a period before deducting tax expense.
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 net 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:
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.
Temporary differences are differences between the carrying amount of an asset or liability in the balance sheet and its tax base. Temporary differences may be either:
(a) taxable temporary differences, which are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or
(b) deductible temporary differences, which are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.
6    Tax expense (tax income) comprises current tax expense (current tax income and deferred tax expense (deferred tax income).

Tax Base
7    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 enterprise 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.
Examples
1   A machine cost 100. For tax purposes, depreciation of 30 has already been deducted in the current and prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. Revenue generated 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. The tax base of the machine is 70.
2   Interest receivable has a carrying amount of 100. The related interest revenue will be taxed on a cash basis. The tax base of the interest receivable is nil.
3   Trade receivables have a carrying amount of 100. The related revenue has already been included in taxable profit (tax loss). The tax base of the trade receivables is 100.
4   Dividends receivable from a subsidiary have a carrying amount of 100. The dividends are not taxable. In substance, the entire carrying amount of the asset is deductible against the economic benefits. Consequently, the tax base of the dividends receivable is 100.[1]
5   A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax consequences. The tax base of the loan is 100.
 

9    Some items have a tax base but are not recognised as assets and liabilities in the balance sheet. For example, research costs are recognised as an expense in determining accounting profit in the period in which they are incurred but may not be permitted as a deduction in determining taxable profit (tax loss) until a later period. The difference between the tax base of the research costs, being the amount the taxation authorities will permit as a deduction in future periods, and the carrying amount of nil is a deductible temporary difference that results in a deferred tax asset.
10 Where the tax base of an asset or liability is not immediately apparent, it is helpful to consider the fundamental principle upon which this Standard is based: that an enterprise should, with certain limited exceptions, recognise a deferred tax liability (asset) whenever recovery or settlement of the carrying amount of an asset or liability would make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences. Example C following Paragraph 52 illustrates circumstances when it may be helpful to consider this fundamental principle, for example, when the tax base of an asset or liability depends on the expected manner of recovery or settlement.
11 In consolidated financial statements, temporary differences are determined by comparing the carrying amounts of assets and liabilities in the consolidated financial statements with the appropriate tax base. The tax base is determined by reference to a consolidated tax return in those jurisdictions in which such a return is filed. In other jurisdictions, the tax base is determined by reference to the tax returns of each enterprise in the group.

Recognition of Current Tax Liabilities and Current Tax Assets
12. Current tax for current and prior periods should, to the extent unpaid, be recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the amount due for those periods, the excess should be recognised as an asset.
13. The benefit relating to a tax loss that can be carried back to recover current tax of a previous period should be recognised as an asset.
14. When a tax loss is used to recover current tax of a previous period, an enterprise recognises the benefit as an asset in the period in which the tax loss occurs because it is probable that the benefit will flow to the enterprise and the benefit can be reliably measured.