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IAS 12 Income Taxes

Summary, key points, exam traps and a worked example — written for ICAP, ACCA, ICAI, CIMA and ICAEW students.

On this page
  1. Status & recent changes
  2. Objective
  3. Scope
  4. Key definitions
  5. Recognition & measurement
  6. Key disclosures
  7. Common exam traps
  8. Worked example
  9. Related standards
  10. Practise MCQs

Status & recent changes

  • Amendments effective from 2023 narrowed the initial recognition exemption so it does not apply to transactions that give rise to equal taxable and deductible temporary differences (e.g. many leases and decommissioning obligations).
  • May 2023 amendments introduced a temporary mandatory exception from recognising and disclosing deferred taxes arising from the OECD Pillar Two global minimum tax rules, with related disclosures.

Objective

Prescribes how to account for current and deferred tax on profits, using the balance-sheet liability method for deferred tax.

Scope

  • Domestic and foreign taxes based on taxable profits, including withholding taxes payable by a subsidiary, associate or joint arrangement on distributions.
  • Does not cover government grants (IAS 20) or investment tax credits in detail.

Key definitions

Current tax
Income tax payable or recoverable on the taxable profit or loss for a period.
Tax base
The amount attributed to an asset or liability for tax purposes.
Temporary difference
The difference between the carrying amount of an asset or liability and its tax base.
Taxable temporary difference
One that will result in taxable amounts in future periods, giving a deferred tax liability (e.g. carrying amount of an asset above its tax base).
Deductible temporary difference
One that will result in deductible amounts in future, giving a deferred tax asset (e.g. a provision deductible only when paid).

Recognition & measurement

Current tax

  • Recognise unpaid current tax as a liability; overpayments as an asset.
  • Measure at the amount expected to be paid or recovered, using rates enacted or substantively enacted by the reporting date.
  • Under/over provisions from prior years are adjusted in the current year's tax charge (they are changes in estimate, not errors, unless they result from an error).

Deferred tax

  • Recognise a deferred tax liability for all taxable temporary differences, except those from the initial recognition of goodwill and certain initial recognition cases outside business combinations.
  • Recognise a deferred tax asset for deductible temporary differences, unused tax losses and credits only to the extent it is probable that future taxable profit will be available.
  • Measure using rates expected to apply when the difference reverses, based on rates enacted or substantively enacted at the reporting date.
  • Deferred tax is never discounted.
  • Recognise tax in the same place as the underlying item: profit or loss, OCI or equity (e.g. tax on a revaluation surplus goes to OCI).
  • In a business combination, deferred tax on fair value adjustments affects the goodwill calculation.

Key disclosures

  • Major components of the tax expense (current, deferred, prior-year adjustments).
  • A reconciliation between tax expense and accounting profit multiplied by the applicable rate (or a rate reconciliation).
  • Deferred tax balances by type of temporary difference and unused losses.
  • Deductible differences and losses for which no deferred tax asset is recognised.

Common exam traps

  • Tax base, not 'tax written-down value' of liabilities, drives the calculation: for an accrued expense deductible on payment, the tax base is nil.
  • Deferred tax on revaluations goes to OCI, not profit or loss.
  • A history of recent losses is strong evidence against recognising a deferred tax asset.
  • Do not discount deferred tax, even for long-dated differences.

Worked example: Deferred tax on accelerated tax depreciation

Scenario. Plant has a carrying amount of $800k and a tax base of $600k at the year end. The tax rate is 25%. The opening deferred tax liability was $30k.

  1. Taxable temporary difference = 800 − 600 = $200k.
  2. Closing deferred tax liability = 200 × 25% = $50k.
  3. Movement = 50 − 30 = $20k increase, charged to profit or loss.

Answer: Deferred tax liability $50k; deferred tax expense $20k.

Practise MCQs on this standard

Test your understanding of IAS 12 with free chapter-wise MCQs and explanations in these question banks.

CAF-6 Corporate ReportingICAP CAFACCA FR Financial ReportingACCACA Inter P1 Advanced AccountingICAI CA Intermediate

ICAI CA Intermediate examines Indian Accounting Standards, which are based on but can differ from IFRS. Check your syllabus.

Read the official IAS 12 text on ifrs.org