IAS 12 Income Taxes: Summary, Practice Questions & Decision Tree

Every deferred tax question starts with two numbers per item: the carrying amount in the financial statements and the tax base — the amount the tax authority will let the entity deduct (for assets) or has already taxed or will not tax (for liabilities) in the future (IAS 12.7–8). For an asset, the tax base is the amount deductible against future taxable benefits; for a liability, it is the carrying amount minus anything deductible in the future. When the two numbers agree, there is nothing to do. When they diverge, the difference is a temporary difference and deferred tax follows.

A worked contrast makes it concrete. A machine cost CU 100,000; accounting depreciation to date is CU 20,000 but the tax authority allowed CU 35,000 of tax depreciation. Carrying amount 80,000, tax base 65,000 — a CU 15,000 taxable temporary difference. Interest received in arrears taxed on a cash basis: the receivable's carrying amount is its full value, its tax base is nil until the cash arrives.

Temporary differences come in two flavours (IAS 12.5). Taxable temporary differences will make future taxable profit bigger than accounting profit when they reverse — typically because tax relief was taken early (accelerated tax depreciation) or income was recognised in the accounts before being taxed (a revaluation). They create deferred tax liabilities. Deductible temporary differences work the other way — a provision expensed now but only tax-deductible when paid, or an impairment the tax authority ignores until realised — and create deferred tax assets.

• Carrying amount of asset > tax base → taxable difference → deferred tax liability
• Carrying amount of asset < tax base → deductible difference → deferred tax asset
• For liabilities the logic reverses: carrying amount > tax base → deductible difference

A handful of differences are never provided for: the initial recognition of goodwill, and the initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting nor taxable profit (IAS 12.15, 24).

Deferred tax liabilities are recognised for taxable temporary differences essentially in full (IAS 12.15). Deferred tax assets face a hurdle: they are recognised only to the extent it is probable that future taxable profit will be available to absorb the deductible difference (IAS 12.24, 27). The same test governs unused tax losses and credits carried forward — and the standard is explicitly sceptical here, demanding convincing evidence when the entity has a history of recent losses (IAS 12.34–36). A DTA that fails the test today is reassessed each period and recognised later if prospects improve (IAS 12.37).

Deferred tax is measured at the tax rates expected to apply in the period the difference reverses, based on rates enacted or substantively enacted by the reporting date (IAS 12.47) — not necessarily this year's rate. Where different types of income are taxed differently, the rate follows the expected manner of recovery: using the asset versus selling it can attract different rates, and the measurement follows management's expected route (IAS 12.51–51A). One firm rule that surprises students: deferred tax balances are never discounted, however far in the future the reversal sits (IAS 12.53).

Deferred tax follows the item that created it (IAS 12.57–58, 61A). If the underlying gain or expense sits in profit or loss, so does the tax effect — this is the routine case. If it sits in other comprehensive income, like a revaluation surplus under IAS 16 or fair value moves on FVOCI investments, the deferred tax is charged or credited in OCI too. If it went straight to equity, the tax follows it there. Exams love the revaluation case: an upward revaluation creates a taxable temporary difference (carrying amount rises, tax base does not), so a deferred tax liability is recognised with the debit taken against the revaluation surplus in OCI, not against profit.

Current tax is the amount payable to (or recoverable from) the tax authority for the period, measured at enacted or substantively enacted rates (IAS 12.46). Unpaid amounts sit as a current tax liability; overpayments as an asset. Like deferred tax, current tax is charged wherever the underlying item went — P&L, OCI or equity. The total tax expense line in the income statement is simply current tax plus the movement in deferred tax for the period, and the standard requires a reconciliation of that expense to accounting profit at the standard rate so users can see what drives the effective rate (IAS 12.81(c)).