PAS 12 INCOME TAXES Non-deductible expenses

 Fines, penalties and/or surcharges

OBJECTIVE  Premiums paid on life insurance for officers
 To prescribe the accounting treatment and employees (company is the beneficiary)
for income taxes.  Loss on expropriation of property
 Impairment of loss on goodwill
**In meeting this objective, PAS 12 notes the  Charitable contribution in excess of tax
following: liabilities

 It is inherent in the recognition of an  Temporary differences – differences

asset or liability that the asset or liability between the carrying amount of an asset
will be recovered or settled. This or liability in the statement of financial
recovery or settlement may give rise to position and its tax bases
future tax consequences which should be  Timing differences – items of income
recognized at the same time as the asset and expenses which are included in both
or liability. accounting and taxable income but at
 An entity should account for the tax different time periods
consequences of transactions and other  Taxable temporary differences –
events in the same way it accounts for these will result in taxable amounts in
the transactions or other events determining taxable profit (tax loss) of
themselves. future periods when the carrying amount
of the asset or liability is recovered or
DEFINITION OF TERMS
settled
 Accounting/Financial income –net  Cases where an item give rise to a future
income for the period before deducting taxable amount/taxable temporary
income tax expense (Revenue – differences
Expenses = Accounting Income)  Accounting/Financial Income > Taxable
 Taxable income – income determined Income
in accordance with rules established by 1. Revenues and gains included in
taxation authorities (Taxable Revenue accounting income for the current
– Deductible Expenses = Taxable period but are taxable in the future
Income) periods
 Tax base – the amount attributed to the 2. Expenses and losses that are
asset or liability for tax purposes deductible for tax purposes in the
 Permanent differences – items or current period but are deductible for
revenue and expense which are included accounting purposes in future periods
in either accounting income or taxable
income but will never be included in the NOTE!
other ASSET: Carrying amount > Tax Base
Classification LIABILITY: Carrying amount < Tax Base

Non-taxable Revenues  Deductible temporary differences –

 Income already subjected to final tax these will result in amounts that are
(e.g. interest income on time/savings deductible in determining taxable profit
deposit, government bonds, treasury (tax loss) of future periods when the
bills and gains subject to capital gains carrying amount of the asset or liability
tax) is recovered or settled
 Income exempted from income  Cases where an item give rise to a future
taxation (intercompany dividends from deductible amount/deductible temporary
a domestic corporation and proceeds differences
from life insurance)  Financial Income < Taxable Income
1. Revenues and gains are included in taxable
income of the current period but are
 included in accounting income of future carrying amount. (If recovery has NO
periods. TAX CONSEQUENCES, tax base is equal
2. Expenses and losses are deducted from to CARRYING AMOUNT)
accounting income of current period but are  Revenue received in advance – the
deductible for tax purposes in future periods tax base is the carrying amount less
revenue that will not be taxable in future
NOTE! periods
ASSET: Carrying amount < Tax Base  Other liabilities – the tax base is the
LIABILITY: Carrying amount > Tax Base carrying amount less any amount that
will be deductible for tax purposes
 Deferred tax liabilities (DTL) –  Unrecognised items – if items have
amounts of income taxes payable in tax base but are not recognized in SFP,
future periods in respect to taxable carrying amount is nil
temporary differences  Tax bases not immediately apparent
 Deferred tax assets (DTA) – amounts – tax base should be determined in such
of income taxes recoverable in the future a manner to ensure the future tax
periods in respect of: consequences of recovery or settlement
 Deductible temporary differences of the item is recognized as a deferred
 Carryforward of unused tax tax amount
losses  Consolidated financial statement –
 Carryforward of unused tax tax bases are determined by reference
credits to any consolidated tax return
 Current Tax Liability – the current tax
expense or the amount of income tax MEASUREMENT OF CURRENT TAX
actually payable; classified as current  Current tax liability/asset – measured
liability using the tax rate that has been enacted
 Current Tax Asset – the excess of the and effective at the end of the reporting
amount of tax already paid for the period
current period over the amount actually
payable for the period RECOGNITION OF TAX AMOUNTS FOR THE
PERIOD
ACCOUNTING METHODS FOR INCOME TAXES
Formula:
INCOME STATMENT APPROACH- Focuses on
Current tax for the period
timing differences only in the computation of
Add: Movement in deferred tax balances
deferred tax asset or deferred tax liability,
for the period
timing differences will affect the current period
Tax recognized for the period
income statement and will be reverse on one or
more subsequent period
RECOGNITION OF DEFERRED TAX LIABILITIES

FINANCIAL STATEMENT APPROACH- This Deferred tax liabilities – recognized for all
method considers all temporary differences TAXABLE temporary differences
including timing differences. There are
differences which might affect only the financial EXCEPTIONS:
position which are technically not timing
 Goodwill arising from business
differences.
combination and which is non-deductible
for tax purposes
IFRS requires the use of the statement of
 Asset or liability, other than those in a
financial position approach
business combination, that does NOT
GUIDANCE IN DETERMINING TAX BASES affect either accounting or taxable
income
 Assets – the tax base is the amount  Undistributed profit from subsidiary,
that will be deductible against taxable associate or joint venture when:
economic benefits from recovering the
  the entity is able to CONTROL GUIDANCE IN MEASURING DEFERRED TAXES
the timing of the reversal of the
differences; and  Tax rate/base is impacted by the
 it is PROBABLE that the reversal manner it recovers its assets or
will NOT occur in the foreseeable settles its liabilities – measurement is
future consistent in which asset is recovered or
liability is settled
Formula:  Revalued non-depreciable assets –
measurement reflects the tax
Carrying amount consequences of selling the asset
Less: Tax Base  Investment property measured at
Taxable Temporary Difference fair value – measurement reflect the
Multiplied by: Tax Rate rebuttable presumption that the
Deferred Tax Liability investment property will be recovered
through sale
RECOGNITION OF DEFERRED TAX ASSETS  Deferred tax assets and liabilities
Deferred Tax Assets – recognized for: CANNOT be discounted

 deductible temporary differences RECOGNITION OF TAX AMOUNTS FOR THE

 unused tax losses and unused tax credits PERIOD:
(only if it is PROBABLE that there will be FORMULA:
sufficient future taxable profit against Current tax for the period
which the loss or credit carryforward can + Movement in deferred tax balance for
be utilized) the period
Tax to recognize for the period
**The carrying amount of the DTA is reviewed
at the end of each reporting period and reduced Current tax and deferred taxes is recognize as
if appropriate. income or expense and included in the profit or
loss for the period except to the tax arising
EXCEPTIONS:
from:
 Asset or liability, other than those in a
business combination, that does NOT  Transactions or events outside the profit or
affect either the accounting or taxable loss
income  A business combination in which case the
tax amounts are recognized as identifiable
Formula: asset or liabilities at the acquisition date,
and accordingly effectively taken into
Carrying amount
account in the determination of goodwill
Less: Tax Base
under IFRS 3.
Deductible Temporary Difference
Multiplied by: Tax Rate
ADDITIONAL GUIDANCE IN DETERMINING THE
Deferred Tax Asset
INCOME TAX FOR THE PERIOD:
Unused Tax Loss/Credits
 When there’s a difficulty in measuring the
Multiplied by: Tax Rate
tax attributable to a transaction outside of
Deferred Tax Asset
profit or loss it is thereby determine using
MEASUREMENT OF DEFERRED TAXES pro-rata allocation or another appropriate
method
 DTA and DTL - measured at tax rates  Where payment of dividends impacts tax
that are expected to apply to the period rates or resulted in taxable amount or
when the asset is realized or the liability refunds, this is more directly linked to past
is settled transaction or event and so are recognize in
 The measurement reflects the entity’s profit or loss unless this events arise from
expectations at the end of the reporting outside profit or loss
period
 The impact of business combination or the  Temporary differences associated with
recognition on pre-combination deferred tax investments in subsidiaries, branches
assets are not included in the determination and associates, and interests in joint
of goodwill. arrangements
 The recognition of acquired deferred tax  Tax relating to discontinued operations
benefit subsequent to a business  Information about the impacts of
combination as period adjustment if they business combinations on an acquirer’s
qualify for that treatment, or otherwise deferred tax assets.
recognized in profit of loss,  Recognition of deferred tax assets of an
 Tax benefits of equity settled share based acquiree after the acquisition date.
payment transaction that exceed the tax  Details of deferred tax asset
affected cumulative remuneration expense  Tax consequence of future dividend
are considered to relate to an equity item payment
and are recognized directly in equity.

PRESENTATION
Current tax asset and current tax
liabilities can only be offset int the statement of
financial position if the entity has the legal right
and the intention to settle on a net basis.
Deferred tax asset and Deferred tax
liabilities can only be offset in the financial
position if the entity has the legal right to settle
current tax amounts on a net net basis and the
deferred tax amounts are levied by the same
taxing authority on the same entity or different
entities that intend to realize the asset and
settle the liability at the same time
The amount of tax expense (income)
related to profit or loss is required to be
presented in the statement of comprehensive
income.
The tax effects of items included in other
comprehensive income can either be shown net
for each item, or the items can be shown before
tax effects with an aggregate amount of income
tax for group of items.

DISCLOSURE
IAS 12 REUIRES THE FOLLOWING
DISCLOSURE (not all are indicated others can be
seen in IAS 12.80, IAS 12.81 and IAS 12.82)
 Current tax expense
 Any adjustment of taxes of prior period
 Amount of deferred taxes (income)
relating to the origination and reversal
of temporary differences.
 Write down, or reversal of a previous
write down, of a deferred tax asset.
 Aggregate current and deferred tax
relating to items recognized directly on
equity
 Changes in tax rates