1

IAS 12

INCOME TAX

BY
REDWAN KELIL
 2

Overview
 INTRODUCTION
 OBJECTIVE
 SCOPE
 DEFINITIONS
 tax base
 RECOGNITION OF CURRENT TAX ASSETS AND LIABILITIES
 RECOGNITION OF DEFERRED TAX ASSETS AND LIABILITIES
 taxable temporary deference
 deductible temporary deference
 Permanent difference
2
 DISCLOSURE
 INTRODUCTION
 companies spend a considerable amount of time and effort to minimize
their income tax payments. And with good reason, as income taxes are a
major cost of doing business for most corporations.
 companies must present financial information of present and potential
tax obligations and tax benefits.
 On this standard, we discuss the basic guidelines that companies must
follow in reporting income taxes. .

3
 ACCOUNTING FOR INCOME TAXES

 Corporations must file income tax returns following the guidelines developed by the
appropriate tax authority.
 Because IFRS and tax regulations differ in a number of ways, frequently the
amounts reported for the following will differ:
 Income tax expense (IFRS)
 Income taxes payable (Tax Authority)
 The statement prepared for the investors and creditors is General purpose financial
statement (financial statement) based on IFRS
 The statement prepared for the tax authority is special purpose (tax return) based on
tax code
LO 1
 ACCOUNTING FOR INCOME TAXES
Financial Statements Tax Return

vs.

Pretax Financial Income  Taxable Income

IFRS Tax Code
Income Tax Expense  Income Taxes Payable

LO 1
 Objective

To Understand the concepts, principles and rules

for: Identifying and Accounting for income taxes
and Accounting for deferred income tax
 Scope

Includes
 . all taxes that are based on taxable income

“Taxable Income" shall mean the amount of income subject to tax after
deduction of all expenses and other deductible items allowed under
Income Tax Proclamation, its amendments, regulations, directives and
related circulars.

Excludes taxes that are not based on income tax

 Definitions
Accounting profit.
Net profit or loss for a period before deducting tax expense. (in
». accordance with the rules of IFRS)
Tax expense (tax income) .
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 .
The amount of income taxes payable (recoverable) in respect of the taxable profit (tax
loss) for a period.
Taxable profit (tax loss). .
The profit (loss) for a period, determined in accordance with the rules of ERCA on which
income taxes are payable
 Current tax
overview of the recognition and measurement
requirements
».
Recognize a current tax liability (Asset) for

• tax payable(Recoverable) on taxable profit(loss) for the current

and past periods (current tax)

Measure current tax liability (asset) at

• The amount the entity expects to pay (recover) using substantively

enacted tax rates
 CASE 1 ILLUSTRATION 19-2
Financial Reporting
Income

IFRS Reporting 2015 2016 2017 Total

Revenues $130,000 $130,000 $130,000 $390,000

Expenses 60,000 60,000 60,000 180,000
Pretax financial income $70,000 $70,000 $70,000 $210,000

Income tax expense (40%) $28,000 $28,000 $28,000 $84,000

ILLUSTRATION 19-3
Tax Reporting 2015 2016 2017 Total

Revenues $100,000 $150,000 $140,000 $390,000

Expenses 60,000 60,000 60,000 180,000
Taxable income $40,000 $90,000 $80,000 $210,000

Income taxes payable (40%) $16,000 $36,000 $32,000 $84,000

LO 1
 Book vs. Tax Differences ILLUSTRATION 19-4
Comparison of Income
Tax Expense to Income
Taxes Payable

Comparison 2015 2016 2017 Total

Income tax expense (IFRS) $28,000 $28,000 $28,000 $84,000

Income tax payable (TA) 16,000 36,000 32,000 84,000
Difference $12,000 $(8,000) $(4,000) $0

Income tax expense (40%) $28,000 $28,000 $28,000 $84,000

Are the differences accounted for in the financial statements? Yes

Year Reporting Requirement

2015 Deferred tax liability account increased to $12,000 (“REAL LIABILITIES”)
2016
Deferred tax liability account reduced by $8,000
2017 Deferred tax liability account reduced by $4,000

LO 1
» The differences between income tax expense and income taxes
payable in this example arise for a simple reason.
» For financial reporting, companies use the full accrual method
to report revenues. For tax purposes, they generally use a
modified cash basis.
 Permanent differences

Permanent differences result from items that (1) enter into pretax financial income but
never into taxable income or (2) enter into taxable income but never into pretax
financial income.

Permanent differences affect only the period in which they occur. They do not give rise
to future taxable or deductible amounts. There are no deferred tax consequences to be
recognized.

LO 6
 permanent differences
and tax loss carried forward
» Permanent Difference- are differences that will remain unsolved
period after period. Eg- donation, fines and expenses for violating
the law, life insurance proceeds and tax exempt incomes entities
shall deduct or add back permanent differences from accounting
profit in order to determine taxable profit
» Tax loss carried forward- are tax losses that are to be taken forward
and use against future taxable profits
 Current tax: permanent differences and tax loss carried
forward
test your understanding
» The Government specifies that:
» Adama real estate must each year pay a tax = 30% of taxable profit for the year
» taxable profit is determined in accordance with IFRS adjusted for specified expenses that
are excluded from the calculation of taxable income (ie donations and entertainment)
» If the determination of taxable business income results in a loss in a tax period, that loss
may be set off against taxable income in the next five (5) tax periods, earlier losses being
set off before later losses.

» Adama real estate determines, accounting profit in accordance with

IFRS:
» profit for 2014 to be 900,000 (donation expense = 100,000)
» loss for 2015 to be 400,000 (entertainment expense =100,000)
Continued…
 Current tax: permanent differences and tax loss

» Adama real estate current tax expense for 2014 is? (choose one of):
1) 1,000,000; 2) 900,000; 3) 800,000; 4) 300,000; 5) 230,000; or
6) 200,000.
Answer- 300,000

» Adama real estate current tax income for 2015 is? (choose one of):
1) 500,000; 2) 400,000; 3) 300,000; 4) 130,000; 5) 100,000;
6) 90,000; or 7) nil.
Answer-90,000
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 Deferred tax
definitions cont.’
» 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:
 Deductible temporary differences

 The carry forward of unused tax losses

Temporary differences are differences between the carrying amount of an asset or liability
in the statement of financial position and its tax base.
 Temporary differences

(a) interest revenue is included in accounting profit on a time proportion

basis but may, in some jurisdictions, be included in taxable profit when
cash is collected. The tax base of any receivable recognised in the
statement of financial position with respect to such revenues is nil
because the revenues do not affect taxable profit until cash is collected;
(b) depreciation used in determining taxable profit (tax loss) may differ
from that used in determining accounting profit. The temporary
difference is the difference between the carrying amount of the asset
and its tax base which is the original cost of the asset less all
deductions in respect of that asset permitted by the taxation authorities
in determining taxable profit of the current and prior periods.
21
 Deferred tax
definitions cont.’
» Temporary differences may be either:

. temporary differences that will result in taxable amounts in

Taxable temporary determining taxable profit (tax loss) of future periods when the
differences, carrying amount of the asset or liability is recovered or settled

which are temporary differences that will result in amounts

Deductible temporary that are deductible in determining taxable profit (tax loss)
differences of future periods when the carrying amount of the asset or
liability is recovered or settled
 More Examples Tax Base

1. Interest receivable has a carrying amount of $1,000. The related interest revenue
will be taxed on a cash basis.

2. Trade receivables have a carrying amount of $10,000. The related revenue has
already been included in taxable profit (tax loss).

3. A loan receivable has a carrying amount of $1m. The repayment of the loan will
have no tax consequences.
Future Deductible Amounts

Deferred Tax Asset

A deferred tax asset represents the increase in taxes refundable (or saved) in future
years as a result of deductible temporary differences existing at the end of the current
year.

LO 3
 Presentation

» The tax expense (income) related to profit or loss from ordinary activities shall be
presented as part of profit or loss in the statement(s) of profit or loss and other
comprehensive income.
Thank You
Questions and Discussion
 Case study 1
 Facts
ethio telecom has the following assets and liabilities recorded in its Statement of financial position at June 30, 2015:

Items Carrying value million'

Property 10
Plant and equipment 5
Inventory 4
Trade receivables 3
Trade payables 6
Cash 2
The value for tax purposes of property and for plant and equipment are 7 million and 4 million respectively. The entity has made a
provision for inventory obsolescence of 2 million, which is not allowable for tax purposes until the inventory is sold. Further, an
impairment charge against trade receivables of 1 million has been made. This charge does not relate to any specific trade receivable
but to the entity’s assessment of the overall collectability of the amount. This charge will not be allowed in the current year for tax
purposes but will be allowed in the future. Income tax paid is at 30%.
 Required
Calculate the deferred tax provision at June 30, 2015
 Case study 2
 Facts

ethio telecom has revalued its property and has recognized the increase in the revaluation in its financial statements. The

carrying value of the property was 8 million and the revalued amount was 10 million. Tax base of the property was 6 million. The

tax rate applicable to profits is 30% and the tax rate applicable to profits made on the sale of property is 15%. If the revaluation

took place at the entity’s year end of June 30, 2014

Required

calculate the deferred tax liability on the property as of that date.

 Solution
 0.6 million. The carrying value after revaluation is 10 million, the tax base is 6
million, and the rate of tax applicable to the sale of property is 15%; therefore, the
answer is 10 million minus 6 million multiplied by 15%, or 0.6 million.
 Case study 3
 Facts

ethio telecom has spent 600,000 in developing a new product. These costs meet the definition of an intangible asset under

IAS 38 and have been recognized in the Statement of financial position. Local tax legislation allows these costs to be

deducted for tax purposes when they are incurred. Therefore, they have been recognized as an expense for tax purposes.

At the year-end the intangible asset is deemed to be impaired by 50,000.

 Required

Calculate the tax base of the intangible asset at the accounting year-end.
 Solution
 Zero, because the tax authority has already allowed the intangible asset
costs to be deducted for tax purposes.
 Case study 5
 Facts

ethio telecom operates in Ethiopian jurisdiction where the tax rate is 30% for retained profits and 40% for distributed

profits. Management has declared a state dividend of 10 million, which is payable after the year-end. A liability has

not been recognized in the financial statements at the year-end. The taxable profit before tax of the entity was 100

million.

 Required

Calculate the current income tax expense for ethio telecom for the current year.
Solution

 30million (30% of 100 million). The tax rate that should be applied
should be that relating to retained profits.