IAS 12 : Introduction

1      Introduction

Aim

The aim of this workbook is to assist the individual in understanding the IFRS accounting treatment and disclosures of Income Taxes, as detailed in IAS 12.

Definitions of the terms used are set in section 3 on page 4.

Deferred tax is making an accrual for tax, which is then reversed when the tax is paid. The purpose is to account for tax in the same accounting period as the economic event that incurs the tax, regardless of when the tax is paid (or recovered). It links the accounting system with the systems of taxation reported in the financial statements.

In simple terms, sales generally generate a tax charge. Revaluations generate a deferred tax charge (an accrual for tax).

Objective

The accounting profit may differ from the taxable profit as each is compiled according to its own set of rules and regulations.

IFRS is a common set of guidelines for compiling the financial statements but the tax law and tax code of Russia stipulates how the tax liability will be calculated, and when it will be paid.

Tax is often only collected in arrears or in advance. When this happens, there will be timing differences between when the profit is reported and when the tax on it is paid. This generates a tax liability (or tax asset).

IFRS 12 sets out to overcome this problem in terms of presentation so that financial statements prepared under different tax regimes include the effect of taxes at the appropriate time.

IAS 12 prescribes the accounting treatment for income taxes, and the tax consequences of:

(1)  Transactions of the current period that are recorded the financial statements; and

(2)  The future liquidation of assets and liabilities that are recorded only the balance sheet.

If liquidation of those assets and liabilities will make future tax payments larger or smaller, IAS 12 generally requires an undertaking to record a deferred tax liability (or deferred tax asset).

IAS 12 requires an undertaking to account for the tax consequences of transactions, in the same manner that it accounts for the transactions. i.e.

q  For transactions recorded in the income statement, any related tax consequences are also recorded in the income statement.

q  For transactions recorded directly in equity, any related tax consequences are also recorded directly in equity (for example, property revaluations under IAS 16).

The recognition of deferred tax assets, and liabilities, in a business combination affects the amount of goodwill arising in that combination.

IAS 12 also covers:

1.     Recognition of deferred tax assets arising from unused tax losses, or unused tax credits,

2.     Presentation of income taxes, and

3.     Disclosure of information relating to income taxes.

Scope

IAS 12 should be applied in accounting for income taxes including: 

1.     All domestic, and foreign, taxes based on taxable profits.

2.     Taxes, such as withholding taxes payable by a subsidiary, associate, trade investment or joint venture on distributions to the reporting undertaking.

IAS 12 does not deal with the methods of accounting for government grants, or investment tax credits (see IAS 20).

However, IAS 12 does deal with the accounting for temporary differences that may arise from such grants, or investment tax credits each of which alter the timing of when the tax is payable.