Accounting for Income Taxes under IAS 12: An Overview
Accounting for Income Taxes under IAS 12: An Overview

Accounting for Income Taxes under IAS 12: An Overview

Accounting for income taxes. You either love it or you hate it. As a former auditor, this is an area that I tried to avoid – like I try to avoid olives, cardio, or catching the flu. However, my colleague, Chris Brundrett, showed me the light. One of the first courses I observed when I started working for GAAP Dynamics over 10 years ago was Chris teaching accounting for income taxes to a group of new senior associates at a Big 4 firm. I realized that my disdain of income taxes had nothing to do with the topic, but everything to do with the fact that no one had been able to explain it in a way I could understand. Since then, I’ve learned to love the topic of IAS 12, and I hope, after this post, you will too!

If you haven’t had the pleasure of being able to see Chris Brundrett in the classroom breaking down the complexities of IAS 12, fear not! He developed an entire course collection covering everything you may need to know about accounting for income taxes under IFRS following the guidance in IAS 12. Let’s explore the basics of that guidance now.

Overview of IAS 12

IFRS, specifically IAS 12 Income Taxes, prescribes the accounting treatment for income taxes. The objective of income tax accounting under IAS 12 is to properly account for the following types of income taxes in the financial statements:

  1. The amount of taxes payable or refundable for the current year
  2. Deferred tax liabilities and assets for the future tax consequences of events that have been recognized in a company’s financial statements or tax returns

But please note, I said income taxes. The scope of the standard is quite important! Income taxes include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such as withholding taxes, which are payable by a subsidiary, associate, or joint arrangement on distributions to the reporting entity. Any other taxes (i.e., equity and transaction taxes, revenue-based taxes, and value-added taxes) should be included in other operating expenses!

IAS 12 achieves its objective by using a comprehensive balance sheet method to recognize both the current tax consequences of transactions and events that have already occurred and the future consequences of the ultimate settlement of an entity’s assets and liabilities as carried on their current financial statements. This results in two types of expense (or income) being recognized as part of total income tax expense (or income):

  1. Current taxes – represents the income taxes payable or refundable in the current year. These taxes are relatively straightforward and are based on the company’s tax return.
  2. Deferred taxes – represents income taxes payable or refundable that will impact current taxes in the future. Essentially deferred taxes are reconciling differences between the IFRS financial statements and tax returns (tax effects of temporary differences). These taxes are more complex and are the primary focus when dealing with accounting for income taxes.

Let’s look at each of these in a bit more detail.

Current tax expense (tax income) is the amount of income taxes payable or receivable for the current year as determined by applying the provisions of tax law to taxable profit (tax loss) for the year. Remember, taxable profit is different from accounting profit.

After the “amount owed to the government” (current tax payable) is calculated, we must then determine whether any other income taxes must be recognized for financial reporting purposes. This depends on whether there are any temporary differences between the amounts reported for tax purposes and those reported for book purposes.

Please note that permanent differences are not defined in IAS 12. Instead, this is a matter of tax law and will therefore vary among jurisdictions! Generally, permanent differences are items that enter pretax financial income but never into taxable income – or vice versa.

Deferred tax expense (tax income) generally represents the change in the sum of the deferred tax assets and deferred tax liabilities during the year.

Remember, a temporary difference is the difference between the asset or liability provided on the tax return (tax base) and its carrying (book) amount in the financial statements. This difference will result in a taxable or deductible amount in the future. Future taxable amounts increase taxable income and result in deferred tax liabilities for financial reporting purposes; and future deductible amounts decrease taxable income and result in deferred tax assets for financial reporting purposes.

Deferred tax assets are recognized to the extent that it is probable that sufficient taxable profit will be available in future years to recover those assets. They should be reviewed at each balance sheet date to determine whether they are still expected to be recoverable. Any amounts not deemed to be recoverable should be written off.

Finally, total tax expense (tax income) is the sum of current tax expense or benefit plus deferred tax expense or benefit.

You may be thinking “that doesn’t sound too bad.” And you’d be right! But remember, we are only scratching the surface in this post. For instance, what happens when the tax code isn’t clear? A company still must take a stand and decide on a tax treatment. What could be the accounting consequence if this decision is audited by the taxing authorities? Might the entity owe more taxes? This gives rise to uncertainty in income taxes. Want a reminder on what IFRIC 23 has to say on this matter? Check out our blog post on the topic here, or check out our eLearning series below to learn more!

Income Taxes: IAS 12 (Part One) [1.0 CPE]

IAS 12 Part One (1.0 CPE) will introduce IAS 12 and its objectives and scope. It will primarily focus on the accounting for current taxes, including uncertainty over income tax treatments. IAS 12 Part Two will focus on the accounting for deferred taxes.

By the end of this course, you should be able to:

  • Recall how to recognize and measure current tax
  • Recall the accounting for uncertainty over income tax treatments set out in IFRIC 23
  • Recognize common financial statement disclosures related to income taxes

Take me to this course!

Income Taxes: IAS 12 (Part Two) [1.5 CPE]

IAS 12 Part One introduced IAS 12 and its objectives and scope. It focused on the accounting for current taxes, including uncertainty over income tax treatments. This course, IAS 12 Part Two, will focus on the accounting for deferred taxes. Identification of temporary differences, measurement, and recognition of deferred taxes, as well as determining whether an exemption from recognition applies, will be covered.

By the end of this course, you should be able to:

  • Recall how to recognize and measure deferred taxes
  • Identify exceptions to deferred tax recognition
  • Recognize common financial statement disclosures related to income taxes

Take me to this course!

About GAAP Dynamics  

We’re a DIFFERENT type of accounting training firm. We don’t think of training as a “tick the box” exercise, but rather an opportunity to empower your people to help them make the right decisions at the right time. Whether it’s U.S. GAAP training, IFRS training, or audit training, we’ve helped thousands of professionals since 2001. Our clients include some of the largest accounting firms and companies in the world. As lifelong learners, we believe training is important. As CPAs, we believe great training is vital to doing your job well and maintaining the public trust. We want to help you understand complex accounting matters and we believe you deserve the best training in the world, regardless of whether you work for a large, multinational company or a small, regional accounting firm. We passionately create high-quality training that we would want to take. This means it is accurate, relevant, engaging, visually appealing, and fun. That’s our brand promise. Want to learn more about how GAAP Dynamics can help you? Let’s talk!


This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.

New Call-to-action
New Call-to-action

Comments (0)

Add a Comment

Allowed tags: <b><i><br>Add a new comment:

Ready To Make a Change?

Cookies on the GAAP Dynamics website

To give you the best possible experience, this website uses cookies. By continuing to browse this website you are agreeing to our use of cookies. For more details about cookies and how to manage them, please see our privacy policy.