IAS 12 – Income Taxes

Taxation is a compulsory levy imposed by government on taxable persons — including individuals, companies, and other entities — to raise revenue for public services. In accounting, taxes influence profit reporting, asset valuation, and deferred obligations. IAS 12 – Income Taxes explains how income tax should be recognized, measured, and disclosed in financial statements prepared under IFRS.

Objective of IAS 12

The objective of IAS 12 is to prescribe the accounting treatment for income taxes. The Standard ensures that current and future tax consequences of transactions are appropriately recognized in the entity’s financial statements.

IAS 12 is concerned with how to account for tax in the books — not how to calculate tax under local laws. It assumes tax computations have been done by the tax authorities.

Key Definitions

Over or Under-estimation of Tax

When financial statements are prepared, tax expense is often estimated. The actual amount later agreed with tax authorities may differ:

• Underestimate: Add the difference to current year’s tax expense.
• Overestimate: Deduct the difference from current year’s tax expense.

Tax Base of an Asset

The tax base of an asset is the amount deductible for tax purposes against future economic benefits from that asset. It represents the portion of the asset that the tax authority allows as a deduction.

Example 1: A machine has a carrying amount of GHS 5,000 and a tax base of GHS 2,500. The future taxable amount is (5,000 – 2,500) = GHS 2,500. If all benefits are non-taxable, then the tax base equals carrying amount and no deferred tax arises.

Tax Base of a Liability

The tax base of a liability is its carrying amount less any amount that will be deductible for tax purposes in the future. It represents the non-deductible portion of a liability.

Example 2 – Deductible Liability: Accrued expenses of GHS 100 are deductible when paid. Tax base = 100 – 100 = 0 (nil). The entire liability will be deductible later.

Example 3 – Non-deductible Liability: Accrued penalties of GHS 100 are not tax-deductible. Tax base = 100 – 0 = 100. None will be deductible in the future.

Temporary Differences

A temporary difference arises when the carrying amount of an asset or liability differs from its tax base. These differences reverse in future periods, hence the name “temporary.”

Types of Temporary Differences

1. Taxable Temporary Differences

These lead to future taxable amounts and create a Deferred Tax Liability (DTL). Occurs when:

• Carrying amount of asset > tax base
• Carrying amount of liability < tax base

Example – Credit Sales: Revenue of GHS 5,000 recorded for accounting, but tax authorities tax it upon cash receipt. Deferred tax liability arises for future tax payable.

2. Deductible Temporary Differences

These create Deferred Tax Assets (DTA) because they lead to future tax deductions. Occur when:

• Carrying amount of asset < tax base
• Carrying amount of liability > tax base

Example – Accrued Bonus: Bonus of GHS 10,000 not yet deductible until paid. Tax rate 30%.

Deferred Tax Liability (DTL)

A DTL arises when taxable temporary differences exist, meaning higher tax will be paid later. Common causes include accelerated depreciation, revaluation of assets, and early revenue recognition.

Example – Accelerated Depreciation: Asset cost GHS 100,000; accounting depreciation 10,000; tax depreciation 30,000; tax rate 30%.

Dr Income Tax Expense (P&L) .......... 6,000
    Cr Deferred Tax Liability (SFP) ....... 6,000

Deferred Tax Asset (DTA)

A DTA arises from deductible temporary differences, such as carry-forward losses or warranty provisions. It is recognized only when future taxable profits are probable.

Measurement of Deferred Tax

Deferred tax assets and liabilities are measured using the tax rates expected to apply when the asset is realized or the liability settled, based on tax laws enacted or substantively enacted by the reporting date.

Disclosure and Presentation

• Disclose current and deferred tax separately in the financial statements.
• Offset deferred tax assets and liabilities only when legally enforceable and relating to the same tax authority.

Exam Questions (ICAG & CITG)

Internal and Outbound Links

• IAS 1 – Presentation of Financial Statements
• IAS 2 – Inventories
• IAS 7 – Statement of Cash Flows
• IFRS Foundation – IAS 12 Overview
• Institute of Chartered Accountants, Ghana (ICAG)
• Profs Training Solutions – Ghana’s IFRS and Tax Academy

Conclusion

IAS 12 ensures that both current and deferred tax are recognized consistently with the underlying transactions. Understanding the temporary differences between accounting and tax treatments is crucial for accurate financial reporting and examination success.

Written and explained by Profs Training Solutions – Ghana’s No.1 IFRS and Tax Education Partner.