Overview

IAS 12 Income Taxes establishes the accounting treatment for income taxes, covering both current tax (the tax payable for the current period) and deferred tax (the future tax consequences of temporary differences between accounting and tax carrying amounts).

IAS 12 addresses three interconnected areas:

• Current tax — recognition and measurement of tax payable or recoverable for the current reporting period
• Deferred tax — recognition of DTAs and DTLs arising from temporary differences, unused tax losses, and unused tax credits
• Disclosures — reconciliation of effective tax rate, movements in deferred tax, and evidence supporting DTA recognition

The standard applies to taxes based on taxable profit (income taxes) and excludes taxes on distributions such as withholding tax on dividends.

Current Tax

Current tax is the amount of income tax payable (or recoverable) in respect of the taxable profit (or tax loss) for the current period, measured at the enacted tax rate (IAS 12.12).

Key points:

• Current tax liabilities are recognised when the entity has a legal obligation to pay tax to the tax authority
• Current tax assets (prepayments, overpayments, or refunds due) are recognised when the entity has a legal right to recover the amounts
• If a tax position is uncertain, the entity uses the expected value or most likely amount depending on which better predicts resolution

Current and deferred tax arising from the same transaction are recognised consistently: if the underlying item flows through profit or loss, so does the tax; if through OCI or equity, so does the tax (IAS 12.61A).

Deferred Tax

Deferred tax arises from temporary differences — situations where the carrying amount of an asset or liability in the financial statements differs from its tax base.

The balance sheet liability method (IAS 12.5) requires:

• A deferred tax liability (DTL) for all taxable temporary differences (additional tax payable when the difference reverses)
• A deferred tax asset (DTA) for deductible temporary differences, unused tax losses, and unused tax credits — but only to the extent it is probable that future taxable profit will be available (IAS 12.34)

DTAs and DTLs are measured using the tax rate enacted or substantively enacted at the reporting date (IAS 12.47), classified as non-current, and offset only when they relate to the same tax authority and same taxable entity (IAS 12.73–74).

For detailed mechanics, worked journal entries, and the recognition probability assessment, see IAS 12 — Deferred Tax Accounting.

Disclosures

IAS 12.79–88 requires extensive disclosures on income taxes, including:

• Components of tax expense: current tax, deferred tax movements by category, adjustments for prior periods
• Tax rate reconciliation: the effective tax rate reconciled to the applicable statutory rate, with each significant reconciling item explained (IAS 12.81(c))
• Deferred tax by temporary difference category: movements in DTAs and DTLs, with opening and closing balances
• Unrecognised DTAs: amounts and expiry dates of unused tax losses and credits for which no DTA is recognised (IAS 12.82)
• Evidence for DTA recognition: where the entity has recent tax losses, an explanation of why recognition is supported

The tax rate reconciliation (the "tax proof") is a critical disclosure that allows users to understand why the effective tax rate differs from the statutory rate. Common reconciling items include non-deductible expenses, tax-exempt income, tax credits, and rate differences on foreign operations.

Summary