IAS 12: Taxation

1. Current tax

1.1 Current tax is the amount payable to tax authorities with regards to the trading activities
of the current period.

Double entry for current tax is similar to double entry for expenses:

Debit tax charge (transferred to the debit side of the income statement)

Credit tax liability (transferred to the credit side of the statement of financial position).
Current year’s tax is normally paid in the following year

1.2 Accounting profit – Net profit for a period before deducting the tax expense

1.3 Taxable profit (tax loss) – is profit (loss) for a period determined according to tax rules
of a jurisdiction, and upon which income taxes payable (recoverable) are determined.

1.4 Tax expense (income) – the aggregate amount included in the determination of net
profit or loss for the period with regards to current tax and deferred tax

1.5 Current tax liabilities are recognised for any unpaid tax for the current period and prior
periods

1.6 current tax assets are recognised for any excess tax payment in the current period or
prior periods.

Illustrative exercise

Lalela Limited had taxable profits of $2,000.00 in 2019. In 2018 income tax was estimated at
$400 in tax. The tax rate is 25%

Required

Calculate tax charge and liability in 2019 if the 2018 tax was subsequently ascertained to be

a) $550
b) $370

Solution

a) Tax due on 2019 profits: 2,000.00 X 25/100 = $500

An alternative treatment in (b) is to show the $30 due as income in the statement of
comprehensive income and as an asset in the statement of financial position

1.7 The carrying back of tax losses

When a company makes a tax loss in a given year, it may carry it back to recover the
current tax of a previous period. In this case, the standard requires recognition of such a
benefit as income.

Illustrative example

Asiluzikakhulu Limited paid a tax of $300 on its year2018 profits. In 2019 in made a tax
loss of $80. The tax rate is 25%

Required

Show the tax charge and tax liability for 2019

Solution

Tax repayment due on tax losses: $80 x 25/100 = $20

Debit – Tax receivable (statement of financial position)

Credit – Tax repayment (statement of profit and loss)

1.8 Measurement of current tax liabilities and assets – the amounts expected to be
paid to or recovered from tax authorities.
1.9 Recognition of current tax – it is recognised as income or expense and included in
the net profit or loss for the period in the exception of:
 Tax arising from a business combination. In this case, it is included in the
calculation of goodwill
 Tax arising from a transaction or event which is recognised directly in equity.
In this case the related tax is charged directly to equity e.g. when there is a
change in opening retained earnings as a result of a change in accounting
policy that is applied retrospectively.

1.10 Presentation – In the statement of financial position, tax assets and liabilities should
be shown separately from other assets and liabilities.
 2. Deferred tax

The term deferred tax may be understood clearer by explaining it after explaining other
terms/concepts associated with it.

2.1 Tax base of an asset

 is the amount attributable to the asset for tax purposes.

Illustrative exercise

State the tax base for each of the following assets:

i. A machine cost $600 and has a carrying amount of $400. For tax purposes,
depreciation of $80 has already been deducted in the current and prior periods and
the remaining cost will be deductible in future periods either as depreciation or
through deduction on disposal. Revenue generated by using the machine is taxable,
any gain on disposal of the machine will be taxable and any loss on disposal will be
deductible for tax purposes.
ii. Interest receivable has a carrying amount of $200. The related interest revenue will
be taxed on a cash basis.
iii. Trade receivables have a carrying amount of $150. The related revenue has already
been included in taxable profit (tax loss)
iv. A loan receivable has a carrying amount of $300. The repayment of the loan will
have no tax consequence.

Solution

In the solution which follows, for each scenario, you are given a portion of the attribute of a
tax base of an asset as stipulated in three different bullets at the beginning of this
subsection (2.1) above. The given bullet corresponds with the bullet incorporating the
specific portion of the attribute which helps to come up with the answer.

i. $580
 Revisit this bullet at the beginning of 2,1 above
 ii. Nil – Currently the interest receivable amount is not yet recognised as an asset for
tax purposes since the related interest revenue will be taxed on cash basis and cash
has not yet been received
 Revisit this bullet at the beginning of 2.1 above
iii. $150 – the related revenue has already been included in the current period’s taxable
profit (tax loss)
 Revisit this bullet at the beginning of 2.1 above
iv. $300 – The economic benefits are not taxable
 Revisit this bullet at the beginning of 2.1 above.

2.2 Accounting profits and taxable profits – Accounting profits are profits determined on
accounting bases whilst taxable profits are profits determined on taxation basis. If all items
regarded as revenue for accounting purposes are also regarded as revenue for taxation
purposes (and vice versa) and all items regarded as expenses are also regarded as allowable
deductions for tax purposes (and vice versa), then accounting profit will always be equal to
taxable profits in any given year but this is NOT always so because of permanent differences
and temporary differences.

2.3 Permanent differences – is whereby taxable profits differ from accounting profits as a
result of certain items which may be included in calculation of accounting profit but
excluded from the calculation of taxable profits e.g. entertainment expenses.

2.4 Temporary differences – is whereby items of revenue or expense are included in both
accounting profits and taxable profits but in different accounting periods.