IAS 12: Income Taxes

Accounting profit is profit or loss for a period before deducting tax expense.

Taxable profit (tax loss) is the profit (loss) for a period, determined in accordance with the rules established by
the taxation authorities, upon which income taxes are payable (recoverable).

Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a
period.

Tax computation
A series of adjustments is made against a company’s accounting profit to arrive at its taxable profit. These
adjustments involve:

 Adding back inadmissible deductions (accounting expenses which are not allowed as a deduction against
taxable profit).
 Deducting admissible deductions which include:
o expenses that are allowable as a deduction against taxable profit but which have not been
recognised in the financial statements.
o Income recognised in the financial statements but which is not taxed. The tax rate is applied to
the taxable profit to calculate how much a company owes in tax for the period. IFRS describes this
as current tax.

Measurement of current tax

Current tax liabilities (assets) for the current and prior periods must be measured at the amount expected to be
paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or
substantively enacted by the end of the reporting period.

Over-estimate or under-estimate of tax from the previous year

Current tax for current and prior periods must be recognised as a liability until paid. If the amount already paid
exceeds the amount due the excess must be recognised as an asset.

When the financial statements are prepared, the tax charge on the profits for the year is likely to be an estimate.
The figure for tax on profits in the statement of profit or loss is therefore not the amount of tax that will
eventually be payable, because it is only an estimate. The actual tax charge, agreed with the tax authorities some
time later, is likely to be different.

In these circumstances, the tax charge for the year is adjusted for any underestimate or over-estimate of tax in
the previous year.

 an under-estimate of tax on the previous year’s profits is added to the tax charge for the current year.
 an over-estimate of tax on the previous year’s profits is deducted from the tax charge for the current
year.

Abdurrasheed Balogun - 09053016211 Page 1 of 10

Current taxation in the statement of financial position
The taxation charge for the year is the liability that the company expects to pay. Depending on the tax rules, tax
payment dates might vary from country to country but current tax liability is usually presented as a current
liability in Nigeria.

Tax base
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

This is the tax authority’s view of the carrying amount of the asset measured as cost less depreciation calculated
according to the tax legislation (Capital allowance).

IFRS uses the term tax base to refer to an asset or liability measured according to the tax rules.

Deferred Tax
The estimated future tax consequences of transactions and events in the financial statements of the current and
previous periods.

Deferred tax is NOT a tax payable to the government, it is purely an accounting entry.

Deferred tax arises because of:

Accounting profit (PBT) ≠ Taxable profit

This differences can be permanent or temporary

Permanent differences are:

 One off differences between accounting and taxable profits caused by certain items not being taxable/
allowable. They will NEVER affect the taxable profit
 No Deferred Tax arises as a result of these differences
 E.G: Non-Deductible expenses (Entertainment, fines, penalties), Tax exempt income (Government bonds
ad dividends), donation to unapproved charities, Depreciation for Non-qualifying assets.

Temporary differences are:

 Differences between the tax and accounting treatment this year that will be cancelled out in future years.
 Deferred Tax will arise as a result of these differences
 E.G: Depreciation, revaluation of PPE, employee benefits (Gratuity and pension liabilities), unrealized
foreign exchange gains or losses, Items which are taxed on cash basis but will be accounted for on accrual
basis.

Temporary differences are common in Nigeria due to differences between IFRS (accounting standards) and
Nigerian tax laws. These differences lead to deferred tax assets or liabilities, which must be recognized in
financial statements under IAS 12.

The result of this is that the overall tax expense recognised in the statement of profit or loss is made up of the
current tax and deferred tax numbers.

Abdurrasheed Balogun - 09053016211 Page 2 of 10

Tax expense
Tax expense (tax income) is the aggregate amount included in the determination of profit or loss for the period
in respect of current tax and deferred tax.

Tax Expense = Current Tax ± Changes in Deferred Tax

Identifying deferred tax balances

The differences between the two sets of rules will result in different numbers in the financial statements and in
the tax computations.

 a statement of profit or loss (income and expenses) perspective: Compare Income and expenditure
under IFRS vs those allowed under Tax Laws
 a statement of financial position (assets and liabilities) perspective: Compare Carrying amount of assets
and liabilities under IFRS vs Tax laws (Tax Base)

IAS 12 uses the statement of financial position perspective.

Accounting for deferred tax

Step 1: Calculate the temporary difference (if not given)

Carrying Amount – Tax base = Temporary difference

EG: For PPE, CA = Cost – Acc dep, while Tax base = Cost – Acc tax dep (Capital allowance)

Step 2: Determine if the temporary difference is a taxable temporary difference or a deductible temporary
difference.

For an asset:

 If: Carrying Value > Tax Base = Taxable temporary difference

 If: Carrying Value < Tax Base = Deductible temporary difference

For a liability:

 If: Carrying Value < Tax Base = Taxable temporary difference

 If: Carrying Value > Tax Base = Deductible temporary difference

Step 3: Calculate the differed tax position

Temporary difference x Tax rate

 This gives us the figure to be recognized in the statement of financial position as either deferred tax asset
or deferred tax liability.
 The tax rate to be applied is the rate expected to be in effect when the transaction will be recognized by
the tax authority (be taxed or allowed)

Step 4: Determine if it is a differed tax is an asset or a liability

Abdurrasheed Balogun - 09053016211 Page 3 of 10

Refer to Step 2:

 If the temporary difference Is taxable, it gives rise to a deferred tax liability

 If the temporary difference in deductible, it gives rise to a deferred tax asset

Step 5: Calculate the movement in deferred tax position

Movement on deferred tax position goes to the profit or loss (Tax expense)

Closing deferred tax position X

Opening deferred tax position X
Movement in deferred tax position X/(X)
An increase in deferred tax liability will be expensed in profit or loss (Decrease will be recognized as income)
A decrease in deferred tax asset will be expensed in profit or loss (Increase will be recognized as income)

Recognition Criteria for deferred tax

A deferred tax asset must only be recognised to the extent that it is probable that taxable profit will be available
against which the deductible temporary difference can be used.

This means that IAS 12 brings a different standard to the recognition of deferred tax assets than it does to
deferred tax liabilities:
 liabilities are always recognised in full (subject to certain exemptions beyond the scope of your syllabus);
but
 assets may not be recognised in full (or in some cases at all).

Measurement of deferred tax balances

Deferred tax assets and liabilities must not be discounted. Deferred tax assets and liabilities must be measured
at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based
on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Presentation of deferred tax balances

IAS 12: Income taxes contains rules on when current tax liabilities may be offset against current tax assets
Offset of deferred tax liabilities and assets
A company must offset deferred tax assets and deferred tax liabilities if, and only if:
 the entity has a legally enforceable right to set off current tax assets against current tax liabilities; and
 the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation
authority on either:
o the same taxable entity; or
o different taxable entities which intend either to settle current tax liabilities and assets on a net
basis, or to realise the assets and settle the liabilities simultaneously, in each future period in
which significant amounts of deferred tax liabilities or assets are expected to be settled or
recovered.

Abdurrasheed Balogun - 09053016211 Page 4 of 10

 The existence of deferred tax liability is strong evidence that a deferred tax asset from the same tax
authority will be recoverable.

Exam approach
For numerous items, it is best to adopt a tabular approach in computing the deferred tax asset or liability.
Item Carrying Tax Base Temporary Deferred tax asset Deferred tax
Amount difference (TR x TD) liability
(CA - TB) (TR x TD)

Always check if the difference given in the question is a permanent difference or a temporary difference as only
temporary differences lead to deferred tax.

ICAN Past Questions

NOV 19 Q2
a. In accordance with IAS 12 on Income Tax, the income tax expense in statement of profit or loss is composed
of two tax components:
(i) Current tax; and
(ii) Deferred tax
Required:
Explain these TWO tax components. (5 Marks)

b. Dan Ruwa Nigeria Limited is a company that is based in the North-western part of Nigeria and specialises in
the production of bottled and sachets water.

The company was incorporated on January 1, 2018.

The summarised financial statements of the company for the year ended December 31, 2018 is as follows:

Extract of Statements of profit or loss for the year ended December 31, 2018
N’000
Revenue 270,000
Administrative and other allowable expenses (138,000)
Accounting depreciation (11,000)
Net profit before taxation 121,000

Extracts of statement of financial position as at December 31, 2018

Assets (Non-current assets) N’000
Property, plant & equipment 48,000
Motor vehicle 12,000
Less:
Depreciation (11,000)
Carrying amount December 31, 2018 49,000

Abdurrasheed Balogun - 09053016211 Page 5 of 10

 N’000
Ordinary share capital 17,000
Retained earnings 12,000
Other liabilities 20,000
49,000

The Federal Inland Revenue Service (FIRS) granted the company a capital allowance on its non-current assets,
which amounted to N15,000,000 and company income tax rate is 30%.

Required:
i. Calculate the current income tax expense and the deferred tax liability balance that should be disclosed in the
statement of financial position of the company as at December 31, 2018. (10 Marks)
ii. Prepare the statement of profit or loss of Dan Ruwa Nigeria Limited incorporating the tax expense for the year
ended December 31, 2018. (5 Marks)
(Total 20 Marks)
NOV 18 Q3
Yemnike Nigeria Limited has an accounting profit before taxation of N225 million for the year ended December
31, 2017.
The following are extracts of the financial position of Yemnike Nigeria Limited as at December 31,
2017.

NON-CURRENT ASSETS N’000

Building 157,500
Plant and machinery 250,000
Assets held under finance lease 200,000

RECEIVABLES
Trade receivables 182,500
Interest receivable 2,500

PAYABLES
Fines 25,000
Finance lease obligation 216,000
Interest payable 8,250
The following information is relevant:

(i) The building was acquired by the company at the cost of N175million at the start of the year and it is the
policy of the company to depreciate building at 10% p.a. on straight line basis.

The company tax consultants have stated that the company can claim N105million capital
allowance this year on the building.

Abdurrasheed Balogun - 09053016211 Page 6 of 10

(ii) The balance in respect of plant and machinery is after providing for depreciation of N30million and the capital
allowance claimable on it is N25million.

(iii) The asset held under finance lease was acquired during the year. The relevant tax law does not distinguish
between finance lease and operating lease. Rental expense for lease is tax deductible. The annual lease rental is
N72million and was paid on December 31, 2017. The depreciation policy for leased assets is 20% p.a. on straight
line while annual finance charge amounted to N36,667million.

(iv) The receivables figure is shown net of an allowance for doubtful balances of N17.5million. This is the first
year that such an allowance has been recognised. A deduction for debt is only allowed for tax purposes when
the debtor enters liquidation.

(v) Interest income is taxed and interest expense is allowable both on cash bases. There were no opening
balances on interest receivable and interest payable.

(vi) Provision for fines and penalties are not allowable deductions for tax purposes. The fines payable is a
provision made during the year.

Required:
a. Calculate current tax expense for the period. (7 Marks)
b. Calculate the deferred tax liability as at December 31, 2017 (12 Marks)
c. Prepare notes showing the component of tax expense for the year. (1 Mark)
N.B: Income tax rate is 30%. (Total 20 Marks)

MAY 18 Q6
a. IAS 12 - Income Tax details the requirements relating to the accounting treatment of deferred tax and current
income tax.

Required:
Explain the need to provide for deferred tax and briefly outline the principles of accounting for deferred tax
contained in IAS 12. (7 Marks)

b. Lawmarg Nigeria Limited purchased an item of plant for N2,000,000 on October 1, 2014. It had an estimated
life of eight years and an estimated residual value of N400,000. The plant is depreciated on a straight-line basis.
The tax authorities do not allow depreciation as a deductible expense. Instead an initial capital allowance of 40%
of the cost of this type of asset can be claimed against income tax, and 20% per annum (on a reducing balance
basis) of its tax base thereafter. The rate of income tax can be taken as 30%.

Required:
In respect of the above item of plant, calculate the deferred tax charge/credit in Lawmarg Nigeria Limited’s
statement of profit or loss for the year ended

December 31, 2017 and the deferred tax balance in the statement of financial position at that date. (8 Marks)
(Total 15 Marks)

Abdurrasheed Balogun - 09053016211 Page 7 of 10

NOV 14 Q6
Skelewu Nigeria Limited owns the following Property, Plant and Equipment as at 31
December 2011.

Cost Accumulated Carrying

Depreciation Amount
N’000 N’000 N’000
Plant & Machinery 45.000 9,000 36,000
Land 25,000 - 25,000
Office buildings 75,000 15,000 60,000

Additional pieces of information are:

(i) Plant and Machinery are depreciated on a straight-line basis over 5 years. The plant & machinery was acquired
on 1 January 2011.

(ii) Land is not depreciated

(iii) Buildings are depreciated on a straight-line basis over 25 years.

(iv) Depreciation on office building is not deductible for tax purposes but for the plant and machinery; tax
deductible is granted over a period of 3 years in the ratio 50:30:20 percent of cost consecutively.

(v) The accounting profit before tax amounted to N15,000,000 for the 2012 financial year and N20,000,000 for
year 2013. These figures include non- taxable revenue of N4,000,000 in year 2012 and N5,000,000 in year 2013.

(vi) Skelewu Nig. Ltd had a tax loss on 31 December 2011 of N12,500,000. The tax rate for year 2011 was 35%
and 30% for each of years 2012 and 2013.

Required:

a. In accordance with IAS 12 on Income Taxes, differentiate between Current Tax and Deferred Tax. (2 Marks)

b. Prepare the Deferred Tax Account for the year ended 31 December 2013. (10 Marks)

c. Advise the Directors of Skelewu Nigeria Limited on the reasons why it is necessary to recognise or make
provision for Deferred Tax in the company’s Financial Statements. (3 Marks)
(Total 15 Marks)

MAY 23 Q3C
Babanriga Nigeria Limited acquired a factory machine for N10million on January 1, 2019. The machine had
estimated life and residual value of 10 years and N2million respectively. It is depreciated on a straight line basis.
In lieu of depreciation, the tax authority allows a tax expense of 40% of the cost of this type of machine to be
claimed against income tax in the year of purchase and 25% per annum of its tax base subsequently on reducing
balance basis. The prevailing company income tax rate is 30%.

Abdurrasheed Balogun - 09053016211 Page 8 of 10

Required:
Calculate the deferred tax charge or credit which will be recorded in Babanriga Nigeria Limited Statements of
profit or loss and other comprehensive income for the year ended December 31, 2021 and the deferred tax
balance in the statement of financial position at that date. (5 Marks)

MAY 23 Q4
a. Accounting for deferred tax is based on the identification of the temporary differences.
Required:
Explain the term “Temporary difference” and discuss the TWO different types. (3 Marks)

b. State and briefly explain FIVE components of tax expense or income. (5 Marks)

c. Buga Nigeria Limited had an accounting profit before taxation of N196,800,000 for the year ended September
30, 2022. The following balances were extracted from the company’s books as at September 30, 2022.

Non-current assets N‟000 N‟000

Freehold property 236,700
Office equipment 205,000
Tax allowed depreciation (22,500) 182,500
Current assets
Trade receivables 174,250
Interest receivable 3,250
Current liabilities
Fine payable 32,500
Interest payable 10,850

Other information
(i) Interest income is taxed while interest expense is allowable on a cash basis. There were no opening balances
on interest receivable and interest payable.

(ii) The trade receivables above is shown net of an allowance for doubtful balances of N16,750,000. This is the
first year that such an allowance has been recognised. A deduction for debts is only allowed for tax purposes
when the debtors is in the process of winding-up.

(iii) The balances in respect of office equipment are after charging accounting depreciation of N28,250,000 and
tax allowable depreciation of N22,500,000 respectively.

(iv) The freehold property was purchased on October 1, 2021 for N263,000,000 and is being depreciated for
accounting purposes on a 10% per annum. Buga Nigeria Limited is in a position to claim N94,600,000 as
accelerated depreciation on cost as taxable expense in this year’s tax computation.

Abdurrasheed Balogun - 09053016211 Page 9 of 10

Required:
i. Prepare a tax computation and calculate the current tax expense. (4 Marks)
ii. Calculate the deferred tax liability as at September 30, 2022. (6 Marks)
iii. Show the movement on the deferred tax account for the year ended September 30, 2022 given that the
opening balance was N8,100,000. (2 Marks)
(Total 20 Marks)
NOV 23 Q5
a. Explain the following terms in accordance with IAS 12 – Income tax.
i. Deferred tax
ii. Permanent differences
iii. Temporary differences (3 Marks)

b. Shakara Limited was incorporated on January 1, 2022. During the year ended December 31, 2022, the
company made a profit before taxation of N18,150,000.
The following capital expenditure were made during the year.
N’000
Plant and machinery 7,200
Motor vehicles 1,800

The depreciation charged for the year amounted to N1,650,000 and capital allowance granted by Federal Inland
Revenue Services (FIRS) for the same period amounted to N2,250,000. Company income tax rate is 30% and
deferred tax liability brought forward was N1,200,000.

Required:
i. Calculate the company income tax liability for the year ended December 31, 2022. (3 Marks)
ii. Calculate the deferred tax balance that should be disclosed in the statement of financial position of Shakara
Limited as at December 31, 2022. (3 Marks)
iii. Prepare notes showing the movement of deferred tax charged to profit or loss for the year ended December
31, 2022. (3 Marks)
iv. Prepare income tax expense notes that will accompany the statement of profit or loss of Shakara Limited for
the year ended December 31, 2022. (3 Marks)
(Total 15 Marks)

Abdurrasheed Balogun - 09053016211 Page 10 of 10