IAS 12
Active
Income Taxes
Prescribes the accounting treatment for current and deferred income taxes, including the recognition, measurement and disclosure of tax consequences arising from transactions and events.
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Conceptual Framework Linkage
Why deferred tax is a genuine Framework asset/liability
Tax law and accounting standards frequently recognise income and expenses in DIFFERENT periods. IAS 12 exists to recognise the future tax consequences of these timing differences NOW, as genuine assets and liabilities under the Conceptual Framework – not merely as a reconciling disclosure item.
HOW DEFERRED TAX MAPS TO THE FRAMEWORK'S ELEMENTS
Deferred tax liability – a present obligation, arising from a past transaction, requiring an outflow of resources (higher future tax payments) – a genuine Framework liability Deferred tax asset – a present economic resource controlled by the entity, from a past event, with the potential to reduce future tax payments – a genuine Framework asset Past event – the transaction or event that created the temporary difference (e.g. purchasing an asset depreciated differently for tax and accounting purposes)
IAS 12 uses the BALANCE SHEET (temporary difference) approach rather than the older income-statement (timing difference) approach – a deliberate alignment with the Framework's asset/liability-driven definition of income and expense.
Measurement principles applied by IAS 12
Deferred tax is measured using tax rates and laws that have been ENACTED OR SUBSTANTIVELY ENACTED by the reporting date – reflecting the manner in which the entity expects to recover/settle the underlying asset/liability.
Framework basisUsed by IAS 12 for…
Undiscounted, expected settlement valueBoth current and deferred tax – NO discounting to present value, unlike many other long-term liabilities
Enacted/substantively enacted tax ratesThe rate expected to apply when the asset is realised or liability settled
Qualitative characteristics in action: the strict prohibition on discounting deferred tax balances trades some theoretical relevance for greater verifiability and comparability – discounting would require highly subjective assumptions about the TIMING of reversal that IAS 12 deliberately avoids.
2
Scope & Applicability
What IAS 12 covers
IAS 12 prescribes the accounting treatment for income taxes – encompassing ALL domestic and foreign taxes based on taxable profits, including withholding taxes payable by a subsidiary/associate/joint venture on distributions to the reporting entity.
SCOPE INCLUDES
Current tax, deferred tax, and the tax consequences of dividends and other distributions.
IAS 12 does NOT address methods of accounting for government grants (IAS 20) or investment tax credits – though it DOES address the temporary differences that may arise FROM such grants or credits.
Key definitions you must know
Tax base
The amount attributed to an asset or liability for TAX purposes – the amount that will be deductible for tax purposes against any future taxable economic benefits (assets), or the carrying amount less amounts deductible in future periods (liabilities).
Temporary difference
The difference between the carrying amount of an asset/liability in the SOFP and its tax base – either a taxable temporary difference (leads to a deferred tax liability) or a deductible temporary difference (leads to a deferred tax asset).
Current tax
The amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.
Taxable profit / tax loss
The profit (loss) for a period, determined in accordance with rules established by the TAXATION authorities, upon which income taxes are payable (recoverable).
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Current Tax
Recognition & measurement mechanics
Current tax expense = Taxable profit × Applicable tax rate
Current tax for the current and prior periods is recognised as a LIABILITY to the extent unpaid. If the amount already paid exceeds the amount due, the excess is recognised as an ASSET.
MEASUREMENT
Measured at the amount expected to be paid to (recovered from) the tax authorities, using tax rates and laws enacted or substantively enacted by the reporting date.
Worked example – current tax computation
Example 1: Accounting profit to current tax liability
Accounting profit before tax: $500,000. Depreciation charged: $80,000. Tax depreciation (capital allowances) claimed: $120,000. Entertainment expenses of $10,000 are non-deductible for tax. Tax rate: 25%.
Accounting profit: 500,000
+ Depreciation added back: +80,000
− Tax depreciation deducted: −120,000
+ Non-deductible entertainment: +10,000
= Taxable profit: 470,000
Current tax liability = 470,000 × 25% = $117,500
+ Depreciation added back: +80,000
− Tax depreciation deducted: −120,000
+ Non-deductible entertainment: +10,000
= Taxable profit: 470,000
Current tax liability = 470,000 × 25% = $117,500
Dr
Income tax expense $117,500
SOPL
Cr
Current tax liability $117,500
SOFP
4
Temporary Differences – The Core Mechanic
Identifying temporary differences with a worked example
Temporary difference = Carrying amount (accounting) − Tax base
TAXABLE TEMPORARY DIFFERENCE → DEFERRED TAX LIABILITY
Carrying amount > Tax base – e.g. an asset where tax depreciation has been claimed FASTER than accounting depreciation, so future taxable profit will be HIGHER when the asset is used/sold.
DEDUCTIBLE TEMPORARY DIFFERENCE → DEFERRED TAX ASSET
Carrying amount < Tax base – e.g. a provision recognised for accounting purposes but not yet tax-deductible until actually paid, so future taxable profit will be LOWER when the deduction is finally allowed.
Example 2: PPE temporary difference
A machine cost $200,000. Accumulated accounting depreciation to date: $40,000 (carrying amount = $160,000). Accumulated tax depreciation to date: $70,000 (tax base = $130,000). Tax rate: 25%.
Temporary difference = 160,000 − 130,000 = $30,000 taxable temporary difference (carrying amount exceeds tax base)
Deferred tax liability = 30,000 × 25% = $7,500
Deferred tax liability = 30,000 × 25% = $7,500
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Deferred Tax Liabilities – Recognition & Exceptions
General rule and the three recognition exceptions
A deferred tax liability is recognised for ALL taxable temporary differences, EXCEPT to the extent it arises from:
The initial recognition of GOODWILL The initial recognition of an asset/liability in a transaction that is NOT a business combination, and at the time of the transaction affects NEITHER accounting profit NOR taxable profit (the "initial recognition exemption") Taxable temporary differences associated with investments in subsidiaries, branches, associates, and joint arrangements, WHERE the parent/investor/venturer is able to control the timing of reversal AND it is probable the difference will not reverse in the foreseeable future
Worked example – revaluation surplus creates deferred tax
Example 3: Deferred tax on a PPE revaluation
A building with a carrying amount of $400,000 (tax base also $400,000) is revalued upward to $550,000 under IAS 16's revaluation model. Tax rate: 25%.
New temporary difference = 550,000 − 400,000 = $150,000
Deferred tax liability = 150,000 × 25% = $37,500
Deferred tax liability = 150,000 × 25% = $37,500
Dr
Revaluation surplus $37,500
OCI
Cr
Deferred tax liability $37,500
SOFP
This is the classic exam example of deferred tax NOT flowing through SOPL – it follows the revaluation surplus into OCI (Section 8).
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Deferred Tax Assets – Recognition & the Probability Test
The recognition threshold
A deferred tax asset is recognised for deductible temporary differences, unused tax LOSSES, and unused tax CREDITS, to the extent it is PROBABLE that future taxable profit will be available against which they can be utilised.
This is the single most heavily tested recognition rule in IAS 12 – deferred tax assets are NOT recognised automatically like liabilities; a genuine probability assessment of future taxable profits is required at EVERY reporting date, and unrecognised deferred tax assets are reassessed at each reporting date too (they may become recognisable later).
Worked example – unused tax losses
Example 4: Recognising a deferred tax asset on carried-forward losses
An entity has accumulated tax losses of $200,000 carried forward, available to offset against future taxable profits with no expiry. Forecasts show the entity is expected to be reliably profitable going forward, generating sufficient taxable profit within the next 3 years to utilise the full loss. Tax rate: 25%.
Since future taxable profits are judged PROBABLE, the deferred tax asset is recognised:
Deferred tax asset = 200,000 × 25% = $50,000
Deferred tax asset = 200,000 × 25% = $50,000
If instead the entity had a history of recent losses with no convincing forecast of future profits, IAS 12 would require CONVINCING OTHER evidence before recognition – a stricter threshold than "probable" alone.
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Measurement of Deferred Tax
Rate and manner of recovery/settlement
Measured using tax rates EXPECTED to apply in the period the asset is realised or liability settled, based on rates ENACTED or SUBSTANTIVELY ENACTED by the reporting date Measurement reflects the tax consequences that follow from the MANNER in which the entity expects, at the reporting date, to recover or settle the carrying amount of the related asset/liability (e.g. use vs sale of an asset, if different rates apply) NOT discounted to present value, regardless of the expected timing of reversal
Worked example – differing rates for use vs sale
Example 5: Manner of recovery affects the rate applied
A jurisdiction taxes capital gains from asset SALES at 15%, but profits from ongoing USE of an asset at the standard 25% rate. An entity holds land with a $100,000 taxable temporary difference, and management intends to hold and use the land indefinitely rather than sell it.
Since the entity expects to recover the carrying amount through CONTINUING USE, the deferred tax liability is measured using the 25% rate, NOT the 15% capital gains rate – even though the asset (land) could theoretically be sold.
Deferred tax liability = 100,000 × 25% = $25,000
Deferred tax liability = 100,000 × 25% = $25,000
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Recognition Outside Profit or Loss
The matching principle – tax follows the item it relates to
Current and deferred tax are recognised OUTSIDE profit or loss if the tax relates to items recognised outside profit or loss (either in OCI or directly in equity), in the SAME or a DIFFERENT period.
ItemRelated tax recognised in…
Revaluation surplus (IAS 16/38)OCI
Remeasurement of defined benefit plans (IAS 19)OCI
FVOCI financial assets (IFRS 9)OCI
Exchange differences on foreign operations (IAS 21)OCI
Transaction costs of an equity issueEquity (direct)
All other temporary differences (the vast majority)SOPL
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Disclosure Requirements
Required disclosures
MAJOR COMPONENTS OF TAX EXPENSE
Current tax expense; adjustments recognised for current tax of prior periods Amount of deferred tax expense/income relating to the origination and reversal of temporary differences, and to changes in tax rates/imposition of new taxes Amount of any benefit from a previously unrecognised tax loss, credit, or temporary difference used to reduce current/deferred tax expense
RECONCILIATION & OTHER DISCLOSURES
A numerical reconciliation between tax expense and accounting profit multiplied by the applicable tax rate, explaining the differences Aggregate current and deferred tax relating to items recognised directly in OCI or equity Amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and unused tax credits for which no deferred tax asset is recognised
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Critical Judgments & Estimates
Where management judgement matters most
SIGNIFICANT JUDGEMENTS
Whether it is "probable" sufficient future taxable profit will be available to utilise deferred tax assets – perhaps the single most subjective judgement in the standard The expected manner of recovery of an asset (use vs sale), where different tax rates or bases apply Whether a taxable temporary difference on an investment in a subsidiary will reverse in the foreseeable future
SIGNIFICANT ESTIMATES
Forecasts of future taxable profits supporting deferred tax asset recognition The applicable future tax rate, where substantively enacted but not yet finally enacted legislation exists Uncertain tax positions (per IFRIC 23) – whether a tax treatment will be accepted by the tax authority
Deferred tax asset recognition is one of the clearest areas where management OPTIMISM can materially inflate reported net assets – auditors and examiners alike scrutinise the quality and timeframe of profit forecasts used to support recognition.
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IFRS vs US GAAP – Key Differences
Comparison – IAS 12 vs US GAAP (ASC 740)
FeatureIFRS (IAS 12)US GAAP
Deferred tax asset recognition thresholdRecognise IF probable future taxable profit available (net presentation of the asset itself)Recognise the FULL gross asset, then assess need for a VALUATION ALLOWANCE if not "more likely than not" to be realised – a two-step, gross-then-allowance approach
Initial recognition exemption (goodwill)Deferred tax NOT recognised on initial recognition of goodwillSimilarly excludes goodwill in most circumstances, though mechanics differ in detail
Current/non-current classificationAll deferred tax classified as NON-CURRENT (per IAS 1)Also classified as non-current (aligned since ASU 2015-17)
Uncertain tax positionsGoverned by IFRIC 23 – expected value or most likely amount approachGoverned by ASC 740-10 (FIN 48) – a two-step recognition/measurement threshold ("more likely than not" to be sustained)
Substantively enacted ratesSubstantively enacted tax law/rates ARE usedOnly ENACTED tax law/rates are used – substantively enacted is not sufficient
The gross-asset-plus-valuation-allowance approach under US GAAP versus IFRS's net "probable" recognition threshold is the most conceptually significant difference – both aim at the same economic outcome but via different mechanics, which can affect presentation even when the net deferred tax asset figure is similar.
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Statement Mapping – Where Every Tax Event Lands
Comprehensive event-to-statement mapping table
Event / transactionStatement(s) affectedNotes
Current tax expense for the periodSOPL SOFPLiability recognised for unpaid amount
Deferred tax on ordinary taxable/deductible temporary differencesSOPL SOFPThe vast majority of deferred tax movements
Deferred tax on a revaluation surplusOCI SOFPFollows the related item (IAS 16/38) into OCI, not SOPL
Deferred tax on remeasurements of defined benefit plansOCI SOFPFollows IAS 19 remeasurements into OCI
Tax effect of share issue costsEquity SOFPRecognised directly in equity, matching the original cost's treatment
Change in tax rate – remeasurement of existing deferred tax balancesSOPL SOFPRecognised in the period the change is enacted/substantively enacted (generally through SOPL unless the original balance was in OCI/equity)
Recognition of previously unrecognised deferred tax assetSOPL SOFPRecognised when recovery becomes probable
Cash tax paidCash Flow StatementOperating activities outflow (IAS 7), unless specifically identifiable with investing/financing
Movement in deferred tax balances (non-cash)Cash Flow StatementAdded back/deducted as a non-cash adjustment within operating activities (indirect method)
Tax rate reconciliation, unrecognised deferred tax assetsNotesMandatory disclosure regardless of jurisdiction
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Related Standards – Cross-Reference Map
How IAS 12 connects across the IFRS body of literature
StandardNature of the connection
IAS 16 / IAS 38Revaluations create temporary differences via the gap between carrying amount and tax base; related deferred tax follows the revaluation into OCI
IAS 19Remeasurements of defined benefit plans create temporary differences whose deferred tax effect also flows through OCI
IAS 37Provisions recognised for accounting but not yet tax-deductible are a classic source of deductible temporary differences (deferred tax assets)
IFRS 3Deferred tax on assets/liabilities acquired in a business combination is recognised as part of the acquisition accounting, EXCEPT for goodwill itself (initial recognition exemption)
IAS 21Exchange differences on translating foreign operations create temporary differences whose deferred tax effect follows into OCI, consistent with the underlying translation reserve
IAS 8Changes in tax rate/law are treated prospectively; retrospective restatements from error correction also require deferred tax recalculation
IAS 10Tax rate changes enacted/substantively enacted AFTER year end but before authorisation are typically non-adjusting events, disclosed rather than reflected in year-end deferred tax balances
IFRIC 23Provides specific guidance on accounting for uncertainty over income tax treatments, supplementing IAS 12's general recognition and measurement principles
IAS 20Government grants themselves are outside IAS 12's direct scope, but any temporary difference they create (e.g. a grant taxable on receipt but recognised as income later) falls within IAS 12
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Quick-Reference Glossary
Accounting profit
Profit or loss for a period BEFORE deducting tax expense, as reported in the SOPL.
Tax expense (tax income)
The aggregate amount included in profit or loss for the period in respect of current and deferred tax.
Enacted / substantively enacted
Tax legislation that has completed (or virtually completed, per specific jurisdictional processes) the legislative process required for it to become law, used as the basis for measuring deferred tax.
Initial recognition exemption
The exception preventing deferred tax recognition on an asset/liability's first recognition, where the transaction is not a business combination and affects neither accounting nor taxable profit at the time.
Unused tax losses
Tax losses carried forward from prior periods, available to reduce future taxable profits, subject to jurisdiction-specific rules on expiry and offset restrictions.
Withholding tax
Tax payable by a subsidiary, associate, or joint venture on distributions to the reporting entity – explicitly within IAS 12's scope.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows
History & Development
Apr-1978
Exposure Draft E13 Accounting for Taxes on Income published
Jul-1979
IAS 12 Accounting for Taxes on Income issued
Jan-1989
Exposure Draft E33 Accounting for Taxes on Income published
1994
IAS 12 (1979) was reformatted
Oct-1994
Exposure Draft E49 Income Taxes published
Oct-1996
IAS 12 Income Taxes issued
Operative for financial statements covering periods beginning on or after 1 January 1998
Oct-2000
Limited Revisions to IAS 12 published (tax consequences of dividends)
Operative for financial statements covering periods beginning on or after 1 January 2001
31-Mar-2009
Exposure Draft ED/2009/2 Income Tax published
Comment deadline 31 July 2009 (proposals were not finalised)
10-Sep-2010
Exposure Draft ED/2010/11 Deferred Tax: Recovery of Underlying Assets (Proposed amendments to IAS 12) published
Comment deadline 9 November 2010
20-Dec-2010
Amended by Deferred Tax: Recovery of Underlying Assets
Effective for annual periods beginning on or after 1 January 2012
19-Jan-2016
Amended by Recognition of Deferred Tax Assets for Unrealised Losses
Effective for annual periods beginning on or after 1 January 2017
07-Jun-2017
IFRIC 23 Uncertainty over Income Tax Treatments issued
Effective for annual periods beginning on or after 1 January 2019
12-Dec-2017
Amended by Annual Improvements to IFRS Standards 2015-2017 Cycle
Effective for annual periods beginning on or after 1 January 2019
07-May-2021
Amended by Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12)
Effective for annual periods beginning on or after 1 January 2023
23-May-2023
Amended by International Tax Reform - Pillar Two Model Rules (Amendments to IAS 12)
The amendments introduce an exception to the requirements in the standard that an entity does not recognise and does not disclose information about deferred tax assets and liabilities related to the OECD pillar two income taxes; an entity applies the exception and the requirement to disclose that it has applied the exception immediately upon issuance of the amendments; the remaining disclosure requirements are required for annual reporting periods beginning on or after 1 January 2023