IAS 12 relates to accounting for taxes. It deals with recognising, measuring, and representing deferred taxes in a company’s balance sheet and the current taxes in profit and loss accounts. IAS 12 ensures that tax expense derives meaning from taxable transactions undertaken during the entity’s business operations rather than on a transaction-by-transaction basis across periods. As regards the tax base of assets and liabilities involved in different temporary differences leading to deferred tax liability or deferred tax asset, IAS 12 addresses these issues. It has focused on definitions, conditions, nonrecognition of such temporary differences, general provisions related to the recognition and measurement of deferred taxes, disclosure, and determination of tax implications where deferred taxes apply to financial statements. The question of how financial reporting should ensure accurate reporting results is implicit in IAS 12 definitions for deferred taxes, calculations, and their implications in financial statements.
IAS 12 and Accounting for Income Taxes
It was first aimed at income tax accounting to match expenses to revenues and, second, to clarify that temporary differences would cause effects of taxes on taxable profits. However, The model dictates that firms should address the recognition of deferred tax assets and liabilities when preparing the financial statement to reflect the accurate measurement of deferred taxes.
Key Concepts of IAS 12 on Accounting for Income Taxes
But all of those principles are contained in IAS 12:
- Recognition of deferred taxes: its use is in the situation when there is a discrepancy between accounting for an item in financial reporting and taxation.
- Recognise liabilities or benefits for future taxation as deferred tax provisions.
The tax impact on transactions must adequately reflect the financial statements.
- According to deferral tax treatment, a coupling of financial statements with tax reporting principles should be happening in companies.
- Aligned current tax and taxable profit converged by the performance of business activities, leaving no room for ambiguity in financial reporting on income taxes.
Application Areas of IAS 12
IAS 12 includes the following:
- Taxable temporary differences: They give rise to a deferred tax liability. Thus, the tax must be paid in the future. Now, deduct the temporary differences, and a deferred tax asset will arise, decreasing the future tax savings.
- Deferred income taxes: Adjustment for tax account balance will be established when financial reports differ from tax accounting.
- Deferred Taxes: For example, a company would accelerate depreciation for tax if the tax base was lower than the carrying value. As a result, there is a deferred tax liability.
- Tax implications of investments: Companies must consider what future taxes might apply if they invest in subsidiary companies or joint ventures.
When IAS 12 is followed, it helps the companies to show incurred tax expense which is a significant point of transparency in financial reporting.
IAS 12 in Deferred Taxes
The reason for this lies in the heart of IAS 12, deferred tax. It arises when based on business norms, the reporting is different from taxation due to the temporary differences of the asset or liability. Companies must apply the rules regarding the recognition of deferred taxes when they have to create deferred tax liability and, in some instances, a deferred tax asset in their books.
Recognition of Deferred Tax Assets and Liabilities
An asset for deferred taxes is accepted when an expectation arises that a deduction of taxes is available for the future. Hence, it involves a scenario wherein temporary differences lead to lesser taxable income in the future. On the contrary, a deferred tax liability arises when a company believes it will become liable for more taxes due to differences between the financial and tax reporting of assets and liabilities in the future. Once again, take machinery depreciation as an example. Suppose a business depreciates its machinery faster for tax purposes than for financial statements.Then in this kind of case, this will create a timing difference and create a deferred tax liability because, in reality, it will pay a higher amount of tax when depreciation gets reduced.
Calculating Deferred Tax
The calculation of deferred tax involves calculating:
- Temporary differences (tax vs. financial reporting);
- Setting up the tax base related to the asset or liability;
- Applying appropriate tax rate for measuring deferred tax provision;
- Recognition of the deferred tax effect in the financial statements.
For instance, where a company has a temporary difference of ₹1,00,000, and the rate of tax is 30%, a deferred tax liability of ₹30,000 would arise.
Deferred Tax Treatment in Financial Statements
Treatment for the deferred tax in the financial statements consists of provisions regarding:
- Deferred tax assets and deferred tax liabilities are being recognized;
- Disclosure of income tax consequences of the deferred tax items;
- Adjustments of deferred tax provisions in the event of changes in tax law;
- Correct accounting treatment for income taxes is congruent with financial and tax reporting.
- The correct treatment of deferred tax enables companies to act in accordance with tax legislation, thus giving a full view of how the company is performing.
An Introduction to Deferred Tax Adjustments Under IAS 12
IAS 12 genus defines how tax should affect from the deferred tax provisions and operative it wherever necessitate. Well, these changes affect the balance sheets and affect decision-making.
The Implications of Deferred Tax on Your Returns
Deferred tax refers to tax effects of:
- Taxable profits: Kput In the deferred revenue will be recognized later for tax purposes, reducing the current tax liability and increasing the deferred tax liability.
- Financial Ratio Impacts: A high deferred tax liability reduces the profitability ratios, affecting investor perceptions.
- Tax Planning would consider: A company must factor the deferred tax treatment into its future tax forecasting.
As an illustration, if a company receives advance payments when a tax is levied now but revenue is recognized later, it will create a temporary difference followed by a deferred tax liability.
Deferred Tax Adjustments in the Financial Reporting
Deferred tax adjustments refer to:
- Amendment of the deferred tax provisions when changes occur in tax laws;
- The calculation of deferred tax must also be updated whenever changes in financial reporting occur;
- Recognition of deferred tax assets and liabilities in alignment with company policy.
For example, if the government announced an immediate cut in the corporate tax rate from 30% to 25%, the company would have to adjust all deferred tax liabilities even before the financial statements are signed.
Summary of IAS 12
Deferred taxes demonstrate the role of temporary differences in determining taxable profits.
- The recognition of deferred taxes ensures that financial reporting is not misleading.
- Tax effect analysis allows a company to plan for its future tax liabilities.
- Deferred tax provisions relieve the burden of unexpected taxes.
Understanding these attributes allows companies to efficiently administer income tax accounting schemes, resulting in transparency in the tax report.
Relevance to ACCA Syllabus
Income tax is an important area of the ACCA syllabus, especially in the financial reporting and advanced taxation streams, and this means that IAS 12 is a topic that will be. IAS 12 guides ACCA candidates in understanding and applying tax accounting concepts such as current and deferred tax computation. As financial reporting is a fundamental ACCA module, professionals dealing with IAS 12 are critical in preparing financial statements reliably. The other is a crucial part of corporate tax planning, allowing professionals to evaluate tax liabilities and identify deferred tax assets and liabilities for inclusion in financial reporting.
IAS 12 ACCA Questions
Q1: What is the main objective of IAS 12 for financial statements?
A) That uses a tax rate calculator for the relevant jurisdictions
B) Set the accounting treatment for income taxes, deferring taxes
C) To distinguish between income taxes as an operating or non-operating expense
D) To make sure companies pay their taxes on time
Ans: B) To dictate the accounting treatment for income taxes including deferred tax
Q2: Which of the following statements regarding deferred tax in accordance with IAS 12 is correct?
A) Deferred tax comes into play only if tax authorities alter their tax rates
B) Deferred tax is recognised only when an entity is able to forecast future taxable profit
C) has deferred tax representation based on accounting against taxable income variations
D) not relevant to the case of permanent differences
Ans: C) Deferred tax is computed due to the timing difference between accounting and taxable income
Q3: When is a deferred tax liability recognised?
A) A company pays too much tax up to now
B) An asset’s tax base is lower than its carrying amount
C) Tax refund from tax authority to a company
D) This is when the tax base of an asset exceeds its carrying amount
Ans: B) Asset [carrying amount] > tax base
Q4: In accordance with IAS 12, which of the following would give rise to a deferred tax asset?
1) A taxable temporary difference
B) The appreciation of an asset
C) Temporary difference that will give rise to a deductible temporary difference
D) Increase in taxable profit
Ans: C) A deductible temporary difference
Q5: When do you recognise changes in deferred tax balances in accordance with IAS 12?
A) Directly in equity
B) Always in profit or loss
C) In profit or loss or in other comprehensive income depending on the underlying transaction
E) A decrease in deferred tax liabilities will increase income.
Ans: C) Recognised either in profit or loss or in OCI based on the underlying transaction
Relevance to US CMA Syllabus
Tax accounting is one of the most critical aspects in the areas of financial planning, analysis and control, thus IAS 12 relates to US CMA syllabus. A CMA is meant to play a role in economic decision-making to not only help manage tax liabilities but also optimise cash flow, thus understanding tax accounting is essential. The subject material is also consistent with US GAAP ASC 740 dealing with income taxes accounting, so CMAs are well verse on international and US tax statements.
IAS 12 US CMA Questions
Q1: What causes the Deferred Tax Liabilities as per IAS 12?
B) A temporary difference that decreases taxable income in future periods
A) A permanent difference between accounting profit and taxable profit
C) The lowering of tax rates made by a government
D) A corporation’s ability to pay taxes
Ans: A) A temporary difference that results in greater taxable income in future periods
Q2: Deferred tax assets can only be recognised under IAS 12 if:
A) There is negligible probability of making taxable profit in future
B) A company has taxable temporary differences
C) There is probable future taxable profits to absorb the deductible temporary differences
D) The company is tax-exempt
Ans: C) The future taxable profit is likely to be despite the deductible temporary differences.
Q3: What approach does IAS 12 use for the taxable temporary differences in deferred tax?
A) Income statement method
B) Liability method
C) Cash flow method
D) Direct allocation method
Ans: B) Liability method
Q4: Under IAS 12, how will deferred tax be treated for a company which has a tax loss?
A) The loss would be ignored unless the company has taxable profits.
B) Where it is probable that future taxable profits will be available
C) A deferred tax liability is recorded as a befit instantaneously
D) No accounting adjustment D).
Ans: B) Deferred tax asset is recognised when there is expectation of future taxable profits
Q5: What measurement requirements does IAS 12 set out for deferred tax assets and liabilities?
A) At current tax rates
B) At tax rates that were enacted or substantively enacted that were expected to be applicable
C) At historical tax rates
D) As the company deems fit
Ans: At enacted or substantively enacted tax rates expected to apply
Relevance to US CPA Syllabus
Covering income tax accounting, financial reporting, and deferred taxes, IAS 12 reflects the General Accepted Accounting Principles (GAAP) used by U.S. entities serving as an essential guide for CPA candidates studying for the FAR and Regulation (REG) sections. The standard parallels ASC 740 under US GAAP, enabling CPA practitioners to apply tax accounting principles across both domestic and international scenarios.
IAS 12 US CPA Questions
Q1: Which of the following is the primary area of emphasis in IAS 12 for financial reporting?
A) Tax avoidance and planning strategies
B) Current and Deferred Tax: Recognition and Measurement
C) The preparation of income tax returns
D) Payroll tax calculation
Ans: B) Current and deferred tax recognition and measurement
Q2: A deferred tax liability arises when:
A) Temp difference: will be recognized as an expense in the book and if it increases taxable income.
A) An organization is granted a government tax subsidy
C) A tax credit is claimed
D) More taxes are paid by a company than its due
Ans: A) A temp difference will increase the future taxable income
Q3: How are tax credits treated under IAS 12?
A) Record as tax assets where they decrease future taxable income
B) Current liabilities
C) Only recorded if used during this tax year
D) They do not affect the financial statements
Ans: A) If they reduce future taxable income they are recorded as tax assets
Q4: All except which of the following with respect to deferred tax assets is true under IAS 12?
A) they are unconditionally recognised regularly
B) They are only recognised if it is probable that future taxable profits will be available
C) They are left out if the company operates at a loss
D) They are reported as an immediate profit on the income statement
Ans: B) They are recognized only if future taxable profits are likely to be available
Q5: IAS 12 applies to the classification of deferred tax assets and deferred tax liabilities as follows:
A) As current or non-current, depending on the management policy
B) Always current liabilities
C) Always non-current items
D: by expected settlement period
Ans: C) All time non-current Items
Relevance to CFA Syllabus
It is also to mention that IAS 12 comes under the CFA Exam in FRA (Financial Reporting and Analysis) domain. They also must understand how income tax is reflected on the financial statements, how deferred taxes are calculated, if operating or financing activities are affected, and how taxes can affect valuation and economic analysis. That’s why this topic may be essential for someone who focuses on investment and risk assessment as deferred tax assets and liabilities can have a significant effect on the financial position of a company.
IAS 12 CFA Questions
Q1: Deferred tax assets are recognized by IAS 12 as the result of:
A) Transitory differences.
B) Temporary differences that are deductible
C) Permanent differences
D) Government subsidies
Ans: B) Deductible temporary differences
Q2 — IAS12 — How to account for changes in tax rates?
A) Deferred tax balances to be adjusted to reflect the new rates
TAXATION OF INCOME 14 (A) Deferred tax assets are written off.
C) Deferred tax liabilities remain unaffected
D) Adjust recent tax payments for historical ones
Ans: A) Income tax balances are adjusted for new rates
Q3: A deferred tax liability normally grows when:
A) Tax depreciation is greater than book depreciation
B) A company earns tax-exempt income
C) A business provides advance taxes
D) Tax rates decrease
Ans: A) Tax depreciation more than the financial accounts depreciation
Q4: When should a deferred tax liability be recognised under IAS 12?
A) When it is approved by tax authorities
B) If temporary differences are taxable
C) Benefitting from a profit made by the company
D) When the tax is paid in advance
Ans: B) In situation of presence of taxable temporary differences
Q5:Parsing with IAS 12 on deferred tax
A) Cash method
B) Accrual method
C) Liability method of balance sheet
D) Equity method
Ans: C) Balance sheet liability method
