IAS 12

IAS 12 Income Taxes is the standard in International Financial Reporting Standards that prescribes how an entity accounts for taxes based on its profits. It covers current tax, which is the amount payable or recoverable for the current and earlier periods, and deferred tax, which reflects the future tax consequences of transactions and events already recognised in the financial statements. The aim is to match the tax effect of an item to the period in which the item itself is reported.

The current standard dates from a revision issued in 1996 by the body that preceded the International Accounting Standards Board. It applies to all domestic and foreign taxes on taxable profit, including withholding taxes payable by a subsidiary or associate on distributions to the reporting entity. It does not cover government grants or taxes that are not based on income, such as sales taxes.

Unpaid current tax for the period and for earlier periods is recognised as a liability, and any overpayment as an asset. It is measured at the amount expected to be paid to or recovered from the tax authorities, using tax rates and laws enacted or substantively enacted by the end of the reporting period. The benefit of a tax loss that can be carried back to recover tax of an earlier period is recognised as an asset. The resulting charge forms part of income tax expense.

Deferred tax arises because accounting rules and tax rules often recognise the same item at different times. IAS 12 approaches this through the balance sheet. For each asset and liability the entity compares the carrying amount in the statement of financial position with its tax base, which is the amount attributed to it for tax purposes. The difference is a temporary difference.

• Taxable temporary differences will result in more tax in future periods when the asset is recovered or the liability settled. They give rise to a deferred tax liability. A common example is equipment that is written off faster for tax than in the accounts.
• Deductible temporary differences will reduce future tax. They give rise to a deferred tax asset, as do unused tax losses and unused tax credits carried forward. An example is a provision that is deductible only when paid.

Deferred tax liabilities are recognised for nearly all taxable temporary differences. Deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available against which they can be used, and the carrying amount is reviewed at each reporting date.

The standard contains several exceptions. No deferred tax liability is recognised on the initial recognition of goodwill. Under the initial recognition exemption, no deferred tax is recognised when an asset or liability is first recorded in a transaction that is not a business combination and affects neither accounting profit nor taxable profit. An amendment effective from 2023 narrowed this exemption so that it no longer applies to transactions that give rise to equal taxable and deductible differences, such as leases and decommissioning obligations. For investments in subsidiaries, branches, associates and joint arrangements, a liability is not recognised where the parent controls the timing of the reversal and it is probable that the difference will not reverse in the foreseeable future.

Deferred tax is measured at the tax rates expected to apply when the asset is realised or the liability settled, based on rates enacted or substantively enacted at the reporting date, and reflecting the way the entity expects to recover or settle the item. Deferred tax balances are not discounted. Current and deferred tax are recognised in profit or loss, except where the tax relates to an item recognised in other comprehensive income or directly in equity, in which case it follows that item, or where it arises from a business combination.

Deferred tax assets and liabilities are presented as non-current and are offset only where the entity has a legal right to set off current tax and the balances relate to the same tax authority. Required disclosures include the main components of tax expense and a reconciliation between the tax charge and accounting profit multiplied by the applicable tax rate, which explains the effective tax rate. The calculation of these figures at each reporting date is described under tax provision.

Where it is unclear whether a tax authority will accept a treatment, IFRIC 23 Uncertainty over Income Tax Treatments, effective from 2019, applies. The entity assumes that the authority will examine the treatment with full knowledge of the facts. If acceptance is not probable, the uncertainty is reflected using either the most likely amount or the expected value, whichever better predicts the outcome.

The Pillar Two global minimum tax developed through the OECD raised the question of how top-up taxes should be reflected in deferred tax. In May 2023 the Board amended IAS 12 to introduce a mandatory temporary exception: entities do not recognise or disclose deferred tax assets and liabilities related to Pillar Two income taxes, but must disclose that they have applied the exception, their current tax expense for Pillar Two, and information about their exposure.

• IFRS Foundation