IAS 12 Income Tax
Tax Expense= Current tax +/- Movement in Deferred tax Liability or Asset
Deferred tax
Current tax Deferred tax is a tool to follow matching concept
the income xe Arises on temporary difference
payable e o e in e h taxable SOCI -Approach SOFP- Approach
e i
Income/Exp Difference b/w carrying
Difference b/w recognition value & tax base of asset
Entry Year and application year or liability
Taxable profit Taxable loss
Dr.Tax expense ** Dr. tax receivable
Cr. Tax payable Cr. Tax Exp
Follow the treatment of line item
Line Item Tax will be charged
P/L P/L
OCI OCI
SOCIE SOCIE
Types of Temporary Difference
Taxable temporary difference Deductible temporary difference
1). Difference which will increase future taxable 1). Difference which will decrease future taxable Profits. When
related asset/liability realized or Profits. When related asset/liability realized settled
or settled
2). TTD will generate DTL 2) .DTD will generate DTA (subject to
availability of future taxable profit
Recognized D.T. Liability for all TTD Except
a). Initial recognition of goodwill
b). Initial recognition of A/L which
-Affects neither accounting nor taxable profit
- Is not a business combination
3). Deferred tax liability =TTD * %age 3). Deferred tax Asset =DTD * % age
4). Dr. Tax expense xx 4). Dr. DTA xx
Cr. DTL xx Cr. Tax income xx
STRATEGIC BUSINESS REPORTING (SBR) | By Zubair Saleem
, Future changes in DTL Future changes in DTA
Increase in liability Decrease in liability Increase in asset Decrease in asset
Dr. Tax Expense xx Dr. Def. tax liability xx Dr. Def. tax asset xx Dr. Tax Expense xx
Cr. Def. tax liability xx Cr. Tax income xx Cr. Tax income xx Cr. Def. tax asset xx
(net settlement as (Reversal of entry)
reversal entry)
Balance Sheet approach
TTD DTD
Carrying value of asset carrying value of asset
Vs. Vs.
Tax base of asset Tax base of asset
Carrying value of liability Carrying value of liability
Vs. Vs.
Tax base of liability Tax base of liability
Income statement approach
Current year future year Generate
Income /gain recognized Tax will pay TTD
Expense/loss recognize Tax relief DTD
Tax will pay income/gain recognize DTD
Tax relief Expense/loss recognize TTD
Example (Taxable temporary difference)
Each of the following is a taxable temporary difference leading to the recognition of a deferred tax liability.
Carrying Temporary tax liability
amount Tax base difference (30%)
Non-current asset 1,000 800 200 60
Inventory 650 600 50 15
Receivable 800 500 300 90
Receivable (note 1) 500 nil 500 150
Payable (note 2) (1,000) (1,200) 200 60
Note 1:
This implies that an item accounted for using the accruals basis in the financial statements is being taxed on a cash bases.
If an item is taxed on cash basis the tax base would be zero as no receivable would be recognized under the tax rules
Note 2:
The credit balance in the financial statements is Rs. 1,000 and the tax base is a credit of Rs. 1,200. Therefore, the financial
statements show a debit balance of 200 compared to the tax base. This leads to a deferred tax liability.
STRATEGIC BUSINESS REPORTING (SBR) | By Zubair Saleem
Tax Expense= Current tax +/- Movement in Deferred tax Liability or Asset
Deferred tax
Current tax Deferred tax is a tool to follow matching concept
the income xe Arises on temporary difference
payable e o e in e h taxable SOCI -Approach SOFP- Approach
e i
Income/Exp Difference b/w carrying
Difference b/w recognition value & tax base of asset
Entry Year and application year or liability
Taxable profit Taxable loss
Dr.Tax expense ** Dr. tax receivable
Cr. Tax payable Cr. Tax Exp
Follow the treatment of line item
Line Item Tax will be charged
P/L P/L
OCI OCI
SOCIE SOCIE
Types of Temporary Difference
Taxable temporary difference Deductible temporary difference
1). Difference which will increase future taxable 1). Difference which will decrease future taxable Profits. When
related asset/liability realized or Profits. When related asset/liability realized settled
or settled
2). TTD will generate DTL 2) .DTD will generate DTA (subject to
availability of future taxable profit
Recognized D.T. Liability for all TTD Except
a). Initial recognition of goodwill
b). Initial recognition of A/L which
-Affects neither accounting nor taxable profit
- Is not a business combination
3). Deferred tax liability =TTD * %age 3). Deferred tax Asset =DTD * % age
4). Dr. Tax expense xx 4). Dr. DTA xx
Cr. DTL xx Cr. Tax income xx
STRATEGIC BUSINESS REPORTING (SBR) | By Zubair Saleem
, Future changes in DTL Future changes in DTA
Increase in liability Decrease in liability Increase in asset Decrease in asset
Dr. Tax Expense xx Dr. Def. tax liability xx Dr. Def. tax asset xx Dr. Tax Expense xx
Cr. Def. tax liability xx Cr. Tax income xx Cr. Tax income xx Cr. Def. tax asset xx
(net settlement as (Reversal of entry)
reversal entry)
Balance Sheet approach
TTD DTD
Carrying value of asset carrying value of asset
Vs. Vs.
Tax base of asset Tax base of asset
Carrying value of liability Carrying value of liability
Vs. Vs.
Tax base of liability Tax base of liability
Income statement approach
Current year future year Generate
Income /gain recognized Tax will pay TTD
Expense/loss recognize Tax relief DTD
Tax will pay income/gain recognize DTD
Tax relief Expense/loss recognize TTD
Example (Taxable temporary difference)
Each of the following is a taxable temporary difference leading to the recognition of a deferred tax liability.
Carrying Temporary tax liability
amount Tax base difference (30%)
Non-current asset 1,000 800 200 60
Inventory 650 600 50 15
Receivable 800 500 300 90
Receivable (note 1) 500 nil 500 150
Payable (note 2) (1,000) (1,200) 200 60
Note 1:
This implies that an item accounted for using the accruals basis in the financial statements is being taxed on a cash bases.
If an item is taxed on cash basis the tax base would be zero as no receivable would be recognized under the tax rules
Note 2:
The credit balance in the financial statements is Rs. 1,000 and the tax base is a credit of Rs. 1,200. Therefore, the financial
statements show a debit balance of 200 compared to the tax base. This leads to a deferred tax liability.
STRATEGIC BUSINESS REPORTING (SBR) | By Zubair Saleem
