IAS 12 – INCOME TAX
(Application of Matching Principle)
This treatment is done because of difference! Difference of reporting in Accounting World & Tax World.
Accounting World Accrual Basis
Tax World Cash Basis/ Receipt Basis
And because of this difference of these two worlds, DEFERRED TAX came into this world!
Income will match with (result in) Tax Expense i.e. Income Increases Tax Expense Increases
Expense will match with (result in) Tax Benefit i.e. Expense Increases Tax Benefit Increases
DIFFERENCE
Timing Difference Abhi nahi Aur kabhi nahi
TEMPORARY NON-TEMPORARY
1. Dividends Receivable 1. IAS 20 – Government Grants
2. Provisions, Accrued Expense 2. Fines/ Penalties (Buray Log)
3. IAS 2 – Inventory (Damage) 3. Political Donations
4. Issue Cost (Loan Notes) 4. Goodwill in Business Combination (Tax Dept. treats P. Co.’s
5. Tax Accelerated Depreciation investment in S. Co. as a Normal Investment. They don’t
6. IAS 38 – Capitalized Development Cost recognize goodwill and so amortization. But in accounting
7. IFRS – 16 Leases (Tax Dept. treats all leases as Operating books, we record goodwill impairment as an expense & if we
Lease) go to Tax Dept., they will say ABHI NAHI AUR KABHI NAHI. In
8. Convertible loan notes (Tax Dept. treats it as a pure loan) Tax world, goodwill is taken as Investment in Shares)
9. IAS 19 – Employee Benefits, DBO Accounting (Current
Service Cost)
10. IFRS 2 – Share Based Payments
Prepared by: Arsalan M. Khan Page 1 of 3
TEMPORARY DIFFERENCE
TAXABLE TEMPORARY DIFFERENCE DEDUCTABLE TEMPORARY DIFFERENCE
1. Because of which future taxable profit increases 1. Because of which future taxable profit decreases
2. You need to pay tax in future. 2. You get tax benefit in future.
3. Results in Deferred Tax Liability 3. Results in Deferred Tax Asset
4. E.g. Dividends 4. E.g. Provisions
P&L XXX D.T.A XXX
D.T.L XXX P&L XXX
SOFP APPROACH:
Carrying Value Tax Base Temporary Difference
Asset TAXABLE TEMPORARY DIFFERENCE
Asset DEDUCTABLE TEMPORARY
DIFFERENCE
DEDUCTABLE TEMPORARY
Liability
DIFFERENCE
Liability TAXABLE TEMPORARY DIFFERENCE
Note: Answers will be same in Income Statement Approach & SOFP Approach. As whatever comes in
Income Statement goes later to SOFP.
E.g. Receivables XXX
Sales XXX
UNUSED TAX LOSSES
D.T.A, due to unused tax losses, can only be recognized, if it is probable that they will set off
future taxable profits. In some jurisdictions, there is an expiry date of unused losses. In that
case, it must be probable that future taxable profits arises before the expiry date.
Prepared by: Arsalan M. Khan Page 2 of 3
If the company has sufficient taxable temporary difference to use the deductible temporary
difference (E.g. Dividends Receivable)
If tax planning opportunities are available to the company (75% group P. Co offsets S. Cos losses)
If that loss arises from identifiable reasons and that reason is ceased now (Flop Product)
EXCEPTION (NON-TEMPORARY DIFFERENCE):
In case of Undistributed Profits of Subsidiary Co. & Associates, where P. Co. has control over the
dividend policy of S. Co. & it is probable that P. Co. wont withdraw any dividends from S. Co.
o “YOU CAN BUT YOU WON’T”
Corporate America saves its money in Mexico
IMPORTANT POINTS:
Entry: D.T.A. XXX
P&L XXX
In any case, D.T.A can only be booked, if it’s probable that company will get tax benefit
Any change in D.T.A or D.T.L is adjusted prospectively
D.T.A & D.T.L can be offset, if company has legal & enforceable right to offset current tax
payment
That’s why normally, D.T.A in P. Co.’s books and D.T.L in S. Co.’s books can’t offset each other.
For deferred tax, use those tax rates which are enacted before reporting date.
REASONS FOR DIFFERENCE IN ACTUAL TAX RATE & EFFECTIVE TAX RATE
Non Temporary difference
Foreign subsidiaries different tax rates
Over/ under provision of last year.
Deferred tax booked on different rates
Prepared by: Arsalan M. Khan Page 3 of 3
