IAS 12 - Taxation

Publication date: 06 Aug 2019

Resources (This includes links to the latest standards, drafts, PwC interpretations, tools and practice aids for this topic)

Latest developments

In December 2017 the International Accounting Standards Board issued amendments to IAS 12 ‘Income Taxes’ as part of the Annual Improvements to IFRS Standards 2015-2017 Cycle.

The amendment clarified that the income tax consequences of dividends on financial instruments classified as equity should be recognised according to where the past transactions or events that generated distributable profits were recognised. These requirements apply to all income tax consequences of dividends. The amendments are effective from annual periods starting on or after 1 January 2019.

In June 2017, the IFRS IC issued IFRIC 23, which clarifies how the recognition and measurement requirements of IAS 12 ‘Income taxes’, are applied where there is uncertainty over income tax treatments.

The IFRS IC had clarified previously that IAS 12, not IAS 37 ‘Provisions, contingent liabilities and contingent assets’, applies to accounting for uncertain income tax treatments. IFRIC 23 explains how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment.

An uncertain tax treatment is any tax treatment applied by an entity where there is uncertainty over whether that treatment will be accepted by the tax authority. For example, a decision to claim a deduction for a specific expense or not to include a specific item of income in a tax return is an uncertain tax treatment if its acceptability is uncertain under tax law. IFRIC 23 applies to all aspects of income tax accounting where there is an uncertainty regarding the treatment of an item, including taxable profit or loss, the tax bases of assets and liabilities, tax losses and credits and tax rates. IFRIC 23 is effective 1 January 2019 subject to EU endorsement.

In September 2017, the IFRS IC issued an agenda decision on interest and penalties related to income taxes. IFRIC 23 applies to income taxes within the scope of IAS 12, but it does not address the accounting for interest and penalties related to income taxes. The IC observed in the agenda decision that entities do not have an accounting policy choice between applying IAS 12 and applying IAS 37, ‘Provisions, contingent liabilities and contingent assets’, to interest and penalties. If an entity considers that a particular amount payable or receivable for interest and penalties is an income tax, IAS 12 is applied to that amount. If an entity does not apply IAS 12 to an amount payable or receivable for interest and penalties, it applies IAS 37 to that amount.

Judgement is required to determine which standard applies. Management should consider the substance and intent of the tax law and the settlement process with the tax authority to determine whether interest and penalties are separate components that are accounted for by applying IAS 37 or part of an overall settlement with the tax authority that is accounted for by applying IAS 12.

Topical issues

Impact of Brexit on Tax and US tax reform (RLO)

Impact of Brexit on Tax

There are a number of potential tax exposures which arise as a result of the UK leaving the EU.

IAS 12 requires that current and deferred tax balances should be measured based on tax rates and laws that have been enacted or substantively enacted by the end of the reporting period. Our view of IAS 12’s accounting requirements is that giving notice under article 50 substantively enacts the UK’s withdrawal from the EU, but the effects of that withdrawal on tax legislation are uncertain and might depend on what is contained in any 'withdrawal agreement'.

There is substantial uncertainty as to what will transpire in relation to specific tax arrangements. However, entities should monitor developments in the coming months before the transition period ends, and consider the accounting implications of any ‘withdrawal agreement’.

As in the case for all uncertain tax positions, good quality disclosure of the judgments taken by management and the potential exposures should be given.

US tax reform

On 22 December 2017, President Trump signed into law extensive changes to the US tax system. These changes are known as the ‘Tax Cuts and Jobs Act’ (the 2017 Act).

The 2017 Act was substantively enacted for accounting purposes in 2017, and the impact of the tax law changes were therefore reflected in financial statements at 31 December 2017.

The 2017 Act has, amongst other things, reduced tax rates, substantially changed the international tax rules, and made significant changes to the way in which tax losses are carried forward and recovered. The 2017 Act affects the financial statements of entities with a US tax presence. It affects, for example, the current tax charge each year, the measurement of deferred taxes, and the recoverability of deferred tax assets.

Entities may have estimated  the accounting impact of the 2017 Act based on the information available when the 31 December 2017 financial statements were approved. Estimates should have been revised as more information and analyses became available, and should be finalised for 31 December 2018 year-ends.


IAS 12 only deals with taxes on income, comprising current tax and deferred tax.

Current tax expense for a period is based on the taxable and deductible amounts that will be shown on the tax return for the current year. An entity recognises a liability in the balance sheet in respect of current tax expense for the current and prior periods to the extent unpaid. It recognises an asset if current tax has been overpaid.

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.

Tax payable based on taxable profit seldom matches the tax expense that might be expected based on pre-tax accounting profit.  Tax laws and financial accounting standards recognise and measure income, expenditure, assets and liabilities in different ways.

Deferred tax accounting seeks to deal with this mismatch. It is based on the temporary differences between the tax base of an asset or liability and its carrying amount in the financial statements. For example, an asset is revalued upwards but not sold, the revaluation creates a temporary difference (if the carrying amount of the asset in the financial statements is greater than the tax base of the asset), and the tax consequence is a deferred tax liability.

Deferred tax is provided in full for all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, except when the temporary difference arises from:

  • initial recognition of goodwill (for deferred tax liabilities only);
  • initial recognition of an asset or liability in a transaction that is not a business combination and that affects neither accounting profit nor taxable profit; and
  • investments in subsidiaries, branches, associates and joint ventures, but only where certain criteria apply.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the balance sheet date. The discounting of deferred tax assets and liabilities is not permitted.

Generally, the measurement of deferred tax liabilities and deferred tax assets reflects the tax consequences that would follow from the manner in which the entity expects, at the balance sheet date, to recover or settle the carrying amount of its assets and liabilities. The carrying amount of a non-depreciable asset (eg., land) can only be recovered through sale.. For other assets, the manner in which management expects to recover the asset (that is, through use or through sale or through a combination of both) is considered at each balance sheet date. An exception has been introduced for investment property measured using the fair value model in IAS 40, with a rebuttable presumption that such investment property is recovered entirely through sale.

Management only recognises a deferred tax asset for deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised. This also applies to deferred tax assets for unused tax losses carried forward.

Current and deferred tax is recognised in profit or loss for the period, unless the tax arises from a business combination or a transaction or event that is recognised outside profit or loss, either in other comprehensive income or directly in equity in the same or different period. The tax consequences that accompany, for example, a change in tax rates or tax laws, a reassessment of the recoverability of deferred tax assets or a change in the expected manner of recovery of an asset are recognised in profit or loss, except to the extent that they relate to items previously charged or credited outside profit or loss.

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