IAS 12 Income Taxes provides that deferred tax arises from temporary differences between the carrying amount of an asset or liability in the statement of financial position and its tax base, and that deferred tax liabilities and assets are measured using the tax rates expected to apply when the asset is realised or the liability is settled.
What Does Tax Expense Consist Of?
The Standard provides that tax expense (tax income) comprises current tax expense (current tax income) and deferred tax expense (deferred tax income). Deferred tax is therefore one of the two components of the total income tax expense shown in profit or loss, alongside the current tax due on the period's profits.
What Is a Temporary Difference and How Does Deferred Tax Arise?
The Standard defines temporary differences as differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. These may be taxable temporary differences, which will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
The Standard defines deferred tax liabilities as the amounts of income taxes payable in future periods in respect of taxable temporary differences. Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of deductible temporary differences, the carryforward of unused tax losses, and the carryforward of unused tax credits.
When Is a Deferred Tax Liability Recognised?
The Standard provides that a deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from the initial recognition of goodwill, or from the initial recognition of an asset or liability in a transaction which is not a business combination and, at the time of the transaction, affects neither accounting profit nor taxable profit.
An Example From the Standard's Own Text
The Standard gives a direct worked example: an asset which cost 150 has a carrying amount of 100. Cumulative depreciation for tax purposes is 90, and the tax rate is 25%. The tax base of the asset is 60 (cost of 150 less cumulative tax depreciation of 90).
The Standard states that the difference between the carrying amount of 100 and the tax base of 60 is a taxable temporary difference of 40. Therefore, the entity recognises a deferred tax liability of 10 (40 at 25%) representing the income taxes that it will pay when it recovers the carrying amount of the asset.
When Is a Deferred Tax Asset Recognised?
The Standard provides that a deferred tax asset shall be recognised for all 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, subject to specific exceptions relating to the initial recognition of an asset or liability.
At What Rate Is Deferred Tax Measured?
The Standard requires deferred tax assets and liabilities to be 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 end of the reporting period.
Legal References
- IAS 12 — Income Taxes, paragraph 6 (the two components of tax expense: current and deferred)
- IAS 12 — Income Taxes, paragraph 5 (definitions of temporary differences and deferred tax liabilities/assets)
- IAS 12 — Income Taxes, paragraph 15 (recognition of a deferred tax liability)
- IAS 12 — Income Taxes, paragraph 16 (worked example of a deferred tax liability)
- IAS 12 — Income Taxes, paragraph 24 (recognition of a deferred tax asset)
- IAS 12 — Income Taxes, paragraph 47 (rate used to measure deferred tax)
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