IAS 12 Accounting Standards and Income Taxes

IAS 12 Accounting Standards and Income Taxes is a crucial aspect of financial reporting that helps businesses accurately reflect their tax obligations.

The standard requires companies to account for income taxes in a way that reflects their current tax position.

Accounting for income taxes involves recognizing deferred tax assets and liabilities, which can have a significant impact on a company's financial statements.

Deferred tax assets arise when a company has a temporary difference between its accounting profit and taxable profit, resulting in a tax loss or credit.

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IAS 12 is all about understanding tax, and it's divided into two main types.

Temporary differences in tax can be tricky, but companies should consistently apply the same approach to identifying and measuring deferred taxes on them across all reporting periods.

Judgement is needed when recognizing deferred tax assets, and they should only be recognized when it's probable that there will be future taxable profits to offset against.

IAS 12 requires companies to reconcile tax expenses with profit for the period, which helps users understand the effective tax rate and any significant adjustments.

This reconciliation is crucial for financial statement users to evaluate the entity's vulnerability to the Pillar Two top-up tax and the potential ramifications of these rules on its future financial performance.

Deferred tax accounts for the future effects of differences between the accounting base (carrying amount) and the tax base of assets and liabilities. This is created by "temporary differences", which are classified into taxable and deductible temporary differences.

Temporary differences result in deferred tax liabilities or assets. For example, if an asset's carrying amount is $10,000 in financial statements, but its tax base is $8,000, the difference of $2,000 results in a taxable temporary difference, leading to a deferred tax liability.

Deferred tax is recognized using the balance sheet approach. This approach identifies deferred tax assets and liabilities based on temporary differences between the carrying amounts of assets and liabilities in the financial statements and their tax bases.

For your interest: Future Taxable Amounts Result in Deferred Tax Assets.

IAS 12 ensures that entities recognize current and deferred taxes in a way that aligns with the tax impact of income and expenses in the same period they are reported in the financial statements. This means that deferred tax is not just a one-time adjustment, but rather a continuous process that reflects the changing tax landscape.

Temporary differences can be either taxable or deductible. Taxable temporary differences result in deferred tax liabilities, while deductible temporary differences result in deferred tax assets. Here is a summary of the two types of temporary differences:

Companies can benefit from a temporary exception from deferred tax accounting for accounting for deferred taxes resulting from the implementation of the international tax reform (Pillar Two Model Rules). This exception is provided to ensure consistency in the application of IAS 12 when financial statements are prepared during the phased implementation of the rules.

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IFRS/IAS 12 requires companies to report on their tax accounting process, which is crucial for multinational groups starting from fiscal year 2023.

The IFRS Board mandates specific disclosures under IAS 12, including the recognition and disclosure of deferred tax assets and liabilities related to Pillar 2 income taxes.

An entity must disclose separately its current tax expense (income) related to Pillar 2 income taxes.

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The IFRS Board requires the following Pillar 2 disclosures under IAS 12:

IAS 12 has been effective since January 1, 1998, and entities applying IFRS must adhere to this standard in recognizing and disclosing tax-related impacts on financial statements.

Entities that have implemented IAS 12 have seen improvements in financial reporting, allowing stakeholders to make more informed decisions.

The implementation date of January 1, 1998, marks the beginning of a new era in tax-related financial reporting.

Entities applying IFRS must ensure they are in compliance with IAS 12 to avoid any potential issues or penalties.

By following IAS 12, entities can provide a clearer picture of their financial situation, which can lead to increased transparency and trust among stakeholders.

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ABC Construction Ltd. is a company that's preparing its financial statements for the year ending December 31, 2023. They have a taxable profit of $100,000 and a tax rate of 30%, resulting in a current tax liability of $30,000.

Their situation with deferred tax is a bit more complex, as they use straight-line depreciation for accounting purposes but accelerated depreciation for tax purposes. As of December 31, 2023, the carrying amount of their machinery is $50,000, while the tax base is $40,000, resulting in a temporary difference of $10,000.

This temporary difference leads to a deferred tax liability, which is calculated by multiplying the temporary difference by the tax rate. In this case, the deferred tax liability is $3,000.

On the other hand, ABC Construction has made a provision for bad debts of $5,000, which is deductible for accounting but not for tax purposes. This results in a deferred tax asset, which is calculated by multiplying the provision by the tax rate. In this case, the deferred tax asset is $1,500.

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Here's a breakdown of the deferred tax calculation for ABC Construction:

This example illustrates the importance of accurately calculating deferred tax in financial reporting. By considering both the current tax liability and the deferred tax liability and asset, companies can ensure that their financial statements accurately reflect their tax situation.

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This can significantly reduce operational costs and risks for companies of all sizes. TaxProof's solution is designed to ease tax accounting-related workflows for companies ranging from small to large-cap.

By automating data collection and assessment, companies can save time and resources that would otherwise be spent on manual labor. This can be especially beneficial for companies with complex tax accounting needs.

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