The Objective and Scope of IAS 12, INCOME TAXES

The OBJECTIVE of IAS 12 is to prescribe the accounting treatment for INCOME TAXES.

The principal issue in accounting for income taxes is how to account for the CURRENT and FUTURE tax consequences of :

1. the future recovery (settlement) of the carrying amount of assets (liabilities) that are recognized in an entity’s statement of financial position; and
2. transactions and other events of the current period that are recognized in an entity’s financial statements.

It is inherent in the recognition of an asset or liability that the reporting entity expects to recover or settle the carrying amount of that asset or liability. If it is probable that recovery or settlement of that carrying amount will make future tax payments larger (smaller) than they would be if such recovery or settlement were to have no tax consequences, IAS 12 requires an entity to recognize a DEFERRED TAX LIABILITY (DEFERRED TAX ASSET), with certain limited exceptions.

IAS 12 requires an entity to account for the tax consequences of transactions and other events in the same way that it accounts for the transactions and other events themselves. Thus, for transactions and other events recognized in PROFIT OR LOSS, any related tax effects are ALSO RECOGNIZED in PROFIT OR LOSS. For transactions and other events recognized OUTSIDE PROFIT OR LOSS (either in OTHER COMPREHENSIVE INCOME or DIRECTLY IN EQUITY), any related tax effects are also recognized OUTSIDE PROFIT OR LOSS (either in other comprehensive income or directly in equity, respectively).  Similarly, the recognition of deferred tax assets and liabilities in a business combination affects the amount of goodwill arising in that business combination or the amount of the bargain purchase gain recognized.

IAS 12 also deals with the recognition of DEFERRED TAX ASSET arising from UNUSED TAX LOSSES or UNUSED TAX CREDITS, the presentation of income taxes in the financial statements and the disclosure of information relating to income taxes.

IAS 12 shall be applied in accounting for income taxes, which include all domestic and foreign taxes which are based on taxable profits. Income taxes also include taxes, such withholding taxes, which are payable by a subsidiary, associate or joint venture on a distribution to the reporting entity.

This standard does not deal with the methods of accounting for government grants or investment tax credits. However, this Standard does deal with the accounting for temporary differences that may arise from such grants or investment tax credits (HRD).