17 - IAS 12 - Income Taxes

This set of flashcards summarizes key concepts related to IAS 12, focusing on current tax, deferred tax, their calculations, effects on financial statements, and presentation requirements.

What are the two types of tax effects that must be accounted for in an entity’s financial statements according to IAS 12?

Current tax and deferred tax assets/liabilities.

Define current tax.

Current tax refers to the liability owed to tax authorities for the current year’s taxable profits.

What is meant by deferred tax in IAS 12?

Deferred tax assets and liabilities are adjustments made to reconcile accounting treatment with tax treatment.

How is current tax recognized in financial statements?

Current tax is recognized as an expense in the SOPL and as a liability in the SOFP.

What is the purpose of estimating current tax liability at year-end?

To determine potential liabilities or assets based on expected profits or losses for the year.

If a company has a £3,200 balance in their income tax payable account, what does this represent?

It represents the previous year's income tax payable.

What is the estimated income tax liability for a company for the year to December 31, according to the notes?

£24,500.

What is the income tax charge in the statement of profit or loss for the year ended December 31 if the previous balance was £3,200 and the current estimate is £24,500?

£27,700 (correct answer).

What happens to current tax when an adjustment decreases an expense or increases income?

Current tax will be increased, resulting in a decrease in profit.

How do you calculate the amount of tax effect from an adjustment?

Adjust the amount by multiplying the adjustment amount by the applicable tax rate.

If ABC Ltd capitalizes £10,000 of wages incorrectly, what is the tax reduction due to the correction?

£1,900 (10,000 x 19%).

In the presentation of tax assets and liabilities, what should be done with current tax?

They should be shown separately unless specific conditions for offsetting are met.

What are the conditions under which current tax assets and liabilities can be offset?

A legal right exists, and the entity intends to settle on a net basis.

What is the key reason for accounting for deferred tax?

To smooth out discrepancies between accounting profit and taxable profit.

What is a permanent difference in taxation?

When items of revenue or expense are excluded from taxable profits.

What is a temporary difference in taxation?

When items are included in both accounting profits and taxable profits, but not in the same period.

How is a deferred tax liability created?

When there is a taxable temporary difference where the carrying amount exceeds the tax base.

What is the effect of recognizing a deferred tax asset?

It reflects future tax benefits available against future taxable profits.

How are deferred tax amounts recognized in the financial statements?

They are recognized in profit or loss as part of the entity’s tax expense.

What should not be offset in the financial statements regarding deferred tax assets and liabilities?

Unless there is a legal right and intention to settle on a net basis.

Define tax base of an asset.

The amount deductible for tax purposes against any taxable economic benefits.

When does the tax base equal the carrying amount of an asset?

For assets that will not generate future revenue.

For liabilities, what affects the tax base?

The carrying amount less any amounts deductible in future periods.

What type of temporary differences arise for tangible assets?

When the carrying amount and tax base differ due to depreciation or taxation rules.

What should you look for to determine the tax base?

Tax rules about deductibility of capital allowances, income recognition basis, etc.

What is the impact of accrued income recognized on an accruals basis for tax purposes?

It will usually affect both profit and the tax base.

What is considered when recognizing deferred tax assets?

The probability of having sufficient taxable profits available.

What constitutes a deductible temporary difference?

It occurs when the tax base of an asset exceeds its carrying amount.

What indicators suggest deferred tax asset recognition should be limited?

Insufficient future profits and current losses.

How does a net pension liability affect deferred tax?

It creates a deductible temporary difference allowing a deferred tax asset recognition.

What tax treatment occurs for defined benefit pension service costs?

Only paid contributions are deductible for tax purposes.

What happens to excess deferred tax assets on share-based payments?

Excess is taken directly to equity while the rest goes to profit or loss.

What is the general rule for recognizing deferred tax on share-based payments?

Movement towards the share-based payment expense is recognized in profit or loss or equity as appropriate.

What is deferred taxation on fair value adjustments during consolidation?

A taxable temporary difference arises with the net gain in fair value on consolidation requiring a deferred tax liability.

How should foreign subsidiaries’ taxable profits be treated for deferred tax purposes?

Differences due to exchange rates must be recognized as deferred tax liabilities or assets accordingly.

What are DT implications for intra-group trades?

It leads to a deductible temporary difference affecting tax calculations in consolidated financial statements.

How do temporary differences arise in share option schemes?

From differences between the accounting treatment of share options and their tax bases.

In what instance might a company recognize deferred tax regarding provisions?

When only deductible for tax purposes on a cash basis.

What additional considerations exist regarding deferred tax assets in periods of losses?

The need for assurance of taxable temporary differences to offset against.

Define the term DT asset.

Deferred tax asset reflects future tax reductions based on temporary differences.

How are deferred tax assets and liabilities treated on initial recognition?

Entire amounts are credited or debited to profit or loss.

What is the formula for calculating a deferred tax asset?

Deferred Tax Asset = deductible TD x tax rate.

For bank holidays provision accounting, what type of temporary difference could arise?

A deductible temporary difference.

How does the market value of share-based payments affect tax calculations?

Tax base changes based on the intrinsic value at the time of option exercise.

What effect does tax law have on accounting for deferred tax related to goodwill?

Deferred taxes adjust the initial cost of goodwill in business combinations.

In the context of deferred tax, what does SOPL stand for?

Statement of Profit or Loss.

What does SOFP represent regarding deferred tax?

Statement of Financial Position.

Why is deferred tax essential in financial Reporting?

To accurately reflect profit and loss under accounting standards.

How should entities apply when recognizing tax bases?

Entities must apply tax laws related to temporary and deductible differences.

If an entity has a legal right to offset taxes, what should be reflected in the SOFP?

Net amounts of tax assets and liabilities.

What is the tax implication if a company corrects an expense by capitalizing it?

It can reduce current tax due to an adjustment in profit.

What constitutes a taxable temporary difference?

A difference arising when the carrying amount exceeds the tax base, leading to deferred tax liability.

What is required for a deferred tax asset to be recognized?

It must be probable that sufficient future taxable profits will be available for offsetting.

What does IAS 12 primarily address?

It addresses the accounting for income taxes.