IAS 12, Income Tax
By Graham Holt
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IAS 12 uses a liability method and adopts a balance sheet approach to accounting for taxation. It accounts for the temporary differences between the accounting and tax bases of assets and liabilities rather than accounting for the timing differences between the accounting and tax consequences of revenue and expenses. IAS 12 adopts a full provision balance sheet approach to accounting for tax. It is assumed that the recovery of all assets and the settlement of all liabilities have tax consequences and that these consequences can be estimated reliably and cannot be avoided. As the IFRS recognition criteria are different from those which are normally set out in tax law, certain income and expenditure in financial statements will not be allowed for taxation purposes, thus causing 'temporary differences'.
A deferred tax liability or asset is recognised for the future tax consequences of past transactions with certain exemptions. The standard assumes that each asset and liability has a value for tax purposes and this is called a tax base. Differences between the carrying amount of an asset and liability and its tax base are called temporary differences. The principle utilised in IAS 12 is that an entity will settle its liabilities and recover its assets eventually over time and, at that point, the tax consequences will crystallise. There are two kinds of temporary differences: a taxable temporary difference and a deductible temporary difference. A taxable temporary difference results in the payment