Chapter 15: Income Taxes

Perspective and Issues

Accounting for income taxes is made complicated by the fact that in most jurisdictions, the amount of revenues and expenses recognized in a given period for taxation purposes will not correspond to what is reported under GAAP (whether national GAAP or IAS). The matching principle states that for financial reporting purposes the amount presented as current period tax expense should relate appropriately to the amount of pretax accounting income being reported. That expense would rarely equal the current period's tax payment obligation. The solution is to record deferred income tax assets and liabilities as the difference between the amount owed and the amount accruable for financial reporting purposes.

Under the provisions of IAS 12, as most recently revised, the liability method of computing interperiod income tax allocation is required. This method essentially is oriented toward the balance sheet and the accurate, appropriate measurement of assets and liabilities—specifically, toward appropriate representation of deferred tax benefits and obligations. In order to achieve this, at each balance sheet date the amounts in the deferred tax asset and/or liability accounts is assessed, with the necessary adjustment(s) to achieve the correct balance(s) being reported in the tax provision for the period. Use of this method may or may not achieve optimal "matching" of tax expense with pretax (accounting) income, but it does result in a balance sheet with assets and liabilities meeting the criteria established in 1989 when IASC adopted the Framework for the Preparation and Presentation of Financial Statements.

Under IAS 12, deferred tax assets and liabilities are to be presented at the amounts which are expected to flow to or from the reporting entity when the benefits are ultimately realized or the obligations are settled. Revised IAS 12 makes no significant distinction between operation losses and other types of deductible temporary differences, and requires that both be given recognition when realization is deemed to be probable. Discounting of these amounts to present values is not permitted. Both tax assets and liabilities are measured by reference to expected tax rates, which in general are the enacted, effective rates as of the balance sheet date. The standard also alters the criteria for recognition of the tax effects of temporary differences arising from ownership interest in investees and subsidiaries, and for the accounting related to goodwill and negative goodwill arising from business acquisitions. Presentation of deferred tax assets or liabilities as current assets or liabilities is prohibited, and a somewhat lengthier list of additional disclosures has also been mandated by IAS 12, as set forth in this chapter.

Sources of IAS

IAS 12 (revised)

SIC 17, 25