IAS 12 sets out the guidelines for accounting for income taxes, which include both current and deferred taxes. These taxes encompass all domestic and foreign taxes based on taxable profits.
Understanding taxable profits
IAS 12 applies exclusively to taxes based on taxable profits (IAS 12.2). The IFRS Interpretations Committee clarified that taxable profit may differ from accounting profit, yet it must still represent a form of profit. Taxes based on revenue or the value of assets do not qualify as income taxes under IFRS. These are recognised as revenue expenses within the operating profit under other applicable IFRSs, such as IAS 37.
Investment tax credits
Investment tax credits are not covered by either IAS 12 (as per IAS 12.4) or IAS 20 (as per IAS 20.20). Consequently, they fall outside the remit of IFRS and entities must develop their own accounting policies in accordance with IAS 8. Commonly, investment tax credits are accounted for as a reduction in income tax expense, although other methods may also be applied. The chosen approach depends on the link between the realisation of the tax credit and the availability of taxable profits, as well as whether such credits are considered taxable income.
Interest and penalties related to income taxes
Entities may incur interest and penalties related to income taxes, and there is ambiguity regarding their classification as either income tax expenses or general expenses affecting profit before tax. The IFRS Interpretations Committee clarified that entities should not freely choose between IAS 12 and IAS 37 for these costs. Instead, they should adhere to the general requirements of IAS 12 to determine if these expenses are part of the income tax expense. Key considerations for this determination include:
- If penalties are calculated on taxable profit, they should be included in the income tax expense. If, however, they are determined arbitrarily by the tax office, they are likely to be considered a revenue expense.
- Interest or penalties that reflect current market assessments of the time value of money are typically treated as finance costs.
Are you tired of the constant stream of IFRS updates? I know it's tough! That's why I created Reporting Period – a once-a-month summary for professional accountants. It consolidates all essential IFRS developments and Big 4 insights into one readable email. I personally curate every issue to ensure it's packed with the most relevant information, delivered straight to your inbox. It's free, with no spam, and you can unsubscribe with just one click. Ready to give it a try?
Disclosure
The specific disclosure requirements for income taxes are detailed in paragraphs IAS 12.79-88.
More about IAS 12
See other pages relating to IAS 12:
IAS 12 Income Taxes: Deferred Tax
IAS 12 Income Taxes: Current Tax