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Monday, February 13, 2017

Current Tax and Deferred Tax Treatment

 09:37:00     Financial Reporting, General     No comments   





IAS 12 does not account for the calculation of an entity’s tax liabilities for the accounting period rather IAS 12 is concerned with the treatment of tax in the accounts of the entity.
IAs 12 Income Taxes is the Standard that sets the treatment for taxes. The standard went further to classify these taxes into;

         i.            Current Tax
       ii.            Deferred Tax

Current tax: IAS 12 defines current tax as ‘the amount of income taxes payable in respect of the taxable profit for the period”.

The requirement of IAS 12 regarding current tax treatment include;

         i.            Any amount of calculated current tax should be treated as an expense in the income statement.

       ii.            Any unpaid tax at the end of the accounting period is recognised as a liability, while excess tax paid is treated as an asset.


     iii.            Where there is an underestimate/overestimate of the calculated tax in the previous period, the standard said, such amount to the tune of the underestimated/overestimated should be included in the current year tax expense.

Deferred Tax: these are tax liabilities payable in the future by the entity. They are caused by differences between accounting profits and taxable profits. These differences could be either permanent or temporary.

         i.            Permanent Differences: are caused by the treatment of allowable and non-allowable items in the calculation of taxable profits, which results in a difference between the Accounting profits and taxable profits. They are ignored as it can’t be reversed in the future.

       ii.            Temporary Differences however, arises when some of the income or expenses in the accounting for the current period are dealt with for tax purpose in a different accounting period.

     iii.            Example of causes of such difference is the calculation of depreciation to arrive at accounting profit and the calculation of capital allowances to arrive at taxable profit.

Accounting Treatment for Deferred Tax
a)      Where taxable profit is higher than accounting profit in an accounting year, the deferred tax account is credited with such amount 

b)      Where taxable profit is lower than accounting profit in an accounting year, the deferred tax account is debited with such amount.
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