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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