IAS 12

IAS 12

Income Taxes
In April 2001 the International Accounting Standards Board (Board) adopted
IAS 12 Income Taxes, which had originally been issued by the International Accounting
Standards Committee in October 1996. IAS 12 Income Taxes replaced parts of
IAS 12 Accounting for Income Taxes (issued in July 1979).

In December 2010 the Board amended IAS 12 to address an issue that arises when entities
apply the measurement principle in IAS 12 to temporary differences relating to
investment properties that are measured at fair value. That amendment also
incorporated some guidance from a related Interpretation (SIC-21 Income Taxes—Recovery of
Revalued Non-Depreciable Assets).

In January 2016 the Board issued Recognition of Deferred Tax Assets for Unrealised
Losses (Amendments to IAS 12) to clarify the requirements on recognition of deferred tax
assets related to debt instruments measured at fair value.

Other Standards have made minor consequential amendments to IAS 12. They include
IFRS 11 Joint Arrangements (issued May 2011), Presentation of Items of Other Comprehensive
Income (Amendments to IAS 1) (issued June 2011), Investment Entities (Amendments to
IFRS 10, IFRS 12 and IAS 27) (issued October 2012), IFRS 9 Financial Instruments (Hedge
Accounting and amendments to IFRS 9, IFRS 7 and IAS 39) (issued November 2013),
IFRS 15 Revenue from Contracts with Customers (issued May 2014), IFRS 9 Financial
Instruments (issued July 2014), IFRS 16 Leases (issued January 2016), Annual Improvements to
IFRS Standards 2015–2017 Cycle (issued December 2017) and Amendments to References to the
Conceptual Framework in IFRS Standards (issued March 2018).

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CONTENTS
from paragraph

INTERNATIONAL ACCOUNTING STANDARD 12

INCOME TAXES
OBJECTIVE
SCOPE 1
DEFINITIONS 5
Tax base 7
RECOGNITION OF CURRENT TAX LIABILITIES AND CURRENT TAX
ASSETS 12
RECOGNITION OF DEFERRED TAX LIABILITIES AND DEFERRED TAX
ASSETS 15
Taxable temporary differences 15
Deductible temporary differences 24
Unused tax losses and unused tax credits 34
Reassessment of unrecognised deferred tax assets 37
Investments in subsidiaries, branches and associates and interests in joint
arrangements 38
MEASUREMENT 46
RECOGNITION OF CURRENT AND DEFERRED TAX 57
Items recognised in profit or loss 58
Items recognised outside profit or loss 61A
Deferred tax arising from a business combination 66
Current and deferred tax arising from share-based payment transactions 68A
PRESENTATION 71
Tax assets and tax liabilities 71
Tax expense 77
DISCLOSURE 79
EFFECTIVE DATE 89
WITHDRAWAL OF SIC-21 99
APPROVAL BY THE BOARD OF DEFERRED TAX: RECOVERY OF
UNDERLYING ASSETS (AMENDMENTS TO IAS 12) ISSUED IN DECEMBER
2010
APPROVAL BY THE BOARD OF RECOGNITION OF DEFERRED TAX
ASSETS FOR UNREALISED LOSSES (AMENDMENTS TO IAS 12) ISSUED IN
JANUARY 2016

FOR THE ACCOMPANYING GUIDANCE LISTED BELOW, SEE PART B OF THIS EDITION

ILLUSTRATIVE EXAMPLES

FOR THE BASIS FOR CONCLUSIONS, SEE PART C OF THIS EDITION

BASIS FOR CONCLUSIONS

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International Accounting Standard 12 Income Taxes (IAS 12) is set out in paragraphs
1–99. All the paragraphs have equal authority but retain the IASC format of the
Standard when it was adopted by the IASB. IAS 12 should be read in the context of
its objective and the Basis for Conclusions, the Preface to IFRS Standards and
the Conceptual Framework for Financial Reporting. IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors provides a basis for selecting and applying accounting
policies in the absence of explicit guidance.

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International Accounting Standard 12

Income Taxes

Objective
The objective of this Standard is to prescribe the accounting treatment for income taxes.
The principal issue in accounting for income taxes is how to account for the current and
future tax consequences of:

(a) the future recovery (settlement) of the carrying amount of assets (liabilities) that
are recognised in an entity’s statement of financial position; and

(b) transactions and other events of the current period that are recognised in an
entity’s financial statements.

It is inherent in the recognition of an asset or liability that the reporting entity expects to
recover or settle the carrying amount of that asset or liability. If it is probable that
recovery or settlement of that carrying amount will make future tax payments larger
(smaller) than they would be if such recovery or settlement were to have no tax
consequences, this Standard requires an entity to recognise a deferred tax liability
(deferred tax asset), with certain limited exceptions.

This Standard requires an entity to account for the tax consequences of transactions and
other events in the same way that it accounts for the transactions and other events
themselves. Thus, for transactions and other events recognised in profit or loss, any
related tax effects are also recognised in profit or loss. For transactions and other events
recognised outside profit or loss (either in other comprehensive income or directly in
equity), any related tax effects are also recognised outside profit or loss (either in other
comprehensive income or directly in equity, respectively). Similarly, the recognition of
deferred tax assets and liabilities in a business combination affects the amount of
goodwill arising in that business combination or the amount of the bargain purchase
gain recognised.

This Standard also deals with the recognition of deferred tax assets arising from unused
tax losses or unused tax credits, the presentation of income taxes in the financial
statements and the disclosure of information relating to income taxes.

Scope
1 This Standard shall be applied in accounting for income taxes.

2 For the purposes of this Standard, income taxes include all domestic and
foreign taxes which are based on taxable profits. Income taxes also include
taxes, such as withholding taxes, which are payable by a subsidiary, associate
or joint arrangement on distributions to the reporting entity.

3 [Deleted]

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4 This Standard does not deal with the methods of accounting for government
grants (see IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance) or investment tax credits. However, this Standard does deal with the
accounting for temporary differences that may arise from such grants or
investment tax credits.

Definitions
5 The following terms are used in this Standard with the meanings specified:

Accounting profit is profit or loss for a period before deducting tax expense.

Taxable profit (tax loss) is the profit (loss) for a period, determined in
accordance with the rules established by the taxation authorities, upon
which income taxes are payable (recoverable).

Tax expense (tax income) is the aggregate amount included in the

determination of profit or loss for the period in respect of current tax and
deferred tax.

Current tax is the amount of income taxes payable (recoverable) in respect

of the taxable profit (tax loss) for a period.

Deferred tax liabilities are the amounts of income taxes payable in future
periods in respect of taxable temporary differences.

Deferred tax assets are the amounts of income taxes recoverable in future
periods in respect of:

(a) deductible temporary differences;

(b) the carryforward of unused tax losses; and

(c) the carryforward of unused tax credits.

Temporary differences are differences between the carrying amount of an

asset or liability in the statement of financial position and its tax base.
Temporary differences may be either:

(a) taxable temporary differences, which are temporary differences that

will result in taxable amounts in determining taxable profit (tax
loss) of future periods when the carrying amount of the asset or
liability is recovered or settled; or

(b) deductible temporary differences, which are temporary differences that

will result in amounts that are deductible in determining taxable
profit (tax loss) of future periods when the carrying amount of the
asset or liability is recovered or settled.

The tax base of an asset or liability is the amount attributed to that asset or
liability for tax purposes.

6 Tax expense (tax income) comprises current tax expense (current tax income)
and deferred tax expense (deferred tax income).

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Tax base
7 The tax base of an asset is the amount that will be deductible for tax purposes
against any taxable economic benefits that will flow to an entity when it
recovers the carrying amount of the asset. If those economic benefits will not
be taxable, the tax base of the asset is equal to its carrying amount.

Examples
1 A machine cost 100. For tax purposes, depreciation of 30 has already
been deducted in the current and prior periods and the remaining cost
will be deductible in future periods, either as depreciation or through a
deduction on disposal. Revenue generated by using the machine is
taxable, any gain on disposal of the machine will be taxable and any loss
on disposal will be deductible for tax purposes. The tax base of the machine
is 70.
2 Interest receivable has a carrying amount of 100. The related interest
revenue will be taxed on a cash basis. The tax base of the interest receivable is
nil.
3 Trade receivables have a carrying amount of 100. The related revenue
has already been included in taxable profit (tax loss). The tax base of the
trade receivables is 100.
4 Dividends receivable from a subsidiary have a carrying amount of 100.
The dividends are not taxable. In substance, the entire carrying amount of the
asset is deductible against the economic benefits. Consequently, the tax base of the
dividends receivable is 100.(a)
5 A loan receivable has a carrying amount of 100. The repayment of the
loan will have no tax consequences. The tax base of the loan is 100.

(a) Under this analysis, there is no taxable temporary difference. An alternative

analysis is that the accrued dividends receivable have a tax base of nil and that a
tax rate of nil is applied to the resulting taxable temporary difference of 100.
Under both analyses, there is no deferred tax liability.

8 The tax base of a liability is its carrying amount, less any amount that will be
deductible for tax purposes in respect of that liability in future periods. In the
case of revenue which is received in advance, the tax base of the resulting
liability is its carrying amount, less any amount of the revenue that will not
be taxable in future periods.

Examples
1 Current liabilities include accrued expenses with a carrying amount of
100. The related expense will be deducted for tax purposes on a cash
basis. The tax base of the accrued expenses is nil.
2 Current liabilities include interest revenue received in advance, with a
carrying amount of 100. The related interest revenue was taxed on a
cash basis. The tax base of the interest received in advance is nil.

continued...

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...continued

Examples
3 Current liabilities include accrued expenses with a carrying amount of
100. The related expense has already been deducted for tax purposes. The
tax base of the accrued expenses is 100.
4 Current liabilities include accrued fines and penalties with a carrying
amount of 100. Fines and penalties are not deductible for tax purposes.
The tax base of the accrued fines and penalties is 100.(a)
5 A loan payable has a carrying amount of 100. The repayment of the loan
will have no tax consequences. The tax base of the loan is 100.

(a) Under this analysis, there is no deductible temporary difference. An alternative

analysis is that the accrued fines and penalties payable have a tax base of nil and
that a tax rate of nil is applied to the resulting deductible temporary difference of
100. Under both analyses, there is no deferred tax asset.

9 Some items have a tax base but are not recognised as assets and liabilities in
the statement of financial position. For example, research costs are recognised
as an expense in determining accounting profit in the period in which they
are incurred but may not be permitted as a deduction in determining taxable
profit (tax loss) until a later period. The difference between the tax base of the
research costs, being the amount the taxation authorities will permit as a
deduction in future periods, and the carrying amount of nil is a deductible
temporary difference that results in a deferred tax asset.

10 Where the tax base of an asset or liability is not immediately apparent, it is

helpful to consider the fundamental principle upon which this Standard is
based: that an entity shall, with certain limited exceptions, recognise a
deferred tax liability (asset) whenever recovery or settlement of the carrying
amount of an asset or liability would make future tax payments larger
(smaller) than they would be if such recovery or settlement were to have no
tax consequences. Example C following paragraph 51A illustrates
circumstances when it may be helpful to consider this fundamental principle,
for example, when the tax base of an asset or liability depends on the expected
manner of recovery or settlement.

11 In consolidated financial statements, temporary differences are determined by

comparing the carrying amounts of assets and liabilities in the consolidated
financial statements with the appropriate tax base. The tax base is determined
by reference to a consolidated tax return in those jurisdictions in which such a
return is filed. In other jurisdictions, the tax base is determined by reference
to the tax returns of each entity in the group.

Recognition of current tax liabilities and current tax assets

12 Current tax for current and prior periods shall, to the extent unpaid, be
recognised as a liability. If the amount already paid in respect of current
and prior periods exceeds the amount due for those periods, the excess
shall be recognised as an asset.

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13 The benefit relating to a tax loss that can be carried back to recover
current tax of a previous period shall be recognised as an asset.

14 When a tax loss is used to recover current tax of a previous period, an entity
recognises the benefit as an asset in the period in which the tax loss occurs
because it is probable that the benefit will flow to the entity and the benefit
can be reliably measured.

Recognition of deferred tax liabilities and deferred tax assets

Taxable temporary differences

15 A deferred tax liability shall be recognised for all taxable temporary
differences, except to the extent that the deferred tax liability arises from:

(a) the initial recognition of goodwill; or

(b) the initial recognition of an asset or liability in a transaction which:

(i) is not a business combination; and

(ii) at the time of the transaction, affects neither accounting

profit nor taxable profit (tax loss).

However, for taxable temporary differences associated with investments in

subsidiaries, branches and associates, and interests in joint arrangements,
a deferred tax liability shall be recognised in accordance
with paragraph 39.

16 It is inherent in the recognition of an asset that its carrying amount will be

recovered in the form of economic benefits that flow to the entity in future
periods. When the carrying amount of the asset exceeds its tax base, the
amount of taxable economic benefits will exceed the amount that will be
allowed as a deduction for tax purposes. This difference is a taxable temporary
difference and the obligation to pay the resulting income taxes in future
periods is a deferred tax liability. As the entity recovers the carrying amount
of the asset, the taxable temporary difference will reverse and the entity will
have taxable profit. This makes it probable that economic benefits will flow
from the entity in the form of tax payments. Therefore, this Standard requires
the recognition of all deferred tax liabilities, except in certain circumstances
described in paragraphs 15 and 39.

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Example
An asset which cost 150 has a carrying amount of 100. Cumulative
depreciation for tax purposes is 90 and the tax rate is 25%.

The tax base of the asset is 60 (cost of 150 less cumulative tax depreciation of 90).
To recover the carrying amount of 100, the entity must earn taxable income of 100, but
will only be able to deduct tax depreciation of 60. Consequently, the entity will pay
income taxes of 10 (40 at 25%) when it recovers the carrying amount of the asset. The
difference between the carrying amount of 100 and the tax base of 60 is a taxable
temporary difference of 40. Therefore, the entity recognises a deferred tax liability of 10
(40 at 25%) representing the income taxes that it will pay when it recovers the carrying
amount of the asset.

17 Some temporary differences arise when income or expense is included in

accounting profit in one period but is included in taxable profit in a different
period. Such temporary differences are often described as timing differences.
The following are examples of temporary differences of this kind which are
taxable temporary differences and which therefore result in deferred tax
liabilities:

(a) interest revenue is included in accounting profit on a time proportion

basis but may, in some jurisdictions, be included in taxable profit
when cash is collected. The tax base of any receivable recognised in the
statement of financial position with respect to such revenues is nil
because the revenues do not affect taxable profit until cash is collected;

(b) depreciation used in determining taxable profit (tax loss) may differ
from that used in determining accounting profit. The temporary
difference is the difference between the carrying amount of the asset
and its tax base which is the original cost of the asset less all
deductions in respect of that asset permitted by the taxation
authorities in determining taxable profit of the current and prior
periods. A taxable temporary difference arises, and results in a
deferred tax liability, when tax depreciation is accelerated (if tax
depreciation is less rapid than accounting depreciation, a deductible
temporary difference arises, and results in a deferred tax asset); and

(c) development costs may be capitalised and amortised over future

periods in determining accounting profit but deducted in determining
taxable profit in the period in which they are incurred. Such
development costs have a tax base of nil as they have already been
deducted from taxable profit. The temporary difference is the
difference between the carrying amount of the development costs and
their tax base of nil.

18 Temporary differences also arise when:

(a) the identifiable assets acquired and liabilities assumed in a business

combination are recognised at their fair values in accordance with
IFRS 3 Business Combinations, but no equivalent adjustment is made for
tax purposes (see paragraph 19);

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(b) assets are revalued and no equivalent adjustment is made for tax
purposes (see paragraph 20);

(c) goodwill arises in a business combination (see paragraph 21);

(d) the tax base of an asset or liability on initial recognition differs from
its initial carrying amount, for example when an entity benefits from
non-taxable government grants related to assets (see paragraphs 22 and
33); or

(e) the carrying amount of investments in subsidiaries, branches and

associates or interests in joint arrangements becomes different from
the tax base of the investment or interest (see paragraphs 38–45).

Business combinations
19 With limited exceptions, the identifiable assets acquired and liabilities
assumed in a business combination are recognised at their fair values at the
acquisition date. Temporary differences arise when the tax bases of the
identifiable assets acquired and liabilities assumed are not affected by the
business combination or are affected differently. For example, when the
carrying amount of an asset is increased to fair value but the tax base of the
asset remains at cost to the previous owner, a taxable temporary difference
arises which results in a deferred tax liability. The resulting deferred tax
liability affects goodwill (see paragraph 66).

Assets carried at fair value

20 IFRSs permit or require certain assets to be carried at fair value or to be
revalued (see, for example, IAS 16 Property, Plant and Equipment, IAS 38 Intangible
Assets, IAS 40 Investment Property, IFRS 9 Financial Instruments and IFRS 16 Leases).
In some jurisdictions, the revaluation or other restatement of an asset to fair
value affects taxable profit (tax loss) for the current period. As a result, the tax
base of the asset is adjusted and no temporary difference arises. In other
jurisdictions, the revaluation or restatement of an asset does not affect taxable
profit in the period of the revaluation or restatement and, consequently, the
tax base of the asset is not adjusted. Nevertheless, the future recovery of the
carrying amount will result in a taxable flow of economic benefits to the
entity and the amount that will be deductible for tax purposes will differ from
the amount of those economic benefits. The difference between the carrying
amount of a revalued asset and its tax base is a temporary difference and gives
rise to a deferred tax liability or asset. This is true even if:

(a) the entity does not intend to dispose of the asset. In such cases, the
revalued carrying amount of the asset will be recovered through use
and this will generate taxable income which exceeds the depreciation
that will be allowable for tax purposes in future periods; or

(b) tax on capital gains is deferred if the proceeds of the disposal of the
asset are invested in similar assets. In such cases, the tax will
ultimately become payable on sale or use of the similar assets.

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Goodwill
21 Goodwill arising in a business combination is measured as the excess of (a)
over (b) below:

(a) the aggregate of:

(i) the consideration transferred measured in accordance with

IFRS 3, which generally requires acquisition-date fair value;

(ii) the amount of any non-controlling interest in the acquiree

recognised in accordance with IFRS 3; and

(iii) in a business combination achieved in stages, the

acquisition-date fair value of the acquirer’s previously held
equity interest in the acquiree.

(b) the net of the acquisition-date amounts of the identifiable assets

acquired and liabilities assumed measured in accordance with IFRS 3.

Many taxation authorities do not allow reductions in the carrying amount of

goodwill as a deductible expense in determining taxable profit. Moreover, in
such jurisdictions, the cost of goodwill is often not deductible when a
subsidiary disposes of its underlying business. In such jurisdictions, goodwill
has a tax base of nil. Any difference between the carrying amount of goodwill
and its tax base of nil is a taxable temporary difference. However, this
Standard does not permit the recognition of the resulting deferred tax liability
because goodwill is measured as a residual and the recognition of the deferred
tax liability would increase the carrying amount of goodwill.

21A Subsequent reductions in a deferred tax liability that is unrecognised because

it arises from the initial recognition of goodwill are also regarded as arising
from the initial recognition of goodwill and are therefore not recognised
under paragraph 15(a). For example, if in a business combination an entity
recognises goodwill of CU100 that has a tax base of nil, paragraph 15(a)
prohibits the entity from recognising the resulting deferred tax liability. If the
entity subsequently recognises an impairment loss of CU20 for that goodwill,
the amount of the taxable temporary difference relating to the goodwill is
reduced from CU100 to CU80, with a resulting decrease in the value of the
unrecognised deferred tax liability. That decrease in the value of the
unrecognised deferred tax liability is also regarded as relating to the initial
recognition of the goodwill and is therefore prohibited from being recognised
under paragraph 15(a).

21B Deferred tax liabilities for taxable temporary differences relating to goodwill
are, however, recognised to the extent they do not arise from the initial
recognition of goodwill. For example, if in a business combination an entity
recognises goodwill of CU100 that is deductible for tax purposes at a rate of
20 per cent per year starting in the year of acquisition, the tax base of the
goodwill is CU100 on initial recognition and CU80 at the end of the year of
acquisition. If the carrying amount of goodwill at the end of the year of
acquisition remains unchanged at CU100, a taxable temporary difference of
CU20 arises at the end of that year. Because that taxable temporary difference

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does not relate to the initial recognition of the goodwill, the resulting deferred
tax liability is recognised.

Initial recognition of an asset or liability

22 A temporary difference may arise on initial recognition of an asset or liability,
for example if part or all of the cost of an asset will not be deductible for tax
purposes. The method of accounting for such a temporary difference depends
on the nature of the transaction that led to the initial recognition of the asset
or liability:

(a) in a business combination, an entity recognises any deferred tax

liability or asset and this affects the amount of goodwill or bargain
purchase gain it recognises (see paragraph 19);

(b) if the transaction affects either accounting profit or taxable profit, an

entity recognises any deferred tax liability or asset and recognises the
resulting deferred tax expense or income in profit or loss (see
paragraph 59);

(c) if the transaction is not a business combination, and affects neither

accounting profit nor taxable profit, an entity would, in the absence of
the exemption provided by paragraphs 15 and 24, recognise the
resulting deferred tax liability or asset and adjust the carrying amount
of the asset or liability by the same amount. Such adjustments would
make the financial statements less transparent. Therefore, this
Standard does not permit an entity to recognise the resulting deferred
tax liability or asset, either on initial recognition or subsequently (see
example below). Furthermore, an entity does not recognise subsequent
changes in the unrecognised deferred tax liability or asset as the asset
is depreciated.

Example illustrating paragraph 22(c)

An entity intends to use an asset which cost 1,000 throughout its useful life
of five years and then dispose of it for a residual value of nil. The tax rate is
40%. Depreciation of the asset is not deductible for tax purposes.
On disposal, any capital gain would not be taxable and any capital loss would
not be deductible.

As it recovers the carrying amount of the asset, the entity will earn taxable income of
1,000 and pay tax of 400. The entity does not recognise the resulting deferred tax
liability of 400 because it results from the initial recognition of the asset.

In the following year, the carrying amount of the asset is 800. In earning taxable
income of 800, the entity will pay tax of 320. The entity does not recognise the deferred
tax liability of 320 because it results from the initial recognition of the asset.

23 In accordance with IAS 32 Financial Instruments: Presentation the issuer of a

compound financial instrument (for example, a convertible bond) classifies
the instrument’s liability component as a liability and the equity component
as equity. In some jurisdictions, the tax base of the liability component on
initial recognition is equal to the initial carrying amount of the sum of the

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liability and equity components. The resulting taxable temporary difference

arises from the initial recognition of the equity component separately from
the liability component. Therefore, the exception set out in paragraph 15(b)
does not apply. Consequently, an entity recognises the resulting deferred tax
liability. In accordance with paragraph 61A, the deferred tax is charged
directly to the carrying amount of the equity component. In accordance with
paragraph 58, subsequent changes in the deferred tax liability are recognised
in profit or loss as deferred tax expense (income).

Deductible temporary differences

24 A deferred tax asset shall be recognised for all deductible temporary
differences to the extent that it is probable that taxable profit will be
available against which the deductible temporary difference can be
utilised, unless the deferred tax asset arises from the initial recognition of
an asset or liability in a transaction that:

(a) is not a business combination; and

(b) at the time of the transaction, affects neither accounting profit nor
taxable profit (tax loss).

However, for deductible temporary differences associated with investments

in subsidiaries, branches and associates, and interests in joint
arrangements, a deferred tax asset shall be recognised in accordance with
paragraph 44.

25 It is inherent in the recognition of a liability that the carrying amount will be

settled in future periods through an outflow from the entity of resources
embodying economic benefits. When resources flow from the entity, part or
all of their amounts may be deductible in determining taxable profit of a
period later than the period in which the liability is recognised. In such cases,
a temporary difference exists between the carrying amount of the liability and
its tax base. Accordingly, a deferred tax asset arises in respect of the income
taxes that will be recoverable in the future periods when that part of the
liability is allowed as a deduction in determining taxable profit. Similarly, if
the carrying amount of an asset is less than its tax base, the difference gives
rise to a deferred tax asset in respect of the income taxes that will be
recoverable in future periods.

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Example
An entity recognises a liability of 100 for accrued product warranty costs.
For tax purposes, the product warranty costs will not be deductible until the
entity pays claims. The tax rate is 25%.

The tax base of the liability is nil (carrying amount of 100, less the amount that will be
deductible for tax purposes in respect of that liability in future periods). In settling the
liability for its carrying amount, the entity will reduce its future taxable profit by an
amount of 100 and, consequently, reduce its future tax payments by 25 (100 at 25%).
The difference between the carrying amount of 100 and the tax base of nil is a
deductible temporary difference of 100. Therefore, the entity recognises a deferred tax
asset of 25 (100 at 25%), provided that it is probable that the entity will earn sufficient
taxable profit in future periods to benefit from a reduction in tax payments.

26 The following are examples of deductible temporary differences that result

in deferred tax assets:

(a) retirement benefit costs may be deducted in determining accounting

profit as service is provided by the employee, but deducted in
determining taxable profit either when contributions are paid to a
fund by the entity or when retirement benefits are paid by the entity.
A temporary difference exists between the carrying amount of the
liability and its tax base; the tax base of the liability is usually nil. Such
a deductible temporary difference results in a deferred tax asset as
economic benefits will flow to the entity in the form of a deduction
from taxable profits when contributions or retirement benefits are
paid;

(b) research costs are recognised as an expense in determining accounting

profit in the period in which they are incurred but may not be
permitted as a deduction in determining taxable profit (tax loss) until a
later period. The difference between the tax base of the research costs,
being the amount the taxation authorities will permit as a deduction
in future periods, and the carrying amount of nil is a deductible
temporary difference that results in a deferred tax asset;

(c) with limited exceptions, an entity recognises the identifiable assets

acquired and liabilities assumed in a business combination at their fair
values at the acquisition date. When a liability assumed is recognised
at the acquisition date but the related costs are not deducted in
determining taxable profits until a later period, a deductible
temporary difference arises which results in a deferred tax asset. A
deferred tax asset also arises when the fair value of an identifiable
asset acquired is less than its tax base. In both cases, the resulting
deferred tax asset affects goodwill (see paragraph 66); and

(d) certain assets may be carried at fair value, or may be revalued, without
an equivalent adjustment being made for tax purposes (see
paragraph 20). A deductible temporary difference arises if the tax base
of the asset exceeds its carrying amount.

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Example illustrating paragraph 26(d)

Identification of a deductible temporary difference at the end of Year 2:

Entity A purchases for CU1,000, at the beginning of Year 1, a debt

instrument with a nominal value of CU1,000 payable on maturity in 5 years
with an interest rate of 2% payable at the end of each year. The effective
interest rate is 2%. The debt instrument is measured at fair value.
At the end of Year 2, the fair value of the debt instrument has decreased to
CU918 as a result of an increase in market interest rates to 5%. It is probable
that Entity A will collect all the contractual cash flows if it continues to hold
the debt instrument.
Any gains (losses) on the debt instrument are taxable (deductible) only when
realised. The gains (losses) arising on the sale or maturity of the debt
instrument are calculated for tax purposes as the difference between the
amount collected and the original cost of the debt instrument.
Accordingly, the tax base of the debt instrument is its original cost.

The difference between the carrying amount of the debt instrument in Entity A’s
statement of financial position of CU918 and its tax base of CU1,000 gives rise to a
deductible temporary difference of CU82 at the end of Year 2 (see paragraphs 20 and
26(d)), irrespective of whether Entity A expects to recover the carrying amount of the
debt instrument by sale or by use, ie by holding it and collecting contractual cash flows,
or a combination of both.
This is because deductible temporary differences are differences between the carrying
amount of an asset or liability in the statement of financial position and its tax base
that will result in amounts that are deductible in determining taxable profit (tax loss) of
future periods, when the carrying amount of the asset or liability is recovered or settled
(see paragraph 5). Entity A obtains a deduction equivalent to the tax base of the asset of
CU1,000 in determining taxable profit (tax loss) either on sale or on maturity.

27 The reversal of deductible temporary differences results in deductions in

determining taxable profits of future periods. However, economic benefits in
the form of reductions in tax payments will flow to the entity only if it earns
sufficient taxable profits against which the deductions can be offset.
Therefore, an entity recognises deferred tax assets only when it is probable
that taxable profits will be available against which the deductible temporary
differences can be utilised.

27A When an entity assesses whether taxable profits will be available against
which it can utilise a deductible temporary difference, it considers whether
tax law restricts the sources of taxable profits against which it may make
deductions on the reversal of that deductible temporary difference. If tax law
imposes no such restrictions, an entity assesses a deductible temporary
difference in combination with all of its other deductible temporary
differences. However, if tax law restricts the utilisation of losses to deduction
against income of a specific type, a deductible temporary difference is assessed
in combination only with other deductible temporary differences of the
appropriate type.

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IAS 12

28 It is probable that taxable profit will be available against which a deductible

temporary difference can be utilised when there are sufficient taxable
temporary differences relating to the same taxation authority and the same
taxable entity which are expected to reverse:

(a) in the same period as the expected reversal of the deductible

temporary difference; or

(b) in periods into which a tax loss arising from the deferred tax asset can
be carried back or forward.

In such circumstances, the deferred tax asset is recognised in the period in

which the deductible temporary differences arise.

29 When there are insufficient taxable temporary differences relating to the

same taxation authority and the same taxable entity, the deferred tax asset is
recognised to the extent that:

(a) it is probable that the entity will have sufficient taxable profit relating
to the same taxation authority and the same taxable entity in the same
period as the reversal of the deductible temporary difference (or in the
periods into which a tax loss arising from the deferred tax asset can be
carried back or forward). In evaluating whether it will have sufficient
taxable profit in future periods, an entity:

(i) compares the deductible temporary differences with future

taxable profit that excludes tax deductions resulting from the
reversal of those deductible temporary differences. This
comparison shows the extent to which the future taxable profit
is sufficient for the entity to deduct the amounts resulting from
the reversal of those deductible temporary differences; and

(ii) ignores taxable amounts arising from deductible temporary

differences that are expected to originate in future periods,
because the deferred tax asset arising from these deductible
temporary differences will itself require future taxable profit in
order to be utilised; or

(b) tax planning opportunities are available to the entity that will create
taxable profit in appropriate periods.

29A The estimate of probable future taxable profit may include the recovery of
some of an entity’s assets for more than their carrying amount if there is
sufficient evidence that it is probable that the entity will achieve this. For
example, when an asset is measured at fair value, the entity shall consider
whether there is sufficient evidence to conclude that it is probable that the
entity will recover the asset for more than its carrying amount. This may be
the case, for example, when an entity expects to hold a fixed-rate debt
instrument and collect the contractual cash flows.

30 Tax planning opportunities are actions that the entity would take in order to
create or increase taxable income in a particular period before the expiry of a
tax loss or tax credit carryforward. For example, in some jurisdictions, taxable
profit may be created or increased by:

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(a) electing to have interest income taxed on either a received or

receivable basis;

(b) deferring the claim for certain deductions from taxable profit;

(c) selling, and perhaps leasing back, assets that have appreciated but for
which the tax base has not been adjusted to reflect such appreciation;
and

(d) selling an asset that generates non-taxable income (such as, in some
jurisdictions, a government bond) in order to purchase another
investment that generates taxable income.

Where tax planning opportunities advance taxable profit from a later period
to an earlier period, the utilisation of a tax loss or tax credit carryforward still
depends on the existence of future taxable profit from sources other than
future originating temporary differences.

31 When an entity has a history of recent losses, the entity considers the
guidance in paragraphs 35 and 36.

32 [Deleted]

Goodwill
32A If the carrying amount of goodwill arising in a business combination is less
than its tax base, the difference gives rise to a deferred tax asset. The deferred
tax asset arising from the initial recognition of goodwill shall be recognised as
part of the accounting for a business combination to the extent that it is
probable that taxable profit will be available against which the deductible
temporary difference could be utilised.

Initial recognition of an asset or liability

33 One case when a deferred tax asset arises on initial recognition of an asset is
when a non-taxable government grant related to an asset is deducted in
arriving at the carrying amount of the asset but, for tax purposes, is not
deducted from the asset’s depreciable amount (in other words its tax base); the
carrying amount of the asset is less than its tax base and this gives rise to a
deductible temporary difference. Government grants may also be set up as
deferred income in which case the difference between the deferred income
and its tax base of nil is a deductible temporary difference. Whichever method
of presentation an entity adopts, the entity does not recognise the resulting
deferred tax asset, for the reason given in paragraph 22.

Unused tax losses and unused tax credits

34 A deferred tax asset shall be recognised for the carryforward of unused tax
losses and unused tax credits to the extent that it is probable that future
taxable profit will be available against which the unused tax losses and
unused tax credits can be utilised.

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35 The criteria for recognising deferred tax assets arising from the carryforward
of unused tax losses and tax credits are the same as the criteria for recognising
deferred tax assets arising from deductible temporary differences. However,
the existence of unused tax losses is strong evidence that future taxable profit
may not be available. Therefore, when an entity has a history of recent losses,
the entity recognises a deferred tax asset arising from unused tax losses or tax
credits only to the extent that the entity has sufficient taxable temporary
differences or there is convincing other evidence that sufficient taxable profit
will be available against which the unused tax losses or unused tax credits can
be utilised by the entity. In such circumstances, paragraph 82 requires
disclosure of the amount of the deferred tax asset and the nature of the
evidence supporting its recognition.

36 An entity considers the following criteria in assessing the probability that

taxable profit will be available against which the unused tax losses or unused
tax credits can be utilised:

(a) whether the entity has sufficient taxable temporary differences

relating to the same taxation authority and the same taxable entity,
which will result in taxable amounts against which the unused tax
losses or unused tax credits can be utilised before they expire;

(b) whether it is probable that the entity will have taxable profits before
the unused tax losses or unused tax credits expire;

(c) whether the unused tax losses result from identifiable causes which
are unlikely to recur; and

(d) whether tax planning opportunities (see paragraph 30) are available to
the entity that will create taxable profit in the period in which the
unused tax losses or unused tax credits can be utilised.

To the extent that it is not probable that taxable profit will be available
against which the unused tax losses or unused tax credits can be utilised, the
deferred tax asset is not recognised.

Reassessment of unrecognised deferred tax assets

37 At the end of each reporting period, an entity reassesses unrecognised
deferred tax assets. The entity recognises a previously unrecognised deferred
tax asset to the extent that it has become probable that future taxable profit
will allow the deferred tax asset to be recovered. For example, an
improvement in trading conditions may make it more probable that the entity
will be able to generate sufficient taxable profit in the future for the deferred
tax asset to meet the recognition criteria set out in paragraph 24 or 34.
Another example is when an entity reassesses deferred tax assets at the date of
a business combination or subsequently (see paragraphs 67 and 68).

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Investments in subsidiaries, branches and associates and

interests in joint arrangements
38 Temporary differences arise when the carrying amount of investments in
subsidiaries, branches and associates or interests in joint arrangements
(namely the parent or investor’s share of the net assets of the subsidiary,
branch, associate or investee, including the carrying amount of goodwill)
becomes different from the tax base (which is often cost) of the investment or
interest. Such differences may arise in a number of different circumstances,
for example:

(a) the existence of undistributed profits of subsidiaries, branches,

associates and joint arrangements;

(b) changes in foreign exchange rates when a parent and its subsidiary are
based in different countries; and

(c) a reduction in the carrying amount of an investment in an associate to

its recoverable amount.

In consolidated financial statements, the temporary difference may be

different from the temporary difference associated with that investment in
the parent’s separate financial statements if the parent carries the investment
in its separate financial statements at cost or revalued amount.

39 An entity shall recognise a deferred tax liability for all taxable temporary
differences associated with investments in subsidiaries, branches and
associates, and interests in joint arrangements, except to the extent that
both of the following conditions are satisfied:

(a) the parent, investor, joint venturer or joint operator is able to

control the timing of the reversal of the temporary difference; and

(b) it is probable that the temporary difference will not reverse in the
foreseeable future.

40 As a parent controls the dividend policy of its subsidiary, it is able to control

the timing of the reversal of temporary differences associated with that
investment (including the temporary differences arising not only from
undistributed profits but also from any foreign exchange translation
differences). Furthermore, it would often be impracticable to determine the
amount of income taxes that would be payable when the temporary difference
reverses. Therefore, when the parent has determined that those profits will
not be distributed in the foreseeable future the parent does not recognise a
deferred tax liability. The same considerations apply to investments in
branches.

41 The non-monetary assets and liabilities of an entity are measured in its

functional currency (see IAS 21 The Effects of Changes in Foreign Exchange Rates). If
the entity’s taxable profit or tax loss (and, hence, the tax base of its
non-monetary assets and liabilities) is determined in a different currency,
changes in the exchange rate give rise to temporary differences that result in a
recognised deferred tax liability or (subject to paragraph 24) asset. The

© IFRS Foundation A1039

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resulting deferred tax is charged or credited to profit or loss (see

paragraph 58).

42 An investor in an associate does not control that entity and is usually not in a
position to determine its dividend policy. Therefore, in the absence of an
agreement requiring that the profits of the associate will not be distributed in
the foreseeable future, an investor recognises a deferred tax liability arising
from taxable temporary differences associated with its investment in the
associate. In some cases, an investor may not be able to determine the amount
of tax that would be payable if it recovers the cost of its investment in an
associate, but can determine that it will equal or exceed a minimum amount.
In such cases, the deferred tax liability is measured at this amount.

43 The arrangement between the parties to a joint arrangement usually deals

with the distribution of the profits and identifies whether decisions on such
matters require the consent of all the parties or a group of the parties. When
the joint venturer or joint operator can control the timing of the distribution
of its share of the profits of the joint arrangement and it is probable that its
share of the profits will not be distributed in the foreseeable future, a deferred
tax liability is not recognised.

44 An entity shall recognise a deferred tax asset for all deductible temporary
differences arising from investments in subsidiaries, branches and
associates, and interests in joint arrangements, to the extent that, and only
to the extent that, it is probable that:

(a) the temporary difference will reverse in the foreseeable future; and

(b) taxable profit will be available against which the temporary

difference can be utilised.

45 In deciding whether a deferred tax asset is recognised for deductible

temporary differences associated with its investments in subsidiaries,
branches and associates, and its interests in joint arrangements, an entity
considers the guidance set out in paragraphs 28 to 31.

Measurement
46 Current tax liabilities (assets) for the current and prior periods shall be
measured at the amount expected to be paid to (recovered from) the
taxation authorities, using the tax rates (and tax laws) that have been
enacted or substantively enacted by the end of the reporting period.

47 Deferred tax assets and liabilities shall be measured at the tax rates that
are expected to apply to the period when the asset is realised or the
liability is settled, based on tax rates (and tax laws) that have been enacted
or substantively enacted by the end of the reporting period.

48 Current and deferred tax assets and liabilities are usually measured using the
tax rates (and tax laws) that have been enacted. However, in some
jurisdictions, announcements of tax rates (and tax laws) by the government
have the substantive effect of actual enactment, which may follow the
announcement by a period of several months. In these circumstances, tax

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assets and liabilities are measured using the announced tax rate (and tax
laws).

49 When different tax rates apply to different levels of taxable income, deferred
tax assets and liabilities are measured using the average rates that are
expected to apply to the taxable profit (tax loss) of the periods in which the
temporary differences are expected to reverse.

50 [Deleted]

51 The measurement of deferred tax liabilities and deferred tax assets shall
reflect the tax consequences that would follow from the manner in which
the entity expects, at the end of the reporting period, to recover or settle
the carrying amount of its assets and liabilities.

51A In some jurisdictions, the manner in which an entity recovers (settles) the
carrying amount of an asset (liability) may affect either or both of:

(a) the tax rate applicable when the entity recovers (settles) the carrying
amount of the asset (liability); and

(b) the tax base of the asset (liability).

In such cases, an entity measures deferred tax liabilities and deferred tax
assets using the tax rate and the tax base that are consistent with the expected
manner of recovery or settlement.

Example A
An item of property, plant and equipment has a carrying amount of 100 and
a tax base of 60. A tax rate of 20% would apply if the item were sold and a
tax rate of 30% would apply to other income.

The entity recognises a deferred tax liability of 8 (40 at 20%) if it expects to sell the item
without further use and a deferred tax liability of 12 (40 at 30%) if it expects to retain
the item and recover its carrying amount through use.

Example B
An item or property, plant and equipment with a cost of 100 and a carrying
amount of 80 is revalued to 150. No equivalent adjustment is made for tax
purposes. Cumulative depreciation for tax purposes is 30 and the tax rate is
30%. If the item is sold for more than cost, the cumulative tax depreciation
of 30 will be included in taxable income but sale proceeds in excess of cost
will not be taxable.

The tax base of the item is 70 and there is a taxable temporary difference of 80. If the
entity expects to recover the carrying amount by using the item, it must generate
taxable income of 150, but will only be able to deduct depreciation of 70. On this basis,
there is a deferred tax liability of 24 (80 at 30%). If the entity expects to recover the
carrying amount by selling the item immediately for proceeds of 150, the deferred tax
liability is computed as follows:

continued...

© IFRS Foundation A1041

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...continued

Example B
Taxable Tax Rate Deferred
Temporary Tax Liabil-
Difference ity
Cumulative tax depreciation 30 30% 9
Proceeds in excess of cost 50 nil –
Total 80 9

(note: in accordance with paragraph 61A, the additional deferred tax that arises on the
revaluation is recognised in other comprehensive income)

Example C
The facts are as in example B, except that if the item is sold for more than
cost, the cumulative tax depreciation will be included in taxable income
(taxed at 30%) and the sale proceeds will be taxed at 40%, after deducting an
inflation-adjusted cost of 110.

If the entity expects to recover the carrying amount by using the item, it must generate
taxable income of 150, but will only be able to deduct depreciation of 70. On this basis,
the tax base is 70, there is a taxable temporary difference of 80 and there is a deferred
tax liability of 24 (80 at 30%), as in example B.

If the entity expects to recover the carrying amount by selling the item immediately for
proceeds of 150, the entity will be able to deduct the indexed cost of 110. The net
proceeds of 40 will be taxed at 40%. In addition, the cumulative tax depreciation of 30
will be included in taxable income and taxed at 30%. On this basis, the tax base is 80
(110 less 30), there is a taxable temporary difference of 70 and there is a deferred tax
liability of 25 (40 at 40% plus 30 at 30%). If the tax base is not immediately apparent
in this example, it may be helpful to consider the fundamental principle set out
in paragraph 10.

(note: in accordance with paragraph 61A, the additional deferred tax that arises on the
revaluation is recognised in other comprehensive income)

51B If a deferred tax liability or deferred tax asset arises from a non-depreciable
asset measured using the revaluation model in IAS 16, the measurement of
the deferred tax liability or deferred tax asset shall reflect the tax
consequences of recovering the carrying amount of the non-depreciable asset
through sale, regardless of the basis of measuring the carrying amount of that
asset. Accordingly, if the tax law specifies a tax rate applicable to the taxable
amount derived from the sale of an asset that differs from the tax rate
applicable to the taxable amount derived from using an asset, the former rate
is applied in measuring the deferred tax liability or asset related to a
non-depreciable asset.

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51C If a deferred tax liability or asset arises from investment property that is
measured using the fair value model in IAS 40, there is a rebuttable
presumption that the carrying amount of the investment property will be
recovered through sale. Accordingly, unless the presumption is rebutted, the
measurement of the deferred tax liability or deferred tax asset shall reflect the
tax consequences of recovering the carrying amount of the investment
property entirely through sale. This presumption is rebutted if the investment
property is depreciable and is held within a business model whose objective is
to consume substantially all of the economic benefits embodied in the
investment property over time, rather than through sale. If the presumption
is rebutted, the requirements of paragraphs 51 and 51A shall be followed.

Example illustrating paragraph 51C

An investment property has a cost of 100 and fair value of 150. It is
measured using the fair value model in IAS 40. It comprises land with a cost
of 40 and fair value of 60 and a building with a cost of 60 and fair value of
90. The land has an unlimited useful life.

Cumulative depreciation of the building for tax purposes is 30. Unrealised

changes in the fair value of the investment property do not affect taxable
profit. If the investment property is sold for more than cost, the reversal of
the cumulative tax depreciation of 30 will be included in taxable profit and
taxed at an ordinary tax rate of 30%. For sales proceeds in excess of cost, tax
law specifies tax rates of 25% for assets held for less than two years and 20%
for assets held for two years or more.
Because the investment property is measured using the fair value model in IAS 40, there
is a rebuttable presumption that the entity will recover the carrying amount of the
investment property entirely through sale. If that presumption is not rebutted, the
deferred tax reflects the tax consequences of recovering the carrying amount entirely
through sale, even if the entity expects to earn rental income from the property before
sale.

The tax base of the land if it is sold is 40 and there is a taxable temporary difference of
20 (60 – 40). The tax base of the building if it is sold is 30 (60 – 30) and there is a
taxable temporary difference of 60 (90 – 30). As a result, the total taxable temporary
difference relating to the investment property is 80 (20 + 60).

In accordance with paragraph 47, the tax rate is the rate expected to apply to the
period when the investment property is realised. Thus, the resulting deferred tax
liability is computed as follows, if the entity expects to sell the property after holding it
for more than two years:
Taxable Tax Rate Deferred
Temporary Tax Liabil-
Difference ity
Cumulative tax depreciation 30 30% 9
Proceeds in excess of cost 50 20% 10
Total 80 19

continued...

© IFRS Foundation A1043

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...continued

Example illustrating paragraph 51C

If the entity expects to sell the property after holding it for less than two years, the above
computation would be amended to apply a tax rate of 25%, rather than 20%, to the
proceeds in excess of cost.
If, instead, the entity holds the building within a business model whose objective is to
consume substantially all of the economic benefits embodied in the building over time,
rather than through sale, this presumption would be rebutted for the building.
However, the land is not depreciable. Therefore the presumption of recovery through
sale would not be rebutted for the land. It follows that the deferred tax liability would
reflect the tax consequences of recovering the carrying amount of the building through
use and the carrying amount of the land through sale.
The tax base of the building if it is used is 30 (60 – 30) and there is a taxable
temporary difference of 60 (90 – 30), resulting in a deferred tax liability of 18 (60 at
30%).

The tax base of the land if it is sold is 40 and there is a taxable temporary difference of
20 (60 – 40), resulting in a deferred tax liability of 4 (20 at 20%).

As a result, if the presumption of recovery through sale is rebutted for the building, the
deferred tax liability relating to the investment property is 22 (18 + 4).

51D The rebuttable presumption in paragraph 51C also applies when a deferred
tax liability or a deferred tax asset arises from measuring investment property
in a business combination if the entity will use the fair value model when
subsequently measuring that investment property.

51E Paragraphs 51B–51D do not change the requirements to apply the principles
in paragraphs 24–33 (deductible temporary differences) and paragraphs 34–36
(unused tax losses and unused tax credits) of this Standard when recognising
and measuring deferred tax assets.

52 [moved and renumbered 51A]

52A In some jurisdictions, income taxes are payable at a higher or lower rate if
part or all of the net profit or retained earnings is paid out as a dividend to
shareholders of the entity. In some other jurisdictions, income taxes may be
refundable or payable if part or all of the net profit or retained earnings is
paid out as a dividend to shareholders of the entity. In these circumstances,
current and deferred tax assets and liabilities are measured at the tax rate
applicable to undistributed profits.

52B [Deleted]

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Example illustrating paragraphs 52A and 57A

The following example deals with the measurement of current and deferred tax assets
and liabilities for an entity in a jurisdiction where income taxes are payable at a higher
rate on undistributed profits (50%) with an amount being refundable when profits are
distributed. The tax rate on distributed profits is 35%. At the end of the reporting
period, 31 December 20X1, the entity does not recognise a liability for dividends
proposed or declared after the reporting period. As a result, no dividends are recognised
in the year 20X1. Taxable income for 20X1 is 100,000. The net taxable temporary
difference for the year 20X1 is 40,000.

The entity recognises a current tax liability and a current income tax expense of 50,000. No asset is
recognised for the amount potentially recoverable as a result of future dividends. The entity also
recognises a deferred tax liability and deferred tax expense of 20,000 (40,000 at 50%) representing
the income taxes that the entity will pay when it recovers or settles the carrying amounts of its assets
and liabilities based on the tax rate applicable to undistributed profits.

Subsequently, on 15 March 20X2 the entity recognises dividends of 10,000 from

previous operating profits as a liability.

On 15 March 20X2, the entity recognises the recovery of income taxes of 1,500 (15% of the
dividends recognised as a liability) as a current tax asset and as a reduction of current income tax
expense for 20X2.

53 Deferred tax assets and liabilities shall not be discounted.

54 The reliable determination of deferred tax assets and liabilities on a

discounted basis requires detailed scheduling of the timing of the reversal of
each temporary difference. In many cases such scheduling is impracticable or
highly complex. Therefore, it is inappropriate to require discounting of
deferred tax assets and liabilities. To permit, but not to require, discounting
would result in deferred tax assets and liabilities which would not be
comparable between entities. Therefore, this Standard does not require or
permit the discounting of deferred tax assets and liabilities.

55 Temporary differences are determined by reference to the carrying amount of

an asset or liability. This applies even where that carrying amount is itself
determined on a discounted basis, for example in the case of retirement
benefit obligations (see IAS 19 Employee Benefits).

56 The carrying amount of a deferred tax asset shall be reviewed at the end of
each reporting period. An entity shall reduce the carrying amount of a
deferred tax asset to the extent that it is no longer probable that sufficient
taxable profit will be available to allow the benefit of part or all of that
deferred tax asset to be utilised. Any such reduction shall be reversed to
the extent that it becomes probable that sufficient taxable profit will be
available.

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IAS 12

Recognition of current and deferred tax

57 Accounting for the current and deferred tax effects of a transaction or other
event is consistent with the accounting for the transaction or event itself.
Paragraphs 58 to 68C implement this principle.

57A An entity shall recognise the income tax consequences of dividends as defined
in IFRS 9 when it recognises a liability to pay a dividend. The income tax
consequences of dividends are linked more directly to past transactions or
events that generated distributable profits than to distributions to owners.
Therefore, an entity shall recognise the income tax consequences of dividends
in profit or loss, other comprehensive income or equity according to where
the entity originally recognised those past transactions or events.

Items recognised in profit or loss

58 Current and deferred tax shall be recognised as income or an expense and
included in profit or loss for the period, except to the extent that the tax
arises from:

(a) a transaction or event which is recognised, in the same or a

different period, outside profit or loss, either in other
comprehensive income or directly in equity (see paragraphs 61A–65);
or

(b) a business combination (other than the acquisition by an investment

entity, as defined in IFRS 10 Consolidated Financial Statements, of a
subsidiary that is required to be measured at fair value through
profit or loss) (see paragraphs 66–68).

59 Most deferred tax liabilities and deferred tax assets arise where income or
expense is included in accounting profit in one period, but is included in
taxable profit (tax loss) in a different period. The resulting deferred tax is
recognised in profit or loss. Examples are when:

(a) interest, royalty or dividend revenue is received in arrears and is

included in accounting profit in accordance with IFRS 15 Revenue from
Contracts with Customers, IAS 39 Financial Instruments: Recognition and
Measurement or IFRS 9 Financial Instruments, as relevant, but is included
in taxable profit (tax loss) on a cash basis; and

(b) costs of intangible assets have been capitalised in accordance with

IAS 38 and are being amortised in profit or loss, but were deducted for
tax purposes when they were incurred.

60 The carrying amount of deferred tax assets and liabilities may change even
though there is no change in the amount of the related temporary differences.
This can result, for example, from:

(a) a change in tax rates or tax laws;

(b) a reassessment of the recoverability of deferred tax assets; or

(c) a change in the expected manner of recovery of an asset.

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The resulting deferred tax is recognised in profit or loss, except to the extent
that it relates to items previously recognised outside profit or loss (see
paragraph 63).

Items recognised outside profit or loss

61 [Deleted]

61A Current tax and deferred tax shall be recognised outside profit or loss if
the tax relates to items that are recognised, in the same or a different
period, outside profit or loss. Therefore, current tax and deferred tax that
relates to items that are recognised, in the same or a different period:

(a) in other comprehensive income, shall be recognised in other

comprehensive income (see paragraph 62).

(b) directly in equity, shall be recognised directly in equity (see

paragraph 62A).

62 International Financial Reporting Standards require or permit particular items

to be recognised in other comprehensive income. Examples of such items are:

(a) a change in carrying amount arising from the revaluation of property,

plant and equipment (see IAS 16); and

(b) [deleted]

(c) exchange differences arising on the translation of the financial

statements of a foreign operation (see IAS 21).

(d) [deleted]

62A International Financial Reporting Standards require or permit particular items

to be credited or charged directly to equity. Examples of such items are:

(a) an adjustment to the opening balance of retained earnings resulting

from either a change in accounting policy that is applied
retrospectively or the correction of an error (see IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors); and

(b) amounts arising on initial recognition of the equity component of a

compound financial instrument (see paragraph 23).

63 In exceptional circumstances it may be difficult to determine the amount of

current and deferred tax that relates to items recognised outside profit or loss
(either in other comprehensive income or directly in equity). This may be the
case, for example, when:

(a) there are graduated rates of income tax and it is impossible to

determine the rate at which a specific component of taxable profit (tax
loss) has been taxed;

(b) a change in the tax rate or other tax rules affects a deferred tax
asset or liability relating (in whole or in part) to an item that was
previously recognised outside profit or loss; or

© IFRS Foundation A1047

IAS 12

(c) an entity determines that a deferred tax asset should be recognised, or

should no longer be recognised in full, and the deferred tax asset
relates (in whole or in part) to an item that was previously recognised
outside profit or loss.

In such cases, the current and deferred tax related to items that are
recognised outside profit or loss are based on a reasonable pro rata allocation
of the current and deferred tax of the entity in the tax jurisdiction concerned,
or other method that achieves a more appropriate allocation in the
circumstances.

64 IAS 16 does not specify whether an entity should transfer each year from
revaluation surplus to retained earnings an amount equal to the difference
between the depreciation or amortisation on a revalued asset and the
depreciation or amortisation based on the cost of that asset. If an entity makes
such a transfer, the amount transferred is net of any related deferred tax.
Similar considerations apply to transfers made on disposal of an item of
property, plant or equipment.

65 When an asset is revalued for tax purposes and that revaluation is related to
an accounting revaluation of an earlier period, or to one that is expected to be
carried out in a future period, the tax effects of both the asset revaluation and
the adjustment of the tax base are recognised in other comprehensive income
in the periods in which they occur. However, if the revaluation for tax
purposes is not related to an accounting revaluation of an earlier period, or to
one that is expected to be carried out in a future period, the tax effects of the
adjustment of the tax base are recognised in profit or loss.

65A When an entity pays dividends to its shareholders, it may be required to pay a
portion of the dividends to taxation authorities on behalf of shareholders.
In many jurisdictions, this amount is referred to as a withholding tax. Such an
amount paid or payable to taxation authorities is charged to equity as a part of
the dividends.

Deferred tax arising from a business combination

66 As explained in paragraphs 19 and 26(c), temporary differences may arise in a
business combination. In accordance with IFRS 3, an entity recognises any
resulting deferred tax assets (to the extent that they meet the recognition
criteria in paragraph 24) or deferred tax liabilities as identifiable assets and
liabilities at the acquisition date. Consequently, those deferred tax assets and
deferred tax liabilities affect the amount of goodwill or the bargain purchase
gain the entity recognises. However, in accordance with paragraph 15(a), an
entity does not recognise deferred tax liabilities arising from the initial
recognition of goodwill.

67 As a result of a business combination, the probability of realising a

pre-acquisition deferred tax asset of the acquirer could change. An acquirer
may consider it probable that it will recover its own deferred tax asset that
was not recognised before the business combination. For example, the
acquirer may be able to utilise the benefit of its unused tax losses against the
future taxable profit of the acquiree. Alternatively, as a result of the business

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combination it might no longer be probable that future taxable profit will

allow the deferred tax asset to be recovered. In such cases, the acquirer
recognises a change in the deferred tax asset in the period of the business
combination, but does not include it as part of the accounting for the business
combination. Therefore, the acquirer does not take it into account in
measuring the goodwill or bargain purchase gain it recognises in the business
combination.

68 The potential benefit of the acquiree’s income tax loss carryforwards or other
deferred tax assets might not satisfy the criteria for separate recognition when
a business combination is initially accounted for but might be realised
subsequently. An entity shall recognise acquired deferred tax benefits that it
realises after the business combination as follows:

(a) Acquired deferred tax benefits recognised within the measurement

period that result from new information about facts and
circumstances that existed at the acquisition date shall be applied to
reduce the carrying amount of any goodwill related to that acquisition.
If the carrying amount of that goodwill is zero, any remaining deferred
tax benefits shall be recognised in profit or loss.

(b) All other acquired deferred tax benefits realised shall be recognised in
profit or loss (or, if this Standard so requires, outside profit or loss).

Current and deferred tax arising from share-based

payment transactions
68A In some tax jurisdictions, an entity receives a tax deduction (ie an amount that
is deductible in determining taxable profit) that relates to remuneration paid
in shares, share options or other equity instruments of the entity. The amount
of that tax deduction may differ from the related cumulative remuneration
expense, and may arise in a later accounting period. For example, in some
jurisdictions, an entity may recognise an expense for the consumption of
employee services received as consideration for share options granted, in
accordance with IFRS 2 Share-based Payment, and not receive a tax deduction
until the share options are exercised, with the measurement of the tax
deduction based on the entity’s share price at the date of exercise.

68B As with the research costs discussed in paragraphs 9 and 26(b) of this
Standard, the difference between the tax base of the employee services
received to date (being the amount the taxation authorities will permit as a
deduction in future periods), and the carrying amount of nil, is a deductible
temporary difference that results in a deferred tax asset. If the amount the
taxation authorities will permit as a deduction in future periods is not known
at the end of the period, it shall be estimated, based on information available
at the end of the period. For example, if the amount that the taxation
authorities will permit as a deduction in future periods is dependent upon the
entity’s share price at a future date, the measurement of the deductible
temporary difference should be based on the entity’s share price at the end of
the period.

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68C As noted in paragraph 68A, the amount of the tax deduction (or estimated
future tax deduction, measured in accordance with paragraph 68B) may differ
from the related cumulative remuneration expense. Paragraph 58 of the
Standard requires that current and deferred tax should be recognised as
income or an expense and included in profit or loss for the period, except to
the extent that the tax arises from (a) a transaction or event that is recognised,
in the same or a different period, outside profit or loss, or (b) a business
combination (other than the acquisition by an investment entity of a
subsidiary that is required to be measured at fair value through profit or loss).
If the amount of the tax deduction (or estimated future tax deduction) exceeds
the amount of the related cumulative remuneration expense, this indicates
that the tax deduction relates not only to remuneration expense but also to an
equity item. In this situation, the excess of the associated current or deferred
tax should be recognised directly in equity.

Presentation

Tax assets and tax liabilities

69–70 [Deleted]

Offset
71 An entity shall offset current tax assets and current tax liabilities if, and
only if, the entity:

(a) has a legally enforceable right to set off the recognised amounts;
and

(b) intends either to settle on a net basis, or to realise the asset and
settle the liability simultaneously.

72 Although current tax assets and liabilities are separately recognised and
measured they are offset in the statement of financial position subject to
criteria similar to those established for financial instruments in IAS 32. An
entity will normally have a legally enforceable right to set off a current tax
asset against a current tax liability when they relate to income taxes levied by
the same taxation authority and the taxation authority permits the entity to
make or receive a single net payment.

73 In consolidated financial statements, a current tax asset of one entity in a

group is offset against a current tax liability of another entity in the group if,
and only if, the entities concerned have a legally enforceable right to make or
receive a single net payment and the entities intend to make or receive such a
net payment or to recover the asset and settle the liability simultaneously.

74 An entity shall offset deferred tax assets and deferred tax liabilities if, and
only if:

(a) the entity has a legally enforceable right to set off current tax assets
against current tax liabilities; and

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(b) the deferred tax assets and the deferred tax liabilities relate to
income taxes levied by the same taxation authority on either:

(i) the same taxable entity; or

(ii) different taxable entities which intend either to settle

current tax liabilities and assets on a net basis, or to realise
the assets and settle the liabilities simultaneously, in each
future period in which significant amounts of deferred tax
liabilities or assets are expected to be settled or recovered.

75 To avoid the need for detailed scheduling of the timing of the reversal of each
temporary difference, this Standard requires an entity to set off a deferred tax
asset against a deferred tax liability of the same taxable entity if, and only if,
they relate to income taxes levied by the same taxation authority and the
entity has a legally enforceable right to set off current tax assets against
current tax liabilities.

76 In rare circumstances, an entity may have a legally enforceable right of set-off,

and an intention to settle net, for some periods but not for others. In such rare
circumstances, detailed scheduling may be required to establish reliably
whether the deferred tax liability of one taxable entity will result in increased
tax payments in the same period in which a deferred tax asset of another
taxable entity will result in decreased payments by that second taxable entity.

Tax expense
Tax expense (income) related to profit or loss from ordinary
activities
77 The tax expense (income) related to profit or loss from ordinary activities
shall be presented as part of profit or loss in the statement(s) of profit or
loss and other comprehensive income.

77A [Deleted]

Exchange differences on deferred foreign tax liabilities or assets

78 IAS 21 requires certain exchange differences to be recognised as income or
expense but does not specify where such differences should be presented in
the statement of comprehensive income. Accordingly, where exchange
differences on deferred foreign tax liabilities or assets are recognised in the
statement of comprehensive income, such differences may be classified as
deferred tax expense (income) if that presentation is considered to be the most
useful to financial statement users.

Disclosure
79 The major components of tax expense (income) shall be disclosed
separately.

80 Components of tax expense (income) may include:

(a) current tax expense (income);

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(b) any adjustments recognised in the period for current tax of prior
periods;

(c) the amount of deferred tax expense (income) relating to the

origination and reversal of temporary differences;

(d) the amount of deferred tax expense (income) relating to changes in tax
rates or the imposition of new taxes;

(e) the amount of the benefit arising from a previously unrecognised tax
loss, tax credit or temporary difference of a prior period that is used to
reduce current tax expense;

(f) the amount of the benefit from a previously unrecognised tax loss, tax
credit or temporary difference of a prior period that is used to reduce
deferred tax expense;

(g) deferred tax expense arising from the write-down, or reversal of a

previous write-down, of a deferred tax asset in accordance with
paragraph 56; and

(h) the amount of tax expense (income) relating to those changes in

accounting policies and errors that are included in profit or loss in
accordance with IAS 8, because they cannot be accounted for
retrospectively.

81 The following shall also be disclosed separately:

(a) the aggregate current and deferred tax relating to items that are
charged or credited directly to equity (see paragraph 62A);

(ab) the amount of income tax relating to each component of other

comprehensive income (see paragraph 62 and IAS 1 (as revised in
2007));

(b) [deleted]

(c) an explanation of the relationship between tax expense (income)

and accounting profit in either or both of the following forms:

(i) a numerical reconciliation between tax expense (income) and

the product of accounting profit multiplied by the applicable
tax rate(s), disclosing also the basis on which the applicable
tax rate(s) is (are) computed; or

(ii) a numerical reconciliation between the average effective tax

rate and the applicable tax rate, disclosing also the basis on
which the applicable tax rate is computed;

(d) an explanation of changes in the applicable tax rate(s) compared to

the previous accounting period;

(e) the amount (and expiry date, if any) of deductible temporary

differences, unused tax losses, and unused tax credits for which no
deferred tax asset is recognised in the statement of financial
position;

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(f) the aggregate amount of temporary differences associated with

investments in subsidiaries, branches and associates and interests in
joint arrangements, for which deferred tax liabilities have not been
recognised (see paragraph 39);

(g) in respect of each type of temporary difference, and in respect of

each type of unused tax losses and unused tax credits:

(i) the amount of the deferred tax assets and liabilities

recognised in the statement of financial position for each
period presented;

(ii) the amount of the deferred tax income or expense

recognised in profit or loss, if this is not apparent from the
changes in the amounts recognised in the statement of
financial position;

(h) in respect of discontinued operations, the tax expense relating to:

(i) the gain or loss on discontinuance; and

(ii) the profit or loss from the ordinary activities of the

discontinued operation for the period, together with the
corresponding amounts for each prior period presented;

(i) the amount of income tax consequences of dividends to

shareholders of the entity that were proposed or declared before
the financial statements were authorised for issue, but are not
recognised as a liability in the financial statements;

(j) if a business combination in which the entity is the acquirer causes

a change in the amount recognised for its pre-acquisition deferred
tax asset (see paragraph 67), the amount of that change; and

(k) if the deferred tax benefits acquired in a business combination are

not recognised at the acquisition date but are recognised after the
acquisition date (see paragraph 68), a description of the event or
change in circumstances that caused the deferred tax benefits to be
recognised.

82 An entity shall disclose the amount of a deferred tax asset and the nature
of the evidence supporting its recognition, when:

(a) the utilisation of the deferred tax asset is dependent on future

taxable profits in excess of the profits arising from the reversal of
existing taxable temporary differences; and

(b) the entity has suffered a loss in either the current or preceding
period in the tax jurisdiction to which the deferred tax asset relates.

82A In the circumstances described in paragraph 52A, an entity shall disclose

the nature of the potential income tax consequences that would result
from the payment of dividends to its shareholders. In addition, the entity
shall disclose the amounts of the potential income tax consequences

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practicably determinable and whether there are any potential income tax
consequences not practicably determinable.

83 [Deleted]

84 The disclosures required by paragraph 81(c) enable users of financial

statements to understand whether the relationship between tax expense
(income) and accounting profit is unusual and to understand the significant
factors that could affect that relationship in the future. The relationship
between tax expense (income) and accounting profit may be affected by such
factors as revenue that is exempt from taxation, expenses that are not
deductible in determining taxable profit (tax loss), the effect of tax losses and
the effect of foreign tax rates.

85 In explaining the relationship between tax expense (income) and accounting

profit, an entity uses an applicable tax rate that provides the most meaningful
information to the users of its financial statements. Often, the most
meaningful rate is the domestic rate of tax in the country in which the entity
is domiciled, aggregating the tax rate applied for national taxes with the rates
applied for any local taxes which are computed on a substantially similar level
of taxable profit (tax loss). However, for an entity operating in several
jurisdictions, it may be more meaningful to aggregate separate reconciliations
prepared using the domestic rate in each individual jurisdiction. The following
example illustrates how the selection of the applicable tax rate affects the
presentation of the numerical reconciliation.

Example illustrating paragraph 85

In 19X2, an entity has accounting profit in its own jurisdiction (country A) of
1,500 (19X1: 2,000) and in country B of 1,500 (19X1: 500). The tax rate is 30%
in country A and 20% in country B. In country A, expenses of 100 (19X1:
200) are not deductible for tax purposes.
The following is an example of a reconciliation to the domestic tax rate.
19X1 19X2
Accounting profit 2,500 3,000
Tax at the domestic rate of 30% 750 900
Tax effect of expenses that are not deductible for tax
purposes 60 30
Effect of lower tax rates in country B (50) (150)
Tax expense 760 780

continued...

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...continued

Example illustrating paragraph 85

The following is an example of a reconciliation prepared by aggregating separate
reconciliations for each national jurisdiction. Under this method, the effect of differ-
ences between the reporting entity’s own domestic tax rate and the domestic tax rate
in other jurisdictions does not appear as a separate item in the reconciliation. An
entity may need to discuss the effect of significant changes in either tax rates, or the
mix of profits earned in different jurisdictions, in order to explain changes in the
applicable tax rate(s), as required by paragraph 81(d).
Accounting profit 2,500 3,000
Tax at the domestic rates applicable to profits in the
country concerned 700 750
Tax effect of expenses that are not deductible for tax
purposes 60 30
Tax expense 760 780

86 The average effective tax rate is the tax expense (income) divided by the
accounting profit.

87 It would often be impracticable to compute the amount of unrecognised

deferred tax liabilities arising from investments in subsidiaries, branches and
associates and interests in joint arrangements (see paragraph 39). Therefore,
this Standard requires an entity to disclose the aggregate amount of the
underlying temporary differences but does not require disclosure of the
deferred tax liabilities. Nevertheless, where practicable, entities are
encouraged to disclose the amounts of the unrecognised deferred tax
liabilities because financial statement users may find such information useful.

87A Paragraph 82A requires an entity to disclose the nature of the potential
income tax consequences that would result from the payment of dividends to
its shareholders. An entity discloses the important features of the income tax
systems and the factors that will affect the amount of the potential income
tax consequences of dividends.

87B It would sometimes not be practicable to compute the total amount of the
potential income tax consequences that would result from the payment of
dividends to shareholders. This may be the case, for example, where an entity
has a large number of foreign subsidiaries. However, even in such
circumstances, some portions of the total amount may be easily determinable.
For example, in a consolidated group, a parent and some of its subsidiaries
may have paid income taxes at a higher rate on undistributed profits and be
aware of the amount that would be refunded on the payment of future
dividends to shareholders from consolidated retained earnings. In this case,
that refundable amount is disclosed. If applicable, the entity also discloses
that there are additional potential income tax consequences not practicably
determinable. In the parent’s separate financial statements, if any, the

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disclosure of the potential income tax consequences relates to the parent’s

retained earnings.

87C An entity required to provide the disclosures in paragraph 82A may also be
required to provide disclosures related to temporary differences associated
with investments in subsidiaries, branches and associates or interests in joint
arrangements. In such cases, an entity considers this in determining the
information to be disclosed under paragraph 82A. For example, an entity may
be required to disclose the aggregate amount of temporary differences
associated with investments in subsidiaries for which no deferred tax
liabilities have been recognised (see paragraph 81(f)). If it is impracticable to
compute the amounts of unrecognised deferred tax liabilities (see
paragraph 87) there may be amounts of potential income tax consequences of
dividends not practicably determinable related to these subsidiaries.

88 An entity discloses any tax-related contingent liabilities and contingent assets

in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Contingent liabilities and contingent assets may arise, for example, from
unresolved disputes with the taxation authorities. Similarly, where changes in
tax rates or tax laws are enacted or announced after the reporting period, an
entity discloses any significant effect of those changes on its current and
deferred tax assets and liabilities (see IAS 10 Events after the Reporting Period).

Effective date
89 This Standard becomes operative for financial statements covering periods
beginning on or after 1 January 1998, except as specified in paragraph 91.
If an entity applies this Standard for financial statements covering periods
beginning before 1 January 1998, the entity shall disclose the fact it has
applied this Standard instead of IAS 12 Accounting for Taxes on Income, approved
in 1979.

90 This Standard supersedes IAS 12 Accounting for Taxes on Income, approved in

1979.

91 Paragraphs 52A, 52B, 65A, 81(i), 82A, 87A, 87B, 87C and the deletion of
paragraphs 3 and 50 become operative for annual financial statements1
covering periods beginning on or after 1 January 2001. Earlier adoption is
encouraged. If earlier adoption affects the financial statements, an entity shall
disclose that fact.

92 IAS 1 (as revised in 2007) amended the terminology used throughout IFRSs. In
addition it amended paragraphs 23, 52, 58, 60, 62, 63, 65, 68C, 77 and 81,
deleted paragraph 61 and added paragraphs 61A, 62A and 77A. An entity shall
apply those amendments for annual periods beginning on or after 1 January
2009. If an entity applies IAS 1 (revised 2007) for an earlier period, the
amendments shall be applied for that earlier period.

1 Paragraph 91 refers to ‘annual financial statements’ in line with more explicit language for
writing effective dates adopted in 1998. Paragraph 89 refers to ‘financial statements’.

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93 Paragraph 68 shall be applied prospectively from the effective date of IFRS 3

(as revised in 2008) to the recognition of deferred tax assets acquired in
business combinations.

94 Therefore, entities shall not adjust the accounting for prior business
combinations if tax benefits failed to satisfy the criteria for separate
recognition as of the acquisition date and are recognised after the acquisition
date, unless the benefits are recognised within the measurement period and
result from new information about facts and circumstances that existed at the
acquisition date. Other tax benefits recognised shall be recognised in profit or
loss (or, if this Standard so requires, outside profit or loss).

95 IFRS 3 (as revised in 2008) amended paragraphs 21 and 67 and added

paragraphs 32A and 81(j) and (k). An entity shall apply those amendments for
annual periods beginning on or after 1 July 2009. If an entity applies IFRS 3
(revised 2008) for an earlier period, the amendments shall also be applied for
that earlier period.

96 [Deleted]

97 [Deleted]

98 Paragraph 52 was renumbered as 51A, paragraph 10 and the examples

following paragraph 51A were amended, and paragraphs 51B and 51C and the
following example and paragraphs 51D, 51E and 99 were added by Deferred
Tax: Recovery of Underlying Assets, issued in December 2010. An entity shall apply
those amendments for annual periods beginning on or after 1 January 2012.
Earlier application is permitted. If an entity applies the amendments for an
earlier period, it shall disclose that fact.

98A IFRS 11 Joint Arrangements, issued in May 2011, amended paragraphs 2, 15,
18(e), 24, 38, 39, 43–45, 81(f), 87 and 87C. An entity shall apply those
amendments when it applies IFRS 11.

98B Presentation of Items of Other Comprehensive Income (Amendments to IAS 1), issued
in June 2011, amended paragraph 77 and deleted paragraph 77A. An entity
shall apply those amendments when it applies IAS 1 as amended in June 2011.

98C Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27), issued in
October 2012, amended paragraphs 58 and 68C. An entity shall apply those
amendments for annual periods beginning on or after 1 January 2014. Earlier
application of Investment Entities is permitted. If an entity applies those
amendments earlier it shall also apply all amendments included in Investment
Entities at the same time.

98D [Deleted]

98E IFRS 15 Revenue from Contracts with Customers, issued in May 2014, amended
paragraph 59. An entity shall apply that amendment when it applies IFRS 15.

98F IFRS 9, as issued in July 2014, amended paragraph 20 and deleted

paragraphs 96, 97 and 98D. An entity shall apply those amendments when it
applies IFRS 9.

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98G IFRS 16, issued in January 2016, amended paragraph 20. An entity shall apply
that amendment when it applies IFRS 16.

98H Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to IAS 12),
issued in January 2016, amended paragraph 29 and added paragraphs 27A,
29A and the example following paragraph 26. An entity shall apply those
amendments for annual periods beginning on or after 1 January 2017. Earlier
application is permitted. If an entity applies those amendments for an earlier
period, it shall disclose that fact. An entity shall apply those amendments
retrospectively in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors. However, on initial application of the
amendment, the change in the opening equity of the earliest comparative
period may be recognised in opening retained earnings (or in another
component of equity, as appropriate), without allocating the change between
opening retained earnings and other components of equity. If an entity applies
this relief, it shall disclose that fact.

98I Annual Improvements to IFRS Standards 2015–2017 Cycle, issued in December

2017, added paragraph 57A and deleted paragraph 52B. An entity shall apply
those amendments for annual reporting periods beginning on or after
1 January 2019. Earlier application is permitted. If an entity applies those
amendments earlier, it shall disclose that fact. When an entity first applies
those amendments, it shall apply them to the income tax consequences of
dividends recognised on or after the beginning of the earliest comparative
period.

Withdrawal of SIC-21
99 The amendments made by Deferred Tax: Recovery of Underlying Assets, issued in
December 2010, supersede SIC Interpretation 21 Income Taxes—Recovery of
Revalued Non-Depreciable Assets.

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Approval by the Board of Deferred Tax: Recovery of Underlying

Assets (Amendments to IAS 12) issued in December 2010
Deferred Tax: Recovery of Underlying Assets (Amendments to IAS 12) was approved for
publication by the fifteen members of the International Accounting Standards Board.

Sir David Tweedie Chairman

Stephen Cooper
Philippe Danjou
Jan Engström
Patrick Finnegan
Amaro Luiz de Oliveira Gomes
Prabhakar Kalavacherla
Elke König
Patricia McConnell
Warren J McGregor
Paul Pacter
Darrel Scott
John T Smith
Tatsumi Yamada
Wei-Guo Zhang

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Approval by the Board of Recognition of Deferred Tax Assets for

Unrealised Losses (Amendments to IAS 12) issued in January
2016
Recognition of Deferred Tax Assets for Unrealised Losses was approved for issue by the fourteen
members of the International Accounting Standards Board.

Hans Hoogervorst Chairman

Ian Mackintosh Vice-Chairman
Stephen Cooper
Philippe Danjou
Martin Edelmann
Patrick Finnegan
Amaro Gomes
Gary Kabureck
Suzanne Lloyd
Takatsugu Ochi
Darrel Scott
Chungwoo Suh
Mary Tokar
Wei-Guo Zhang

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IASB documents published to accompany

IAS 12

Income Taxes
The text of the unaccompanied standard, IAS 12, is contained in Part A of this edition. Its
effective date when issued was 1 January 1998. The text of the Basis for Conclusions on
IAS 12 is contained in Part C of this edition. This part presents the following documents:

ILLUSTRATIVE EXAMPLES
Examples of temporary differences
Illustrative computations and presentation

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Illustrative Examples
These illustrative examples accompany, but are not part of, IAS 12.

Examples of temporary differences

A. Examples of circumstances that give rise to taxable temporary

differences
All taxable temporary differences give rise to a deferred tax liability.

Transactions that affect profit or loss

1 Interest revenue is received in arrears and is included in accounting profit on
a time apportionment basis but is included in taxable profit on a cash basis.

2 Revenue from the sale of goods is included in accounting profit when goods
are delivered but is included in taxable profit when cash is collected. (note: as
explained in B3 below, there is also a deductible temporary difference associated with
any related inventory).

3 Depreciation of an asset is accelerated for tax purposes.

4 Development costs have been capitalised and will be amortised to the

statement of comprehensive income but were deducted in determining
taxable profit in the period in which they were incurred.

5 Prepaid expenses have already been deducted on a cash basis in determining

the taxable profit of the current or previous periods.

Transactions that affect the statement of financial

position
6 Depreciation of an asset is not deductible for tax purposes and no deduction
will be available for tax purposes when the asset is sold or scrapped. (note:
paragraph 15(b) of the Standard prohibits recognition of the resulting deferred tax
liability unless the asset was acquired in a business combination, see also paragraph 22
of the Standard.)

7 A borrower records a loan at the proceeds received (which equal the amount
due at maturity), less transaction costs. Subsequently, the carrying amount of
the loan is increased by amortisation of the transaction costs to accounting
profit. The transaction costs were deducted for tax purposes in the period
when the loan was first recognised. (notes: (1) the taxable temporary difference is the
amount of transaction costs already deducted in determining the taxable profit of current
or prior periods, less the cumulative amount amortised to accounting profit; and (2) as
the initial recognition of the loan affects taxable profit, the exception in paragraph 15(b)
of the Standard does not apply. Therefore, the borrower recognises the deferred tax
liability.)

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8 A loan payable was measured on initial recognition at the amount of the net
proceeds, net of transaction costs. The transaction costs are amortised to
accounting profit over the life of the loan. Those transaction costs are not
deductible in determining the taxable profit of future, current or prior
periods. (notes: (1) the taxable temporary difference is the amount of unamortised
transaction costs; and (2) paragraph 15(b) of the Standard prohibits recognition of the
resulting deferred tax liability.)

9 The liability component of a compound financial instrument (for example a

convertible bond) is measured at a discount to the amount repayable on
maturity (see IAS 32 Financial Instruments: Presentation). The discount is not
deductible in determining taxable profit (tax loss).

Fair value adjustments and revaluations

10 Financial assets or investment property are carried at fair value which exceeds
cost but no equivalent adjustment is made for tax purposes.

11 An entity revalues property, plant and equipment (under the revaluation

model treatment in IAS 16 Property, Plant and Equipment) but no equivalent
adjustment is made for tax purposes. (note: paragraph 61A of the Standard
requires the related deferred tax to be recognised in other comprehensive income.)

Business combinations and consolidation

12 The carrying amount of an asset is increased to fair value in a business
combination and no equivalent adjustment is made for tax purposes. (Note that
on initial recognition, the resulting deferred tax liability increases goodwill or decreases
the amount of any bargain purchase gain recognised. See paragraph 66 of the Standard.)

13 Reductions in the carrying amount of goodwill are not deductible in

determining taxable profit and the cost of the goodwill would not be
deductible on disposal of the business. (Note that paragraph 15(a) of the Standard
prohibits recognition of the resulting deferred tax liability.)

14 Unrealised losses resulting from intragroup transactions are eliminated by

inclusion in the carrying amount of inventory or property, plant and
equipment.

15 Retained earnings of subsidiaries, branches, associates and joint ventures are

included in consolidated retained earnings, but income taxes will be payable if
the profits are distributed to the reporting parent. (note: paragraph 39 of the
Standard prohibits recognition of the resulting deferred tax liability if the parent,
investor or venturer is able to control the timing of the reversal of the temporary
difference and it is probable that the temporary difference will not reverse in the
foreseeable future.)

16 Investments in foreign subsidiaries, branches or associates or interests in

foreign joint ventures are affected by changes in foreign exchange rates. (notes:
(1) there may be either a taxable temporary difference or a deductible temporary
difference; and (2) paragraph 39 of the Standard prohibits recognition of the resulting
deferred tax liability if the parent, investor or venturer is able to control the timing of the

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reversal of the temporary difference and it is probable that the temporary difference will
not reverse in the foreseeable future.)

17 The non-monetary assets and liabilities of an entity are measured in its

functional currency but the taxable profit or tax loss is determined in a
different currency. (notes: (1) there may be either a taxable temporary difference or a
deductible temporary difference; (2) where there is a taxable temporary difference, the
resulting deferred tax liability is recognised (paragraph 41 of the Standard); and (3) the
deferred tax is recognised in profit or loss, see paragraph 58 of the Standard.)

Hyperinflation
18 Non-monetary assets are restated in terms of the measuring unit current at
the end of the reporting period (see IAS 29 Financial Reporting in
Hyperinflationary Economies) and no equivalent adjustment is made for tax
purposes. (notes: (1) the deferred tax is recognised in profit or loss; and (2) if, in addition
to the restatement, the non-monetary assets are also revalued, the deferred tax relating to
the revaluation is recognised in other comprehensive income and the deferred tax relating
to the restatement is recognised in profit or loss.)

B. Examples of circumstances that give rise to deductible

temporary differences
All deductible temporary differences give rise to a deferred tax asset. However, some deferred tax
assets may not satisfy the recognition criteria in paragraph 24 of the Standard.

Transactions that affect profit or loss

1 Retirement benefit costs are deducted in determining accounting profit as
service is provided by the employee, but are not deducted in determining
taxable profit until the entity pays either retirement benefits or contributions
to a fund. (note: similar deductible temporary differences arise where other expenses,
such as product warranty costs or interest, are deductible on a cash basis in determining
taxable profit.)

2 Accumulated depreciation of an asset in the financial statements is greater

than the cumulative depreciation allowed up to the end of the reporting
period for tax purposes.

3 The cost of inventories sold before the end of the reporting period is deducted
in determining accounting profit when goods or services are delivered but is
deducted in determining taxable profit when cash is collected. (note: as
explained in A2 above, there is also a taxable temporary difference associated with the
related trade receivable.)

4 The net realisable value of an item of inventory, or the recoverable amount of

an item of property, plant or equipment, is less than the previous carrying
amount and an entity therefore reduces the carrying amount of the asset, but
that reduction is ignored for tax purposes until the asset is sold.

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5 Research costs (or organisation or other start-up costs) are recognised as an

expense in determining accounting profit but are not permitted as a
deduction in determining taxable profit until a later period.

6 Income is deferred in the statement of financial position but has already been
included in taxable profit in current or prior periods.

7 A government grant which is included in the statement of financial position

as deferred income will not be taxable in future periods. (note: paragraph 24 of
the Standard prohibits the recognition of the resulting deferred tax asset, see also
paragraph 33 of the Standard.)

Fair value adjustments and revaluations

8 Financial assets or investment property are carried at fair value which is less
than cost, but no equivalent adjustment is made for tax purposes.

Business combinations and consolidation

9 A liability is recognised at its fair value in a business combination, but none of
the related expense is deducted in determining taxable profit until a later
period. (Note that the resulting deferred tax asset decreases goodwill or increases the
amount of any bargain purchase gain recognised. See paragraph 66 of the Standard.)

10 [Deleted]

11 Unrealised profits resulting from intragroup transactions are eliminated from

the carrying amount of assets, such as inventory or property, plant or
equipment, but no equivalent adjustment is made for tax purposes.

12 Investments in foreign subsidiaries, branches or associates or interests in

foreign joint ventures are affected by changes in foreign exchange rates. (notes:
(1) there may be a taxable temporary difference or a deductible temporary difference; and
(2) paragraph 44 of the Standard requires recognition of the resulting deferred tax asset
to the extent, and only to the extent, that it is probable that: (a) the temporary difference
will reverse in the foreseeable future; and (b) taxable profit will be available against
which the temporary difference can be utilised).

13 The non-monetary assets and liabilities of an entity are measured in its

functional currency but the taxable profit or tax loss is determined in a
different currency. (notes: (1) there may be either a taxable temporary difference or a
deductible temporary difference; (2) where there is a deductible temporary difference, the
resulting deferred tax asset is recognised to the extent that it is probable that sufficient
taxable profit will be available (paragraph 41 of the Standard); and (3) the deferred tax
is recognised in profit or loss, see paragraph 58 of the Standard.)

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C. Examples of circumstances where the carrying amount of an

asset or liability is equal to its tax base
1 Accrued expenses have already been deducted in determining an entity’s
current tax liability for the current or earlier periods.

2 A loan payable is measured at the amount originally received and this amount
is the same as the amount repayable on final maturity of the loan.

3 Accrued expenses will never be deductible for tax purposes.

4 Accrued income will never be taxable.

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Illustrative computations and presentation

Extracts from statements of financial position and statements of comprehensive income are provided
to show the effects on these financial statements of the transactions described below. These extracts do
not necessarily conform with all the disclosure and presentation requirements of other Standards.

All the examples below assume that the entities concerned have no transaction other
than those described.

Example 1 – Depreciable assets

An entity buys equipment for 10,000 and depreciates it on a straight-line basis over its
expected useful life of five years. For tax purposes, the equipment is depreciated at 25% a
year on a straight-line basis. Tax losses may be carried back against taxable profit of the
previous five years. In year 0, the entity’s taxable profit was 5,000. The tax rate is 40%.

The entity will recover the carrying amount of the equipment by using it to manufacture
goods for resale. Therefore, the entity’s current tax computation is as follows:

Year
1 2 3 4 5
Taxable income 2,000 2,000 2,000 2,000 2,000
Depreciation for tax purposes 2,500 2,500 2,500 2,500 0
Taxable profit (tax loss) (500) (500) (500) (500) 2,000
Current tax expense (income) at
40% (200) (200) (200) (200) 800

The entity recognises a current tax asset at the end of years 1 to 4 because it recovers the
benefit of the tax loss against the taxable profit of year 0.

The temporary differences associated with the equipment and the resulting deferred tax
asset and liability and deferred tax expense and income are as follows:

Year
1 2 3 4 5
Carrying amount 8,000 6,000 4,000 2,000 0
Tax base 7,500 5,000 2,500 0 0
Taxable temporary difference 500 1,000 1,500 2,000 0

Opening deferred tax liability 0 200 400 600 800

Deferred tax expense (income) 200 200 200 200 (800)
Closing deferred tax liability 200 400 600 800 0

The entity recognises the deferred tax liability in years 1 to 4 because the reversal of the
taxable temporary difference will create taxable income in subsequent years. The entity’s
statement of comprehensive income includes the following:

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Year
1 2 3 4 5
Income 2,000 2,000 2,000 2,000 2,000
Depreciation 2,000 2,000 2,000 2,000 2,000
Profit before tax 0 0 0 0 0
Current tax expense (income) (200) (200) (200) (200) 800
Deferred tax expense (income) 200 200 200 200 (800)
Total tax expense (income) 0 0 0 0 0
Profit for the period 0 0 0 0 0

Example 2 – Deferred tax assets and liabilities

The example deals with an entity over the two-year period, X5 and X6. In X5 the enacted
income tax rate was 40% of taxable profit. In X6 the enacted income tax rate was 35% of
taxable profit.

Charitable donations are recognised as an expense when they are paid and are not
deductible for tax purposes.

In X5, the entity was notified by the relevant authorities that they intend to pursue an
action against the entity with respect to sulphur emissions. Although as at December X6
the action had not yet come to court the entity recognised a liability of 700 in X5 being
its best estimate of the fine arising from the action. Fines are not deductible for tax
purposes.

In X2, the entity incurred 1,250 of costs in relation to the development of a new product.
These costs were deducted for tax purposes in X2. For accounting purposes, the entity
capitalised this expenditure and amortised it on the straight-line basis over five years.
At 31/12/X4, the unamortised balance of these product development costs was 500.

In X5, the entity entered into an agreement with its existing employees to provide
healthcare benefits to retirees. The entity recognises as an expense the cost of this plan as
employees provide service. No payments to retirees were made for such benefits in X5 or
X6. Healthcare costs are deductible for tax purposes when payments are made to retirees.
The entity has determined that it is probable that taxable profit will be available against
which any resulting deferred tax asset can be utilised.

Buildings are depreciated for accounting purposes at 5% a year on a straight-line basis

and at 10% a year on a straight-line basis for tax purposes. Motor vehicles are depreciated
for accounting purposes at 20% a year on a straight-line basis and at 25% a year on a
straight-line basis for tax purposes. A full year’s depreciation is charged for accounting
purposes in the year that an asset is acquired.

At 1/1/X6, the building was revalued to 65,000 and the entity estimated that the
remaining useful life of the building was 20 years from the date of the revaluation. The
revaluation did not affect taxable profit in X6 and the taxation authorities did not adjust
the tax base of the building to reflect the revaluation. In X6, the entity transferred 1,033
from revaluation surplus to retained earnings. This represents the difference of 1,590
between the actual depreciation on the building (3,250) and equivalent depreciation

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based on the cost of the building (1,660, which is the book value at 1/1/X6 of 33,200
divided by the remaining useful life of 20 years), less the related deferred tax of 557
(see paragraph 64 of the Standard).

Current tax expense

X5 X6
Accounting profit 8,775 8,740
Add
Depreciation for accounting purposes 4,800 8,250
Charitable donations 500 350
Fine for environmental pollution 700 –
Product development costs 250 250
Healthcare benefits 2,000 1,000
17,025 18,590
Deduct
Depreciation for tax purposes (8,100) (11,850)
Taxable profit 8,925 6,740

Current tax expense at 40% 3,570

Current tax expense at 35% 2,359

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Carrying amounts of property, plant and equipment

Building Motor Total
vehicles
Balance at 31/12/X4 50,000 10,000 60,000
Additions X5 6,000 – 6,000
Balance at 31/12/X5 56,000 10,000 66,000
Elimination of accumulated depreciation on
revaluation at 1/1/X6 (22,800) – (22,800)
Revaluation at 1/1/X6 31,800 – 31,800
Balance at 1/1/X6 65,000 10,000 75,000
Additions X6 – 15,000 15,000
65,000 25,000 90,000

Accumulated depreciation 5% 20%

Balance at 31/12/X4 20,000 4,000 24,000
Depreciation X5 2,800 2,000 4,800
Balance at 31/12/X5 22,800 6,000 28,800
Revaluation at 1/1/X6 (22,800) – (22,800)
Balance at 1/1/X6 – 6,000 6,000
Depreciation X6 3,250 5,000 8,250
Balance at 31/12/X6 3,250 11,000 14,250

Carrying amount
31/12/X4 30,000 6,000 36,000
31/12/X5 33,200 4,000 37,200
31/12/X6 61,750 14,000 75,750

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Tax base of property, plant and equipment

Building Motor Total
vehicles
Cost
Balance at 31/12/X4 50,000 10,000 60,000
Additions X5 6,000 – 6,000
Balance at 31/12/X5 56,000 10,000 66,000
Additions X6 – 15,000 15,000
Balance at 31/12/X6 56,000 25,000 81,000

Accumulated depreciation 10% 25%

Balance at 31/12/X4 40,000 5,000 45,000
Depreciation X5 5,600 2,500 8,100
Balance at 31/12/X5 45,600 7,500 53,100
Depreciation X6 5,600 6,250 11,850
Balance 31/12/X6 51,200 13,750 64,950

Tax base
31/12/X4 10,000 5,000 15,000
31/12/X5 10,400 2,500 12,900
31/12/X6 4,800 11,250 16,050

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Deferred tax assets, liabilities and expense at 31/12/X4

Carrying Tax base Temporary
amount differences

Accounts receivable 500 500 –

Inventory 2,000 2,000 –
Product development costs 500 – 500
Investments 33,000 33,000 –
Property, plant & equipment 36,000 15,000 21,000
TOTAL ASSETS 72,000 50,500 21,500

Current income taxes payable 3,000 3,000 –

Accounts payable 500 500 –
Fines payable – – –
Liability for healthcare benefits – – –
Long-term debt 20,000 20,000 –
Deferred income taxes 8,600 8,600 –
TOTAL LIABILITIES 32,100 32,100

Share capital 5,000 5,000 –

Revaluation surplus – – –
Retained earnings 34,900 13,400
TOTAL LIABILITIES/EQUITY 72,000 50,500

TEMPORARY DIFFERENCES 21,500

Deferred tax liability 21,500 at 40% 8,600

Deferred tax asset – – –

Net deferred tax liability 8,600

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Deferred tax assets, liabilities and expense at 31/12/X5

Carrying Tax base Temporary
amount differences

Accounts receivable 500 500 –

Inventory 2,000 2,000 –
Product development costs 250 – 250
Investments 33,000 33,000 –
Property, plant & equipment 37,200 12,900 24,300
TOTAL ASSETS 72,950 48,400 24,550

Current income taxes payable 3,570 3,570 –

Accounts payable 500 500 –
Fines payable 700 700 –
Liability for healthcare benefits 2,000 – (2,000)
Long-term debt 12,475 12,475 –
Deferred income taxes 9,020 9,020
TOTAL LIABILITIES 28,265 26,265 (2,000)

Share capital 5,000 5,000 –

Revaluation surplus – – –
Retained earnings 39,685 17,135
TOTAL LIABILITIES/EQUITY 72,950 48,400

TEMPORARY DIFFERENCES 22,550

Deferred tax liability 24,550 at 40% 9,820

Deferred tax asset 2,000 at 40% (800)
Net deferred tax liability 9,020
Less: Opening deferred tax liability (8,600)
Deferred tax expense (income) related to
the origination and reversal of temporary
differences 420

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Deferred tax assets, liabilities and expense at 31/12/X6

Carrying Tax base Temporary
amount differences

Accounts receivable 500 500 –

Inventory 2,000 2,000 –
Product development costs – – –
Investments 33,000 33,000 –
Property, plant & equipment 75,750 16,050 59,700
TOTAL ASSETS 111,250 51,550 59,700

Current income taxes payable 2,359 2,359 –

Accounts payable 500 500 –
Fines payable 700 700
Liability for healthcare benefits 3,000 – (3,000)
Long-term debt 12,805 12,805 –
Deferred income taxes 19,845 19,845 –
TOTAL LIABILITIES 39,209 36,209 (3,000)
Share capital 5,000 5,000 –
Revaluation surplus 19,637 – –
Retained earnings 47,404 10,341
TOTAL LIABILITIES/EQUITY 111,250 51,550

TEMPORARY DIFFERENCES 56,700

Deferred tax liability 59,700 at 35% 20,895
Deferred tax asset 3,000 at 35% (1,050)
Net deferred tax liability 19,845
Less: Opening deferred tax liability (9,020)
Adjustment to opening deferred tax liability
resulting from reduction in tax rate 22,550 at 5% 1,127
Deferred tax attributable to revaluation
surplus 31,800 at 35% (11,130)
Deferred tax expense (income) related to
the origination and reversal of temporary
differences 822

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Illustrative disclosure
The amounts to be disclosed in accordance with the Standard are as follows:

Major components of tax expense (income) (paragraph 79)

X5 X6
Current tax expense 3,570 2,359
Deferred tax expense relating to the origination and reversal of
temporary differences: 420 822
Deferred tax expense (income) resulting from reduction in tax rate – (1,127)
Tax expense 3,990 2,054

Income tax relating to the components of other comprehensive income

(paragraph 81(ab))

Deferred tax relating to revaluation of building – (11,130)

In addition, deferred tax of 557 was transferred in X6 from retained earnings to

revaluation surplus. This relates to the difference between the actual depreciation on the
building and equivalent depreciation based on the cost of the building.

Explanation of the relationship between tax expense and accounting profit

(paragraph 81(c))

The Standard permits two alternative methods of explaining the relationship between tax
expense (income) and accounting profit. Both of these formats are illustrated below.

(i) a numerical reconciliation between tax expense (income) and the product of
accounting profit multiplied by the applicable tax rate(s), disclosing also the basis
on which the applicable tax rate(s) is (are) computed

X5 X6
Accounting profit 8,775 8,740
Tax at the applicable tax rate of 35% (X5: 40%) 3,510 3,059
Tax effect of expenses that are not deductible in determining taxable
profit:
Charitable donations 200 122
Fines for environmental pollution 280 –
Reduction in opening deferred taxes resulting from reduction in tax
rate – (1,127)
Tax expense 3,990 2,054

The applicable tax rate is the aggregate of the national income tax rate of 30% (X5: 35%)
and the local income tax rate of 5%.

(ii) a numerical reconciliation between the average effective tax rate and the
applicable tax rate, disclosing also the basis on which the applicable tax rate is
computed

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X5 X6
% %
Applicable tax rate 40.0 35.0
Tax effect of expenses that are not deductible for tax purposes:
Charitable donations 2.3 1.4
Fines for environmental pollution 3.2 –
Effect on opening deferred taxes of reduction in tax rate – (12.9)
Average effective tax rate (tax expense divided by profit before tax) 45.5 23.5

The applicable tax rate is the aggregate of the national income tax rate of 30% (X5: 35%)
and the local income tax rate of 5%.

An explanation of changes in the applicable tax rate(s) compared to the previous

accounting period (paragraph 81(d))

In X6, the government enacted a change in the national income tax rate from 35% to
30%.

In respect of each type of temporary difference, and in respect of each type of unused
tax losses and unused tax credits:

(i) the amount of the deferred tax assets and liabilities recognised in the statement
of financial position for each period presented;

(ii) the amount of the deferred tax income or expense recognised in profit or loss for
each period presented, if this is not apparent from the changes in the amounts
recognised in the statement of financial position (paragraph 81(g)).

X5 X6
Accelerated depreciation for tax purposes 9,720 10,322
Liabilities for healthcare benefits that are deducted for tax purposes
only when paid (800) (1,050)
Product development costs deducted from taxable profit in earlier
years 100 –
Revaluation, net of related depreciation – 10,573
Deferred tax liability 9,020 19,845

(note: the amount of the deferred tax income or expense recognised in profit or loss for the current year
is apparent from the changes in the amounts recognised in the statement of financial position)

Example 3 – Business combinations

On 1 January X5 entity A acquired 100 per cent of the shares of entity B at a cost of 600.
At the acquisition date, the tax base in A’s tax jurisdiction of A’s investment in B is 600.
Reductions in the carrying amount of goodwill are not deductible for tax purposes, and
the cost of the goodwill would also not be deductible if B were to dispose of its
underlying business. The tax rate in A’s tax jurisdiction is 30 per cent and the tax rate in
B’s tax jurisdiction is 40 per cent.

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The fair value of the identifiable assets acquired and liabilities assumed (excluding
deferred tax assets and liabilities) by A is set out in the following table, together with
their tax bases in B’s tax jurisdiction and the resulting temporary differences.

Amount Tax base Temporary

recognised at differences
acquisition
Property, plant and equipment 270 155 115
Accounts receivable 210 210 –
Inventory 174 124 50
Retirement benefit obligations (30) – (30)
Accounts payable (120) (120) –
Identifiable assets acquired and liabilities
assumed, excluding deferred tax 504 369 135

The deferred tax asset arising from the retirement benefit obligations is offset against the
deferred tax liabilities arising from the property, plant and equipment and
inventory (see paragraph 74 of the Standard).

No deduction is available in B’s tax jurisdiction for the cost of the goodwill. Therefore,
the tax base of the goodwill in B’s jurisdiction is nil. However, in accordance
with paragraph 15(a) of the Standard, A recognises no deferred tax liability for the
taxable temporary difference associated with the goodwill in B’s tax jurisdiction.

The carrying amount, in A’s consolidated financial statements, of its investment in B is

made up as follows:

Fair value of identifiable assets acquired and liabilities assumed, exclud-

ing deferred tax 504
Deferred tax liability (135 at 40%) (54)
Fair value of identifiable assets acquired and liabilities assumed 450
Goodwill 150
Carrying amount 600

Because, at the acquisition date, the tax base in A’s tax jurisdiction, of A’s investment in
B is 600, no temporary difference is associated in A’s tax jurisdiction with the
investment.

During X5, B’s equity (incorporating the fair value adjustments made as a result of the
business combination) changed as follows:

At 1 January X5 450
Retained profit for X5 (net profit of 150, less dividend payable of 80) 70
At 31 December X5 520

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A recognises a liability for any withholding tax or other taxes that it will incur on the
accrued dividend receivable of 80.

At 31 December X5, the carrying amount of A’s underlying investment in B, excluding

the accrued dividend receivable, is as follows:

Net assets of B 520

Goodwill 150
Carrying amount 670

The temporary difference associated with A’s underlying investment is 70. This amount
is equal to the cumulative retained profit since the acquisition date.

If A has determined that it will not sell the investment in the foreseeable future and that
B will not distribute its retained profits in the foreseeable future, no deferred tax liability
is recognised in relation to A’s investment in B (see paragraphs 39 and 40 of the
Standard). Note that this exception would apply for an investment in an associate only if
there is an agreement requiring that the profits of the associate will not be distributed in
the foreseeable future (see paragraph 42 of the Standard). A discloses the amount of the
temporary difference for which no deferred tax is recognised, ie 70 (see paragraph 81(f) of
the Standard).

If A expects to sell the investment in B, or that B will distribute its retained profits in the
foreseeable future, A recognises a deferred tax liability to the extent that the temporary
difference is expected to reverse. The tax rate reflects the manner in which A expects to
recover the carrying amount of its investment (see paragraph 51 of the Standard).
A recognises the deferred tax in other comprehensive income to the extent that the
deferred tax results from foreign exchange translation differences that have been
recognised in other comprehensive income (paragraph 61A of the Standard). A discloses
separately:

(a) the amount of deferred tax that has been recognised in other comprehensive
income (paragraph 81(ab) of the Standard); and

(b) the amount of any remaining temporary difference which is not expected to
reverse in the foreseeable future and for which, therefore, no deferred tax is
recognised (see paragraph 81(f) of the Standard).

Example 4 – Compound financial instruments

An entity receives a non-interest-bearing convertible loan of 1,000 on 31 December X4
repayable at par on 1 January X8. In accordance with IAS 32 Financial Instruments:
Presentation the entity classifies the instrument’s liability component as a liability and the
equity component as equity. The entity assigns an initial carrying amount of 751 to the
liability component of the convertible loan and 249 to the equity component.
Subsequently, the entity recognises imputed discount as interest expense at an annual
rate of 10% on the carrying amount of the liability component at the beginning of the
year. The tax authorities do not allow the entity to claim any deduction for the imputed
discount on the liability component of the convertible loan. The tax rate is 40%.

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The temporary differences associated with the liability component and the resulting
deferred tax liability and deferred tax expense and income are as follows:

Year
X4 X5 X6 X7
Carrying amount of liability component 751 826 909 1,000
Tax base 1,000 1,000 1,000 1,000
Taxable temporary difference 249 174 91 –
Opening deferred tax liability at 40% 0 100 70 37
Deferred tax charged to equity 100 – – –
Deferred tax expense (income) – (30) (33) (37)
Closing deferred tax liability at 40% 100 70 37 –

As explained in paragraph 23 of the Standard, at 31 December X4, the entity recognises

the resulting deferred tax liability by adjusting the initial carrying amount of the equity
component of the convertible liability. Therefore, the amounts recognised at that date
are as follows:

Liability component 751

Deferred tax liability 100
Equity component (249 less 100) 149
1,000

Subsequent changes in the deferred tax liability are recognised in profit or loss as tax
income (see paragraph 23 of the Standard). Therefore, the entity’s profit or loss includes
the following:

Year
X4 X5 X6 X7
Interest expense (imputed discount) – 75 83 91
Deferred tax expense (income) – (30) (33) (37)
– 45 50 54

Example 5 – Share-based payment transactions

In accordance with IFRS 2 Share-based Payment, an entity has recognised an expense for the
consumption of employee services received as consideration for share options granted.
A tax deduction will not arise until the options are exercised, and the deduction is based
on the options’ intrinsic value at exercise date.

As explained in paragraph 68B of the Standard, the difference between the tax base of the
employee services received to date (being the amount the taxation authorities will permit
as a deduction in future periods in respect of those services), and the carrying amount of
nil, is a deductible temporary difference that results in a deferred tax
asset. Paragraph 68B requires that, if the amount the taxation authorities will permit as a

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deduction in future periods is not known at the end of the period, it should be estimated,
based on information available at the end of the period. If the amount that the taxation
authorities will permit as a deduction in future periods is dependent upon the entity’s
share price at a future date, the measurement of the deductible temporary difference
should be based on the entity’s share price at the end of the period. Therefore, in this
example, the estimated future tax deduction (and hence the measurement of the deferred
tax asset) should be based on the options’ intrinsic value at the end of the period.

As explained in paragraph 68C of the Standard, if the tax deduction (or estimated future
tax deduction) exceeds the amount of the related cumulative remuneration expense, this
indicates that the tax deduction relates not only to remuneration expense but also to an
equity item. In this situation, paragraph 68C requires that the excess of the associated
current or deferred tax should be recognised directly in equity.

The entity’s tax rate is 40 per cent. The options were granted at the start of year 1, vested
at the end of year 3 and were exercised at the end of year 5. Details of the expense
recognised for employee services received and consumed in each accounting period, the
number of options outstanding at each year-end, and the intrinsic value of the options at
each year-end, are as follows:

Employee services Number of options at Intrinsic value

expense year-end per option
Year 1 188,000 50,000 5
Year 2 185,000 45,000 8
Year 3 190,000 40,000 13
Year 4 0 40,000 17
Year 5 0 40,000 20

The entity recognises a deferred tax asset and deferred tax income in years 1–4 and
current tax income in year 5 as follows. In years 4 and 5, some of the deferred and
current tax income is recognised directly in equity, because the estimated (and actual) tax
deduction exceeds the cumulative remuneration expense.

Year 1
Deferred tax asset and deferred tax income:

(50,000 × 5 × 1 /3 (a)
× 0.40) = 33,333

(a) The tax base of the employee services received is based on the intrinsic value of the options, and
those options were granted for three years’ services. Because only one year’s services have been
received to date, it is necessary to multiply the option’s intrinsic value by one-third to arrive at
the tax base of the employee services received in year 1.

The deferred tax income is all recognised in profit or loss, because the estimated future
tax deduction of 83,333 (50,000 × 5 × 1/3) is less than the cumulative remuneration
expense of 188,000.

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Year 2
Deferred tax asset at year-end:

(45,000 × 8 × 2 /3 × 0.40) = 96,000

Less deferred tax asset at start of year (33,333)
Deferred tax income for year 62,667*
* This amount consists of the following:
Deferred tax income for the temporary difference between the
tax base of the employee services received during the year and
their carrying amount of nil:

(45,000 × 8 × 1 /3 × 0.40) 48,000

Tax income resulting from an adjustment to the tax base of
employee services received in previous years:
(a) increase in intrinsic value: (45,000 × 3 × 1 /3 × 0.40) 18,000
(b) decrease in number of options: (5,000 × 5 × 1 /3 ×
0.40) (3,333)
Deferred tax income for year 62,667

The deferred tax income is all recognised in profit or loss, because the estimated future
tax deduction of 240,000 (45,000 × 8 × 2/3) is less than the cumulative remuneration
expense of 373,000 (188,000 + 185,000).

Year 3
Deferred tax asset at year-end:
(40,000 × 13 × 0.40) = 208,000
Less deferred tax asset at start of year (96,000)
Deferred tax income for year 112,000

The deferred tax income is all recognised in profit or loss, because the estimated future
tax deduction of 520,000 (40,000 × 13) is less than the cumulative remuneration expense
of 563,000 (188,000 + 185,000 + 190,000).

Year 4
Deferred tax asset at year-end:
(40,000 × 17 × 0.40) = 272,000
Less deferred tax asset at start of year (208,000)
Deferred tax income for year 64,000

continued...

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...continued

Year 4
The deferred tax income is recognised partly in profit or loss and
partly directly in equity as follows:
Estimated future tax deduction (40,000 × 17) = 680,000
Cumulative remuneration expense 563,000
Excess tax deduction 117,000
Deferred tax income for year 64,000
Excess recognised directly in equity (117,000 × 0.40) = 46,800
Recognised in profit or loss 17,200

Year 5
Deferred tax expense (reversal of deferred tax asset) 272,000
Amount recognised directly in equity (reversal of cumulative
deferred tax income recognised directly in equity) 46,800
Amount recognised in profit or loss 225,200
Current tax income based on intrinsic value of options at
exercise date (40,000 × 20 × 0.40) = 320,000
Amount recognised in profit or loss (563,000 × 0.40) = 225,200
Amount recognised directly in equity 94,800

Summary

Statement of comprehensive income Statement of financial

position
Employee Current tax Deferred tax Total tax Equity Deferred tax
services expense expense expense asset
expense (income) (income) (income)
Year 1 188,000 0 (33,333) (33,333) 0 33,333
Year 2 185,000 0 (62,667) (62,667) 0 96,000
Year 3 190,000 0 (112,000) (112,000) 0 208,000
Year 4 0 0 (17,200) (17,200) (46,800) 272,000
Year 5 0 (225,200) 225,200 0 46,800 0
(94,800)
Totals 563,000 (225,200) 0 (225,200) (94,800) 0

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Example 6 – Replacement awards in a business combination

On 1 January 20X1 Entity A acquired 100 per cent of Entity B. Entity A pays cash
consideration of CU400 to the former owners of Entity B.

At the acquisition date Entity B had outstanding employee share options with a
market-based measure of CU100. The share options were fully vested. As part of the
business combination Entity B’s outstanding share options are replaced by share options
of Entity A (replacement awards) with a market-based measure of CU100 and an intrinsic
value of CU80. The replacement awards are fully vested. In accordance with paragraphs
B56–B62 of IFRS 3 Business Combinations (as revised in 2008), the replacement awards are
part of the consideration transferred for Entity B. A tax deduction for the replacement
awards will not arise until the options are exercised. The tax deduction will be based on
the share options’ intrinsic value at that date. Entity A’s tax rate is 40 per cent. Entity A
recognises a deferred tax asset of CU32 (CU80 intrinsic value × 40%) on the replacement
awards at the acquisition date.

Entity A measures the identifiable net assets obtained in the business combination
(excluding deferred tax assets and liabilities) at CU450. The tax base of the identifiable
net assets obtained is CU300. Entity A recognises a deferred tax liability of CU60 ((CU450
– CU300) × 40%) on the identifiable net assets at the acquisition date.

Goodwill is calculated as follows:

CU
Cash consideration 400
Market-based measure of replacement awards 100
Total consideration transferred 500
Identifiable net assets, excluding deferred tax assets and liabilities (450)
Deferred tax asset 32
Deferred tax liability 60
Goodwill 78

Reductions in the carrying amount of goodwill are not deductible for tax purposes. In
accordance with paragraph 15(a) of the Standard, Entity A recognises no deferred tax
liability for the taxable temporary difference associated with the goodwill recognised in
the business combination.

The accounting entry for the business combination is as follows:

CU CU
Dr Goodwill 78
Dr Identifiable net assets 450
Dr Deferred tax asset 32
Cr Cash 400
Cr Equity (replacement awards) 100
Cr Deferred tax liability 60

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On 31 December 20X1 the intrinsic value of the replacement awards is CU120. Entity A
recognises a deferred tax asset of CU48 (CU120 × 40%). Entity A recognises deferred tax
income of CU16 (CU48 – CU32) from the increase in the intrinsic value of the
replacement awards. The accounting entry is as follows:

CU CU
Dr Deferred tax asset 16
Cr Deferred tax income 16

If the replacement awards had not been tax-deductible under current tax law, Entity A
would not have recognised a deferred tax asset on the acquisition date. Entity A would
have accounted for any subsequent events that result in a tax deduction related to the
replacement award in the deferred tax income or expense of the period in which the
subsequent event occurred.

Paragraphs B56–B62 of IFRS 3 provide guidance on determining which portion of a

replacement award is part of the consideration transferred in a business combination and
which portion is attributable to future service and thus a post-combination remuneration
expense. Deferred tax assets and liabilities on replacement awards that are post-
combination expenses are accounted for in accordance with the general principles as
illustrated in Example 5.

Example 7—Debt instruments measured at fair value

Debt instruments
At 31 December 20X1, Entity Z holds a portfolio of three debt instruments:

Debt Instrument Cost (CU) Fair value (CU) Contractual

interest rate
A 2,000,000 1,942,857 2.00%
B 750,000 778,571 9.00%
C 2,000,000 1,961,905 3.00%

Entity Z acquired all the debt instruments on issuance for their nominal value. The terms
of the debt instruments require the issuer to pay the nominal value of the debt
instruments on their maturity on 31 December 20X2.

Interest is paid at the end of each year at the contractually fixed rate, which equalled the
market interest rate when the debt instruments were acquired. At the end of 20X1, the
market interest rate is 5 per cent, which has caused the fair value of Debt Instruments A
and C to fall below their cost and the fair value of Debt Instrument B to rise above its
cost. It is probable that Entity Z will receive all the contractual cash flows if it continues
to hold the debt instruments.

At the end of 20X1, Entity Z expects that it will recover the carrying amounts of Debt
Instruments A and B through use, ie by continuing to hold them and collecting
contractual cash flows, and Debt Instrument C by sale at the beginning of 20X2 for its
fair value on 31 December 20X1. It is assumed that no other tax planning opportunity is

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available to Entity Z that would enable it to sell Debt Instrument B to generate a capital
gain against which it could offset the capital loss arising from selling Debt Instrument C.

The debt instruments are measured at fair value through other comprehensive income in
accordance with IFRS 9 Financial Instruments (or IAS 39 Financial Instruments: Recognition and
Measurement1).

Tax law
The tax base of the debt instruments is cost, which tax law allows to be offset either on
maturity when principal is paid or against the sale proceeds when the debt instruments
are sold. Tax law specifies that gains (losses) on the debt instruments are taxable
(deductible) only when realised.

Tax law distinguishes ordinary gains and losses from capital gains and losses. Ordinary
losses can be offset against both ordinary gains and capital gains. Capital losses can only
be offset against capital gains. Capital losses can be carried forward for 5 years and
ordinary losses can be carried forward for 20 years.

Ordinary gains are taxed at 30 per cent and capital gains are taxed at 10 per cent.

Tax law classifies interest income from the debt instruments as ‘ordinary’ and gains and
losses arising on the sale of the debt instruments as ‘capital’. Losses that arise if the
issuer of the debt instrument fails to pay the principal on maturity are classified as
ordinary by tax law.

General
On 31 December 20X1, Entity Z has, from other sources, taxable temporary differences of
CU50,000 and deductible temporary differences of CU430,000, which will reverse in
ordinary taxable profit (or ordinary tax loss) in 20X2.

At the end of 20X1, it is probable that Entity Z will report to the tax authorities an
ordinary tax loss of CU200,000 for the year 20X2. This tax loss includes all taxable
economic benefits and tax deductions for which temporary differences exist on
31 December 20X1 and that are classified as ordinary by tax law. These amounts
contribute equally to the loss for the period according to tax law.

Entity Z has no capital gains against which it can utilise capital losses arising in the years
20X1–20X2.

Except for the information given in the previous paragraphs, there is no further
information that is relevant to Entity Z’s accounting for deferred taxes in the period
20X1–20X2.

1 IFRS 9 replaced IAS 39. IFRS 9 applies to all items that were previously within the scope of IAS 39.

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Temporary differences
At the end of 20X1, Entity Z identifies the following temporary differences:

Carrying Tax base (CU) Taxable Deductible

amount (CU) temporary temporary
differences differences
(CU) (CU)
Debt Instrument A 1,942,857 2,000,000 57,143
Debt Instrument B 778,571 750,000 28,571
Debt Instrument C 1,961,905 2,000,000 38,095
Other sources Not specified 50,000 430,000

The difference between the carrying amount of an asset or liability and its tax base gives
rise to a deductible (taxable) temporary difference (see paragraphs 20 and 26(d) of the
Standard). This is because deductible (taxable) temporary differences are differences
between the carrying amount of an asset or liability in the statement of financial position
and its tax base, which will result in amounts that are deductible (taxable) in determining
taxable profit (tax loss) of future periods when the carrying amount of the asset or
liability is recovered or settled (see paragraph 5 of the Standard).

Utilisation of deductible temporary differences

With some exceptions, deferred tax assets arising from deductible temporary differences
are recognised to the extent that sufficient future taxable profit will be available against
which the deductible temporary differences are utilised (see paragraph 24 of the
Standard).

Paragraphs 28–29 of IAS 12 identify the sources of taxable profits against which an entity
can utilise deductible temporary differences. They include:

(a) future reversal of existing taxable temporary differences;

(b) taxable profit in future periods; and

(c) tax planning opportunities.

The deductible temporary difference that arises from Debt Instrument C is assessed
separately for utilisation. This is because tax law classifies the loss resulting from
recovering the carrying amount of Debt Instrument C by sale as capital and allows capital
losses to be offset only against capital gains (see paragraph 27A of the Standard).

The separate assessment results in not recognising a deferred tax asset for the deductible
temporary difference that arises from Debt Instrument C because Entity Z has no source
of taxable profit available that tax law classifies as capital.

In contrast, the deductible temporary difference that arises from Debt Instrument A and
other sources are assessed for utilisation in combination with one another. This is
because their related tax deductions would be classified as ordinary by tax law.

The tax deductions represented by the deductible temporary differences related to Debt
Instrument A are classified as ordinary because the tax law classifies the effect on taxable
profit (tax loss) from deducting the tax base on maturity as ordinary.

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In assessing the utilisation of deductible temporary differences on 31 December 20X1, the

following two steps are performed by Entity Z.

Step 1: Utilisation of deductible temporary differences because of

the reversal of taxable temporary differences (see paragraph 28 of
the Standard)
Entity Z first assesses the availability of taxable temporary differences as follows:

(CU)
Expected reversal of deductible temporary differences in 20X2
From Debt Instrument A 57,143
From other sources 430,000
Total reversal of deductible temporary differences 487,143
Expected reversal of taxable temporary differences in 20X2
From Debt Instrument B (28,571)
From other sources (50,000)
Total reversal of taxable temporary differences (78,571)
Utilisation because of the reversal of taxable temporary differences (Step 1) 78,571
Remaining deductible temporary differences to be assessed for utilisation in
Step 2 (487,143 - 78,571) 408,572

In Step 1, Entity Z can recognise a deferred tax asset in relation to a deductible temporary
difference of CU78,571.

Step 2: Utilisation of deductible temporary differences because of

future taxable profit (see paragraph 29(a) of the Standard)
In this step, Entity Z assesses the availability of future taxable profit as follows:

(CU)
Probable future tax profit (loss) in 20X2 (upon which income taxes are
payable (recoverable)) (200,000)
Add back: reversal of deductible temporary differences expected to reverse
in 20X2 487,143
Less: reversal of taxable temporary differences (utilised in Step 1) (78,571)
Probable taxable profit excluding tax deductions for assessing utilisa-
tion of deductible temporary differences in 20X2 208,572
Remaining deductible temporary differences to be assessed for utilisation
from Step 1 408,572

Utilisation because of future taxable profit (Step 2) 208,572

Utilisation because of the reversal of taxable temporary differences (Step 1) 78,571

Total utilisation of deductible temporary differences 287,143

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The tax loss of CU200,000 includes the taxable economic benefit of CU2 million from the
collection of the principal of Debt Instrument A and the equivalent tax deduction,
because it is probable that Entity Z will recover the debt instrument for more than its
carrying amount (see paragraph 29A of the Standard).

The utilisation of deductible temporary differences is not, however, assessed against

probable future taxable profit for a period upon which income taxes are payable (see
paragraph 5 of the Standard). Instead, the utilisation of deductible temporary differences
is assessed against probable future taxable profit that excludes tax deductions resulting
from the reversal of deductible temporary differences (see paragraph 29(a) of the
Standard). Assessing the utilisation of deductible temporary differences against probable
future taxable profits without excluding those deductions would lead to double counting
the deductible temporary differences in that assessment.

In Step 2, Entity Z determines that it can recognise a deferred tax asset in relation to a
future taxable profit, excluding tax deductions resulting from the reversal of deductible
temporary differences, of CU208,572. Consequently, the total utilisation of deductible
temporary differences amounts to CU287,143 (CU78,571 (Step 1) + CU208,572 (Step 2)).

Measurement of deferred tax assets and deferred tax liabilities

Entity Z presents the following deferred tax assets and deferred tax liabilities in its
financial statements on 31 December 20X1:

(CU)
Total taxable temporary differences 78,571
Total utilisation of deductible temporary differences 287,143
Deferred tax liabilities (78,571 at 30%) 23,571
Deferred tax assets (287,143 at 30%) 86,143

The deferred tax assets and the deferred tax liabilities are measured using the tax rate for
ordinary gains of 30 per cent, in accordance with the expected manner of recovery
(settlement) of the underlying assets (liabilities) (see paragraph 51 of the Standard).

Allocation of changes in deferred tax assets between profit or

loss and other comprehensive income
Changes in deferred tax that arise from items that are recognised in profit or loss are
recognised in profit or loss (see paragraph 58 of the Standard). Changes in deferred tax
that arise from items that are recognised in other comprehensive income are recognised
in other comprehensive income (see paragraph 61A of the Standard).

Entity Z did not recognise deferred tax assets for all of its deductible temporary
differences at 31 December 20X1, and according to tax law all the tax deductions
represented by the deductible temporary differences contribute equally to the tax loss for
the period. Consequently, the assessment of the utilisation of deductible temporary
differences does not specify whether the taxable profits are utilised for deferred tax items
that are recognised in profit or loss (ie the deductible temporary differences from other
sources) or whether instead the taxable profits are utilised for deferred tax items that are

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recognised in other comprehensive income (ie the deductible temporary differences

related to debt instruments classified as fair value through other comprehensive income).

For such situations, paragraph 63 of the Standard requires the changes in deferred taxes
to be allocated to profit or loss and other comprehensive income on a reasonable pro rata
basis or by another method that achieves a more appropriate allocation in the
circumstances.

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IASB documents published to accompany

IAS 12

Income Taxes
The text of the unaccompanied standard, IAS 12, is contained in Part A of this edition. Its
effective date when issued was 1 January 1998. The text of the Accompanying Guidance
on IAS 12 is contained in Part B of this edition. This part presents the following
document:

BASIS FOR CONCLUSIONS

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Basis for Conclusions on

IAS 12 Income Taxes

This Basis for Conclusions accompanies, but is not part of, IAS 12.

Introduction
BC1 When IAS 12 Income Taxes was issued by the International Accounting
Standards Committee in 1996 to replace the previous IAS 12 Accounting for
Taxes on Income (issued in July 1979), the Standard was not accompanied by a
Basis for Conclusions. This Basis for Conclusions is not comprehensive. It
summarises only the International Accounting Standards Board’s
considerations in making the amendments to IAS 12 contained in Deferred Tax:
Recovery of Underlying Assets issued in December 2010. Individual Board
members gave greater weight to some factors than to others.

BC1A In August 2014 the Board published an Exposure Draft of proposed

amendments to IAS 12 to clarify the requirements on recognition of deferred
tax assets for unrealised losses on debt instruments measured at fair value.
The Board subsequently modified and confirmed the proposals and in January
2016 issued Recognition of Deferred Tax Assets for Unrealised Losses (Amendments to
IAS 12). The Board’s considerations and reasons for its conclusions are
discussed in paragraphs BC37–BC62.

BC2 The Board amended IAS 12 to address an issue that arises when entities apply
the measurement principle in IAS 12 to temporary differences relating to
investment properties that are measured using the fair value model in IAS 40
Investment Property.

BC3 In March 2009 the Board published an exposure draft, Income Tax (the 2009
exposure draft), proposing a new IFRS to replace IAS 12. In the 2009 exposure
draft, the Board addressed this issue as part of a broad proposal relating to the
determination of tax basis. In October 2009 the Board decided not to proceed
with the proposals in the 2009 exposure draft and announced that, together
with the US Financial Accounting Standards Board, it aimed to conduct a
fundamental review of the accounting for income tax in the future. In the
meantime, the Board would address specific significant current practice
issues.

BC4 In September 2010 the Board published proposals for addressing one of those
practice issues in an exposure draft Deferred Tax: Recovery of Underlying Assets
with a 60-day comment period. Although that is shorter than the Board’s
normal 120-day comment period, the Board concluded that this was justified
because the amendments were straightforward and the exposure draft was
short. In addition, the amendments were addressing a problem that existed in
practice and needed to be solved as soon as possible. The Board considered the
comments it received on the exposure draft and in December 2010 issued the
amendments to IAS 12. The Board intends to address other practice issues
arising from IAS 12 in due course, when other priorities on its agenda permit
this.

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Recovery of revalued non-depreciable assets

BC5 In December 2010, the Board incorporated in paragraph 51B of IAS 12 the
consensus previously contained in SIC Interpretation 21 Income Taxes—Recovery
of Revalued Non-Depreciable Assets. However, because paragraph 51C addresses
investment property carried at fair value, the Board excluded such assets from
the scope of paragraph 51B. Paragraphs BC6 and BC7 set out the basis that the
Standing Interpretations Committee (SIC) gave for the conclusions it reached
in developing the consensus expressed in SIC-21.

BC6 The SIC noted that the Framework for the Preparation and Presentation of Financial
Statements1 stated that an entity recognises an asset if it is probable that the
future economic benefits associated with the asset will flow to the entity.
Generally, those future economic benefits will be derived (and therefore the
carrying amount of an asset will be recovered) through sale, through use, or
through use and subsequent sale. Recognition of depreciation implies that the
carrying amount of a depreciable asset is expected to be recovered through
use to the extent of its depreciable amount, and through sale at its residual
value. Consistently with this, the carrying amount of a non-depreciable asset,
such as land having an unlimited life, will be recovered only through sale. In
other words, because the asset is not depreciated, no part of its carrying
amount is expected to be recovered (ie consumed) through use. Deferred taxes
associated with the non-depreciable asset reflect the tax consequences of
selling the asset.

BC7 The SIC noted that the expected manner of recovery is not predicated on the
basis of measuring the carrying amount of the asset. For example, if the
carrying amount of a non-depreciable asset is measured at its value in use, the
basis of measurement does not imply that the carrying amount of the asset is
expected to be recovered through use, but through its residual value upon
ultimate disposal.

Recovery of investment properties

Reason for the exception

BC8 IAS 12 applies the principle that the measurement of deferred tax liabilities
and deferred tax assets should reflect the tax consequences that would follow
from the manner in which the entity expects to recover or settle the carrying
amount of its assets and liabilities. In many cases, however, an entity expects
to rent out investment property to earn rental income and then sell it to gain
from capital appreciation at some point in the future. Without specific plans
for disposal of the investment property, it is difficult and subjective to
estimate how much of the carrying amount of the investment property will be
recovered through cash flows from rental income and how much of it will be
recovered through cash flows from selling the asset.

1 The reference is to the IASC’s Framework for the Preparation and Presentation of Financial Statements,
adopted by the Board in 2001 and in effect when the SIC discussed this matter.

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BC9 It is particularly difficult and subjective to determine the entity’s expected

manner of recovery for investment property that is measured using the fair
value model in IAS 40. In contrast, for investment property that is measured
using the cost model in IAS 40, the Board believes that the estimates required
for depreciation establish the expected manner of recovery because there is a
general presumption that an asset’s carrying amount is recovered through use
to the extent of the amount subject to depreciation and through sale to the
extent of the residual value.

BC10 To address this issue, the Board introduced an exception to the principle in
IAS 12 that applies when an entity adopts an accounting policy of remeasuring
investment property at fair value. The purpose of the exception is to reflect
the entity’s expectation of recovery of the investment property in a practical
manner that involves little subjectivity.

BC11 Many respondents to the exposure draft of September 2010 commented that
the Board should develop application guidance rather than creating an
exception. The Board could have achieved a similar result in some cases by
providing application guidance on how to apply the underlying principle to
investment property. However, the Board chose an exception because it is
simple, straightforward and can avoid unintended consequences by a strict
definition of its scope. In fact, this exception is very similar to application
guidance. However, it is technically an exception because, in some cases, the
asset’s carrying amount is assumed to be recovered entirely through sale even
though an entity expects it to be recovered partly through sale and partly
through use.

BC12 The Board also noted that application guidance would not resolve a practice
issue that arises when the future income generated from an asset is expected
to exceed the carrying amount of that asset and that future income will be
subject to two or more different tax regimes. In those situations, IAS 12
provides no basis for determining which tax rate and tax base apply to the
recovery of the carrying amount. The Board concluded that the practical way
to resolve this issue was to create an exception that determines the manner of
recovery of an asset within the scope of that exception.

Scope of the exception

BC13 The Board understands that the concerns raised in practice relate primarily to
investment property measured using the fair value model in IAS 40. The Board
proposed in the exposure draft that the exception should also apply to
property, plant and equipment or intangible assets measured using the
revaluation model in IAS 16 Property, Plant and Equipment or IAS 38 Intangible
Assets. That was because in assessing the difficulty and subjectivity involved in
determining the expected manner of recovering the carrying amount of the
underlying asset, there is no underlying difference between regularly fair
valuing assets through a revaluation accounting policy and applying a fair
value measurement model.

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BC14 Many respondents disagreed with the proposal to include property, plant and
equipment or intangible assets measured using the revaluation model in
IAS 16 or IAS 38 in the scope of the exception. They stated that many items of
property, plant and equipment are recovered through use rather than through
sale, and that this is consistent with the definition of property, plant and
equipment in IAS 16. In addition, many respondents disagreed with the
presumption of recovery through sale when the underlying assets are
intangible assets for similar reasons. They also warned of unintended
consequences that could arise because of the varying nature of intangible
assets. Many respondents suggested limiting the scope of the exception to
investment properties measured using the fair value model in IAS 40. Having
considered those comments, the Board adopted that suggestion.

BC15 Some respondents supported inclusion of property, plant and equipment in

the scope of the exception, including property, plant and equipment measured
on a cost basis, because of their concerns about the lack of discounting
deferred tax assets and deferred tax liabilities and about a possible
double-counting of tax effects (see paragraph BC19). However, the Board
concluded that considering concerns about the lack of discounting and about
the possible double-counting was outside the limited scope of the
amendments.

BC16 The Board made it clear that the exception also applies on initial
measurement of investment property acquired in a business combination if
the investment property will subsequently be measured using the fair value
model in IAS 40. If the exception did not apply in these circumstances,
deferred taxes might reflect the tax consequences of use at the acquisition
date, but at a later date reflect the tax consequences of sale. The Board
believes that measurement of deferred taxes at the acquisition date should be
consistent with the subsequent measurement of the same deferred taxes. For
the same reason, the Board concluded that the exception should not apply to
investment property initially measured at fair value in a business combination
if the entity subsequently uses the cost model.

BC17 Having considered the responses to the exposure draft, the Board decided not
to extend the exception to other underlying assets and liabilities that are
measured at fair value, including financial instruments or biological assets.
This is because the Board understands that the most significant current
practice issues relate to investment property. In addition, the Board wished to
avoid unintended consequences of expanding the scope to other assets and
liabilities that are measured on a fair value basis.

BC18 The Board concluded that the amendments should apply to all temporary
differences that arise relating to underlying assets within the scope of the
exception, not just those separate temporary differences created by the
remeasurement of the underlying asset. This is because the unit of account
applied in determining the manner of recovery in the Standard is the
underlying asset as a whole, not the individual temporary differences.

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Measurement basis
BC19 The Board decided that when the exception applies, there should be a
presumption that deferred taxes should be measured to reflect the tax
consequences of recovering the carrying amount of the investment property
entirely through sale. In making that decision, the Board considered various
views expressed by interested parties, which included, but were not limited to
the following:

(a) the tax effect would be double-counted in some situations if deferred

taxes are measured on the basis of the tax consequences of use,
because the investment property is measured at fair value, which
reflects some of these tax consequences; and

(b) presuming sale is consistent with a fair value measurement basis that
reflects the price that would be received if the investment property is
sold.

BC20 Many respondents to the exposure draft said that choosing a measurement
basis of fair value is an accounting policy choice that does not imply or predict
recovery of the investment property through sale. Many also said that the
proposed exception would solve the double-counting problem partially but not
completely. The Board noted that the aim of the exception was neither to link
the accounting policy with measurement of deferred taxes (see
paragraph BC7), nor to remove completely the double-counting of tax effects
(see paragraph BC15). The aim of this exception is to provide a practical
approach when determination of the expected manner of recovery is difficult
and subjective.

BC21 In many cases when an entity chooses the fair value model for investment
property, investment properties are recovered through sale. Even if an
investment property earns income through rental use in a given period, the
value of the future earnings capacity of the investment property will often not
decrease and that value will ultimately be realised through sale. Therefore,
the Board retained its proposal to introduce a presumption of recovery
through sale.

BC22 The Board made that presumption rebuttable because the Board believes that
it is not always appropriate to assume the recovery of investment property
through sale. The Board initially proposed in the exposure draft that the
presumption of recovery through sale is not appropriate when the entity has
clear evidence that it will consume the asset’s economic benefits throughout
its economic life. The Board set a criterion that refers to consumption of the
asset’s economic benefits, rather than to the recovery of the carrying amount,
because the Board understands that there is diverse practice regarding the
meaning of the recovery of the carrying amount through use or through sale.

BC23 After considering the responses to the exposure draft, the Board reworded the
rebuttable presumption so that clear evidence would not be required to rebut
it. Instead, the presumption is rebutted if an asset is held within a business
model whose objective is to consume substantially all of the economic benefits
embodied in the investment property over time, rather than through sale.

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Many respondents were concerned that, because clear evidence is an

ambiguous term, the requirement to gather clear evidence would have been
onerous for entities that have no problem applying the existing principle in
IAS 12, and could have led to abuse by entities that choose whether to gather
clear evidence to achieve a favourable result. The Board chose to use the term
‘business model’ because it is already used in IFRS 9 Financial Instruments and
would not depend on management’s intentions for an individual asset. Many
respondents were concerned that the presumption would lead to
inappropriate results in some cases because it would not be rebutted if a
minor scrap value would be recovered through sale. The Board also reworded
the rebuttable presumption in order to respond to those concerns. The Board
also made it clear that the presumption of recovery through sale cannot be
rebutted if the asset is non-depreciable because that fact implies that no part
of the carrying amount of the asset would be consumed through use (see
paragraph BC6).

BC24 The Board also considered other approaches to the measurement of deferred
tax liabilities and deferred tax assets when the exception applies, specifically
whether deferred taxes should be measured on the basis of the lower of the
tax consequences of recovery through use and through sale. However, the
Board rejected such an approach, noting that it would have created:

(a) conceptual and practical concerns about whether deferred tax assets
should be measured to reflect the lower of, or higher of, the tax
consequences of use and of sale;

(b) a measurement basis that some believe would be arbitrary; and

(c) concerns that entities might be required to measure deferred taxes on

a basis that is inconsistent with their expectations of recovery of the
carrying amount of the underlying asset.

BC25 Some respondents to the exposure draft drew the mistaken conclusion that
the exposure draft required presumption of immediate sale at the end of the
reporting period when assessing the presumption of recovery through sale.
The Board observed that paragraph 47 of IAS 12 requires deferred tax assets
and liabilities to be measured at the tax rates that are expected to apply to the
period when the asset is realised or the liability is settled on the basis of tax
rates (and tax laws) that have been enacted or substantively enacted by the
end of the reporting period. This requirement applies even when the
presumption of recovery through sale is used. For clarification, the Board
adjusted the illustrative example following paragraph 51C to reflect the
requirement in paragraph 47.

BC26 In the exposure draft, the Board proposed to withdraw SIC-21. However, many
respondents commented that SIC-21 should be retained in order to avoid
unintended consequences. Having considered the responses to the exposure
draft, the Board decided to incorporate SIC-21 into IAS 12 in its entirety after
excluding from the scope of SIC-21 the investment property subject to the
requirement in paragraph 51C.

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Assessment of deferred tax assets

BC27 The Board inserted paragraph 51E to confirm that the requirements in
paragraphs 24–33 (deductible temporary differences) and paragraphs 34–36
(unused tax losses and unused tax credits) relating to assessment of deferred
tax assets continue to apply even when the presumption of recovery through
sale arises. The Board did not think that additional guidance would be
necessary.

Disclosure requirement
BC28 The Board proposed in the exposure draft disclosure of the fact of, and reasons
for, the rebuttal of the presumption of recovery through sale if the entity has
rebutted the presumption. However, many respondents said that this
disclosure would add little or no value to the financial statements. IAS 1
Presentation of Financial Statements already requires disclosures regarding
material judgements. Thus, there is no need to disclose a particular judgement
on specific types of assets. The Board was convinced by those arguments and
did not proceed with the proposed disclosure requirement.

The costs and benefits of the amendments to IAS 12

BC29 Computation of the tax consequences of selling assets is complex in some tax
jurisdictions and there are concerns that the amendments to IAS 12 will
increase the administrative burden for some entities in those tax jurisdictions.

BC30 However, the Board believes that the benefit of providing the exception
outweighs this potential increase in administrative burden for some entities.
This is because the purpose of the exception is to enable preparers to measure
deferred taxes in these circumstances in the least subjective manner and in so
doing enhance the comparability of financial information about deferred
taxes for the benefit of users of financial statements. It is also expected to
result in an overall reduction of the administrative burden for entities that
have previously had to consider the tax consequence of both use and sale of an
investment property when measuring deferred taxes.

BC31 Many respondents to the exposure draft said that entities would not benefit
from the amendments in jurisdictions in which this practice issue did not
exist but would suffer from an increased administrative burden as a result of
the amendments. Their criticism mainly focused on the rebuttable
presumption, as discussed in paragraphs BC22 and BC23. They also said that
the disclosure requirement proposed in the exposure draft would be onerous.

BC32 After considering the responses to the exposure draft, the Board narrowed the
scope of the exception to apply only to investment property carried at fair
value. It reworded the rebuttable presumption so that clear evidence would no
longer be required to rebut the presumption. The Board also did not pursue
the proposed disclosure requirement regarding the fact of, and reason for, the
rebuttal. After those changes, the Board believes that the amendments will
not be onerous for entities that have previously been able to establish without
difficulty how they expect to recover investment property carried at fair value.

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Transition and effective date

BC33 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires an
entity to apply retrospectively a change in accounting policy resulting from
the initial application of an IFRS that does not have a transition provision. The
Board did not include any transition provision in the amendments because, in
the Board’s view, it would not be unduly burdensome for entities to apply the
changes to IAS 12 retrospectively.

BC34 The Board acknowledges that the amendments may add some administrative
burden if they apply to investment property acquired in a business
combination that occurred in a previous reporting period. For example, it
could be difficult to restate goodwill and recalculate previous impairment
reassessments if some information is not available and an entity is unable to
separate the effects of hindsight. However, the Board reasoned that the
amendments apply only to specific circumstances. Moreover, IAS 8 provides
sufficient guidance to deal with cases when it might be impracticable to
reassess impairment of goodwill or recoverability of deferred tax assets.

BC35 Consequently, the Board concluded that the cost of requiring retrospective
application is outweighed by the benefit of consistent application of the
amendments by entities to all periods presented in the financial statements.
Accordingly, the Board decided that entities should apply the amendments to
IAS 12 retrospectively in accordance with IAS 8.

First-time adoption of IFRSs

BC36 The Board identified no reason to adjust the exception for application by a
first-time adopter at its date of transition to IFRSs.

Recognition of Deferred Tax Assets for Unrealised Losses (2016

amendments)
BC37 The IFRS Interpretations Committee (the ‘Interpretations Committee’) was
asked to provide guidance on how an entity determines, in accordance with
IAS 12, whether to recognise a deferred tax asset when:

(a) the entity has a debt instrument that is classified as an available-for-

sale financial asset in accordance with IAS 39 Financial Instruments:
Recognition and Measurement.2 Changes in the market interest rate result
in a decrease in the fair value of the debt instrument to below its cost
(ie it has an ‘unrealised loss’);

(b) it is probable that the issuer of the debt instrument will make all the
contractual payments;

(c) the tax base of the debt instrument is cost;

2 IFRS 9 Financial Instruments replaced IAS 39. IFRS 9 applies to all items that were previously within
the scope of IAS 39. Under IFRS 9, the same question arises for debt instruments measured at fair
value.

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(d) tax law does not allow a loss to be deducted on a debt instrument until
the loss is realised for tax purposes;

(e) the entity has the ability and intention to hold the debt instrument
until the unrealised loss reverses (which may be at its maturity);

(f) tax law distinguishes between capital gains and losses and ordinary
income and losses. While capital losses can only be offset against
capital gains, ordinary losses can be offset against both capital gains
and ordinary income; and

(g) the entity has insufficient taxable temporary differences and no other
probable taxable profits against which the entity can utilise deductible
temporary differences.

BC38 The Interpretations Committee reported to the Board that practice differed
because of divergent views on the following questions:

(a) Do decreases in the carrying amount of a fixed-rate debt instrument

for which the principal is paid on maturity always give rise to a
deductible temporary difference if this debt instrument is measured at
fair value and if its tax base remains at cost? In particular, do they give
rise to a deductible temporary difference if the debt instrument’s
holder expects to recover the carrying amount of the asset by use,
ie continuing to hold it, and if it is probable that the issuer will pay all
the contractual cash flows? (see paragraphs BC39–BC45)

(b) Does an entity assume that it will recover an asset for more than its
carrying amount when estimating probable future taxable profit
against which deductible temporary differences are assessed for
utilisation if such recovery is probable? This question is relevant when
taxable profit from other sources is insufficient for the utilisation of
the deductible temporary differences related to debt instruments
measured at fair value. In this case, an entity may only be able to
recognise deferred tax assets for its deductible temporary differences if
it is probable that it will collect the entire cash flows from the debt
instrument and therefore recover it for more than its carrying amount.
(see paragraphs BC46–BC54)

(c) When an entity assesses whether it can utilise deductible temporary

differences against probable future taxable profit, does that probable
future taxable profit include the effects of reversing deductible
temporary differences? (see paragraphs BC55–BC56)

(d) Does an entity assess whether a deferred tax asset is recognised for
each deductible temporary difference separately or in combination
with other deductible temporary differences? This question is relevant,
for example, when tax law distinguishes capital gains and losses from
other taxable gains and losses and capital losses can only be offset
against capital gains. (see paragraphs BC57–BC59)

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Existence of a deductible temporary difference

BC39 In the case of many debt instruments, the collection of the principal on
maturity does not increase or decrease taxable profit that is reported for tax
purposes. This is the case in the example illustrating paragraph 26(d) of
IAS 12. Interest is paid at the contractual rate each year, and on maturity of
the debt instrument the issuer pays the principal of CU1,000. In this example,
if the investor continues to hold the debt instrument, the investor only pays
taxes on the interest income. The collection of the principal does not trigger
any tax payments.

BC40 Because the collection of the principal does not increase or decrease the
taxable profit that is reported for tax purposes, some thought that the
collection of the principal is a non-taxable event. Sometimes, tax law does not
explicitly address whether the collection of the principal has tax
consequences. Consequently, proponents of this view thought that a
difference between the carrying amount of the debt instrument in the
statement of financial position and its higher tax base does not give rise to a
deductible temporary difference, if this difference results from a loss that they
expect will not be realised for tax purposes.

BC41 Those who held this view thought that the loss would not be realised for tax
purposes if the entity has the ability and intention to hold the debt
instrument over the period until the loss reverses, which might be until
maturity, and it is probable that the entity will receive all the contractual cash
flows. In this case, differences between the carrying amount of the debt
instrument in the statement of financial position and its tax base reverse over
the period to maturity, as a result of continuing to hold the debt instrument.

BC42 The Board considered the guidance in IAS 12 on the identification of

temporary differences and rejected the reasoning presented in
paragraphs BC40 and BC41. Paragraphs 20 and 26(d) of IAS 12 specify that a
difference between the carrying amount of an asset measured at fair value
and its higher tax base gives rise to a deductible temporary difference. This is
because the calculation of a temporary difference in IAS 12 is based on the
premise that the entity will recover the carrying amount of an asset, and
hence economic benefits will flow to the entity in future periods to the extent
of the asset’s carrying amount at the end of the reporting period. In contrast,
the view presented in paragraphs BC40 and BC41 is based on the assessment of
the economic benefits that are expected at maturity. The Board noted that the
existence of a deductible temporary difference depends solely on a comparison
of the carrying amount of an asset and its tax base at the end of the reporting
period, and is not affected by possible future changes in the carrying amount.

BC43 Consequently, the Board concluded that decreases below cost in the carrying
amount of a fixed-rate debt instrument measured at fair value for which the
tax base remains at cost give rise to a deductible temporary difference. This
applies irrespective of whether the debt instrument’s holder expects to
recover the carrying amount of the debt instrument by sale or by use,
ie continuing to hold it, or whether it is probable that the issuer will pay all
the contractual cash flows. Normally, the collection of the entire principal

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does not increase or decrease taxable profit that is reported for tax purposes,
because the tax base equals the inflow of taxable economic benefits when the
principal is paid. Typically, the tax base of the debt instrument is deducted
either on sale or on maturity.

BC44 The economic benefit embodied in the related deferred tax asset arises from
the ability of the holder of the debt instrument to achieve future taxable gains
in the amount of the deductible temporary difference without paying taxes on
those gains. In contrast, an entity that acquires the debt instrument described
in the example illustrating paragraph 26(d) of IAS 12 for its fair value at the
end of Year 2 (in the example, CU918) and continues to hold it, has to pay
taxes on a gain of CU82, whereas the entity in that example will not pay any
taxes on the collection of the CU1,000 of principal. The Board concluded that
it was appropriate for the different tax consequences for these two holders of
the same instrument to be reflected in the deferred tax accounting for the
debt instrument.

BC45 The Board has added an example after paragraph 26 of IAS 12 to illustrate the
identification of a deductible temporary difference in the case of a fixed-rate
debt instrument measured at fair value for which the principal is paid on
maturity.

Recovering an asset for more than its carrying amount

BC46 The Board noted that paragraph 29 of IAS 12 identifies taxable profit in future
periods as one source of taxable profits against which an entity can utilise
deductible temporary differences. Future taxable profit has to be probable to
justify the recognition of deferred tax assets.

BC47 The guidance in paragraph 29 of IAS 12 does not refer to the carrying amount
of assets within the context of estimating probable future taxable profit. Some
thought, however, that the carrying amount of an asset to which a temporary
difference is related limits the estimate of future taxable profit. They argued
that accounting for deferred taxes should be based on consistent assumptions,
which implies that an entity cannot assume that, for one and the same asset,
the entity will recover it:

(a) for its carrying amount when determining deductible temporary

differences and taxable temporary differences; as well as

(b) for more than its carrying amount when estimating probable future
taxable profit against which deductible temporary differences are
assessed for utilisation.

BC48 Consequently, proponents of this view thought that an entity cannot assume
that it will collect the entire principal of CU1,000 in the example illustrating
paragraph 26(d) of IAS 12 when determining probable future taxable profit.
Instead, they thought that an entity must assume that it will collect only the
carrying amount of the asset.

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BC49 The Board noted however that determining temporary differences and
estimating probable future taxable profit against which deductible temporary
differences are assessed for utilisation are two separate steps and the carrying
amount of an asset is relevant only to determining temporary differences. The
carrying amount of an asset does not limit the estimation of probable future
taxable profit. In its estimate of probable future taxable profit, an entity
includes the probable inflow of taxable economic benefits that results from
recovering an asset. This probable inflow of taxable economic benefits may
exceed the carrying amount of the asset.

BC50 Moreover, a limitation on the estimate of probable future taxable profit by the
carrying amount of assets can lead to inappropriate results in other scenarios.
For example, a significant part of the assets of a profitable manufacturing
entity is property, plant and equipment and inventories. Property, plant and
equipment may be measured using the cost model (paragraph 30 of IAS 16
Property, Plant and Equipment) and inventories are measured at the lower of cost
and net realisable value (paragraph 9 of IAS 2 Inventories). If such an entity
expects to generate future taxable profit, it may be inconsistent to assume
that it will only recover these assets for their carrying amount. This is because
a significant part of the manufacturing entity’s probable future taxable profit
results from using those assets to generate taxable profit in excess of their
carrying amount.

BC51 If a limitation such as the one described in paragraph BC50 was made, then,
for the purpose of consistency, the entity would need to assume that it will
not recover any of its assets for more than their carrying amount. The Board
decided that it would not be appropriate to limit the estimate of probable
future taxable profit to the carrying amount of related assets only for assets to
which temporary differences are related, because there is no basis for a
different assessment that would depend on whether a deductible temporary
difference is related to an asset or not.

BC52 Some respondents to the Exposure Draft expressed concern that the guidance
might be applied more broadly, and in their view, inappropriately, to other
assets, and not merely to debt instruments measured at fair value. Some other
respondents were concerned that any guidance would give the false
impression that future taxable profit should be estimated on an individual
asset basis. The Board noted that the principle that the estimate of probable
future taxable profit includes an expected recovery of assets for more than
their carrying amounts is not limited to any specific type or class of assets.

BC53 However, the Board also noted that there are cases in which it may not be
probable that an asset will be recovered for more than its carrying amount. An
entity should not inappropriately assume that an asset will be recovered for
more than its carrying amount. The Board thought that this is particularly
important when the asset is measured at fair value. In response to that
concern, the Board noted that entities will need to have sufficient evidence on
which to base their estimate of probable future taxable profit, including when
that estimate involves the recovery of an asset for more than its carrying
amount. For example, in the case of a fixed-rate debt instrument measured at
fair value, the entity may judge that the contractual nature of future cash

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flows, as well as the assessment of the likelihood that those contractual cash
flows will be received, adequately supports the conclusion that it is probable
that it will recover the fixed-rate debt instrument for more than its carrying
amount, if the expected cash flows exceed the debt instrument’s carrying
amount. The Board thought that such an example could enhance
understanding and reduce the risk of arbitrary estimates of future taxable
profit.

BC54 The Board has added paragraph 29A to IAS 12 to clarify to what extent an
entity’s estimate of future taxable profit (paragraph 29) includes amounts
from recovering assets for more than their carrying amounts.

Probable future taxable profit against which deductible

temporary differences are assessed for utilisation
BC55 The Interpretations Committee observed that there is uncertainty about how
to determine probable future taxable profit against which deductible
temporary differences are assessed for utilisation when this profit is being
assessed to determine the recognition of all deferred tax assets. The
uncertainty relates to whether the probable future taxable profit should
include or exclude deductions that will arise when those deductible temporary
differences reverse.

BC56 The Board noted that deductible temporary differences are utilised by
deduction against taxable profit, excluding deductions arising from reversal of
those deductible temporary differences. Consequently, taxable profit used for
assessing the utilisation of deductible temporary differences is different from
taxable profit on which income taxes are payable, as defined in paragraph 5 of
IAS 12. If those deductions were not excluded, then they would be counted
twice. The Board has amended paragraph 29(a) to clarify this.

Combined versus separate assessment

BC57 The Board considered the guidance in IAS 12 on the recognition of deferred
tax assets. Paragraph 24 of IAS 12 requires deferred tax assets to be recognised
only to the extent of probable future taxable profit against which the
deductible temporary differences can be utilised. Paragraph 27 explains that:

(a) the deductible temporary differences are utilised when their reversal
results in deductions that are offset against taxable profits of future
periods; and

(b) economic benefits in the form of reductions in tax payments will flow
to the entity only if it earns sufficient taxable profits against which the
deductions can be offset.

BC58 The Board noted that:

(a) tax law determines which deductions are offset against taxable income
in determining taxable profits. The Board also noted that paragraph 5
of IAS 12 defines taxable profit as the profit of a period, determined in
accordance with the rules established by the taxation authorities, upon
which income taxes are payable.

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(b) no deferred tax asset is recognised if the reversal of the deductible

temporary difference will not lead to tax deductions.

BC59 Consequently, if tax law offsets a deduction against taxable income on an

entity basis, without segregating deductions from different sources, an entity
carries out a combined assessment of all its deductible temporary differences
relating to the same taxation authority and the same taxable entity. However,
if tax law offsets specific types of losses only against a particular type, or
types, of income (for example, if tax law limits the offset of capital losses to
capital gains), an entity assesses a deductible temporary difference in
combination with other deductible temporary differences of that type(s), but
separately from other deductible temporary differences. Segregating
deductible temporary differences in accordance with tax law and assessing
them on such a basis is necessary to determine whether taxable profits are
sufficient to utilise deductible temporary differences. The Board has added
paragraph 27A to IAS 12 to clarify this.

Transition
BC60 The Board decided to require the adjustment of comparative information for
any earlier periods presented. However, this amendment allows the change in
opening equity of the earliest comparative period presented that arises upon
the first application of the amendment to be recognised in opening retained
earnings (or in another component of equity, as appropriate), without the
need to allocate the change between opening retained earnings and other
components of equity. This is to avoid undue cost and effort.

BC61 The Board noted that, with the exception of the amounts that would have to
be adjusted within equity, the accounting required by these amendments is
based on amounts and estimates at the end of the reporting periods. The
changes to the accounting are mechanical in nature and so the Board expects
that the cost of adjusting comparatives should not exceed the benefits of
greater comparability.

BC62 The Board has not added additional transition relief for first-time adopters.
This is consistent with the fact that IFRS 1 First-time Adoption of International
Financial Reporting Standards does not include an exception to, or exemption
from, the retrospective application of the requirements in IAS 12.

Income tax consequences of payments on financial instruments

classified as equity (amendments issued in December 2017)
BC63 The Board was asked about the income tax consequences of payments on
financial instruments classified as equity; should an entity recognise them in
profit or loss, or in equity? In particular, the Board was asked whether the
requirements in paragraph 57A (paragraph 52B before the amendments were
made) apply only in the circumstances described in paragraph 52A (for
example, when there are different tax rates for distributed and undistributed
profits), or whether those requirements apply as long as payments on
financial instruments classified as equity are distributions of profit.

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BC64 The Board observed that:

(a) paragraph 57A describes how an entity accounts for income tax
consequences of dividends paid. Dividends are defined in IFRS 9 as
‘distributions of profits to holders of equity instruments in proportion
to their holdings of a particular class of capital’.

(b) paragraph 57A first requires an entity to link the income tax
consequences of dividends to past transactions or events that
generated distributable profits. An entity then applies the
requirements in paragraph 58 to determine where to recognise those
income tax consequences. Applying paragraph 57A, the entity
recognises the income tax consequences of dividends according to
where it has recognised the past transactions or events that generated
distributable profits.

(c) the reason for the income tax consequences of dividends should not
affect where those income tax consequences are recognised. It does not
matter whether such consequences arise, for example, because of
different tax rates for distributed and undistributed profits or because
of the deductibility of dividends for tax purposes. This is because, in
both cases, the income tax consequences arise from the distribution of
profits.

(d) linking the recognition of the income tax consequences of dividends to

how the tax consequences arise (for example, because of different tax
rates, rather than because of different tax-deductibility rules) would
lead to arbitrary results and a lack of comparability across entities in
different tax jurisdictions. Tax jurisdictions choose different methods
of imposing tax or providing tax relief. What matters is the resulting
tax effect, not the mechanism.

BC65 Accordingly, the Board concluded that an entity should recognise all income
tax consequences of dividends applying the requirements in paragraph 57A.
However, the Board also observed that, before those requirements were
amended, the requirements in paragraph 57A could be misread to imply that
paragraph 57A applied only in the circumstances described in paragraph 52A.

BC66 Consequently, the Board clarified that the requirements in paragraph 57A
apply to all income tax consequences of dividends.

BC67 The Board noted that the amendments do not suggest that an entity applies
paragraph 57A to the income tax consequences of all payments on financial
instruments classified as equity. Rather, paragraph 57A applies only when an
entity determines payments on such instruments are distributions of profits
(ie dividends). An entity may need to apply judgement in making this
determination.

BC68 The Board considered whether to include requirements on how to determine

if payments on financial instruments classified as equity are distributions of
profits. It decided not to do so for the following reasons:

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(a) including indicators or requirements that distinguish distributions of

profits from other distributions goes beyond the scope of the
amendments to IAS 12. Any attempt by the Board to define or describe
distributions of profits could affect other IFRS Standards and IFRIC
Interpretations, and risks unintended consequences.

(b) the amendments do not change what is and is not a distribution of

profits. They simply clarify that the requirements in paragraph 57A
apply to all income tax consequences of dividends.

BC69 The Board concluded that finalising the amendments without adding the
possible requirements mentioned in paragraph BC68 would nonetheless be
beneficial to preparers and users of financial statements. In particular, the
amendments would eliminate the potential for inconsistent accounting that
resulted from the ambiguity of the scope of the requirements in
paragraph 57A that existed before those requirements were amended.

Transition
BC70 The Board decided that an entity applies the amendments to income tax
consequences of dividends recognised on or after the beginning of the earliest
comparative period when it first applies the amendments. This is because
application of the amendments before that date could affect only components
of equity as at the beginning of the earliest comparative period. The Board
concluded that entities would have sufficient information to apply the
amendments to the income tax consequences of dividends that occur in
comparative reporting periods and that applying the amendments in this way
will enhance comparability of reporting periods.

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