IAS 12

Welcome! I'm glad we are tackling IAS 12 today. It's one of the most critical accounting standards because it bridges the gap between what you report to your shareholders and what you owe to the tax authorities.

To make sure we tailor this session perfectly to your needs, I'd love to know: what brings you to IAS 12 today, and how familiar are you already with accounting standards like IFRS?

I'm studying for an exam and I'm relatively new to IFRS.

It is great to have you here! Since you are preparing for an exam and are relatively new to IFRS, we will take things step-by-step to make sure everything clicks.

Let's kick things off with our official roadmap so you can see exactly where we are headed today.

Your path

Accounting for Current Income Tax

Tax Bases and Temporary Differences

Recognition of Deferred Income Taxes

Measurement, Presentation, and Disclosure

What is IAS 12 All About?

At its heart, exists to answer a simple but tricky question: how do we account for the current and future tax consequences of the transactions we record today? Think of it as bridging two different worlds that speak different languages: the world of accounting standards and the world of tax law.

To understand this standard, we first need to look at its scope. IAS 12 applies only to income taxes. This includes all domestic and foreign taxes that are based on . If a government levies a tax based on a net amount (revenues minus allowable expenses), it falls under this standard. However, other types of government levies like sales taxes, property taxes, or value-added taxes are outside the scope of IAS 12.

Does the distinction between an income tax based on net profit and other types of taxes make sense so far?

Why doesn't IAS 12 cover sales tax?

That is a very logical question to ask. The short answer is that sales tax is not based on a company's profit. Instead, it is a transaction tax. Under IAS 12, the defining characteristic of an income tax is that it must be based on a net taxable profit. Sales taxes like are fundamentally different in how they are collected and paid.

Because a business is just an intermediary collecting sales tax on behalf of the government, these taxes don't affect the company's net income. Instead, they are handled by other standards, usually recorded as a simple liability (for tax collected but not yet sent to the government) or an expense/receivable under general IFRS principles. Now that we have cleared that up, let's look at the two big players of IAS 12: accounting profit versus taxable profit. Accounting profit is the profit before tax that you show on your income statement. It is calculated using standard IFRS rules to show how the business is performing. On the other hand, taxable profit is the profit calculated using the specific tax laws of your government to figure out exactly what you owe in tax right now. These two numbers are almost never the same.