IAS 12 income Taxes

It’s 2 (TWO) T accounts that are required

The first is for deferred Tax and the second is for Current Tax

In a question concerning tax, you will most often be given a trial balance and, within those two columns of numbers will be the balances as at the end of the year after last year’s tax liability has been paid

Most typically, but not always, there will be a balance on the Deferred Tax account in the credit column (just once recently did the examiner show a deferred tax debit balance in the trial balance)

In the T account for Deferred Tax, put in that figure from the trial balance – normally on the credit side – with the narrative “brought down” or “per question”

Similarly, within the trial balance there is most often a figure for Current Tax (sometimes called Income Tax, Corporation Tax or Company Tax)

Pay great attention to which column in the trial balance this figure is placed and put the amount from the trial balance into the Current Tax account in the correct side again with the narrative “brought down” or “per question”

If the amount for tax is shown in the debit column, put that figure in the debit side of the respective tax account*

* see end of this post for some really irrelevant information

In the notes to the question you will find all the information that you need to complete the exercise

There will either be:

information about the directors’ estimate of the liability for Current Tax on this year’s profits, or

information on the amount charged to this year’s statement of profit or loss

If the information is the estimated tax liability, put that into the Current Tax T account on the debit side with the narrative “carried down”

If the information is about the amount charged to this year’s statement of profit or loss, put that figure into the Current Tax account with the narrative I/S (for Income Statement – it’s quicker than writing SoPoL!)

Turn to the Deferred tax account

A question will always tell you about the liability to carry forward. It will say either:

the Deferred Tax liability needs to be increased by $…., or

the book value of assets at the end of the year exceeded their tax value by $….. and the tax rate is 25%

As a further complication, the examiner will sometimes tell you that during the year just ended some of the increase in the deferred tax liability was due to a revaluation by the entity of some of their assets

In that situation there is a choice of treatments for the deferred tax that arises from that revaluation

Either:

do nothing particularly exciting with that deferred tax that has arisen as a result of the revaluation, or

calculate the deferred tax that has arisen as a result of the revaluation and credit that tax figure to the Deferred Tax account and debit the Revaluation Reserve (the examiner will guide you as to which choice you should take)

Now you’re in a position to balance off the Deferred Tax account so do so … and double enter the balancing figure to the Current Tax account

Now balance off the Current Tax account and take the missing figure either:

to the statement of profit or loss (where the closing liability was given), or

put the figure in the appropriate side of the Current Tax account with the narrative “carried down” (where the charge for Current Tax was given)

* irrelevant information:

that figure shown in the trial balance for Current Tax could be in respect of an over-provision or an under-provision from last year … but which is it?

WHO CARES!!!!!!

You will only need to know where there is an mcq and you are asked whether the figure in the trial balance is an over- or an under-provision

If it’s on the debit side of the trial balance, that’s an under-provision made last year for last year’s tax liability and …

… if it’s on the credit side of the trial balance, that’s an over-provision made last year for last year’s tax liability

BUT IT’S HIGHLY UNLIKELY THAT YOU’LL NEED TO KNOW THAT!!!

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