True or false: Net income equals the net amount of cash collected during the accounting period
IAS 12 was reissued in October 1996 and is applicable to annual periods beginning on or after 1 January 1998. Show
The objective of IAS 12 (1996) is to prescribe the accounting treatment for income taxes. In meeting this objective, IAS 12 notes the following:
[IAS 12.5]
Current tax for the current and prior periods is recognised as a liability to the extent that it has not yet been settled, and as an asset to the extent that the amounts already paid exceed the amount due. [IAS 12.12] The benefit of a tax loss which can be carried back to recover current tax of a prior period is recognised as an asset. [IAS 12.13] Current tax assets and liabilities are measured at the amount expected to be paid to (recovered from) taxation authorities, using the rates/laws that have been enacted or substantively enacted by the balance sheet date. [IAS 12.46] Formulae Deferred tax assets and deferred tax liabilities can be calculated using the following formulae:
The following formula can be used in the calculation of deferred taxes arising from unused tax losses or unused tax credits:
Tax bases The tax base of an item is crucial in determining the amount of any temporary difference, and effectively represents the amount at which the asset or liability would be recorded in a tax-based balance sheet. IAS 12 provides the following guidance on determining tax bases:
Examples The determination of the tax base will depend on the applicable tax laws and the entity's expectations as to recovery and settlement of its assets and liabilities. The following are some basic examples:
Recognition of deferred tax liabilities The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary differences. There are three exceptions to the requirement to recognise a deferred tax liability, as follows:
Example An entity undertaken a business combination which results in the recognition of goodwill in accordance with IFRS 3 Business Combinations. The goodwill is not tax depreciable or otherwise recognised for tax purposes. As no future tax deductions are available in respect of the goodwill, the tax base is nil. Accordingly, a taxable temporary difference arises in respect of the entire carrying amount of the goodwill. However, the taxable temporary difference does not result in the recognition of a deferred tax liability because of the recognition exception for deferred tax liabilities arising from goodwill. Recognition of deferred tax assets A deferred tax asset is recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilised, unless the deferred tax asset arises from: [IAS 12.24]
Deferred tax assets for deductible temporary differences arising from investments in subsidiaries, branches and associates, and interests in joint arrangements, are only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and that taxable profit will be available against which the temporary difference will be utilised. [IAS 12.44] The carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced 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 is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available. [IAS 12.37] A deferred tax asset is recognised for an unused tax loss carryforward or unused tax credit if, and only if, it is considered probable that there will be sufficient future taxable profit against which the loss or credit carryforward can be utilised. [IAS 12.34] Measurement of deferred tax Deferred tax assets and liabilities are 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/laws that have been enacted or substantively enacted by the end of the reporting period. [IAS 12.47] The measurement reflects the entity's expectations, at the end of the reporting period, as to the manner in which the carrying amount of its assets and liabilities will be recovered or settled. [IAS 12.51] IAS 12 provides the following guidance on measuring deferred taxes:
Deferred tax assets and liabilities cannot be discounted. [IAS 12.53] Amount of income tax to recognise The following formula summarises the amount of tax to be recognised in an accounting period:
Where to recognise income tax for the period Consistent with the principles underlying IAS 12, the tax consequences of transactions and other events are recognised in the same way as the items giving rise to those tax consequences. Accordingly, current and deferred tax is recognised as income or expense and included in profit or loss for the period, except to the extent that the tax arises from: [IAS 12.58]
Example An entity undertakes a capital raising and incurs incremental costs directly attributable to the equity transaction, including regulatory fees, legal costs and stamp duties. In accordance with the requirements of IAS 32 Financial Instruments: Presentation, the costs are accounted for as a deduction from equity. Assume that the costs incurred are immediately deductible for tax purposes, reducing the amount of current tax payable for the period. When the tax benefit of the deductions is recognised, the current tax amount associated with the costs of the equity transaction is recognised directly in equity, consistent with the treatment of the costs themselves. IAS 12 provides the following additional guidance on the recognition of income tax for the period:
Current tax assets and current tax liabilities can only be offset in the statement of financial position if the entity has the legal right and the intention to settle on a net basis. [IAS 12.71] Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial position if the entity has the legal right to settle current tax amounts on a net basis and the deferred tax amounts are levied by the same taxing authority on the same entity or different entities that intend to realise the asset and settle the liability at the same time. [IAS 12.74] The amount of tax expense (or income) related to profit or loss is required to be presented in the statement(s) of profit or loss and other comprehensive income. [IAS 12.77] The tax effects of items included in other comprehensive income can either be shown net for each item, or the items can be shown before tax effects with an aggregate amount of income tax for groups of items (allocated between items that will and will not be reclassified to profit or loss in subsequent periods). [IAS 1.91] IAS 12.80 requires the following disclosures:
IAS 12.81 requires the following disclosures:
Other required disclosures:
In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are required by IAS 1 Presentation of Financial Statements, as follows:
Is net income equal to cash at balance?Net income is an accounting metric and does not represent the economic profit or cash flow of a business. Since net profit includes a variety of non-cash expenses such as depreciation, amortization, stock-based compensation, etc., it is not equal to the amount of cash flow a company produced during the period.
What is net income in accounting?Net income refers to the amount an individual or business makes after deducting costs, allowances and taxes. In commerce, net income is what the business has left over after all expenses, including salary and wages, cost of goods or raw material and taxes.
Will a company's net cash flow equal its net income?If all of a company's operating revenues and expenses were in cash, then Net Cash Provided by Operating Activities (Cash Flow Statement) would equal Net Income (Income Statement).
Why does net income not typically equal cash from operations?Cash flow and net income statements are different in most cases because there is a time gap between documented sales and actual payments. The situation is under control if invoiced customers pay in cash during the next period.
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