Liabilities and equity

IAS 12 · Income taxes

Current tax is what is paid for this year; deferred tax is what will be paid (or saved) later because of today's differences.

Draft: not yet reviewed by a teacher

Why it exists

Tax rules often recognise income and expenses in different years from the accounts: tax allowances run faster than depreciation, a provision is deductible only when paid. Showing only the tax in the return would make the tax expense jump around and lose its link with profit. IAS 12 shows the future tax effects of today's differences now.

Key rules

Current tax is the estimate of tax payable for the year. Last year's under-provision increases this year's expense and an over-provision reduces it; the year-end liability is only this year's estimate.
The tax base is the amount attributed to an asset or liability for tax purposes. Temporary difference = carrying amount − tax base.
An asset with a carrying amount above its tax base (or a liability below its tax base) gives a taxable difference and a deferred tax liability; the reverse gives a deductible difference and a deferred tax asset.
A deferred tax asset is recognised only if future taxable profit is probable against which the deduction can be used (tax losses included).
Deferred tax is measured at the rate enacted or substantively enacted at the reporting date for the period when the difference reverses; it is not discounted.
The deferred tax movement goes where the item that created it went: usually P/L, but tax on a revaluation goes to OCI, against the revaluation surplus.
When the statement of financial position splits current and non-current items, deferred tax is not classified as current. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same tax authority on the same taxable entity and there is a legally enforceable right to set off current tax assets against current tax liabilities.

Examples

A Bakı pipe factory, AZN '000, rate 20%. At 31.12.2026 plant has a carrying amount of 14,800 and a tax base of 11,300; a building was revalued from 4,200 to 5,700 (tax base unchanged). Opening deferred tax liability 520. 2026 tax estimate 1,450; 2025 tax provided 1,180, paid 1,240.

Balance: (3,500 + 1,500) × 20% = 1,000
Movement: 1,000 − 520 = 480, of which 1,500 × 20% = 300 to OCI and 180 to P/L
Tax expense: 1,450 + 60 + 180 = 1,690
Statement of financial position: current tax payable 1,450, deferred tax liability 1,000, revaluation surplus 1,200

Tax expense, deferred tax and a revaluation

How it works

Three steps:

the balance: (carrying amount − tax base) × rate for each item, added up;
the movement: closing balance − opening balance;
the split: the part created by OCI items (a revaluation) goes to OCI; the rest goes to the tax expense in P/L.

Income tax expense in P/L = current tax estimate + last year's under-provision (− over-provision) + the deferred tax movement in P/L. Under IFRS 18 it sits below "Profit before income taxes".

Traps

Taught in the course

Why it exists

Key rules

Current tax is the estimate of tax payable for the year. Last year's under-provision increases this year's expense and an over-provision reduces it; the year-end liability is only this year's estimate.

The tax base is the amount attributed to an asset or liability for tax purposes. Temporary difference = carrying amount − tax base.

An asset with a carrying amount above its tax base (or a liability below its tax base) gives a taxable difference and a deferred tax liability; the reverse gives a deductible difference and a deferred tax asset.

A deferred tax asset is recognised only if future taxable profit is probable against which the deduction can be used (tax losses included).

Deferred tax is measured at the rate enacted or substantively enacted at the reporting date for the period when the difference reverses; it is not discounted.

The deferred tax movement goes where the item that created it went: usually P/L, but tax on a revaluation goes to OCI, against the revaluation surplus.

When the statement of financial position splits current and non-current items, deferred tax is not classified as current. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same tax authority on the same taxable entity and there is a legally enforceable right to set off current tax assets against current tax liabilities.