Income taxes: formula sheet

Key formulas

Current tax for the year

Taxable profit × enacted or substantively enacted tax rate

Start from accounting profit and adjust for permanent and temporary differences to reach taxable profit.

Total tax expense in profit or loss

Current tax for the year + under provision (or − over provision) from prior year + deferred tax movement

Deferred tax is covered separately. Only the current tax part is shown here.

Under or over provision

Final tax agreed − provision made in prior year

A positive result is an under provision and an expense. A negative result is an over provision and reduces the expense.

Current tax liability at year end

Current year tax charge − tax already paid for the year (+ any unpaid prior-year balance)

If payments exceed the charge, show a current tax asset.

Where the tax goes

Tax follows the underlying item: profit or loss, OCI or equity

Applies to current and deferred tax alike.

Tax rate to use

Rate enacted or substantively enacted at the reporting date

Do not use proposed rates that are not yet substantively enacted.

Temporary difference

Temporary difference = Carrying amount − Tax base (for an asset)

For an asset, a positive result is a taxable difference (deferred tax liability) and a negative result is a deductible difference (deferred tax asset). For a liability, the signs reverse. Tax base − Carrying amount positive means a taxable difference (deferred tax liability). Carrying amount − Tax base positive means a deductible difference (deferred tax asset). Check the sign for each item.

Deferred tax balance

Deferred tax = Temporary difference × Tax rate

Use the enacted or substantively enacted rate expected to apply when the difference reverses. Do not discount.

Tax base of an asset

Tax base = Cost − Tax deductions already claimed (where the economic benefits are taxable)

If the recovery of the asset is not taxable, the tax base equals the carrying amount.

Tax base of a liability

Tax base = Carrying amount − Amount deductible for tax in future periods

For revenue received in advance: carrying amount − revenue not taxable in future.

Movement in the year

Charge or credit = Closing deferred tax − Opening deferred tax

Post the movement to profit or loss, or to OCI or equity if the underlying item was recognised there.

Direction rule

Asset carrying amount > tax base → deferred tax liability; asset carrying amount < tax base → deferred tax asset

Reverse the test for liabilities: liability carrying amount < tax base → deferred tax liability; liability carrying amount > tax base → deferred tax asset.

Deferred tax asset

DTA = deductible temporary difference × tax rate

Deductible difference = tax base − carrying amount for an asset, or carrying amount − tax base for a liability.

DTA on unused tax losses

DTA = unused tax loss × tax rate expected to apply when the loss is used

Recognise only to the extent future taxable profit is probable.

Recognition rule

Recognise DTA to the extent it is probable that taxable profit will be available against which it can be used

IAS 12 does not define probable; in practice it is generally read as more likely than not. Same tax authority and same taxable entity are required.

Recoverable amount of DTA

Recognised DTA = lower of full DTA and tax rate × supportable future taxable profit

Reassess at each reporting date and adjust.

Measurement

Use tax rates enacted or substantively enacted at the reporting date; do not discount

Rate changes go to profit or loss unless the item was originally recognised in OCI or equity.

Offset

Offset DTA and DTL only if there is a legally enforceable right to offset current tax and both relate to the same tax authority

The same taxable entity, or entities intending to settle net, is also needed.

Temporary difference

Temporary difference = Carrying amount − Tax base

For assets, a positive result is taxable (DTL). A negative result is deductible (DTA). For liabilities, the signs reverse.

Deferred tax balance

Deferred tax = Temporary difference × tax rate enacted or substantively enacted for the period of reversal

Never discount deferred tax. Use the rate of the jurisdiction where the entity pays tax.

Fair value uplift on acquisition

DTL = (Fair value − Tax base) × tax rate; Dr Goodwill, Cr Deferred tax liability

The DTL increases goodwill. Later releases go to profit or loss as the asset is depreciated.

Goodwill rule

No deferred tax on the initial recognition of goodwill itself

Applies to the taxable temporary difference from goodwill. DTL on fair value adjustments is still recognised.

Unrealised intragroup profit

DTA = Unrealised profit × buyer's tax rate

Dr Deferred tax asset, Cr Consolidated tax expense (or the seller's reserves, as the adjustment follows the profit elimination). Recognise only if recoverable.

Unremitted profits (IAS 12.39)

DTL = Undistributed profit expected to reverse × applicable tax rate on remittance

No DTL if the parent controls the timing and reversal is not probable in the foreseeable future. For associates, the DTL is usually required.

Tax expense

Tax expense = current tax for the year ± under/over-provision for prior year ± movement in deferred tax charged to profit or loss

Deferred tax movement on items taken to OCI or equity is excluded and goes to OCI or equity.

Offset of current tax

Offset only if: legal right to set off AND intention to settle net (or settle both simultaneously)

Both conditions must be met.

Offset of deferred tax

Offset only if: legal right to offset current tax items AND same tax authority (same entity, or different entities settling net or simultaneously)

Different tax authorities means no offset.

Tax rate change

Change in deferred tax = opening temporary difference × (new rate − old rate)

Applies to the opening balance. Effect goes to profit or loss unless the item was originally in OCI or equity.

Rate reconciliation

Accounting profit × applicable rate ± tax effect of reconciling items = tax expense

Reconciling items include non-deductible expenses, non-taxable income, rate changes, prior-year adjustments and unrecognised losses.

Recognition threshold

Probable acceptance by the tax authority → use the tax return treatment

'Probable' means more likely than not. Assume the authority examines with full knowledge.

Most likely amount

Single most likely outcome of the uncertainty

Best when there are two possible outcomes or the outcomes cluster around one value.

Expected value

Σ (probability of each outcome × amount of that outcome)

Best when there is a range of possible outcomes with no single clear one.

Uncertain treatment not probable to be accepted

Measure taxable profit, tax bases, losses, credits and rates using the chosen method

Applies to both current tax and deferred tax. Uncertain amounts normally increase the tax liability or reduce the tax asset.

Reassessment

Update judgements when facts and circumstances change

Treat as a change in estimate under IAS 8, with the effect in profit or loss (or elsewhere where the original tax was recognised).

Quick revision

• Current tax is the amount payable or recoverable on the period's taxable profit, using rates enacted or substantively enacted by the reporting date.
• A temporary difference is the difference between an item's carrying amount and its tax base. Read the direction by item type: asset with carrying amount above tax base is taxable (deferred tax liability); asset with carrying amount below tax base is deductible (deferred tax asset); liability with carrying amount above tax base is deductible (deferred tax asset); liability with carrying amount below tax base is taxable (deferred tax liability).
• For an asset, a carrying amount above the tax base gives a taxable temporary difference and a deferred tax liability.
• For a liability, a carrying amount above the tax base gives a deductible temporary difference and a potential deferred tax asset. A liability with a carrying amount below its tax base gives a taxable temporary difference and a deferred tax liability.
• A deferred tax asset is recognised only to the extent that it is probable that taxable profit will be available to use it.
• Deferred tax is not discounted.
• Deferred tax follows the item: profit or loss, other comprehensive income, or equity.
• Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset current tax and they relate to the same tax authority.
• On acquisition, fair value adjustments create temporary differences, and the deferred tax adjusts goodwill.
• Initial recognition of goodwill does not give rise to deferred tax.
• IFRIC 23 assumes the tax authority will examine the treatment with full knowledge of all relevant information.
• Under IFRIC 23, use the most likely amount or the expected value, whichever better predicts resolution of the uncertainty.

Common mistakes

• Restating the prior-year financial statements for an under or over provision. Fix: Treat it as a change in estimate. Put the difference in the current year's tax expense. Use IAS 8 restatement only for a material error.
• Using accounting profit instead of taxable profit to calculate current tax. Fix: Check for non-taxable income and disallowable expenses. Apply the rate to taxable profit.
• Comparing accounting depreciation with tax depreciation instead of carrying amount with tax base. Fix: Always compare closing balances. Carrying amount minus tax base gives the difference. Do not work from the depreciation charge.
• Getting the direction wrong for liabilities, such as a provision. Fix: For a liability, carrying amount − tax base positive is a deductible difference, giving a deferred tax asset. Tax base − carrying amount positive is a taxable difference, giving a deferred tax liability. Test each item separately.
• Recognising the full DTA on tax losses because the losses are legally available to carry forward. Fix: Legal right is not enough. You need probable future taxable profit. Always test the evidence.
• Ignoring the loss history of the entity. Fix: Recent losses are strong negative evidence. Say that convincing other evidence is needed and discuss the cause of the losses.
• Recognising deferred tax on goodwill itself. Fix: Remember the initial recognition exception for goodwill. Only the DTL on fair value uplifts is recognised.
• Not adjusting goodwill for the DTL on fair value uplifts. Fix: At acquisition the DTL reduces net assets, so goodwill goes up. Later releases go to profit or loss.
• Offsetting deferred tax assets and liabilities just because they are in the same entity. Fix: Always state the two tests: a legal right to set off current tax, and the same tax authority. Without both, show them gross.
• Discounting a long-term deferred tax liability. Fix: IAS 12 prohibits discounting deferred tax. Use the undiscounted amount at the enacted rate.

Exam tips

• Show a short ledger or journal for the tax liability. Markers give credit for clear workings even if one number is wrong.
• When the scenario mentions OCI or equity items, ask where the tax goes. This is a regular trap in written questions.
• Write one sentence naming the rule, such as change in estimate or enacted rate. This supports technical marks and professional skills marks.
• Always check the date of any tax rate change against the reporting date before choosing the rate.
• If the question asks you to advise a director, explain the effect on profit and on the statement of financial position in plain business terms.
• Show a clear table of carrying amount, tax base and difference. Markers award marks for each line, even if one figure is wrong.
• Always state where the movement is recorded: profit or loss, OCI or equity. Many students lose marks here.
• When you recognise a deferred tax asset, add a sentence on whether future taxable profit is probable. This earns professional judgement marks.