ACCA Strategic Professional · Strategic Business Reporting (International)

Income Taxes in SBR: IAS 12 and IFRIC 23 Study Guide

Income taxes in SBR cover IAS 12 and IFRIC 23. Current tax is the tax payable on the period's taxable profit. Deferred tax is the tax effect of temporary differences, found by comparing carrying amount with tax base. You solve questions by building a temporary difference table, applying the enacted tax rate, and explaining the result.

What this chapter covers

This chapter covers how IFRS Accounting Standards account for tax on profit. IAS 12 requires current tax for the tax payable or recoverable on the period's taxable profit. It also requires deferred tax for the future tax effects of differences between the accounting and tax treatment of assets and liabilities. IFRIC 23 adds rules for cases where it is uncertain whether the tax authority will accept a treatment.

The core method is the balance sheet approach. For each asset and liability you compare the carrying amount with its tax base. The difference is a temporary difference. You then apply the tax rate enacted or substantively enacted at the reporting date. Taxable temporary differences give deferred tax liabilities. Deductible temporary differences and unused tax losses give deferred tax assets, but only if recognition conditions are met.

Tax links to almost every other SBR area. Revaluations, leases, financial instruments, share-based payments, pensions and provisions all create temporary differences. In group accounts, fair value adjustments on acquisition and unremitted subsidiary profits bring further deferred tax. In the exam, tax can appear as one part of a larger scenario, including the group question, so you need to apply it quickly and explain it clearly.

Deferred tax is a regular feature of SBR scenarios because it attaches to so many other topics, so weak tax knowledge costs marks across several questions, not just one. Examiners reward the numbers, but they also reward you for explaining why a deferred tax asset can or cannot be recognised and how a tax position should be reflected. These are judgement points where well-structured answers earn marks. The mechanics are learnable and repeatable, which makes this a chapter where focused effort gives a reliable return.

Income taxes: topics in the order to study them

1Current Tax under IAS 12Start here: it is the simplest part, and you need the current tax charge and the tax base idea before deferred tax makes sense.
2Deferred Tax and Temporary DifferencesThis is the core method, so learn it next and practise the carrying amount versus tax base table until it is automatic.
3Deferred Tax Assets and Unused Tax LossesIt builds on the core method and adds the judgement on whether future taxable profit will be available.
4Deferred Tax in Group Accounts and Business CombinationsIt applies the core method to consolidation, so study it only after you are comfortable with single-entity deferred tax.
5Presentation and Disclosure of Income TaxesOnce you can calculate balances, learn where they go, when they are offset and what must be disclosed.
6IFRIC 23 Uncertainty over Income Tax TreatmentsIt is a short, self-contained interpretation that sits on top of the rest, so finish with it and link it to current and deferred tax.

How to prepare Income taxes

Treat this chapter as one method applied in different settings. Build the method first, then add the complications.

Learn the definitions of tax base, taxable temporary difference and deductible temporary difference in your own words, then test them on simple assets such as depreciated equipment.
Draw a standard working layout: item, carrying amount, tax base, temporary difference, deferred tax at the enacted rate. Use it for every question so you never miss an item.
Practise the double entry: decide whether the deferred tax movement goes to profit or loss, other comprehensive income or equity, based on where the related item was recognised.
Work through loss and asset-recognition questions, and write one or two sentences on the evidence for future taxable profit each time.
Do group questions: fair value adjustments, goodwill, and unremitted profits of subsidiaries. Check how each affects deferred tax and goodwill.
Write short explanations for IFRIC 23: the assumption that the authority examines the position, and the choice between the most likely amount and the expected value.
Finish with full past-style scenarios, and include a short explanation for each tax number so you score both technical and professional skills marks.

Common mistakes in Income taxes

Using the current tax rate instead of the rate enacted or substantively enacted by the reporting date that is expected to apply when the difference reverses.
Fix: Read the scenario for rate changes. Apply the rate enacted or substantively enacted by the reporting date that is expected to apply when the difference reverses.
Recognising a deferred tax asset on losses with no explanation of future profits.
Fix: State the test: probable future taxable profit. Say what evidence supports it, such as existing taxable temporary differences or a history of profits.
Posting all deferred tax movements to profit or loss.
Fix: Ask where the related item was recognised. Revaluation gains go through other comprehensive income, so their deferred tax does too.
Forgetting deferred tax on group consolidation adjustments.
Fix: List every fair value adjustment, calculate the deferred tax on it, and include it in net assets acquired so goodwill is correct.
Giving numbers with no explanation.
Fix: Add a sentence on the principle and the effect on the financial statements. SBR rewards reasoning and professional skills as well as figures.
Treating IFRIC 23 as a new measurement model that replaces IAS 12.
Fix: Remember it clarifies how to apply IAS 12 recognition and measurement when treatments are uncertain, and it affects both current and deferred tax.

Last-day revision: Income taxes

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.

Income taxes practice questions

Income taxes in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Income taxes: frequently asked questions

What is the difference between current tax and deferred tax?

Current tax is the tax payable or recoverable on the taxable profit of the period. Deferred tax is the tax effect of temporary differences between carrying amounts and tax bases, which will affect tax in future periods.

Which topic should I study first in income taxes?

Start with current tax, then learn the temporary difference method for deferred tax. Everything else, including losses, groups and IFRIC 23, builds on those two.

How is income tax examined in SBR?

It can appear inside a larger scenario, for example alongside group accounting or another reporting issue. You may need to calculate balances, give the accounting entries and explain the treatment in the context of the scenario.

Do I need to know tax law to answer these questions?

Questions normally give you the tax rates and the tax base information you need. You do not need knowledge of any particular country's tax law beyond that. SBR tests how IFRS Accounting Standards treat tax.