Strategic Business Reporting (International) · Income taxes

IAS 12 Presentation and Disclosure of Income Taxes

Updated 11 October 2026 · Fact-checked

IAS 12 presentation and disclosure covers how tax balances are shown and explained. Offset current tax only with a legal right and intent to net settle. Offset deferred tax only with that right and the same tax authority. Never discount deferred tax. Remeasure it when rates change, and reconcile tax expense to accounting profit.

Understand Presentation and Disclosure of Income Taxes

Once you have measured current and deferred tax, IAS 12 tells you how to show it and what to explain. Exam questions in SBR often give you the numbers and ask you to present them, or to explain a change in the tax charge.

Start with the tax expense. It is the total of current tax and deferred tax for the period, less or plus any adjustment to prior-year current tax. Most of it goes to profit or loss. Tax on items recognised in other comprehensive income (OCI) or directly in equity is recognised in OCI or equity too. A revaluation gain on property is a common example. The deferred tax on it goes to OCI, not profit or loss.

Offsetting stops you from showing gross assets and liabilities that in substance cancel out. You can offset current tax assets and liabilities only if the entity has a legally enforceable right to set them off and intends to settle net or settle both at the same time. You can offset deferred tax assets and liabilities only if there is a legally enforceable right to offset current tax items, and both relate to income taxes levied by the same tax authority. They must relate to the same taxable entity, or to different entities that intend to settle net or at the same time. In a group, the offset is usually tested entity by entity or by tax group.

Deferred tax must not be discounted. This is because reliable discounting needs detailed scheduling of when each temporary difference reverses, which is often impractical. The result is that deferred tax is shown at its undiscounted amount, even for a long-dated reversal.

Deferred tax is measured at the tax rates expected to apply when the asset is realised or the liability settled, based on rates enacted or substantively enacted at the reporting date. If a rate changes, you remeasure the opening balance. The effect goes to profit or loss, unless the original item was recognised in OCI or equity. In that case the effect goes there too. The tax rate reconciliation explains why the tax expense differs from accounting profit multiplied by the applicable rate. It can be done in money amounts or in percentages.

Key rules to remember

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.

How to solve Presentation and Disclosure of Income Taxes questions

Use this method for any question on presenting or disclosing income taxes.

1Read the requirement. Decide whether it asks for a presentation (statement of financial position, profit or loss, OCI), a calculation, a reconciliation or an explanation.
2List the components of tax expense: current tax, prior-year adjustment and deferred tax movement. Split anything that belongs in OCI or equity.
3Check for a rate change. Confirm the new rate is enacted or substantively enacted at the reporting date. Remeasure the opening deferred tax and put the effect in the right place.
4Test offsetting. Check the legal right, the intention to settle net and the same tax authority. Apply the tests to each tax type separately.
5Do not discount. If the question gives a discount rate or reversal dates, ignore them for deferred tax.
6For a reconciliation, start with accounting profit × the applicable rate. Add or deduct the tax effect of each reconciling item and agree the total to the tax expense.
7Write one line of explanation for each figure, linked to the scenario. Examiners reward application.

Quickest way: Fast check for presentation questions

When to use it: Use this when you have little time and the question gives figures and asks how to present or explain them.

Total the tax expense first: current + prior-year adjustment + deferred movement.
Strip out any OCI or equity items and place them in their own statement.
Tick or cross the three offsetting tests: legal right, net settlement intention, same authority.
For a reconciliation, multiply each reconciling item by the rate and add up. Check it equals the tax expense.
Add a short sentence of reasoning to every line.

Common mistakes in Presentation and Disclosure of Income Taxes

Offsetting deferred tax assets and liabilities just because they are in the same entity.
Students remember that offsetting is allowed and skip the conditions.
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.
It feels consistent with discounting provisions and other long-term liabilities.
Fix: IAS 12 prohibits discounting deferred tax. Use the undiscounted amount at the enacted rate.
Putting the whole effect of a rate change in profit or loss.
Students treat the change as always a profit or loss item.
Fix: Trace the original deferred tax. If it went to OCI or equity, the remeasurement effect goes there too.
Applying a rate that has only been announced.
News of a future rate is treated as final.
Fix: Use rates enacted or substantively enacted by the reporting date. Announced proposals not yet at that stage are ignored.
Building a rate reconciliation that does not agree to the tax expense.
Reconciling items are multiplied by the wrong rate, or a prior-year adjustment is forgotten.
Fix: Tax-effect each item. Add the prior-year adjustment and any rate change effect. Then check the total to the tax expense.

Worked examples

Example 1

At 31 March 20X5, Zeta has a deferred tax liability of $240,000 on accelerated depreciation. This is 20% of a temporary difference of $1,200,000, all in profit or loss. During the year a new rate of 25% for future years is enacted. The year-end temporary difference is $1,500,000. Calculate the deferred tax liability at year end, and the charge to profit or loss.

Show the solution

Remeasure the opening balance at the new rate: $1,200,000 × 25% = $300,000.
Rate change effect = $300,000 − $240,000 = $60,000, a charge to profit or loss, because the original item went there.
Closing liability = $1,500,000 × 25% = $375,000.
Total movement = $375,000 − $240,000 = $135,000.
The movement from the temporary difference growing is $135,000 − $60,000 = $75,000, which equals ($1,500,000 − $1,200,000) × 25%. This checks.

Answer: The closing deferred tax liability is $375,000. The deferred tax charge to profit or loss is $135,000, of which $60,000 is due to the rate change and $75,000 is due to the increase in the temporary difference.

Example 2

Kappa has accounting profit before tax of $800,000 and an applicable tax rate of 30%. Its tax expense is $240,000. It has non-deductible expenses of $50,000. It has an over-provision of current tax from the prior year of $15,000. Prepare a tax rate reconciliation in money amounts and show that it agrees to the tax expense.

Show the solution

Accounting profit × rate = $800,000 × 30% = $240,000.
Non-deductible expenses: $50,000 × 30% = $15,000 increase.
Over-provision from the prior year reduces the expense by $15,000.
Total = $240,000 + $15,000 − $15,000 = $240,000.
The tax expense is $240,000, so the total agrees to it and no difference is left unexplained.
Check the effective rate: $240,000 ÷ $800,000 = 30%, equal to the applicable rate, because the two reconciling items cancel out.

Answer: The reconciliation balances. Tax at the applicable rate of $240,000, plus $15,000 for non-deductible expenses, less $15,000 for the prior-year over-provision, equals the tax expense of $240,000. Every reconciling item is identified, and the effective rate is 30%.

Exam tips

Name the conditions every time you discuss offsetting. Marks go for legal right, net settlement intention and same tax authority.
When a rate changes, show the remeasurement as a separate line and say where it goes and why.
Keep deferred tax undiscounted even if the question tempts you with a discount rate.
Link every disclosure point to the scenario. Say what the reconciliation tells a user about the group's effective tax rate.
Use the professional skills marks. Give a short, clear explanation that a finance director could follow.

Practice questions from Income taxes

Presentation and Disclosure of 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.

Presentation and Disclosure of Income Taxes: frequently asked questions

When can deferred tax assets and liabilities be offset under IAS 12?

Only when the entity has a legally enforceable right to set off current tax assets against current tax liabilities. The balances must also relate to income taxes levied by the same tax authority. They must be for the same taxable entity, or for different entities that intend to settle net or at the same time.

Why is deferred tax not discounted?

IAS 12 prohibits it because reliable discounting needs detailed scheduling of when each temporary difference reverses. That is often impractical or highly subjective. A ban also keeps entities comparable.

How do I account for a change in tax rate?

Remeasure the opening deferred tax using the new enacted or substantively enacted rate. Put the difference in profit or loss, unless the original deferred tax was recognised in OCI or equity. In that case recognise the effect there.

What is the tax rate reconciliation for?

It explains the relationship between the tax expense and accounting profit. You can present it as amounts or as a percentage reconciliation of the applicable rate to the effective rate. It helps users judge whether the tax charge is sustainable.