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ACCA Applied Skills · Financial Reporting · Taxation

Under IAS 12 Income Taxes, deferred tax is accounted for using the statement of financial position liability method. Which of the following is the basis on which deferred tax is calculated?

Deferred tax under IAS 12 is calculated on temporary differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Permanent differences do not reverse and therefore create no deferred tax.

  1. ATemporary differences between the carrying amount of an asset or liability and its tax baseCorrect
  2. BPermanent differences between accounting profit and taxable profit
  3. CTiming differences between accounting profit and taxable profit that originate in one period
  4. DThe difference between the current tax charge and the tax paid in the year

Explanation

IAS 12 uses the liability method, so deferred tax arises on temporary differences between the carrying amount of assets and liabilities and their tax bases. Permanent differences, such as non-deductible fines, never reverse and give rise to no deferred tax. The income statement (timing difference) approach is the older method, not the one IAS 12 now uses.

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