IAS-12

IAS 12

Accounting for Income Tax

Introduction

International Accounting Standards has continued to receive various criticisms with respect of applicability and usefulness of numbers in accounting for corporate income taxes. The argument of this essay is to present the standards that has been set in IAS 12 are too difficult to apply due to complexity in understanding. This paper will be discussing the statement “IAS12 is too difficult to apply and understand” taking into the account ASB discussion paper “Improving the Financial Reporting of Income Tax”, which was published in December 2011 (Grant Thornton UK, 2012, p. n.d).

Discussion

Requirements of IAS12

Accounting for income taxes according to IAS-12 “Income Taxes”

In most instances, the accounting profit differs from the tax, as each of them is determined in accordance with their own rules and regulations (for example, for tax purposes, the rules and regulations of the Tax Code, while for accounting - accounting regulations (especially the Federal Law of 21.11.96, the N 129-FZ "On Accounting"). Often income tax can be levied as a debt or advance, and then setting off. During this process the time differences between when the expense is recognized in reporting, and the time of payment of the tax on this income, which implies that the formation of tax liability (or asset, respectively) (EC staff, 2012, p. 5).

IAS 12 “Income Taxes” are rules that allow the results of any taxation in the preparation of financial statements according to the different tax rules.

The scope and application procedure of IAS 12

In paragraph 2 of IAS 12 states that the standard applied in accounting for income taxes, including:

All profit are taxed either domestic and foreign profit;

Taxes withheld at source, like taxes paid via associate or subsidiary organization, the organization invested with the profit to be distributed for the benefit of the reporting entity.

Under paragraph 4 of IAS 12 in the standard is considered the treatment of temporary difference that results from the provision of such grants or investment tax credits, which change the time of payment of taxes. With this method, government grants accounting is done under IAS 20 i.e. accounting for Government Grants and Disclosure of Government Assistance (Kraal, 2012, p. 5),.

The reflection of the tax base for income tax in accordance with IAS 12

According to paragraph 7 of IAS 12 that focuses on asset tax base that is for tax purpose the amount is subtracted. Beside this, any amount that is offering an economic benefits is taxable i.e. company will receive compensation for asset book value. In the event of economic benefits, this would not be taxable and the reason for this is that asset book value will be equal to tax base.

Example 1:

A registered Organization encompass machine with a book value of 200 000 pound. For tax purposes, depreciation on this machine is £20 000. This is the amount of revenue to be derived from the use of the machine in the future, subject to taxation in the general procedure. If the machine will be implemented on the side, then any income from the sale ...