Last reviewed: July 2026.
Company Income Tax Accounting under IAS 12: Practical Guide connects the tax return, accounting profit and statement of financial position so current and deferred tax are recognised consistently.
Current tax versus deferred tax
Current tax is based on taxable profit for the current and prior periods and is measured using enacted or substantively enacted tax rates and laws at the reporting date. Deferred tax reflects future tax consequences of recovering assets or settling liabilities at their carrying amounts. The two components are related but distinct. A tax computation may establish current tax payable while the temporary-difference schedule explains deferred tax assets and liabilities.
Start with accounting profit and taxable profit
Accounting profit follows financial-reporting standards, while taxable profit follows tax law. Permanent differences affect the effective tax rate but do not reverse in future periods. Temporary differences arise when the carrying amount of an asset or liability differs from its tax base and normally reverse later. Maintain a reconciliation from accounting profit to taxable profit and a separate balance-sheet analysis of temporary differences.
Understanding tax bases
The tax base of an asset is the amount deductible for tax purposes against future taxable economic benefits. The tax base of a liability is generally its carrying amount less amounts deductible in future periods. Determining tax bases requires knowledge of how the entity expects to recover or settle items. Errors often arise for provisions, leases, revenue received in advance, development costs, revalued assets and assets with different accounting and tax depreciation.
Deferred tax liabilities
A taxable temporary difference generally creates a deferred tax liability because recovering the asset or settling the liability will produce future taxable amounts. For example, if an asset’s carrying amount exceeds its tax base because tax deductions occurred faster than accounting depreciation, future recovery may generate taxable amounts. Apply the specified recognition exceptions carefully and document the expected manner of recovery where it affects the tax rate or tax consequences.
Deferred tax assets
Deductible temporary differences, unused tax losses and unused tax credits may create deferred tax assets, but recognition depends on the probability of future taxable profit against which they can be used. Forecasts should be supportable, consistent with budgets and adjusted for reversing taxable differences and tax-planning opportunities. Do not recognise an asset solely because losses exist. Review recognised and unrecognised amounts at each reporting date and disclose significant judgements.
Measurement and tax rates
Measure current tax at the amount expected to be paid or recovered and deferred tax using enacted or substantively enacted rates expected when the asset is realised or liability settled. Deferred tax is not generally discounted. Changes in tax rates affect existing balances and are recognised in the same broad location as the underlying tax item, subject to the applicable requirements. Maintain evidence for the rate used and the enactment status.
Profit or loss, OCI and equity
Tax consequences should generally follow the recognition location of the underlying transaction. Tax related to ordinary profit or loss is recognised in profit or loss, while tax related to an OCI item or an equity transaction is recognised consistently in OCI or equity. This principle prevents the tax line from obscuring the economics of the underlying event. Use component-level schedules for revaluations, actuarial items, hedges and owner transactions.
Uncertain tax treatments
IFRIC 23 addresses uncertainty over whether a tax authority will accept a treatment. Determine whether uncertain treatments should be considered separately or together and assume the authority will examine amounts it has the right to examine. Measure the uncertainty using the most likely amount or expected value, depending on which method better predicts resolution. Reassess estimates when facts, law, audit activity or authority practice changes.
Worked temporary-difference example
Equipment has a carrying amount of 800,000 and a tax base of 600,000. The taxable temporary difference is 200,000. At a substantively enacted rate of 25%, the deferred tax liability is 50,000, subject to the detailed recognition requirements. If the asset was revalued through OCI, the related deferred tax may also be recognised in OCI. The schedule should show opening balance, new difference, reversals, rate changes and closing balance.
Effective tax-rate reconciliation
Reconcile the reported tax expense to accounting profit multiplied by the applicable tax rate. Explain permanent differences, different jurisdictional rates, unrecognised losses, prior-year adjustments, rate changes and other material items. The reconciliation is both a disclosure and a diagnostic control. Unexpected movements can indicate errors in current tax, deferred tax, entity mapping or classification between profit or loss, OCI and equity.
Controls and close process
Assign ownership for tax computations, temporary-difference schedules and return-to-provision reconciliations. Reconcile tax balances to the general ledger, agree rates to legal evidence, review forecasts supporting deferred tax assets, and obtain specialist input for complex transactions. Track filing status, assessments, payments and uncertainties by jurisdiction. A tax close checklist should connect every financial-statement balance to a calculation, approval and disclosure.
Common errors
Common errors include treating all accounting-tax differences as permanent, using the tax return alone to calculate deferred tax, recognising losses without sufficient future profit, applying an announced but not substantively enacted rate, netting balances that do not qualify for offset, and posting all tax effects to profit or loss. Another error is failing to update tax bases after acquisitions, revaluations, leases or changes in expected recovery.
Related Accounting Guides
- Company Financial Statements: IFRS 18 Structure and Disclosures
- Profit or Loss Disclosures under IFRS 18
- Recognition and Measurement in Financial Statements
Authoritative References
- IAS 12 Income Taxes — Official current-tax and deferred-tax recognition and measurement requirements.
- IFRIC 23 Uncertainty over Income Tax Treatments — Official requirements for uncertain income-tax treatments.