IAS 12 Income Taxes implements a so-called ‘comprehensive balance sheet method’ of accounting for income taxes which recognises both the current tax consequences of transactions and events and the future tax consequences of the future recovery or settlement of the carrying amount of an entity’s assets and liabilities.
Differences between the carrying amount and tax base of assets and liabilities, and carried forward tax losses and credits, are recognised, with limited exceptions, as deferred tax liabilities or deferred tax assets, with the latter also being subject to a ‘probable profits’ test.
The objective of IAS 12 is to prescribe the accounting treatment for income taxes.
In meeting this objective, IAS 12 notes the following:
- It is inherent in the recognition of an asset or liability that that asset or liability will be recovered or settled, and this recovery or settlement may give rise to future tax consequences which should be recognised at the same time as the asset or liability
- An entity should account for the tax consequences of transactions and other events in the same way it accounts for the transactions or other events themselves.