IAS 12 income taxes explained

Every company that pays income tax applies IAS 12, and it is one of the standards students and preparers find hardest. This IAS 12 summary explains the two parts of tax expense, how deferred tax arises, where tax is presented, and how the tax rate reconciliation ties it together.

By Mirza Fahad Baig, Chartered Accountant. Reviewed by Hamza Fida, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

IAS 12 Income Taxes sets out how a company accounts for the tax on its profits. Tax expense has two parts: current tax, the tax payable or recoverable for the period under tax law, and deferred tax, the tax that will become payable or recoverable in future because the carrying amounts of assets and liabilities differ from their tax bases. Tax follows the item it relates to, so it goes to profit or loss, other comprehensive income or equity accordingly.

At a glance

Covers
Taxes based on taxable profit
Tax expense
Current tax plus deferred tax
Deferred tax
On temporary differences
Method
Balance sheet liability method
Rates
Enacted or substantively enacted
Excel
Deferred tax calculator
IAS 12 income taxes explainedCovers: Taxes based on taxable profit; Tax expense: Current tax plus deferred tax; Deferred tax: On temporary differences; Method: Balance sheet liability method; Rates: Enacted or substantively enacted; Excel: Deferred tax calculator.KEY FACTS AT A GLANCEIAS 12 income taxes explainedCoversTaxes based on taxableprofitTax expenseCurrent tax plus deferredtaxDeferred taxOn temporary differencesMethodBalance sheet liabilitymethodRatesEnacted or substantivelyenactedExcelDeferred tax calculatorChecked against official sourcesTax BakersIAS 12 income taxes explainedCovers: Taxes based on taxable profit; Tax expense: Current tax plus deferred tax; Deferred tax: On temporary differences; Method: Balance sheet liability method; Rates: Enacted or substantively enacted; Excel: Deferred tax calculator.KEY FACTS AT A GLANCEIAS 12 income taxes explainedCoversTaxes based on taxable profitTax expenseCurrent tax plus deferred taxDeferred taxOn temporary differencesMethodBalance sheet liability methodRatesEnacted or substantively enactedExcelDeferred tax calculatorChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

What are the two parts of income tax expense under IAS 12?

From accounting profit to tax expenseFrom accounting profit to tax expense1AccountingprofitProfit before taxin the accounts2Apply thetax rulesAdd back and deductper tax law3Current taxTax payable onthis year's profit4Deferred taxTax on timingdifferences
Current tax follows the tax return; deferred tax follows the balance sheet.

Current tax is the tax payable on the year's taxable profit, calculated under tax law. It is a liability to the extent unpaid and an asset if more has been paid than is due. Deferred tax recognises the tax effect of differences between the carrying amounts of assets and liabilities and their tax bases, which will reverse in future periods.

A worked example

A group has profit before tax of 200,000 and a tax rate of 25%. The profit includes a 4,000 fine that is not deductible, 8,000 of exempt dividends, and a 6,000 loss in a subsidiary on which no deferred tax asset is recognised because future profits there are not probable. The profitable companies also claim 2,000 more tax depreciation than accounting depreciation.

CU
Taxable profit of the profitable companies: 200,000 + 6,000 subsidiary loss excluded + 4,000 fine - 8,000 dividends - 2,000 extra tax depreciation200,000
Current tax: 200,000 x 25%50,000
Deferred tax on the 2,000 accelerated depreciation: 2,000 x 25%500
Income tax expense50,500

The effective tax rate is 25.25%. Tax at the statutory rate on accounting profit would be 50,000; the fine adds 1,000, the exempt dividends deduct 2,000 and the unrelieved subsidiary loss adds 1,500, giving 50,500. The accelerated depreciation does not appear in the reconciliation, because deferred tax offsets its effect on current tax. The rate reconciliation sheet in the deferred tax calculator shows each step.

When does deferred tax arise?

When an asset or liability's carrying amount differs from its tax base, the amount attributed to it for tax purposes. Common examples are accelerated tax depreciation, provisions deductible only when paid, revaluations, and tax losses carried forward. Differences that never reverse, such as a non-deductible fine, create no deferred tax; they affect only the effective tax rate. See temporary differences and tax base and deferred tax with examples.

Where is tax presented?

  • Tax on items in profit or loss goes to profit or loss.
  • Tax on items in other comprehensive income, such as a property revaluation, goes to OCI.
  • Tax on items recognised directly in equity goes to equity.

Current and deferred tax assets and liabilities are presented separately from other assets and liabilities, deferred tax always as non-current, and offset only when the company has a legal right and intends to settle net with the same tax authority.

Which tax rate applies?

Rates enacted or substantively enacted by the reporting date, meaning the remaining steps in the legislative process will not change the outcome. Deferred tax uses the rate expected to apply when the difference reverses, and is never discounted.

What must be disclosed?

The major components of tax expense; the tax relating to OCI; a reconciliation between tax expense and accounting profit multiplied by the applicable rate, or between the average effective rate and the applicable rate; the deferred tax balances by type of difference; unrecognised deferred tax assets; and the effect of tax rate changes. Use the Deferred tax calculator (Excel) to build the rate reconciliation.

What is not covered?

Taxes not based on profit, such as sales taxes and VAT, and government grants. Uncertain tax treatments are covered by IFRIC 23, alongside IAS 12; see IFRIC 23. For the global minimum tax, see Pillar Two and IAS 12.

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Questions people ask

What is IAS 12?

The IFRS standard on income taxes, covering current tax and deferred tax and how they are presented and disclosed.

What is the difference between current tax and deferred tax?

Current tax is payable on this year's taxable profit; deferred tax is the future tax effect of differences between carrying amounts and tax bases.

Is deferred tax discounted under IAS 12?

No. Deferred tax assets and liabilities are not discounted.

What is a tax rate reconciliation?

A disclosure explaining the difference between tax expense and accounting profit multiplied by the applicable tax rate.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 12 Income Taxes

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 12Deferred tax liabilities and assets with examplesIAS 12Temporary differences and tax base under IAS 12IFRS vs US GAAPIAS 12 vs ASC 740: income tax differences

More in IAS 12

TopicAll 6 guides in IAS 12

This guide is general information. It is not tax or legal advice for your situation.