Income taxes (IAS 12) - Current tax recognition and presenta...

Learning Outcomes

After reading this article, you will be able to explain how current tax is calculated, recognised, and presented in the financial statements under IAS 12 for the ACCA Financial Reporting (FR) exam. You will understand the distinction between accounting and taxable profit, the journal entries for current tax, and how to present tax balances correctly.

ACCA Financial Reporting (FR) Syllabus

For ACCA Financial Reporting (FR), you are required to understand how to account for current taxation in compliance with IAS 12, including recognition, presentation, and disclosure. You must be confident with:

• Calculating current tax based on taxable profits for the period
• Recording current tax expense and payable in the financial statements
• Dealing with under- and over-provisions from prior years
• Presenting current tax as a separate item in the statement of profit or loss and as a liability (or asset) in the statement of financial position

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which statement best describes how current tax is recognised under IAS 12?
   1. When cash is paid to tax authorities
   2. When the invoice from the tax authority is received
   3. When taxable profits for the year are calculated
   4. When dividends are declared
2. Where should current tax payable be shown in the financial statements at the reporting date?
   1. As revenue
   2. As a current liability
   3. Deducted from cash
   4. Within equity

3. True or false? Under- or over-provisions from the previous year should be adjusted in the current year’s income tax expense.

4. What is the double entry to record the estimate of this year’s income tax charge under IAS 12?

Introduction

For every accounting period, companies must account for tax on their taxable profits. IAS 12 Income Taxes ensures this tax is correctly matched with the period’s results, even if payment is made later. Proper recognition and presentation are essential for accurate and comparable financial statements in line with ACCA requirements.

Key Term: current tax
The amount of income tax payable (or recoverable) on taxable profit (or loss) for a period, calculated using rates and rules enacted at the reporting date.

Current Tax Calculation and Recognition

Current tax is based on taxable profits as determined by the relevant tax laws. This figure may not match accounting profit due to non-deductible or disallowed items. Companies calculate their tax charge using the rates and tax bases in force at the end of the reporting period.

Key Term: taxable profit
Profit for a period, determined in accordance with tax rules, upon which current tax is computed.

Recognition in the Financial Statements

Under IAS 12, a current tax liability (or asset) is recognised for the amount expected to be paid to (or recovered from) the tax authorities in respect of taxable profit (or loss) for the period.

The key journal entry is:

• Dr Income tax expense (profit or loss)
• Cr Income tax payable (statement of financial position: current liability)

If the company has tax recoverable (e.g., a tax refund), the entry is reversed and an asset is recognised.

Key Term: income tax expense
The total tax charge for the period, comprising current and deferred tax, presented as a separate line in the statement of profit or loss.

Presenting Current Tax in the Financial Statements

The tax charge for the period appears as ‘income tax expense’ in the statement of profit or loss, usually just above the profit for the year line. The remaining balance owed (after payments and adjustments) is shown as ‘income tax payable’ in current liabilities on the statement of financial position. If tax has been overpaid, a current tax asset is recognised.

Under- or over-provisions from prior years (differences between estimated and actual tax paid or assessed) are included in the income tax expense of the current year.

Worked Example 1.1

A company estimates its income tax liability for the current year to be $48,000. Last year, the tax liability was estimated at $45,000, but the actual agreed settlement was $43,000. Show the entries for the current year in the income tax expense and payable.

Answer:

• The current year’s estimate of $48,000 will increase the expense and payable.
• There was an over-provision of $2,000 last year ($45,000 estimated less $43,000 actual).
• The income tax expense for the current year: $48,000 (current year estimate) − $2,000 (previous year over-provision) = $46,000.
• Entry: Dr Income tax expense $46,000, Cr Income tax payable $48,000.
• The outstanding $48,000 will appear as a current liability until paid.

Exam Warning

Many candidates mix up accounting profit with taxable profit. Always use the figure calculated per tax rules to determine current tax—never accounting profit alone.

Current Tax: Typical Exam Mistakes and Corrections

1. Forgetting to record the year-end estimate
   You must always recognise the current year’s tax charge, even if not yet assessed or paid.

2. Misclassifying tax balances
   The closing balance is a current liability (income tax payable), unless it is recoverable, when it becomes a current asset.

3. Ignoring prior year adjustments
   Under- or over-provisions must be included in this year’s income tax expense.

Worked Example 1.2

At year-end, Lucas Ltd has a trial balance showing income tax paid during the year of $30,000 and a brought-forward liability of $4,000. The income tax estimate for the year is $36,000. What is the closing income tax payable and current year expense?

Answer:

• Opening liability $4,000 + current year estimate $36,000 = $40,000 owed.
• Less amount paid in year $30,000 = $10,000 payable at year-end.
• The income tax expense for the year is $36,000.

Summary

Current tax under IAS 12 is recognised as an expense in the same reporting period as the related profit, not when actually paid. Any difference between estimated and actual tax paid from prior periods is adjusted through this year's income tax expense. The income tax payable (or receivable) at the reporting date is presented in current liabilities (or assets).

Key Point Checklist

This article has covered the following key knowledge points:

• Calculate and recognise current tax based on taxable profit and enacted tax rates
• Record income tax expense and income tax payable accurately in the ledgers and statements
• Present income tax expense as a separate line in the statement of profit or loss
• Show current tax balances as a current liability or asset in the statement of financial position
• Adjust for under- or over-provisions from previous periods within current year expense

Key Terms and Concepts

• current tax
• taxable profit
• income tax expense