Introduction to IAS 12
IAS 12 deals with income taxes, focusing on the accounting treatment of current and future tax consequences of transactions. It ensures financial statements reflect the tax obligations accurately, aligning with the accrual accounting principle.
Deferred Tax Liabilities
Deferred tax liabilities arise when taxable income is greater than accounting income due to temporary differences. These liabilities reflect future tax payments that result from current transactions but are payable in future periods.
Deferred Tax Assets
Deferred tax assets occur when accounting income exceeds taxable income due to temporary differences. They represent future tax benefits, like unused tax credits or losses carried forward, reducing future tax payments.
Temporary Differences Explained
Temporary differences are discrepancies between the tax base of an asset or liability and its carrying amount in the financial statements, leading to future taxable or deductible amounts when the asset is recovered or liability settled.
Impact on Financial Ratios
Deferred taxes can influence key financial ratios like the debt-to-equity ratio. Recognizing deferred tax assets or liabilities impacts reported earnings and equity, affecting the perception of a company's financial health and stability.Hidden Tax Haven
Surprisingly, some companies use deferred tax assets to smooth earnings, making financial results appear more stable and predictable over time.
What does IAS 12 focus on?
Financial statement analysis
Accounting treatment of current and future taxes
Cash flow management
Company
