1. What IAS 12 is doing
IAS 12 deals with income taxes, with the 2027 IAC syllabus specifically stating that the focus is on deferred tax as a pervasive topic.
carrying amount
difference
presentation
The IAC Principles of Examination describes IAS 12 as a Level 3 pervasive topic and says the deferred-tax treatment of assets and liabilities follows the same basis as the underlying asset or liability.
2. 2027 IAC scope
| Area | 2027 IAC treatment |
|---|---|
| IAS 12 | Level 3 |
| Focus | Deferred tax as a pervasive topic; follows the recognition, measurement, presentation and disclosure pathway. |
| Underlying assets and liabilities | Deferred-tax treatment follows the same basis as the underlying asset or liability. |
| Tax knowledge | Where the tax treatment is included in the tax syllabus, candidates are expected to apply their tax knowledge. Where tax treatment is excluded from the tax syllabus, candidates are required to ignore tax. |
| Specific exclusion | Paragraphs 38–45 relating to group temporary differences are excluded from the IFRS Accounting Standards syllabus. |
3. Tax base – the foundation
The tax base of an asset or liability is central to the temporary-difference approach.
Tax base of an asset
The tax base of an asset is the amount that will be deductible for tax purposes against taxable economic benefits that will flow to the entity when it recovers the carrying amount of the asset.
Tax base of a liability
The tax base of a liability is its carrying amount less any amounts that will be deductible for tax purposes in future periods.
Quick test
4. Temporary differences
A temporary difference is the difference between the carrying amount of an asset or liability in the statement of financial position and its tax base.
| Pattern | Typical consequence | Memory aid |
|---|---|---|
| Asset: CA > TB | Generally a taxable temporary difference → DTL, subject to recognition exceptions. | More economic benefit on books than tax relief. |
| Asset: CA < TB | Generally a deductible temporary difference → DTA, subject to recognition conditions. | More tax deduction remains than accounting carrying amount. |
| Liability: CA > TB | Generally a deductible temporary difference → DTA, subject to recognition conditions. | Future deduction on settlement. |
| Liability: CA < TB | Generally a taxable temporary difference → DTL, subject to recognition exceptions. | Future taxable amount on settlement. |
Do not confuse:
Difference between carrying amount and tax base that reverses in future.
A difference that does not reverse through future taxable/deductible amounts; it does not create deferred tax merely because accounting and tax treatment differ.
5. Recognition of deferred tax
Deferred tax liability
In principle, recognise a DTL for taxable temporary differences, subject to IAS 12's recognition exceptions.
Deferred tax asset
In principle, recognise a DTA for deductible temporary differences, unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible amounts can be utilised, subject to the Standard's requirements and exceptions.
Initial recognition and other exceptions
IAS 12 contains specific recognition exceptions and rules for particular transactions. Do not apply the simple “CA vs TB” matrix mechanically without checking whether a recognition exception applies.
6. Measurement
Deferred tax assets and liabilities are measured using tax rates expected to apply when the asset is realised or the liability is settled, based on tax rates/laws that have been enacted or substantively enacted by the reporting date.
Key measurement points
- Use the tax rate expected on reversal.
- Consider how the entity expects to recover an asset where the tax consequences differ depending on recovery method.
- Do not discount deferred tax assets or liabilities.
- Reassess deferred tax assets at each reporting date.
Example
An asset has a carrying amount of R1,000,000 and a tax base of R700,000. The taxable temporary difference is R300,000. If the applicable tax rate on reversal is 27%, the gross DTL is:
The entry and presentation depend on the underlying transaction and where the related accounting item was recognised.
7. Follow the underlying transaction
This is one of the most important IAC principles: deferred tax follows the accounting treatment of the underlying item.
| Underlying accounting item | Deferred-tax presentation logic |
|---|---|
| Item recognised in profit or loss | Deferred tax generally recognised in profit or loss. |
| Item recognised in OCI | Related deferred tax generally follows to OCI, subject to IAS 12 requirements. |
| Item recognised directly in equity | Related deferred tax generally follows the underlying recognition. |
| Business combination | Deferred tax arising from temporary differences recognised in a business combination can affect goodwill or the gain from a bargain purchase, subject to IFRS 3 and IAS 12. |
Tax rate changes
When tax rates change, deferred tax balances are remeasured using the tax rate expected to apply on reversal. The resulting change follows the relevant recognition rules.
8. High-value integration areas
PPE / depreciation
Compare the accounting carrying amount of PPE with its tax base. Differences can arise because accounting depreciation and tax allowances occur at different rates or times.
Fair value adjustments
If an asset or liability is remeasured for accounting but tax remains based on another amount, compare the resulting carrying amount with the tax base.
Leases
Compare the carrying amounts of the right-of-use asset and lease liability with their respective tax bases. Do not assume they automatically create no deferred tax merely because the amounts originated from the same lease.
Provisions
An accounting provision may not be tax deductible until a later event. This commonly creates a deductible temporary difference and potentially a DTA, subject to recognition requirements.
Intangible assets
Accounting recognition and tax deductions may occur at different times, creating temporary differences.
Business combinations
Fair-value adjustments to identifiable assets and liabilities can create temporary differences and therefore deferred tax, which can affect goodwill.
9. Presentation and disclosure
Statement of financial position
IAS 12 contains rules governing the presentation of deferred tax assets and liabilities, including offsetting requirements. Do not assume that every DTA and DTL can simply be netted.
Profit or loss / OCI
Tax expense or income is allocated consistently with the underlying transaction, except where IAS 12 requires otherwise.
Disclosure
IAS 12 includes disclosure requirements around major components of tax expense/income, relationships between tax expense and accounting profit, tax-related temporary differences and other relevant information.
10. IAC exam approach
Step 1 – Identify the accounting item
Start with the relevant IFRS: PPE, leases, provisions, revenue, financial instruments, business combinations, fair value, etc.
Step 2 – Determine the carrying amount
Use the accounting treatment at the reporting date.
Step 3 – Determine the tax base
Ask what future taxable or deductible amount will arise when the item is recovered or settled.
Step 4 – Calculate the temporary difference
Step 5 – Classify
→ usually DTL
→ potentially DTA
Step 6 – Check recognition exceptions
Do not recognise automatically. Consider IAS 12's specific recognition rules.
Step 7 – Apply the tax rate
Use the rate expected on reversal, based on enacted/substantively enacted tax law.
Step 8 – Follow the underlying transaction
Determine whether the deferred tax belongs in profit or loss, OCI, equity or another accounting location.
Step 9 – Check presentation and disclosure
Complete the IAS 12 analysis rather than stopping after calculating a DTA/DTL.
11. Common exam traps
| Trap | Correct thinking |
|---|---|
| “Accounting profit × tax rate = deferred tax.” | Deferred tax is based on temporary differences, not simply accounting profit. |
| “Any accounting/tax difference creates deferred tax.” | Permanent differences do not create deferred tax merely because accounting and tax treatment differ. |
| “Tax base = tax value on the tax return.” | Work from the IAS 12 definition and the future tax consequences of recovery/settlement. |
| “Every taxable temporary difference automatically means DTL.” | Check IAS 12 recognition exceptions. |
| “Every deductible temporary difference automatically means DTA.” | Consider the probability/recoverability requirement and other recognition rules. |
| “DTA and DTL are always netted.” | Offsetting is subject to IAS 12's specific conditions. |
| “Deferred tax always goes through profit or loss.” | Follow the underlying transaction; OCI/equity presentation can be relevant. |
| “Use today's tax rate automatically.” | Use the rate expected on reversal based on enacted/substantively enacted tax law. |
| “Lease ROU asset and lease liability can be ignored for tax.” | Determine the tax base of each balance and assess the resulting temporary differences. |
| “Study IAS 12 separately from other IFRS.” | IAS 12 is pervasive: integrate it with the underlying asset, liability or transaction. |
12. Study checklist
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13. One-page brain dump
2027 IAC: IAS 12 Level 3; focus on deferred tax.
Core formula: carrying amount vs tax base.
Temporary difference: CA − TB.
Asset CA > TB: generally taxable temporary difference → DTL.
Asset CA < TB: generally deductible temporary difference → DTA.
Liability CA > TB: generally deductible temporary difference → DTA.
Liability CA < TB: generally taxable temporary difference → DTL.
DTL: generally recognise for taxable temporary differences, subject to exceptions.
DTA: recognise for deductible temporary differences to the extent recognition requirements are met.
Tax rate: expected on reversal, based on enacted/substantively enacted rates.
No discounting: deferred tax assets/liabilities are not discounted.
Follow the transaction: P/L → P/L; OCI → OCI; equity → equity, subject to IAS 12.
Tax base: focus on future tax consequences of recovery/settlement.
Integration: IAS 12 follows the underlying IFRS accounting.
Excluded from IAC: paragraphs 38–45 relating to group temporary differences.
Exam sequence: accounting item → CA → tax treatment → TB → temporary difference → recognition → rate → presentation → disclosure.