Introduction to Current and Deferred Tax under IAS 12

Throughout your working career and in your studies, you may have noticed instances where the tax treatment and the accounting treatment of an item vary.

This can occur with things like interest and non-current assets.

For example, the capital allowances of a building may differ to the depreciable amount, so the amount the Revenue/HMRC consider as expenditure on a building may be different to what the entity’s accounts say.

For the purpose of financial reporting, IAS 12 Income taxes deals with accounting for tax on the profits of entities.

Every country has its own specific tax rules regarding taxing corporate profits, but IAS 12 brings consistency to the recognition, measurement, presentation and disclosure of these taxes.

It deals with both current tax and deferred tax.

Current Tax

The current tax is the tax payable on profits for the year.

A company’s profits are subject to corporation tax.

From the accruals concept, the tax expense and current tax liability are recognised in the period they arise, not necessarily when the tax itself is paid.

So although the corporation tax may not get paid until next year, it should be recognised in the financial statements this year.

Corporation tax, or income tax as it’s known in IAS 12, is normally expensed in the P&L.

However, if the tax relates to a gain or loss recorded in OCI and equity, then the tax payable or receivable should also be recorded in OCI and equity.

The corporation tax payable will be estimated by the management.

Once the company files its tax returns the Revenue Commissioners or HMRC will confirm the amount payable, this happens after the reporting period.

Also keep in mind; hardly any company pays its tax bill before the end of the reporting period.

So you should have a tax liability in the statement of financial position.

The journal entry for this is:

DR Corporation Tax Expense (I/S) XX

CR Current tax liability (if not paid) (SOFP) XX

Under/Over Provision of Tax

Sometimes the amount estimated for income tax in the last period differs to the amount actually collected this period.

When this happens the provision is adjusted in the current period, there’s no need to adjust last year’s figures, as it’s a change in accounting estimate, not an error.

Just remember, the under-provision or over provision is dealt with in the profit and loss in the current accounting period, no adjustments needed to the period it actually relates to.

Example: Under/Over Provision of Tax

Let’s look at an example of how this works:

  • Dingle Limited made a provision of €230,000 for corporation tax on profits for the year ended 31 December 20X3.
  • In February 20X4 the corporation tax liability was finalised at €240,000 and paid in March 20X4.
  • The corporation tax payable in the year to 31 December 20X4 is estimated at €260,000.
Corporation Tax
31/12/X3 Balance c/f 230,000 31/12/X3 SOCI (Tax expense estimate) 230,000
1/1/X4 Balance b/f 230,000
1/3/X4 Cash (payment) 240,000 1/2/X4 SOCI (Underestimate) 10,000
31/12/X4 Balance c/f 260,000 31/12/X4 SOCI (Tax expense estimate) 260,000
  500,000     500,000


The statement of comprehensive income for the financial year 20X4 will contain a Corporation Tax expense of €270,000 which is the CT estimate of €260,000 in the current financial period, and also the €10,000 CT underestimate from last year.

Remember, any under or over estimates of CT are taken in the financial statements in the period they are paid, no adjustment is needed for the period they relate to.

In the statement of financial position, you’ll notice last years CT was paid in March, so only the CT for this year is payable.

In the SOFP for 31 December 20X4, Corporation Tax payable will be recorded as a current liability of €260,000.

Tax Losses (Deferred Tax Assets)

You’ll know not all companies make profits each year.

Sometimes, for various reasons, a company will lose money in the financial period.

The company may be allowed to carry forward losses to reduce its tax bill in the future.

So say if it loses €100,000 this year and has a profit of €150,000 next year, it may be able to reduce the taxable profit to €50,000 next year.

This all depends on the relevant tax laws, which we won’t look at here.

If this happens, and the company can carry forward losses to use against profits in a future year, there’s a tax asset.

It is probable that future benefits (a reduction in future tax bills) will flow to the entity, and the amount can be reliably measured.

This meets the IASB’s definition of an asset, and it is recognised in the period when the tax loss occurs.

The calculation of a tax loss asset is:

Unused tax losses X Tax Rates = Deferred tax asset