FRS 12 – Income Taxes

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FRS 12 prescribes the accounting treatment for income taxes.

Current tax refers to the amount of income taxes payable/recoverable in respect of taxable profit/tax loss for the period. Income taxes payable for current and prior periods are recognized as a liability. Income tax recoverable or overpaid is recognized as an asset.

Deferred tax is the differences between the carrying value of the assets and liabilities in the balance sheet and the tax base of assets and liabilities. A deferred tax asset or liability arises if recovery/settlement of asset/liabilities affect the amount of future tax payments.

FRS 12 states that entities should recognize a deferred tax liability in full except in the following situations:-
a) where the initial recognition of an asset/liability in a transaction
i) is not a business combination; and
ii) at the time of the transaction, affects neither accounting profit nor taxable profit

b) deferred tax liability arising from the initial recognition of goodwill, or from goodwill for which amortization is not deductible for tax purposes.

c) deferred taxes on temporary differences arising on investments in subsidiaries, branches, associates and joint ventures if the entity is able to control the timing of the reversal of the difference, and it is probable that the temporary difference will not reverse in the future.

FRS 12 also states that a deferred tax asset is recognized to the extent that it is probable that a tax benefit will be realized in the future. This applies to the unused tax losses and unused tax credits.

Deferred tax is measured at tax rates expected to apply when the deferred tax asset/liability is realized/settled. The tax rates used must be enacted or substantially enacted by the balance sheet date. A deferred tax asset or liability is not discounted.

The tax consequences of transactions and events are recognized in the same financial statement as the transaction or event – that is, current and deferred taxes are:-

a) recognized in equity, if the items to which they relate are credited or charged directly to equity;

b) recognized as identifiable assets or liabilities at the acquisition date, if they arise as part of a business combination in accordance with FRS 103;

c) otherwise, recognized as tax income or expense.

Source – CPA Singapore Wire / ICPAS May 21, 2009

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