Lecture on IS-12 Income Taxes

Introduction

• Two certainties in life: Death and Taxes
• There is an accounting standard for taxes: IS-12

Key Areas of IS-12

1. Current Tax
   • Tax payable to revenue and customs
   • Recognizing tax expense in financial statements
   • Tax payable appears in current liabilities on the financial position statement
2. Deferred Tax
   • Complex accounting area, purely an accounting entry
   • No impact on actual tax balance owed
   • Adjustments made for the matching concept

Financial Statements

• Statement of Financial Position
  • Tax payable in current liabilities
  • Deferred tax in non-current liabilities
• Statement of Profit or Loss
  • Operating costs down to profit before tax
  • Income tax expense composed of current and deferred tax expenses

Exam Tips

• Calculating tax payable is straightforward
• Year-end estimates for tax payable come from tax computations

Current Tax Accounting

• Tax payable is the year-end estimate
• Expensed through profit or loss
• Adjustments needed for any under/over provision from previous year
• Changes applied prospectively, not retrospectively

Example Problem

• Prepare extracts from financial statements for a given date
• Use trial balance with debit and credit columns
• Provision at year-end ($3.5 million)
  • Recognized as year-end estimate on SFP
  • Expense adjusted for under/over provision

T Account for Tax

• Draw up a T account to manage tax entries
• Insert brought forward figure on correct side
• Follow normal accounting treatments
• Income tax expense recorded from T account balancing figure

Understanding Under/Over Provision

• Over-provision: excess provision from last year offsets current profits
• Under-provision: added to estimated tax expense

Conclusion

• Focus on easy marks for tax payable
• Use T accounts to ensure accuracy in exam situations