IAS 12 INCOME TAX

FINANCIALO P E R A T I O N S

PAPER: F1 LECTURER : ABIODUN MAMORA

LAGOS

LESSON 5: IAS 12 INCOME TAXES

12/14/2012


INCOME TAXES

IAS 12 covers the general principles of accounting for

tax. Income tax consist of three elements

• Current tax expense

• Over/under provision of tax charged the previous

period

• Deferred tax

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Current tax

This is the estimated amount of tax payable on the

taxable profit of the enterprise for the period.

At the end of every accounting period the entity will

estimate the amount of tax payable in respect of the

period. This estimate is normally recorded as a

period end adjustment by making the following

double entry.

Dr Income tax expense

Cr Income tax liability

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Over and Under Provision

In the following accounting period the income tax will be

paid. At this point, it will normally be discovered that the

estimate was over or under the actual amount paid. Any

over or under provision will then be recorded in this

following accounting period as an adjustment to the income

tax expense in the income statement.

Illustration 1


Summary

When preparing the financial statement income tax

reported will be as follows

• Income statement= current estimate+ under provision-

over provision

•Statement of financial position=current estimate.


Deferred Tax

Deferred tax is the estimated future tax consequences of

transactions and events recognised in the financial

statements of the current and previous periods.

Deferred tax is an accounting measurement and does

not represent the tax payable to the tax authorities.

The key to deferred tax lies in the two quite different

concepts of profit.

• the accounting profit

•the taxable profitMamora Abiodun +234802 415 7105


Temporary differencesTemporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and it’s tax base ( the amount attributed to that asset or liability for tax purposes).

Temporary differences can be• taxable temporary differences or•deductable temporary differences

SummaryThe cumulative provision is shown on the statement of financial position at each year end while the movement is shown as an adjustment to the income tax expense on the income statement

Test your understanding 2

LESSON 6: IAS 17 LEASES

IAS 17 defines a lease as an agreement where by the lessor conveys to the lessee in return for a payment or series of payment the right to use an asset for an agreed period of time. There are two types of lease1.Finance lease2.Operating lease

Indications of a finance lease1.Legal title is transferred to the lessee at the end of the lease2.The lease term is for the majority of the assets useful economic life3.The lessee has the option to purchase the asset for a price substantially bellow the fair value of the asset4.The lessee bears the losses arising from cancelling the lease5.The lessee has the ability to continue the lease for a secondary period at a rate below market rent6.Present value of the lease payment is at least the majority of the fair value of the assets

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Operating lease

Under an operating lease the risks and rewards of

ownership lies with the lessor, not the lessee. Therefore, by

applying substance over form it can be concluded that the

lessee should not record the item being leased as an asset.

Instead lease payments should be recognised as an

expense in the income statement on a systematic basis

(using straight line) over the term of the lease.

Illustration 1

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LESSON 6: IAS 17 LEASESFinance Lease

The accounting treatment for a finance lease can be summarised as follows•Record asset and liability•Record depreciation charge•Allocate finance charge•Record lease payment

Allocation of InterestA finance lease is effectively a form of borrowing money to finance the purchase of an asset. Interest charge will therefore be built into the lease payments. These need to be allocated over the length of the lease on a sensible basis.There are 2 main methods of allocating the finance charge over the lease period:• actuarial method• sum of the digits method

Illustration 2

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AssignmentTest your understanding 4

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LESSON 7: IAS 32 FINANCIAL INSTRUMENTS

Financial instrument is any contract that gives rise to both a financial assets of one entity and a financial liability or equity instrument of another entity.

Financial AssetThis can be• cash•An entity’s instrument of another entity•A contractual right to receive cash or another financial assets from another entityExamples are trade receivables and shares

Financial LiabilityThis is any contractual obligation• to deliver cash or another financial assets to another entity or•To exchange financial instrument with another entityExamples include trade payable, loans or redeemable preference shares

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Issue of shares

The basic double entry to record a share issue is Dr bankCr share capitalCr share premium

Share issue cost are normally charged against share premium as followsDr share premium Cr bankIf the issue cost exceed the balance on the share premium account, they should be charged against retained earnings.

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Bonus issues of shares

A bonus issue is an issue of shares to existing shareholders for free. The

double entry to record a bonus issue is

Dr share premium

Cr share capital

Right issue

A right issue is an issue of share below the full market value to

existing shareholders.

Test your understanding 5

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Redeemable preferencesIAS 32 classify the redeemable preference shares as a liability not an equity instrument.When a company issues redeemable shares, over the period between the issues and redemptions of the shares, there is a finance cost to the company. This consist of two elements• The dividend paid•The difference between eventual cost of redemption and the original amount raised from the share issues( after deducting the issue costs)

Accounting for finance chargesThe finance charges are calculated in a similar way to finance leases• issue cost•dividend due over the issue period•redemption cost The total finance cost is spread over the issue period using the actuarial method

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Purchase and Redemption of shares

When a company has purchased its own equity shares, but has

not canceled them by the reporting date, the shares will be

reclassified as treasury shares and shown as a deduction in

equity.

The double entry is

Dr treasury shares or distributable reserve

Cr bankIllustration 8

Thanks!

Abiodun MamoraAbiodun [email protected]@gmail.com

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Documents

IAS 12 INCOME TAX