HKAS 12 - Income Taxes (Condensed)

Objective & Scope

Objective

Prescribe accounting treatment for income taxes, focusing on current and future tax consequences of:

• Recovery/settlement of carrying amounts of assets/liabilities
• Transactions and events recognised in financial statements

Scope

Applies to all domestic and foreign taxes based on taxable profits, including withholding taxes on distributions to the reporting entity. Does not cover government grants (HKAS 20) or investment tax credits, but does address temporary differences arising from them.

Key Definitions

Core Terms

Tax Base

Fundamental Formula

Carrying amount – Tax base = Temporary difference. Multiply by tax rate to get deferred tax liability/asset.

Tax Base of an Asset (¶7)

Amount deductible for tax against economic benefits when recovering carrying amount. Formula: Carrying amount – Future taxable amounts + Future deductible amounts.

Tax Base of a Liability (¶8)

Carrying amount – Future deductible amounts + Future taxable amounts.

Examples

Recognition of Current Tax

Current Tax Liabilities and Assets

• Unpaid current tax for current/prior periods → recognise as liability
• Excess paid over amount due → recognise as asset
• Benefit from tax loss carryback → recognise as asset (probable and reliably measurable)

Recognition of Deferred Tax Liabilities

General Rule (¶15)

Recognise deferred tax liability for all taxable temporary differences, except:

• Initial recognition of goodwill
• Initial recognition of asset/liability in a transaction that is not a business combination, affects neither accounting nor taxable profit, and does not give rise to equal taxable/deductible temporary differences

Examples of Taxable Temporary Differences (¶17-18)

• Interest revenue recognised on time basis but taxed on cash basis
• Accelerated tax depreciation vs. accounting depreciation
• Development costs capitalised for accounting but deducted for tax
• Business combination: assets at fair value, tax base unchanged
• Revaluation of assets without tax adjustment

Recognition of Deferred Tax Assets

General Rule (¶24)

Recognise deferred tax asset for deductible temporary differences to extent probable taxable profit available, except for initial recognition exceptions (similar to liabilities).

Examples (¶26)

• Retirement benefit costs: expense recognised earlier for accounting than tax
• Research costs: expensed for accounting, deducted later for tax
• Business combination: liability at fair value, costs deducted later
• Asset revaluation: tax base exceeds carrying amount

Unused Tax Losses and Credits (¶34-36)

• Recognise deferred tax asset to extent probable future taxable profit available
• History of recent losses → strong evidence against future profit; recognise only if sufficient taxable temporary differences or convincing other evidence

Investments in Subsidiaries, Associates & Joint Arrangements

Taxable Temporary Differences (¶39)

Recognise deferred tax liability unless both:

• Parent/investor can control timing of reversal
• Probable that temporary difference will not reverse in foreseeable future

Deductible Temporary Differences (¶44)

Recognise deferred tax asset only if both:

• Probable temporary difference will reverse in foreseeable future
• Probable taxable profit available for utilisation

Measurement

Tax Rates

• Current tax: use enacted/substantively enacted rates at period-end (¶46)
• Deferred tax: use rates expected to apply when asset realised/liability settled, based on enacted/substantively enacted rates (¶47)

Expected Manner of Recovery (¶51-51E)

Measure deferred tax reflecting tax consequences of expected recovery/settlement (use, sale, or both).

• Non-depreciable asset under revaluation model → presume recovery through sale (¶51B)
• Investment property at fair value → rebuttable presumption of sale (¶51C)

Other Measurement Rules

• No discounting (¶53)
• Review carrying amount of deferred tax asset at each reporting date; reduce if no longer probable (¶56)

Recognition of Current & Deferred Tax

General Principle (¶57)

Recognise tax effects consistently with the transaction or event.

Where to Recognise

• Profit or loss (¶58): Most deferred tax, except when related to items outside profit or loss
• Other comprehensive income (¶61A): Tax relating to items in OCI (e.g., revaluation surplus)
• Equity (¶61A): Tax relating to items directly in equity (e.g., adjustment to retained earnings, equity component of compound instrument)

Business Combinations (¶66-68)

• Recognise deferred tax assets/liabilities as identifiable assets/liabilities at acquisition date
• Affect goodwill or bargain purchase gain
• Post-combination realisation of acquiree's deferred tax assets: reduce goodwill if within measurement period, else recognise in profit or loss

Share-Based Payments (¶68A-68C)

• Deductible temporary difference arises if tax deduction differs from cumulative remuneration expense
• Excess tax deduction over expense → recognise directly in equity

Presentation & Disclosure

Offsetting

• Current tax (¶71): Offset if legally enforceable right to set off and intention to settle net or simultaneously
• Deferred tax (¶74): Offset if legally enforceable right to set off current tax and deferred taxes relate to same taxation authority and same taxable entity (or different entities that intend net settlement)

Tax Expense Presentation (¶77)

Present tax expense (income) related to ordinary activities as part of profit or loss.

Disclosure (¶79-80)

Disclose major components of tax expense (income) separately, including:

• Current tax expense (income)
• Adjustments for prior periods
• Deferred tax expense (income) from origination/reversal of temporary differences
• Deferred tax expense from changes in tax rates or laws
• Benefits of previously unrecognised tax losses/credits