IAS 12 (i): current and deferred tax

A company’s profit in its accounts and its profit in the eyes of the tax authority are rarely the same number. Accounting rules say when income and expenses belong to a period. Tax law says when they are taxed or allowed. A machine may be depreciated over four years in the accounts but written off for tax in two.

If the accounts showed only the tax actually payable each year, profit after tax would swing for reasons that have nothing to do with how the business is doing. International Accounting Standard (IAS) 12, Income Taxes, fixes this. It splits the tax charge into current tax (what is payable on this year’s taxable profit) and deferred tax (the tax effect of timing differences that will reverse later).

This topic covers current tax and its computation, the tax base, the correction of last year’s estimate, deferred tax and the statement of financial position approach, temporary differences, the recognition rules and exceptions, measurement, deferred tax on revaluations, and presentation and disclosure. The next topic covers deferred tax in groups, the amendment on single transactions and the tax reconciliation. International Financial Reporting Standards (IFRS) require the liability method described here.

Key terms in plain English

Syllabus check

IAS 12 is examinable under syllabus area B (reporting of performance and position). This topic covers:

• current tax and deferred tax, and the tax expense;
• temporary differences, tax bases, and the recognition and measurement of deferred tax liabilities and assets;
• deferred tax on revaluations;
• presentation, offset and disclosure.

The Institute of Chartered Accountants of Nigeria (ICAN) says in its own notes that deferred tax assets arising from carried-forward unused tax losses and credits are not assessed at this level, and that deferred tax on items in other comprehensive income is covered only briefly. The group topics and the single-transaction amendment are in the next topic.

CAMA 2020 and income taxes

The Companies and Allied Matters Act 2020 (CAMA 2020) requires statements that follow IFRS and give a true and fair view. It does not set tax rates or tax rules, which sit in tax legislation.

Current tax

From accounting profit to taxable profit

1. Start with accounting profit before tax.
2. Add back accounting expenses that the tax law does not allow (for example accounting depreciation, fines, and some entertainment costs).
3. Deduct income that is exempt or taxed under a different regime, and expenses that tax allows but the accounts did not recognise.
4. Adjust for items taxed or allowed on a cash basis.
5. Deduct tax losses brought forward, where the law allows.
6. Deduct capital allowances, which replace accounting depreciation for tax.
7. Apply the tax rate to the taxable profit.

Nigerian tax law changed on 1 January 2026, when the Nigeria Tax Act 2025 took effect.

Reports on the Act describe a companies income tax rate of 30% for companies that are not small companies, exemption for small companies within turnover and asset limits, a 4% development levy on assessable profits that replaced the Tertiary Education Tax and the information technology, science and engineering infrastructure and Police Trust Fund levies, and capital gains taxed at the income tax rate.

The Federal Inland Revenue Service has been replaced by the Nigeria Revenue Service. ICAN’s examples still show the earlier levies, so the exam may use either regime. Use the rates and rules in the question. Whether a levy counts as an income tax under IAS 12 depends on whether it is based on taxable profit, so follow the question’s treatment.

Measurement

Current tax for the current and prior periods is measured at the amount expected to be paid to, or recovered from, the tax authority, using the rates and laws enacted or substantively enacted by the end of the reporting period. It is a liability until paid. If more has been paid than is due, the excess is an asset.

Under- and over-estimates of the previous year

The tax charge in the accounts is an estimate. When the final figure is agreed, the difference is not a prior-year restatement. It adjusts the current year’s tax charge:

• an under-estimate of last year’s tax is added to this year’s charge;
• an over-estimate is deducted from this year’s charge.

Current tax payable in the statement of financial position

Opening balance + charge for the year (including the prior-year adjustment) − payments in the year = closing current tax payable, shown as a current liability.

Tax base

• The tax base of an asset is the amount that will be deductible for tax against the taxable economic benefits when the carrying amount is recovered. For plant it is usually cost less capital allowances claimed (the tax written down value). If the economic benefits will not be taxable, the tax base equals the carrying amount.
• The tax base of a liability is its carrying amount less any amount that will be deductible for tax in future. If the liability is not deductible at all, the tax base equals the carrying amount. For income received in advance, it is the carrying amount less the amount that will not be taxed in future.
• An item taxed on a cash basis has a tax base of nil as an asset (for example interest receivable), because no deduction or tax arises from recovering it.

Deferred tax: the idea

IAS 12 requires the statement of financial position approach: compare carrying amounts with tax bases at each reporting date. The alternative view looks at the difference in income and expense each year. Both give the same answer over time. The movement in the closing balance is the deferred tax expense or credit.

Taxable and deductible temporary differences

Rule of thumb. Asset carrying amount above tax base, or liability carrying amount below tax base: taxable, so a liability. Asset carrying amount below tax base, or liability carrying amount above tax base: deductible, so an asset. A temporary difference can exist even when there is no asset in the accounts (the research costs).

Why it works

Recovering an asset of ₦1,000 will produce ₦1,000 of taxable benefit but only ₦800 of deduction. The extra ₦200 will be taxed in future. That obligation exists now, so the tax on it is recognised now.

Recognition rules

Deferred tax liabilities

Recognised for all taxable temporary differences, except where the difference arises from:

1. the initial recognition of goodwill in a business combination. Goodwill is usually not recognised for tax, so its tax base is nil. A deferred tax liability would increase goodwill, which would create another difference, and so on; and
2. the initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting profit nor taxable profit at the time. For example, an asset outside the tax system with no capital allowances and no taxable gain on disposal. The exception continues to apply for as long as the asset is held.

If the initial transaction does affect profit, no exception applies. For example, a ₦100,000 loan with ₦5,000 arrangement costs that tax allows at once: the loan receivable is ₦105,000 with a tax base of ₦100,000, and deferred tax of ₦1,500 at 30% is recognised. A later amendment narrows the second exception for leases and decommissioning. It is covered in the next topic.

Deferred tax assets

Recognised for deductible temporary differences only to the extent that it is probable that taxable profit will be available to use them. The same initial-recognition exception applies. The carrying amount of a deferred tax asset is reviewed at each reporting date. It is reduced if recovery is no longer probable and the reduction is reversed if recovery becomes probable again. A deferred tax liability needs no probability test.

Permanent differences

If an item will never be taxable or never be deductible, there is no temporary difference and no deferred tax. Income of ₦100,000 that is never taxed has a tax base equal to its carrying amount.

Measurement of deferred tax

• Use the rate enacted or substantively enacted at the reporting date that is expected to apply when the asset is recovered or the liability settled.
• Do not discount deferred tax assets or liabilities.
• The measurement reflects how the entity expects to recover or settle the carrying amount.

Where the other side of the entry goes

The movement normally goes to profit or loss. It goes to other comprehensive income (OCI) or directly to equity if the item that caused it is recognised there. The main case is a revaluation of property, plant and equipment: the gain goes to the revaluation surplus in other comprehensive income, the tax base does not change, and the deferred tax on the gain is also taken to other comprehensive income.

Deferred tax on fair value adjustments in a business combination affects goodwill (next topic).

Presentation and disclosure

Offset

• Current tax assets and liabilities are offset only if the entity has a legally enforceable right to offset and intends to settle net or to realise the asset and settle the liability at the same time.
• Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset current tax assets and liabilities and they relate to income taxes levied by the same authority on the same taxable entity (or on different entities that intend to settle net or at the same time).
• Deferred tax liabilities are shown in non-current liabilities. Deferred tax assets are shown in non-current assets.

Disclosure

The major components of tax expense are disclosed separately: current tax, adjustments for prior periods, deferred tax from origination and reversal of temporary differences, and from changes in rates or laws, write-downs or reversals of deferred tax assets, and effects of changes in accounting policies and errors. A reconciliation of tax expense and accounting profit is also required (next topic).

The rules in more depth

Why deferred tax smooths the charge

Over the life of an asset, total depreciation equals total capital allowances. Deferred tax moves the tax effect of the timing difference into the same period as the profit it relates to, so tax expense stays in line with profit before tax.

Why a deferred tax asset needs a probability test

A liability is a real obligation to pay in future. A deferred tax asset is a hope of a future saving. It is recognised only if there will be taxable profit to save tax on. A history of recent losses makes this harder to support.

Why use future rates

The balance represents tax that will be paid or saved in future, so it is measured at the rate expected then, if that rate has been enacted or substantively enacted.

Effect on analysis

Large deferred tax liabilities on accelerated allowances mean that tax paid is lower than tax expense now, but will be higher later. Analysts compare cash tax paid with tax expense, and the effective tax rate with the statutory rate.

Worked examples

1. Tax charge for the year.
   ₦120,000 − ₦7,000 = ₦113,000 (this ignores deferred tax).
2. Closing payable.
   ₦80,000 + ₦113,000 − ₦130,000 = ₦63,000, a current liability.

The effective rate is ₦240,000 ÷ ₦800,000 = 30% every year. The journal in 2025 is: Dr tax expense ₦150,000, Cr deferred tax liability ₦150,000.

Note: the ICAN practice solution for a similar question (a plant of ₦1 million, 40% tax rate) is slightly different from ours in presentation. It shows the 2021 current tax as ₦40,000 in one table and ₦60,000 in another, and the 2022 taxable profit as both ₦500,000 and ₦350,000. The correct figures are ₦60,000 and ₦350,000, which give a total charge of ₦160,000 (40% of ₦400,000 profit) in every year.

Use the correct figures in the exam and show your workings so that a slip in the model solution does not cost you marks.

1. 2021: temporary difference = ₦750,000 carrying − ₦500,000 tax base = ₦250,000.
   Deferred tax liability at 40% = ₦100,000.
2. 2022: carrying amount ₦500,000, tax base ₦200,000, difference ₦300,000.
   The difference will reverse after the new rate starts, so use 30%: liability = ₦90,000.
   Movement = ₦90,000 − ₦100,000 = credit of ₦10,000.
3. 2022 current tax is at 40% of ₦350,000 = ₦140,000.
   Total tax expense = ₦140,000 − ₦10,000 = ₦130,000.
4. The rate change is disclosed as a separate component of the deferred tax charge.

1. Before: temporary difference ₦400,000, liability ₦120,000 (already recognised).
2. After.
   temporary difference = ₦1,400,000 − ₦600,000 = ₦800,000, liability ₦240,000.
   Increase = ₦120,000.
3. The revaluation gain of ₦400,000 is in other comprehensive income. The ₦120,000 of deferred tax is also charged to other comprehensive income, so the net surplus is ₦280,000. Dr revaluation surplus (other comprehensive income) ₦120,000; Cr deferred tax liability ₦120,000.

1. Non-current assets: taxable difference ₦60,000.
2. Receivable: taxable difference ₦10,000 (tax base nil).
3. Accrued expense: deductible difference ₦20,000 (tax base nil).
4. Net taxable difference.
   ₦60,000 + ₦10,000 − ₦20,000 = ₦50,000.
   Closing liability = ₦15,000.
5. Movement = ₦15,000 − ₦12,000 = ₦3,000.
   Dr tax expense ₦3,000; Cr deferred tax liability ₦3,000.

Here the deferred tax asset on the accrued expense is set against the liability because both arise in the same entity and with the same tax authority, which allows offset.

How to score full marks

• Make a table: carrying amount, tax base, temporary difference, rate, deferred tax.
• Say whether each difference is taxable or deductible, and whether it gives a liability or an asset.
• Check the exceptions: goodwill, initial recognition, permanent differences.
• For assets, say whether recovery is probable.
• Use the right rate and do not discount.
• Compute the movement as closing less opening, and say where the other side goes (profit or loss, or other comprehensive income).
• Add current tax and deferred tax for the total expense. Include any prior-year adjustment.

Common mistakes in the exam

• Treating all differences between accounting profit and taxable profit as deferred tax, including permanent ones.
• Mixing up taxable and deductible differences, and so the asset and the liability.
• Recognising deferred tax on goodwill at initial recognition.
• Recognising a deferred tax asset without testing for probable future profits.
• Discounting deferred tax.
• Using the old rate after a new rate has been enacted.
• Adjusting last year’s accounts for a prior-year estimate instead of adjusting this year’s charge.
• Taking the deferred tax on a revaluation to profit or loss.
• Offsetting balances without checking the conditions.

Quick revision

• Tax expense = current tax + deferred tax. Current tax uses enacted or substantively enacted rates.
• Under- or over-estimate of last year: adjust this year’s charge.
• Temporary difference = carrying amount − tax base. Taxable gives a liability. Deductible gives an asset.
• No deferred tax on goodwill (initial), on certain initial recognition, or on permanent differences.
• Deferred tax asset only if probable future taxable profit. Reviewed each year.
• Measure at the rate expected on reversal. Do not discount.
• Revaluation: deferred tax goes to other comprehensive income.
• Offset only if legally enforceable and same authority.
• CAMA 2020: ss. 377(1), 378, 374(1), 385, 404(7).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Recall check: multiple choice

The real ICAN paper has no multiple-choice section. These questions are for quick recall. The written questions that follow are closer to the exam.

Written questions

Model answers

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