IAS 12 Income Taxes: Current Tax, Tax Computation and Temporary Differences

A company’s accounting profit and the profit on which it pays tax are usually different numbers. Depreciation is not deductible for tax, capital allowances are; some fines are never deductible; some income is taxed when received and not when earned. International Accounting Standard (IAS) 12 Income Taxes deals with the tax effects of these differences.

This topic covers the two things that make up the tax charge in the statements: current tax, which is what the company owes on its taxable profit, and the temporary differences that will give rise to deferred tax. It covers the tax computation, over and under provisions, the components of tax expense, the tax base of assets and liabilities, and how to tell temporary differences from permanent ones. The next topic covers deferred tax itself.

The topic is examined often and many students avoid it. In May Diet, 2023, Question 4 (20 marks) asked for temporary differences, the components of tax expense and a tax computation with current tax. In November Diet, 2023, Question 5 (15 marks) asked for definitions of deferred tax, permanent differences and temporary differences and the company income tax liability, and in November Diet, 2025, Question 2(d) asked about under and over provision. Read related party disclosures first.

Key terms

• Accounting profit: profit or loss for a period before deducting tax expense.
• Taxable profit (tax loss): the profit (loss) for a period, determined under the rules set by the tax authorities, on which income taxes are payable (recoverable).
• Current tax: the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.
• Tax expense (income): the aggregate of current tax and deferred tax included in profit or loss.
• Deferred tax is tax payable or recoverable in future periods because of temporary differences. The next topic explains it.

Income taxes include all domestic and foreign taxes based on taxable profits. Value added tax is not an income tax.

Current tax

Current tax for the current and prior periods is recognised as a liability to the extent it is unpaid. If amounts already paid exceed what is due, the excess is an asset. Current tax is recognised in profit or loss, except to the extent it relates to an item recognised outside profit or loss (in other comprehensive income or directly in equity), in which case it is recognised there too.

Current tax is measured at the rates that have been enacted or substantively enacted by the reporting date.

Under and over provisions

The tax charge for a year is an estimate. When the final assessment is agreed, it may differ. The difference is an under provision if the final tax is more than estimated, and an over provision if it is less. It is a change in estimate and is not a prior period error.

It is included in the tax expense of the period in which it is settled, so an under provision increases the current year’s charge and an over provision decreases it. Prior period figures are not restated.

The tax computation

Current tax is found by adjusting the accounting profit before tax to the taxable profit.

1. Start with accounting profit before tax.
2. Add back expenses that are not allowed for tax: accounting depreciation, fines and penalties, entertainment, donations that are not allowed, and increases in general allowances such as an allowance for doubtful debts (until the debt is written off).
3. Deduct income that is not taxable, and deductions allowed for tax, mainly capital allowances in place of depreciation.
4. The result is taxable profit. Multiply by the tax rate to get current tax.

For example, profit before tax is ₦96,000,000. Depreciation ₦12,000,000, fines ₦3,000,000, an increase in the allowance for doubtful debts ₦2,000,000 and entertainment ₦1,000,000 are added back, and capital allowances of ₦20,000,000 are deducted. Taxable profit is ₦96m + ₦12m + ₦3m + ₦2m + ₦1m − ₦20m = ₦94,000,000, and at 30% current tax is ₦28,200,000.

If the previous year’s tax was estimated at ₦20,000,000 and the final assessment is ₦22,500,000, the under provision of ₦2,500,000 is added to this year’s charge, giving a current tax expense of ₦28,200,000 + ₦2,500,000 = ₦30,700,000.

Components of tax expense

The major components of tax expense or income are disclosed separately. They may include:

1. current tax expense or income;
2. adjustments recognised in the period for the current tax of prior periods;
3. deferred tax expense or income relating to the origination and reversal of temporary differences;
4. deferred tax expense or income relating to changes in tax rates or the imposition of new taxes;
5. the benefit of a previously unrecognised tax loss, tax credit or temporary difference of a prior period that is used to reduce current or deferred tax expense;
6. deferred tax expense arising from the write-down, or reversal of a write-down, of a deferred tax asset; and
7. tax expense or income relating to changes in accounting policies and errors that are included in profit or loss because they cannot be accounted for retrospectively.

Tax base and temporary differences

The tax base of an asset is the amount that will be deductible for tax purposes against the taxable economic benefits flowing from recovering its carrying amount. If those 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 in respect of it.

A temporary difference is a difference between the carrying amount of an asset or liability in the statement of financial position and its tax base.

• Taxable temporary differences will result in taxable amounts in future periods when the carrying amount is recovered or settled. An asset depreciated more slowly for accounting than for tax has a carrying amount above its tax base. Interest receivable that is taxed only when received has a carrying amount and a tax base of nil.
• Deductible temporary differences will result in amounts that are deductible in future. A receivable shown net of an allowance that is deductible only when the debt is written off has a carrying amount below its tax base. Interest payable that is deductible only when paid has a tax base of nil against a carrying amount, so the difference is deductible.

Permanent differences

A permanent difference arises between accounting and taxable profit but never reverses. Examples are fines and penalties that are never deductible, entertainment, donations that are not allowed, and income that is exempt from tax. They affect only the tax computation for the year and create no deferred tax.

A fine payable has a tax base equal to its carrying amount, because no amount will ever be deductible, so there is no temporary difference.

The ideas in more depth

An example of finding the differences

Five items at the year end:

• equipment with a carrying amount of ₦40m and a tax base of ₦28m (taxable difference ₦12m)
• trade receivables carried at ₦46m net of a ₦4m allowance, with a tax base of ₦50m (deductible ₦4m)
• interest receivable of ₦2m taxed when received, with a tax base of nil (taxable ₦2m)
• a fine payable of ₦5m with a tax base of ₦5m (no difference)
• interest payable of ₦3m deductible when paid, with a tax base of nil (deductible ₦3m)

Taxable differences total ₦14m and deductible differences ₦7m, a net ₦7m, which at 30% is a net deferred tax liability of ₦2.1m (a liability of ₦4.2m and an asset of ₦2.1m).

Why separate current and deferred tax

Tax expense should match the profit it relates to. When depreciation is slower than capital allowances, tax is paid early, and deferred tax shows that the saving will reverse. Without it, profit would look better in the years of heavy allowances.

Sources and references

• IAS 12 Income Taxes: definitions, current tax, tax base, taxable and deductible temporary differences, and components of tax expense.

These points are stated as at 5 November 2026.

Worked examples

1. Taxable profit.
   ₦96m + ₦12m + ₦3m + ₦1m + ₦2m − ₦20m = ₦94,000,000.
2. Current tax for the year.
   30% × ₦94,000,000 = ₦28,200,000.
3. Under provision.
   ₦22,500,000 − ₦20,000,000 = ₦2,500,000, added to this year.
4. Current tax expense.
   ₦28,200,000 + ₦2,500,000 = ₦30,700,000.

1. Building.
   ₦180m − ₦120m = ₦60m, taxable.
2. Equipment.
   ₦90m − ₦75m = ₦15m, deductible.
3. Receivables.
   ₦65m − ₦60m = ₦5m, deductible.
4. Interest receivable. ₦4m − nil = ₦4m, taxable.
5. Fine payable. Tax base equals carrying amount: no difference.
6. Accrued expenses. Tax base nil, carrying ₦6m: ₦6m, deductible.
7. Totals. Taxable ₦64m; deductible ₦26m; net ₦38m.

How to answer in the exam

• Define. Temporary difference as carrying amount less tax base, then the two types.
• Do the tax computation in order. Profit, add back, deduct, taxable profit, tax. Label each add-back.
• Tabulate differences. Columns: carrying amount, tax base, difference, taxable or deductible. Mark permanent differences with no difference.
• List components. Give five from the seven and keep each to one line.

Common mistakes in the exam

• Adding back capital allowances, or deducting depreciation. Depreciation is added back and capital allowances deducted.
• Treating a fine as a temporary difference.
• Restating last year’s tax for an under or over provision.
• Reversing the direction for liabilities: a liability above its tax base gives a deductible difference.
• Forgetting to add back an increase in a general allowance for doubtful debts.

Quick revision

• Taxable profit = accounting profit + disallowed items − allowed deductions; current tax = rate × taxable profit.
• Under or over provision goes into the current year’s tax expense.
• Tax expense = current tax + deferred tax.
• Temporary difference = carrying amount − tax base. Asset above, or liability below, tax base: taxable. Asset below, or liability above: deductible.
• Permanent differences do not reverse and give no deferred tax.

Practice questions

These are original questions written in the style of the Institute’s exams. Try each one before you open the answer. Section A is a recall check, because the paper itself is written.

Recall check: multiple choice

Section B style: written questions

A further written question

Model answers

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