How total tax expense relates to accounting profit, including deferred tax and reconciling differences.
Luca Briefs1/8
Tax reconciliation
Tax expense is not the final tax payable
A tax reconciliation under IAS 12 explains the gap between total tax expense and accounting profit multiplied by the applicable tax rate.
Quick check
Is this the same as a tax computation?
No
The tax computation determines tax payable. The reconciliation explains how total tax expense relates to accounting profit.
Starting point
Tax expense usually includes three parts
1This year's current tax.
2Adjustments to prior years' current tax.
3Deferred tax arising from temporary differences.
Timing differences
Deferred tax explains the offset
Permanent differences are never taxable or deductible. For temporary differences, a recognised deferred tax credit or expense offsets the current tax impact in total tax expense.
Quick check
Can unrecognised tax credits create a reconciling item?
Yes
Unrecognised deferred tax assets can be reconciling items when future utilisation is not probable. Later utilisation of previously unrecognised tax credits is also shown.
Cross-check
Compare both deferred tax approaches
IAS 12 uses the balance sheet approach, comparing carrying amounts with tax bases. Compare the resulting deferred tax movement with the expense or credit from the profit and loss approach.
Investigate differences
A small difference can hide two errors
Compare opening and closing balance movements with the temporary differences identified in the profit and loss approach.
