Income taxes

Taxes represent an important cash outflow for businesses, and as a consequence many businesses try to manage their transactions and their accounting in such a way as will defer payment of taxation for as long as possible. This is, however, not consistent with accruals accounting generally and the IFRS approach of preparing financial statements that are representationally faithful to the state of the business.

As a consequence accruals-style adjustments (deferred taxation) have to be made to ensure that the consolidated financial statements reflect the tax that would have to be paid on the transactions reported, rather than reflecting only the tax actually paid. It is a normal arrangement in multinational companies that the individual financial statements of subsidiaries are drawn up to maximize national tax advantage, but these are adjusted for input to the consolidated statements drawn up under IFRS.

IAS 12 Income Taxes addresses what can be a very complex issue for multinational companies. It is based on an asset and liability approach to deferred taxation, as opposed to a transactional approach. It says that the company must address the future tax implications of the recovery of an asset or settlement of a liability in the balance sheet (statement of financial position) at reporting date.

An obvious cause of difference is when the entity recognizes unrealized losses and gains in the financial statements that will not be considered for tax purposes until the transaction ...

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