Future operating losses Provisions

Chapter 15 – Taxation Page 185

Chapter 15 TAXATION

1 Business Context Corporate income taxes are an important means of raising government revenue and therefore represent a potential major cash outflow from a business. This is particularly the case in developed countries where typically 5 to 15 of total government revenue comes from such taxes. Taxes on business can take several different forms and these vary from country to country. Entities can incur taxes levied on a variety of bases and transactions, although probably the most significant is that in relation to income generated by an entity through its normal operating activities. Taxation is not just a means of raising revenue for government. Governments may wish to provide incentives or disincentives for entities to act in a particular way. For example, to encourage investment in a particular geographical area or carry out a certain business activity, generous tax allowances may be offered as an incentive for this type of expenditure. The implication of this is that taxes can interact with business decisions, for example in relation to business location. This is of particular significance where businesses have foreign operations in different tax jurisdictions. 2 Chapter Objectives This chapter deals with IAS 12 Income taxes. It considers both the treatment of the current tax charge and liability current taxes and deferred tax, which is a means of accounting for the difference between the effects of the tax and accounting treatments deferred tax of transactions. On completion of this chapter you should be able to:  understand the nature and scope of IAS 12 on income taxes;  interpret the important terminology and definitions which relate to the treatment of current tax and deferred tax in financial statements;  understand the key principles relating to the recognition and measurement of current tax and deferred tax;  demonstrate knowledge of the principal disclosure requirements of IAS 12; and  apply knowledge and understanding of IAS 12 in particular circumstances through basic calculations.