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Is Income Tax Expense Always Recognized In Current Year?

In single word, Yes. Income tax expense always recognized in the current year! Tax effect accounting as mandated in IAS 12 has two main purposes:

To calculate and account for the future tax consequences for those items where taxation and accounting treatments differ. Income Tax Expense Always Recognized In Current Year.

To calculate and account for the current tax liabilities of the company

Future tax consequences arise when the carrying amount of items recognized in the company’s statement of financial position differ from their tax figure.   An item’s tax base equals the amount that would be shown as an asset or liability in a statement of financial position prepared for taxation purposes.

These future tax consequences may involve either the payment of additional tax (temporary taxable differences) or future tax savings (temporary deductible differences and tax losses). Such future liabilities or savings are recognized as deferred tax liabilities or deferred tax assets. The standard requires that both current and deferred amounts be reported as income tax expense (income) for the reporting period.

Thus, if an income tax expense is prepaid creating a deferred tax asset (future deduction) the current year’s income tax expense will record this deduction against the current year’s profit even though the deduction will not affect taxable income until next year. Effectively, tax-effect accounting ensures that the tax-effect of each transaction or event recognized during a financial year will be reflected in the income tax expense of that year irrespective of when that tax-effect will occur.

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