Accounting – FRS12: Income Taxes

The primary objective of the FRS 12 is to offer guidelines regarding how you should treat income taxes when it comes to accounting. It is known that the major issue with accounting for income taxes is how to recognize the current and future consequences of the following:

• The future settlement or recovery of the carrying quantity of liabilities or assets that are recognized in a business’s statement of financial status
• Transactions of the current period that are recognized in the business’s financial statements

The FRS 12 seeks to explain the guidelines that all accounting firms in Singapore should follow while accounting for income taxes. According to this standard, income taxes include all foreign and domestic taxes that are based on taxable profits. They also include taxes like the withholding taxes – these taxes can be paid by an associate, subsidiary, or joint arrangement on distributions to the reporting business.

Note that FRS 12 does not deal with the approaches of accounting for investment tax credits or government grants (Also see Corporate Taxation in Singapore). However, FRS 12 prescribes the right accounting for temporary variations that might arise from such investment tax credits and grants.

According to FRS 12, the tax base of an asset is the amount that is deductible for tax reasons against taxable economic benefits that will flow to the business especially when it recovers the carrying gains of the asset. In a case where the economic benefits are not deductible, then, the asset’s tax base will be nil.

The unpaid current tax for prior and current periods should be recognized as liabilities in the preparation of the financial statements. If the tax is paid in respect of prior and current periods exceeds the amount unpaid for the same periods, then the excess should be treated as an asset in the balance sheet. The FRS 12 also prescribes the right approach to recognizing differed tax assets and differed tax liabilities. It offers the basis for initial recognition of liability and assets.

Regardless of the size, every business in Singapore must calculate and report the income taxes in accordance with the FRS 12. Note that various aspects of income tax are recognized in financial statements depending on the circumstances under which they occur. For example, if the carrying amount of goodwill in a business combination is higher than its tax base, then, the variation will result in differed tax liability. Therefore, for you to recognize income tax in your business’s financial statements, you should comprehend the FRS12.