When it comes to accounting, the main goal of the Financial Reporting Standard 12 is to give guidelines on handling income tax. The significant problem with accounting for income taxes is that we need to know how to recognise the future and current effects of the following:
• The transactions of the particular time frame are recognised in the financial statements in the relevant period (Also see 3 Most Common Accounting Mistakes)
• The recovery or future settlement of the carrying amount of assets (Also see FRS 16 Property, Plant and Equipment) or liabilities that are recognised in the financial statement of the company.
According to FRS 12, the income taxes consist of all foreign and domestic taxes according to the taxable profits. Besides, the income taxes consist of withholding taxes; these taxes are paid by an associate or a subsidiary.
The FRS 12 does not handle the accounting method for financial investment tax credits or federal government grants. Nonetheless, the FRS 12 prescribes the best accounting for temporary variations that might develop from such grants financial and investment tax credits.
According to FRS 12, the tax of an asset is the value that is deductible, in term of tax, versus the taxable revenue that will stream into the business (Also see FRS 11 Construction Contracts). In some cases where the economic benefits are not taxable, the carrying amount of the asset is comparable to its tax base.
The current unsettled tax for current and previous durations need to be recognised as liabilities when preparing the financial statements. The excess will be viewed as an asset if the tax paid for current and previous durations exceeds the quantity unpaid for the same durations. The FRS 12 prescribes the correct method to identify various tax assets and varied tax.
No matter what the size the company is, it is mandatory in Malaysia to compute and report the income taxes based on the FRS 12. Different elements of income tax are recognised in financial statements relying on the situations how they occur. For instance, if the carrying value of goodwill in a company combination is higher than the tax base, the variation will result in varied tax liability.
Hence, you need to understand the FRS12 in order to manage the income tax in your company’s financial statements. If you are still unsure about it, you may contact any accounting firm in Johor Bahru for further guidance.