Taxes on income

Learning objectives

• Identify the default classification of taxes paid and the cases in which they are attributed to investing or financing activities.L1, L2
• Calculate tax paid from the current tax expense and the opening and closing current tax balances.L2, L3
• Relate the journal entry for the tax payment to the cash flow presented.L1, L2

Normative references

• IAS 7 §14Operating cash flows are primarily derived from the principal revenue-producing activities and generally result from the transactions that enter into the determination of profit or loss. Examples: cash receipts from the sale of goods and the rendering of services; cash receipts from royalties, fees, commissions and other revenue; cash payments to suppliers for goods and services; cash payments to and on behalf of employees; cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; cash receipts and payments from contracts held for dealing or trading purposes. Some transactions, such as the sale of an item of plant, give rise to a gain or loss included in profit or loss, but the related cash flows are investing cash flows. However, cash payments to manufacture or acquire assets held for rental to others and subsequently held for sale (IAS 16 para. 68A), as well as rentals and the proceeds from the subsequent sale of those assets, are operating cash flows.
• IAS 7 §35Cash flows arising from taxes on income are separately disclosed and classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities.
• IAS 7 §36Taxes on income arise on transactions that give rise to cash flows classified in all three activities; while tax expense may be identifiable with an investing or financing transaction, the related tax cash flows are often impracticable to identify and may arise in a different period: taxes paid are therefore usually classified as operating activities. When it is practicable to identify the tax cash flow with a transaction classified as investing or financing, it follows that classification; when tax cash flows are allocated over more than one class of activity, the total amount of taxes paid is disclosed.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

20 questions

• Cash flows arising from taxes on income are separately disclosed and classified as operating, unless they can be specifically identified with financing and investing activities.L1
• When taxes paid are allocated over more than one activity, it is enough to present each portion in its activity, without disclosing the total.L1
• Tax paid for the period equals total income tax expense in profit or loss, including deferred tax.L2
• What is the default classification of income taxes paid?L1
• Why are taxes paid usually classified as operating activities?L2
• Brelane sells a subsidiary at a large gain; the related tax is identifiable and paid separately (case data). How should this tax flow be classified?L2
• Which of these statements about taxes paid are correct?L2
• In Nalmira's statement (direct method), which of these tax presentations comply?L3
• Ralbris's current tax expense is {current_tax_expense} (case data, measured under IAS 12). The current tax liability moves from {opening_liability} to {closing_liability}. Compute tax paid.L2
• Norbris's current tax for the year amounts to {current_tax_expense} (case data). At the start of the year it still owed {opening_liability} to the tax authority; at the end only {closing_liability} remains payable. How much tax did it pay out?L2
• Selbris's total tax expense is {total_tax_expense}, of which {deferred_tax_expense} is deferred tax (case data). The current tax liability moves from {opening_liability} to {closing_liability}. Compute current tax and tax paid.L3
• At the start of the year Galvelle had a tax receivable (excess instalments) of {opening_receivable}; at year-end it has a current tax liability of {closing_liability}. Current tax for the year is {current_tax_expense} (case data). Compute net tax paid.L3
• Brivelle paid {total_tax_paid} of income tax, of which {tax_on_disposal} is specifically identifiable with the sale of an investment property presented in investing (case data). Compute the portion presented in operating and the total to disclose.L3
• Talvelle includes its income taxes paid in the line “payments to suppliers and employees”. What is the error?L2
• Pirtara allocates its tax paid in proportion to each activity’s result (60% operating, 40% investing), without being able to link the flows to specific transactions, and does not disclose the total. What is the error?L3
• Halnore pays {amount} of current tax recognised as a liability (case data). Record the payment entry.L1
• Velnore pays the prior year's tax balance, {amount}, recorded as a current tax liability; no link to an investing or financing transaction is possible (case data). Record the entry and state the classification.L2
• Fenlane receives a refund of 60,000 of income tax overpaid in prior years (case data). How should it be presented?L2
• Ostbane issues a loan whose issue costs are tax-deductible; the related tax saving is spread over several quarterly instalments and cannot be isolated (case data). How should the effect on tax paid be classified?L3
• Kalmont's statement presents “taxes paid: 420,000” in operating, equal to total tax expense (of which 70,000 is deferred tax); the current tax liability rose from 50,000 to 80,000 (case data). What corrected amount should be presented?L3