Financial Reporting and IAS-12

International Accounting Standard number 12 was and is the most misunderstood International Accounting Standard in the financial reporting history of Pakistan, apart from International Accounting Standard 32 and 39. The prime reason of this conceptual misunderstanding is the three-dimensional Income Tax Ordinance, 2001 and Sales Tax Act, 1990. The purpose of this article is to cover International Accounting Standard 12 within the context of three-dimensional Income Tax Ordinance, 2001, impact over corporate financial reporting, removal of doubts raised in different articles and lacunas or shortcomings of International Accounting Standard 12 and Companies' Ordinance, 1984.

Normally the accounting profit before tax figure appearing in the financial statements of corporate entities differ from the taxable profit showed in income tax return. Such a difference may be categorized as permanent difference or temporary difference. Permanent difference arises due to permanent factors while temporary difference arises due to temporary factors.

Permanent factors include inadmissible expenditure mentioned in section 21 of Income Tax Ordinance, 2001, for instance entertainment expense in excess of limit prescribed in rule 10 of Income Tax Rules, 2002. Income exempt from tax mentioned in second schedule of Income Tax Ordinance, 2001, for instance, clause 131 of part I of second schedule of Income Tax Ordinance, 2001.