January 29, 2022

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Meaning of Current tax liabilities (assets) in the balance sheet

Meaning of Current tax liabilities (assets) in the balance sheet
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Current tax liabilities (CTL) can be found in a balance sheet or statement of financial position under the current-liabilities section. It is a line item there. On the other hand, current tax assets (CTA) can be found in the current asset section. The financial statement of Seplat Petroleum for 2020 shows the amount for CTL as a line item. You can see this below, in the screenshot.

What IAS 12 says about Current tax liabilities (assets)

IAS 12 states the following concerning current tax liabilities (assets). “Current tax for current and prior periods is, to the extent that it is unpaid, recognized as a liability. Overpayment of current tax is recognized as an asset. Current tax liabilities (assets) for the current and prior periods are measured at the amount expected to be paid to (recovered from) the taxation authorities, using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.” Source: IFRS.ORG

Definition of Current tax Liabilities

Current tax liability is the total estimated unpaid tax for any accounting period after deducting tax paid for the period and any prior period tax that is not paid.

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Definition of current tax assets

Current tax assets are the total estimated tax that the company expects to recover from the federal tax authority for a particular period after deducting payment of tax for that period.

Format of Current tax liabilities (assets)

Below is a simple format to calculate current tax liabilities (assets)

 

Format of Current tax liabilities (assets)

Format of Current tax liabilities (assets)XX
Estimated tax for the yearXX
Tax paid(XX)
Balance at December 2020XX/(XX)

 

If the balance in December 2020 is positive, it is referred to as current tax liability. If it is negative, as in (xx), then it is a current tax asset.

Key Explanations

In calculating tax in a financial statement, the profit before tax is used. This is referred to as accounting profit. The amount of tax calculated here is mere estimates and does not reflect the tax that will be paid using tax profit.

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Upon payment of taxes during the year, there will be a difference between the tax paid and the estimated tax using accounting profit. Therefore, the tax paid is deducted from the prior tax liabilities and tax charged for the year to get the current tax liabilities or assets accrued or recoverable by the entity.

The differences between CTL and CTA are that one is accrued to the entity while the other can be recovered. CTL mean that the entity is expected to pay such taxes in the future. While CTA mean the entity will recover that amount in the next accounting period or year.

Conclusion

Current tax liabilities or assets arose in the balance sheet. Both cannot occur in the same accounting period. I have defined these terms, given their format, and explained them in detail.

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