Tải bản đầy đủ - 0 (trang)
3 Example: Tax losses carried back

3 Example: Tax losses carried back

Tải bản đầy đủ - 0trang

1.4 Measurement

Measurement of current tax liabilities (assets) for the current and prior periods is very simple. They are

measured at the amount expected to be paid to (recovered from) the tax authorities. The tax rates (and

tax laws) used should be those enacted (or substantively enacted) by the year end.



1.5 Recognition of current tax

Normally, current tax is recognised as income or expense and included in the net profit or loss for the

period, except in two cases.

(a)

(b)



Tax arising from a business combination which is an acquisition is treated differently (see

Section 6 of this chapter).

Tax arising from a transaction or event which is recognised directly in equity (in the same or a

different period).



The rule in (b) is logical. If a transaction or event is charged or credited directly to equity, rather than to

profit or loss, then the related tax should be also. An example of such a situation is where, under IAS 8, an

adjustment is made to the opening balance of retained earnings due to either a change in accounting

policy that is applied retrospectively, or to the correction of a fundamental error.



1.6 Presentation

In the statement of financial position, tax assets and liabilities should be shown separately from other

assets and liabilities.

Current tax assets and liabilities can be offset, but this should happen only when certain conditions apply.

(a)



The entity has a legally enforceable right to set off the recognised amounts.



(b)



The entity intends to settle the amounts on a net basis, or to realise the asset and settle the liability

at the same time.



The tax expense (income) related to the profit or loss for the year should be shown in the profit or loss

section of the statement of profit or loss and other comprehensive income.



2 Deferred tax

FAST FORWARD



Exam focus

point



12/07, 6/10, 6/12, 12/12, 6/14, 12/15



Deferred tax is an accounting measure, used to match the tax effects of transactions with their accounting

impact. It is quite complex.

Students invariably find deferred tax very confusing. It is an inherently difficult topic and as such is likely

to appear frequently in its most complicated forms in Paper P2. You must understand the contents of the

rest of this chapter.



2.1 What is deferred tax?

When a company recognises an asset or liability, it expects to recover or settle the carrying amount of

that asset or liability. In other words, it expects to sell or use up assets, and to pay off liabilities. What

happens if that recovery or settlement is likely to make future tax payments larger (or smaller) than they

would otherwise have been if the recovery or settlement had no tax consequences? In these

circumstances, IAS 12 requires companies to recognise a deferred tax liability (or deferred tax asset).



158



6: Income taxes  Part B Accounting standards



2.2 Definitions

Here are the definitions relating to deferred tax given in IAS 12.



Key terms



Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable

temporary differences.

Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:









Deductible temporary differences

The carryforward of unused tax losses

The carryforward of unused tax credits



Temporary differences are differences between the carrying amount of an asset or liability in the

statement of financial position and its tax base. Temporary differences may be either:









Taxable temporary differences, which are temporary differences that will result in taxable amounts

in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or

liability is recovered or settled.

Deductible temporary differences, which are temporary differences that will result in amounts that

are deductible in determining taxable profit (tax loss) of future periods when the carrying amount

of the asset or liability is recovered or settled.



The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

(IAS 12)



2.3 Tax base

We can expand on the definition given above by stating that the tax base of an asset is the amount that

will be deductible for tax purposes against any taxable economic benefits that will flow to the entity when

it recovers the carrying value of the asset. Where those economic benefits are not taxable, the tax base of

the asset is the same as its carrying amount.



Question



Tax base 1



State the tax base of each of the following assets:

(a)



A machine cost $10,000. For tax purposes, depreciation of $3,000 has already been deducted in

the current and prior periods and the remaining cost will be deductible in future periods, either as

depreciation or through a deduction on disposal. Revenue generated by using the machine is

taxable, any gain on disposal of the machine will be taxable and any loss on disposal will be

deductible for tax purposes.



(b)



Interest receivable has a carrying amount of $1,000. The related interest revenue will be taxed on a

cash basis.



(c)



Trade receivables have a carrying amount of $10,000. The related revenue has already been

included in taxable profit (tax loss).



(d)



A loan receivable has a carrying amount of $1m. The repayment of the loan will have no tax

consequences.



(e)



Dividends receivable from a subsidiary have a carrying amount of $5,000. The dividends are not taxable.



Answer

(a)

(b)

(c)

(d)

(e)



The tax base of the machine is $7,000.

The tax base of the interest receivable is nil.

The tax base of the trade receivables is $10,000.

The tax base of the loan is $1m.

The tax base of the dividend is $5,000.



Part B Accounting standards  6: Income taxes



159



In the case of (e), in substance the entire carrying amount of the asset is deductible against the economic

benefits. There is no taxable temporary difference. An alternative analysis is that the accrued dividends

receivable have a tax base of nil and a tax rate of nil is applied to the resulting taxable temporary difference

($5,000). Under both analyses, there is no deferred tax liability.

In the case of a liability, the tax base will be its carrying amount, less any amount that will be deducted for

tax purposes in relation to the liability in future periods. For revenue received in advance, the tax base of

the resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in

future periods.



Question



Tax base 2



State the tax base of each of the following liabilities.

(a)



Current liabilities include accrued expenses with a carrying amount of $1,000. The related expense

will be deducted for tax purposes on a cash basis.



(b)



Current liabilities include interest revenue received in advance, with a carrying amount of $10,000.

The related interest revenue was taxed on a cash basis.



(c)



Current assets include prepaid expenses with a carrying amount of $2,000. The related expense

has already been deducted for tax purposes.



(d)



Current liabilities include accrued fines and penalties with a carrying amount of $100. Fines and

penalties are not deductible for tax purposes.



(e)



A loan payable has a carrying amount of $1m. The repayment of the loan will have no tax

consequences.



Answer

(a)

(b)

(c)

(d)

(e)



The tax base of the accrued expenses is nil.

The tax base of the interest received in advance is nil.

The tax base of the accrued expenses is $2,000.

The tax base of the accrued fines and penalties is $100.

The tax base of the loan is $1m.



IAS 12 gives the following examples of circumstances in which the carrying amount of an asset or liability

will be equal to its tax base.





Pre-paid expenses have already been deducted in determining an entity's current tax liability for

the current or earlier periods.







A loan payable is measured at the amount originally received and this amount is the same as the

amount repayable on final maturity of the loan.







Accrued expenses will never be deductible for tax purposes.







Accrued income will never be taxable.



2.4 Temporary differences

You may have found the definition of temporary differences somewhat confusing. Remember that

accounting profits form the basis for computing taxable profits, on which the tax liability for the year is

calculated. However, accounting profits and taxable profits are different. There are two reasons for the

differences.



160



6: Income taxes  Part B Accounting standards



(a)



Permanent differences. These occur when certain items of revenue or expense are excluded from

the computation of taxable profits (for example, entertainment expenses may not be allowable for

tax purposes).



(b)



Temporary differences. These occur when items of revenue or expense are included in both

accounting profits and taxable profits, but not for the same accounting period. For example, an

expense which is allowable as a deduction in arriving at taxable profits for 20X7 might not be

included in the financial accounts until 20X8 or later. In the long run, the total taxable profits and

total accounting profits will be the same (except for permanent differences) so that timing

differences originate in one period and are capable of reversal in one or more subsequent periods.

Deferred tax is the tax attributable to temporary differences.



The distinction made in the definition between taxable temporary differences and deductible temporary

differences can be made clearer by looking at the explanations and examples given in the standard and its

appendices.



2.5 Section summary











Deferred tax is an accounting device. It does not represent tax payable to the tax authorities.

The tax base of an asset or liability is the value of that asset or liability for tax purposes.

You should understand the difference between permanent and temporary differences.

Deferred tax is the tax attributable to temporary differences.



3 Taxable temporary differences

FAST FORWARD



Exam focus

point



Deferred tax assets and liabilities arise from taxable and deductible temporary differences.

The rule to remember here is that:

'All taxable temporary differences give rise to a deferred tax liability.'

The following are examples of circumstances that give rise to taxable temporary differences.



3.1 Transactions that affect the statement of profit or loss and other

comprehensive income





Interest revenue received in arrears and included in accounting profit on the basis of time

apportionment. It is included in taxable profit, however, on a cash basis.







Sale of goods revenue is included in accounting profit when the goods are delivered, but only

included in taxable profit when cash is received.







Depreciation of an asset may be accelerated for tax purposes. When new assets are purchased,

allowances may be available against taxable profits which exceed the amount of depreciation

chargeable on the assets in the financial accounts for the year of purchase.







Development costs which have been capitalised will be amortised in profit or loss, but they were

deducted in full from taxable profit in the period in which they were incurred.







Prepaid expenses have already been deducted on a cash basis in determining the taxable profit of

the current or previous periods.



3.2 Transactions that affect the statement of financial position





Depreciation of an asset is not deductible for tax purposes. No deduction will be available for tax

purposes when the asset is sold/scrapped.



Part B Accounting standards  6: Income taxes



161







A borrower records a loan at proceeds received (amount due at maturity) less transaction costs.

The carrying amount of the loan is subsequently increased by amortisation of the transaction costs

against accounting profit. The transaction costs were, however, deducted for tax purposes in the

period when the loan was first recognised.







A loan payable is measured on initial recognition at net proceeds (net of transaction costs). The

transaction costs are amortised to accounting profit over the life of the loan. Those transaction

costs are not deductible in determining the taxable profit of future, current or prior periods.







The liability component of a compound financial instrument (eg a convertible bond) is measured

at a discount to the amount repayable on maturity, after assigning a portion of the cash proceeds

to the equity component (see IAS 32). The discount is not deductible in determining taxable profit.



3.3 Fair value adjustments and revaluations





Current investments or financial instruments are carried at fair value. This exceeds cost, but no

equivalent adjustment is made for tax purposes.







Property, plant and equipment is revalued by an entity (under IAS 16), but no equivalent

adjustment is made for tax purposes. This also applies to long-term investments.



The standard also looks at the deferred tax implications of business combinations and consolidations. We

will look at these in Section 6.

Remember the rule we gave you above, that all taxable temporary differences give rise to a deferred tax

liability? There are two circumstances given in the standards where this does not apply.

(a)



The deferred tax liability arises from the initial recognition of goodwill.



(b)



The deferred tax liability arises from the initial recognition of an asset or liability in a transaction

which:

(i)

(ii)



Is not a business combination (see Section 6), and

At the time of the transaction affects neither accounting profit nor taxable profit.



Try to understand the reasoning behind the recognition of deferred tax liabilities on taxable temporary

differences.

(a)



When an asset is recognised, it is expected that its carrying amount will be recovered in the form

of economic benefits that flow to the entity in future periods.



(b)



If the carrying amount of the asset is greater than its tax base, then taxable economic benefits will

also be greater than the amount that will be allowed as a deduction for tax purposes.



(c)



The difference is therefore a taxable temporary difference and the obligation to pay the resulting

income taxes in future periods is a deferred tax liability.



(d)



As the entity recovers the carrying amount of the asset, the taxable temporary difference will

reverse and the entity will have taxable profit.



(e)



It is then probable that economic benefits will flow from the entity in the form of tax payments, and

so the recognition of all deferred tax liabilities (except those excluded above) is required by IAS 12.



3.3.1 Example: Taxable temporary differences

A company purchased an asset costing $1,500. At the end of 20X8 the carrying amount is $1,000. The

cumulative depreciation for tax purposes is $900 and the current tax rate is 25%.

Required

Calculate the deferred tax liability for the asset.



Solution

First, what is the tax base of the asset? It is $1,500 – $900 = $600.



162



6: Income taxes  Part B Accounting standards



In order to recover the carrying value of $1,000, the entity must earn taxable income of $1,000, but it will

only be able to deduct $600 as a taxable expense. The entity must therefore pay income tax of $400 

25% = $100 when the carrying value of the asset is recovered.

The entity must therefore recognise a deferred tax liability of $400  25% = $100, recognising the

difference between the carrying amount of $1,000 and the tax base of $600 as a taxable temporary

difference.



3.4 Revalued assets

Under IAS 16 assets may be revalued. If this affects the taxable profit for the current period, the tax base

of the asset changes and no temporary difference arises.

If, however (as in some countries), the revaluation does not affect current taxable profits, the tax base of

the asset is not adjusted. Consequently, the taxable flow of economic benefits to the entity as the carrying

value of the asset is recovered will differ from the amount that will be deductible for tax purposes. The

difference between the carrying amount of a revalued asset and its tax base is a temporary difference and

gives rise to a deferred tax liability or asset.



3.5 Initial recognition of an asset or liability

A temporary difference can arise on initial recognition of an asset or liability, eg if part or all of the cost of

an asset will not be deductible for tax purposes. The nature of the transaction which led to the initial

recognition of the asset is important in determining the method of accounting for such temporary

differences.

If the transaction affects either accounting profit or taxable profit, an entity will recognise any deferred

tax liability or asset. The resulting deferred tax expense or income will be recognised in profit or loss.

Where a transaction affects neither accounting profit nor taxable profit it would be normal for an entity to

recognise a deferred tax liability or asset and adjust the carrying amount of the asset or liability by the

same amount (unless exempted by IAS 12 as under Paragraph 3.3 above). However, IAS 12 does not

permit this recognition of a deferred tax asset or liability as it would make the financial statements less

transparent. This will be the case both on initial recognition and subsequently, nor should any subsequent

changes in the unrecognised deferred tax liability or asset as the asset is depreciated be made.



3.6 Example: Initial recognition

As an example of the last paragraph, suppose Petros Co intends to use an asset which cost $10,000 in

20X7 through its useful life of five years. Its residual value will then be nil. The tax rate is 40%. Any capital

gain on disposal would not be taxable (and any capital loss not deductible). Depreciation of the asset is

not deductible for tax purposes.

Required

State the deferred tax consequences in each of years 20X7 and 20X8.



Solution

As at 20X7, as it recovers the carrying amount of the asset, Petros Co will earn taxable income of $10,000

and pay tax of $4,000. The resulting deferred tax liability of $4,000 would not be recognised because it

results from the initial recognition of the asset.

As at 20X8, the carrying value of the asset is now $8,000. In earning taxable income of $8,000, the entity

will pay tax of $3,200. Again, the resulting deferred tax liability of $3,200 is not recognised, because it

results from the initial recognition of the asset.

The following question on accelerated depreciation should clarify some of the issues and introduce you to

the calculations which may be necessary in the exam.



Part B Accounting standards  6: Income taxes



163



Question



Deferred tax



Jonquil Co buys equipment for $50,000 and depreciates it on a straight line basis over its expected useful

life of five years. For tax purposes, the equipment is depreciated at 25% per annum on a straight line

basis. Tax losses may be carried back against taxable profit of the previous five years. In year 20X0, the

entity's taxable profit was $25,000. The tax rate is 40%.

Required

Assuming nil profits/losses after depreciation in years 20X1 to 20X5 show the current and deferred tax

impact in years 20X1 to 20X5 of the acquisition of the equipment.



Answer

Jonquil Co will recover the carrying amount of the equipment by using it to manufacture goods for resale.

Therefore, the entity's current tax computation is as follows.

Year

20X1

20X2

20X3

20X4

20X5

$

$

$

$

$

Taxable income*

10,000

10,000

10,000

10,000

10,000

Depreciation for tax purposes

12,500

12,500

12,500

12,500

0

Taxable profit (tax loss)

(2,500) (2,500) (2,500) (2,500) 10,000

Current tax expense (income) at 40%

(1,000) (1,000) (1,000) (1,000)

4,000

* ie nil profit plus ($50,000  5) depreciation add-back.

The entity recognises a current tax asset at the end of years 20X1 to 20X4 because it recovers the benefit

of the tax loss against the taxable profit of year 20X0.

The temporary differences associated with the equipment and the resulting deferred tax asset and liability

and deferred tax expense and income are as follows.

Year

20X1

20X2

20X3

20X4

20X5

$

$

$

$

$

Carrying amount

40,000

30,000

20,000

10,000

0

Tax base

37,500

25,000

12,500

0

0

Taxable temporary difference

2,500

5,000

7,500

10,000

0

Opening deferred tax liability

0

1,000

2,000

3,000

4,000

Deferred tax expense (income): bal fig

1,000

1,000

1,000

1,000

(4,000)

Closing deferred tax liability @ 40%

1,000

2,000

3,000

4,000

0

The entity recognises the deferred tax liability in years 20X1 to 20X4 because the reversal of the taxable

temporary difference will create taxable income in subsequent years. The entity's statement of profit or

loss and other comprehensive income is as follows.

Year

20X1

20X2

20X3

20X4

20X5

$

$

$

$

$

Income

10,000

10,000

10,000

10,000

10,000

Depreciation

10,000

10,000

10,000

10,000

10,000

Profit before tax

0

0

0

0

0

Current tax expense (income)

(1,000) (1,000) (1,000) (1,000)

4,000

Deferred tax expense (income)

1,000

1,000

1,000

1,000

(4,000)

Total tax expense (income)

0

0

0

0

0

Net profit for the year

0

0

0

0

0



164



6: Income taxes  Part B Accounting standards



4 Deductible temporary differences

Refer again to the definition given in Section 2 above.



Exam focus

point



The rule to remember here is that:

'All deductible temporary differences give rise to a deferred tax asset.'

There is a proviso, however. The deferred tax asset must also satisfy the recognition criteria given in

IAS 12. This is that a deferred tax asset should be recognised for all deductible temporary differences to

the extent that it is probable that taxable profit will be available against which it can be utilised. This is

an application of prudence. Before we look at this issue in more detail, let us consider the examples of

deductible temporary differences given in the standard.



4.1 Transactions that affect the statement of profit or loss and other

comprehensive income





Retirement benefit costs (pension costs) are deducted from accounting profit as service is

provided by the employee. They are not deducted in determining taxable profit until the entity pays

either retirement benefits or contributions to a fund. (This may also apply to similar expenses.)







Accumulated depreciation of an asset in the financial statements is greater than the accumulated

depreciation allowed for tax purposes up to the year end.







The cost of inventories sold before the year end is deducted from accounting profit when

goods/services are delivered, but is deducted from taxable profit when the cash is received.

(Note. There is also a taxable temporary difference associated with the related trade receivable,

as noted in Section 3 above.)







The NRV of inventory, or the recoverable amount of an item of property, plant and equipment falls

and the carrying value is therefore reduced, but that reduction is ignored for tax purposes until the

asset is sold.







Research costs (or organisation/other start-up costs) are recognised as an expense for accounting

purposes but are not deductible against taxable profits until a later period.







Income is deferred in the statement of financial position, but has already been included in taxable

profit in current/prior periods.







A government grant is included in the statement of financial position as deferred income, but it will

not be taxable in future periods. (Note. A deferred tax asset may not be recognised here according

to the standard.)



4.2 Fair value adjustments and revaluations

Current investments or financial instruments may be carried at fair value which is less than cost, but no

equivalent adjustment is made for tax purposes.

Other situations discussed by the standard relate to business combinations and consolidation

(see Section 6).



4.3 Recognition of deductible temporary differences

We looked earlier at the important recognition criteria above. As with temporary taxable differences,

there are also circumstances where the overall rule for recognition of deferred tax asset is not allowed.

This applies where the deferred tax asset arises from initial recognition of an asset or liability in a

transaction which is not a business combination, and at the time of the transaction, affects neither

accounting nor taxable profit/tax loss.



Part B Accounting standards  6: Income taxes



165



Let us lay out the reasoning behind the recognition of deferred tax assets arising from deductible

temporary differences.

(a)



When a liability is recognised, it is assumed that its carrying amount will be settled in the form of

outflows of economic benefits from the entity in future periods.



(b)



When these resources flow from the entity, part or all may be deductible in determining taxable

profits of a period later than that in which the liability is recognised.



(c)



A temporary tax difference then exists between the carrying amount of the liability and its tax

base.



(d)



A deferred tax asset therefore arises, representing the income taxes that will be recoverable in

future periods when that part of the liability is allowed as a deduction from taxable profit.



(e)



Similarly, when the carrying amount of an asset is less than its tax base, the difference gives rise

to a deferred tax asset in respect of the income taxes that will be recoverable in future periods.



4.3.1 Example: Deductible temporary differences

Pargatha Co recognises a liability of $10,000 for accrued product warranty costs on 31 December 20X7.

These product warranty costs will not be deductible for tax purposes until the entity pays claims. The tax

rate is 25%.

Required

State the deferred tax implications of this situation.



Solution

What is the tax base of the liability? It is nil (carrying amount of $10,000 less the amount that will be

deductible for tax purposes in respect of the liability in future periods).

When the liability is settled for its carrying amount, the entity's future taxable profit will be reduced by

$10,000 and so its future tax payments by $10,000  25% = $2,500.

The difference of $10,000 between the carrying amount ($10,000) and the tax base (nil) is a deductible

temporary difference. The entity should therefore recognise a deferred tax asset of $10,000  25% =

$2,500 provided that it is probable that the entity will earn sufficient taxable profits in future periods to

benefit from a reduction in tax payments.



4.4 Taxable profits in future periods

When can we be sure that sufficient taxable profit will be available against which a deductible temporary

difference can be utilised? IAS 12 states that this will be assumed when sufficient taxable temporary

differences exist which relate to the same taxation authority and the same taxable entity. These should be

expected to reverse as follows:

(a)



In the same period as the expected reversal of the deductible temporary difference.



(b)



In periods into which a tax loss arising from the deferred tax asset can be carried back

or forward.



Only in these circumstances is the deferred tax asset recognised, in the period in which the deductible

temporary differences arise.

What happens when there are insufficient taxable temporary differences (relating to the same taxation

authority and the same taxable entity)? It may still be possible to recognise the deferred tax asset, but only

to the following extent.

(a)



166



Taxable profits are sufficient in the same period as the reversal of the deductible temporary

difference (or in the periods into which a tax loss arising from the deferred tax asset can be carried

forward or backward), ignoring taxable amounts arising from deductible temporary differences

arising in future periods.



6: Income taxes  Part B Accounting standards



(b)



Tax planning opportunities exist that will allow the entity to create taxable profit in the appropriate

periods.



With reference to (b), tax planning opportunities are actions that an entity would take in order to create or

increase taxable income in a particular period before the expiry of a tax loss or tax credit carryforward. For

example, in some countries it may be possible to increase or create taxable profit by electing to have

interest income taxed on either a received or receivable basis, or deferring the claim for certain deductions

from taxable profit.

In any case, where tax planning opportunities advance taxable profit from a later period to an earlier

period, the utilisation of a tax loss or a tax credit carryforward will still depend on the existence of future

taxable profit from sources other than future originating temporary differences.

If an entity has a history of recent losses, then this is evidence that future taxable profit may not be

available (see below).



4.5 Initial recognition of an asset or liability

Consider Paragraph 3.5 on initial recognition of an asset or liability. The example given by the standard

is of a non-taxable government grant related to an asset, deducted in arriving at the carrying amount of the

asset. For tax purposes, however, it is not deducted from the asset's depreciable amount (ie its tax base).

The carrying amount of the asset is less than its tax base and this gives rise to a deductible temporary

difference. Paragraph 3.5 applies to this type of transaction.



4.6 Unused tax losses and unused tax credits

An entity may have unused tax losses or credits (ie which it can offset against taxable profits) at the end of

a period. Should a deferred tax asset be recognised in relation to such amounts? IAS 12 states that a

deferred tax asset may be recognised in such circumstances to the extent that it is probable future

taxable profit will be available against which the unused tax losses/credits can be utilised.

The criteria for recognition of deferred tax assets here is the same as for recognising deferred tax assets

arising from deductible differences. The existence of unused tax losses is strong evidence, however, that

future taxable profit may not be available. So where an entity has a history of recent tax losses, a deferred

tax asset arising from unused tax losses or credits should be recognised only to the extent that the entity

has sufficient taxable temporary differences or there is other convincing evidence that sufficient taxable

profit will be available against which the unused losses/credits can be utilised by the entity.

In these circumstances, the following criteria should be considered when assessing the probability that

taxable profit will be available against which unused tax losses/credits can be utilised.





Existence of sufficient taxable temporary differences (same tax authority/taxable entity) against

which unused tax losses/credits can be utilised before they expire







Probability that the entity will have taxable profits before the unused tax losses/credits expire







Whether the unused tax losses result from identifiable causes, unlikely to recur







Availability of tax planning opportunities (see above)



To the extent that it is not probable that taxable profit will be available, the deferred tax asset is not

recognised.



4.7 Reassessment of unrecognised deferred tax assets

For all unrecognised deferred tax assets, at each year end an entity should reassess the availability of

future taxable profits and whether part or all of any unrecognised deferred tax assets should now be

recognised. This may be due to an improvement in trading conditions which is expected to continue.



Part B Accounting standards  6: Income taxes



167



4.8 Section summary





Deductible temporary differences give rise to a deferred tax asset.







Prudence dictates that deferred tax assets can only be recognised when sufficient future taxable

profits exist against which they can be utilised.



5 Measurement and recognition of deferred tax

FAST FORWARD



IAS 12 Income taxes covers both current and deferred tax. It has substantial presentation and disclosure

requirements.



5.1 Basis of provision of deferred tax

IAS 12 adopts the full provision method of providing for deferred tax.

The full provision method has the advantage that it recognises that each timing difference at the year end

has an effect on future tax payments. If a company claims an accelerated tax allowance on an item of

plant, future tax assessments will be bigger than they would have been otherwise. Future transactions may

well affect those assessments still further, but that is not relevant in assessing the position at the year end.

The disadvantage of full provision is that, under certain types of tax system, it gives rise to large liabilities

that may fall due only far in the future.



5.2 Example: Full provision

Suppose that Girdo Co begins trading on 1 January 20X7. In its first year it makes profits of $5m, the

depreciation charge is $1m and the tax allowances on those assets is $1.5m. The rate of corporation tax is

30%.



Solution: Full provision

The tax liability is $1.35m, but the debit to profit or loss is increased by the deferred tax liability of 30% ×

$0.5m = $150,000. The total charge to profit or loss is therefore $1.5m which is an effective tax rate of

30% on accounting profits (ie 30% × $5.0m). No judgement is involved in using this method.



5.3 Deferral/liability methods: changes in tax rates

Where the corporate rate of income tax fluctuates from one year to another, a problem arises in respect

of the amount of deferred tax to be credited (debited) to profit or loss in later years. The amount could be

calculated using either of two methods.

(a)



The deferral method assumes that the deferred tax account is an item of 'deferred tax relief' which

is credited to profits in the years in which the timing differences are reversed. Therefore the tax

effects of timing differences are calculated using tax rates current when the differences arise.



(b)



The liability method assumes that the tax effects of timing differences should be regarded as

amounts of tax ultimately due by or to the company. Therefore deferred tax provisions are

calculated at the rate at which it is estimated that tax will be paid (or recovered) when the timing

differences reverse.



The deferral method involves extensive record keeping because the timing differences on each individual

capital asset must be held. In contrast, under the liability method, the total originating or reversing timing

difference for the year is converted into a deferred tax amount at the current rate of tax (and if any change

in the rate of tax has occurred in the year, only a single adjustment to the opening balance on the deferred

tax account is required).



168



6: Income taxes  Part B Accounting standards



Tài liệu bạn tìm kiếm đã sẵn sàng tải về

3 Example: Tax losses carried back

Tải bản đầy đủ ngay(0 tr)

×