Accounting for Deferred Taxation (LKAS 12) Rangajewa Herath B.Sc. Accountancy and Financial Management(Sp.)(USJ) MBA-PIM(USJ)

Introduction to Accounting for Deferred Taxation Differences between accounting rules and tax rules Need for accounting for deferred taxation.

Accounting Profit vs Taxable Income Taxable Profit (Taxable Income) Permanent Differences Temporary Differences Taxable Temporary Differences Deductible Temporary Differences Deferred Tax Liability Deferred Tax Asset

Deferred Tax Liability The amounts of income taxes payable in future periods in respect of taxable temporary differences. Deferred Tax Assets The amounts of income taxes recoverable in future periods in respect of : - deductible temporary differences; and - the carry forward of unused tax losses; and unused tax credits.

Income Tax Expense - based on Accounting Profit (Rs.’000) Taxable Temporary Difference and Deferred Tax Liability Income Tax Expense - based on Accounting Profit (Rs.’000) 1 2 3 4 5 Sales 2,000 Cost of sales (1,000) Gross profit 1,000 Depreciation-Accounting (300) Profit before tax 700 Income tax-20% (140) The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 20% per annum for Accounting purpose.

Income Tax Expense - based on Taxable Profit (Rs.’000) Taxable Temporary Difference and Deferred Tax Liability cont.. Income Tax Expense - based on Taxable Profit (Rs.’000) 1 2 3 4 5 Sales 2,000 Cost of sales (1,000) Gross profit 1,000 Depreciation-Tax purpose (750) - Profit before tax 250 Income tax-20% (50) (200) The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 50% per annum for tax purpose.

Taxable Temporary Difference and Deferred Tax Liability cont.. (Rs.’000) 1 2 3 4 5 Income tax-Based on Accounting Profit 140 Income tax-Based on Taxable Profit 50 200 Deferred Tax Adjustment 90 (60)

Accounting for Deferred Tax Liability   Deferred Tax Liability(Rs.’000) Year 1 C/F 90 Tax Expense Year 2 B/F 180 Year 3 60 120 Year 4 Year 5

Taxable Temporary Differences The 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. All taxable temporary differences give rise to a deferred tax liability.

Taxable Temporary Difference and Deferred Tax Liability cont.. (Rs.’000) 1 2 3 4 5 Carrying Amount of Asset 1,200 900 600 300 - Tax base of the Asset 750 Taxable temporary difference 450 Deferred Tax Liability 90 180 120 60

Income Tax Expense - based on Accounting Profit (Rs.’000) Deductible Temporary Difference and Deferred Tax Asset Income Tax Expense - based on Accounting Profit (Rs.’000) 1 2 3 4 5 Sales 2,000 Cost of sales (1,000) Gross profit 1,000 Depreciation-Tax purpose (750) - Profit before tax 250 Income tax-20% (50) (200) The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 50% per annum.

Income Tax Expense - based on Taxable Profit Deductible Temporary Difference and Deferred tax Liability cont.. Income Tax Expense - based on Taxable Profit 1 2 3 4 5 Sales 2,000 Cost of sales (1,000) Gross profit 1,000 Depreciation-Accounting (300) Profit before tax 700 Income tax-20% (140) The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500 which will depreciate at 20% per annum for tax purpose.

Deductible Temporary Difference and Deferred Tax Asset cont.. (Rs.’000) 1 2 3 4 5 Income tax-Based on Accounting Profit 50 200 Income tax-Based on Taxable Profit 140 Deferred Tax Adjustment 90 (60)

Accounting for Deferred Tax Asset   Deferred Tax Asset(Rs.’000) Year 1 Tax Expense 90 C/F Year 2 B/F 180 Year 3 60 120  C/F  120 Year 4  60 Year 5

Deductible Temporary Differences The 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.

Deductible Temporary Difference and Deferred Tax Asset cont.. (Rs.’000) 1 2 3 4 5 Carrying Amount of Asset 750 - Tax base of the Asset 1200 900 600 300 Deductable temporary difference 450 Deferred Tax Asset 90 180 120 60