Topic 8 Taxation IAS 12 Income tax 1) Current tax Current tax should be accounted for in the income statement unless the tax relates to an item that has been accounted for in equity If the item was accounted for in equity, then the tax should be allocated to the equity Tax rates used shoulf be those that have been enacted by the reporting date. This will include those substantially enacted" by the reporting date. 5-1

Topic 8 Taxation Current taxation Principles In the income statement the tax charge will be made up of: Estimated income tax on taxable profits x Add: under provision for tax charges in the previous year x less: over provision for tax charges in the previous year (x) X 5-2

Topic 8 Taxation Deferred tax It is possible for a company to report an accounting profit of say $100,000 and yet be required to pay no current tax. This is because of temporary differences, which distort the timing of when tax is paid. The normal effect of temporary differences is delay (defer) when tax is paid and , as result there is a need to provide for a deferred tax liability to ensure that the tax effects of transactions are reported when they are recognized. It is possible for temporary differences to accelerate the timing of when tax is paid, in which case this reduces the amount of the deferred tax liability or even creates a deferred tax asset. 5-3

Topic 8 Taxation Deferred tax Temporary differences A temporary difference is the difference between the carrying values of an asset or liability and it tax base.The tax base is the amount attributed to an asset or liability for tax purpose. 5-4

Topic 8 Taxation Deferred tax Temporary differences The classic example of temporary differences relate to the accounting for non-current assets, which attract tax relief (capital allowance) at a different rate thean depreciation is passed through the income statement. Where there have been accelerated capital allowances the net book value of the asset will exceed the tax base and this is the measure of the temporary difference on which deferred tax is provided. Deferred tax is provided for in full on temporary differences. 5-5

Topic 8 Taxation Calculating the deferred tax The basic principle is that deferred tax is provided for in full on all temporary differences, rather than using a nil or partial provision. The charge to income is the balancing figure being the difference between the measurement of the deferred tax proviously privided and the balance as just calculated for the year-end SFP. IAS 12 does not allow the discounting of deferred tax balances. 5-6

Topic 8 Taxation Examples of temporary differences include: 1. Tax deduction for the cost of non-current assets that ahve a different pattern to the write off the asset in the financial statements 2. Pension liabilities that are accrued in the FS but are allowed for tax only when the contribution are made to the pension fund at a later date 3. Intra-group profits in inventoy that are unrealized for consolidation purposes yet taxable in the computation of the group company that made the unrealized profit. 4. A loss is reported in the FS and related tax relief is only available by carry-forward against future taxable profits. 5-7

Topic 8 Taxation IAS 12 Accounting treatment Revaluation Temporary Difference arises when revaluating an asset. The difference is the difference between the asset’s revalued amount and its tax written down value. Because the revaluation increases is credited to equity, the associated deferred tax should also be charged to equity, and therefore is not included as part of the tax charge for the year in the statement of comprehensive income. 5-8

Topic 8 Taxation IAS 12 Accounting treatment Measurement Deferred tax should not be discounted. Tax rate to apply The tax rate in force when the asset is realized or the liability is settled should be used to calculated deferred tax, This rate must be based however on tax rates and legislation that has been enacted or substantially enacted by the reporting date. 5-9

Topic 8 Taxation IAS 12 Accounting treatment Presentation of the movement in the liability If the item giving raise to the deferred tax is dealt with directly in reserves the deferred tax should also be taken directly to reserves. If the item is dealt with in the income statement the deferred tax should also be presented in the income statement. 5-10

Topic 8 Taxation IAS 12 Accounting treatment Tax charge in I/S $ Estimate tax for t0he year (go to SFP as current liability) X Less: over provision of last year/Add: under provision (X) Add: increase in deferred tax Or Less: decrease in deferred tax Tax charge in I/S 5-11

Topic 8 Taxation IAS 12 Accounting treatment Current tax and deferred tax in SFP Current Liability-Current tax payable Non-current Liability-Deferred tax Liability 5-12

Topic 8 Taxation IAS 12 Accounting treatment Deferred tax calculation General Carrying value (NBV) Tax base Temporary difference Asset X X/nil X/(X) Liability/Reserve (X) (X)/nil 5-13

Topic 8 Taxation IAS 12 Accounting treatment Deferred tax calculation Closing deferred tax= temporary difference x tax rate (go to SFP) Change in deferred tax= closing deferred tax- opening deferred tax (go to I/S) 5-14

Topic 8 Taxation IAS 12 Accounting treatment Deferred tax calculation Specific items Carrying value (NBV) Tax base Temporary difference Non-current asset X X/(X) Provision non allowable for tax (X) nil Provision of unrealized profit Loss relief being carried forward 5-15

Topic 8 Taxation IAS 12 Accounting treatment Example Peter Ltd was incorporated on 1 Apr. 2001. In the year ended 31 Mar. 2002 the company make a profit before tax of $100,000 (after charging depreciation of $10,000) and made the following capital additions: Plant $48,000 Motor vehicles $12,000 Income tax is chargeable at the rate of 30%, and tax allowance are available at 25%. 5-16

Topic 8 Taxation IAS 12 Accounting treatment Example Required: The current tax payable for the year ended 31 Mar. 2002 The deferred tax charge for the year on the basis that full provision made for all temporary differences, showing also the relevant extracts from the financial statement. 5-17

Topic 8 Taxation IAS 12 Accounting treatment Example Solution: Current tax PBT 100,000 Deprecation 10,000 Capital allowances 60000*25% (15,000) Taxable profit 95,000 Current tax 95,000 *30% (28,500) 5-18

Topic 8 Taxation IAS 12 Accounting treatment Example Solution: Deferred tax CV 60,000-10,000 50,000 Tax base 60,000-15,000 45,000 Temporary difference 5,000 DTL = 5000* 30% 1,500 5-19

Topic 8 Taxation IAS 12 Accounting treatment Example Solution: IS PBT 100,000 Income tax Current tax 28,500 Deferred tax 1,500 (30,000) Profit for the period 70,000 SFP CL-current tax payable 28,500 NCL-deferred tax liability 1,500 5-20