1. AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance

2. Deferral method Calculate net timing differences each year Tax effect is debited or credited to the tax charge Double entry is effected by making an entry to the deferred tax account What happens if the rate of corporation tax changes? Ignores the effect of changing tax rates on timing differences from earlier periods Emphasis on the profit and loss account

3. Liability method Calculate total timing differences anew each period Apply the current corporation tax rate to net total timing differences each year. This equates to the asset/liability in the balance sheet. Emphasis is on the balance sheet Book the balance sheet movement from period to period to the profit and loss account

4. Recent guidance IAS 12 - Liability method and full provision requirements. FRS 19 (effective for periods ending after 22 January 2002) –liability method required (consistent with ASB emphasis on balance sheet) –full provision required

5. FRS 19 Requires full provision to be made for deferred tax assets and liabilities arising from timing differences between recognition of gains and losses in financial statements and their recognition in a tax computation Most common types of timing differences –Capital allowances –Expenses booked in financial statements on an accruals basis but allowable for tax on a cash basis - likewise income taxable on a cash basis

6. Presentation P&L - include within heading for ‘tax on profit on ordinary activities’ B/S - liabilities to be included under the heading ‘Provisions for liabilities and charges’. Assets to be included in ‘debtors’ Consider materiality of the deferred tax amount and possible need for separate disclosure

7. Note disclosure P&L taxation note: –Separately show amount charged or credited for deferred tax, identifying amounts attributable to changes in tax rates and re-assessments of recoverability of deferred tax assets Balance sheet note on deferred tax –Opening balance, movements and closing balance –Analysis by type of timing difference –If deferred tax asset is recognised, outline basis of recoverability of the asset

8. FRS 19 matters not covered Discounting Partial recognition discussion Detailed assessment of recoverability of assets Timing differences that do not result in deferred tax