13. Taxation Flashcards
What is IAS 12?
Income taxes
What are the two elements of tax that IAS 12 says will need to be accounted for?
Current tax
Deferred tax
What is Current tax?
The amount of tax payable/recoverable in respect of the taxable profit or loss for a period
What is deferred tax?
An accounting adjustment aimed to match the tax effects of transactions to the relevant accounting period
Where will the tax on profits estimate appear in the financial stataments?
Current liabilities
or
Current assets if received
What is the double entry to introduce tax payable to a company?
Dr Income tax (in profit or loss)
Cr Income tax payable (In statement of financial position as CL)
The balance for taxation on the statement of financial position will be what?
The current years provision
How is an under or over provision dealt with?
In the current years tax charge.
Does not effect the year end tax liability
How does an under and over provision effect the current years tax charge exactly?
- An under-provision increases the tax charge
- An over-provision decreases the tax charge.
The balance brought forward on the TB netted off with the payment.
If the result is a debit then what do we have?
This is an under provision and should be charged to the P+L
The balance brought forward on the TB netted off with the payment.
If the result is a credit then what do we have?
This is an over provision and should be credited to the statement of profit or loss
What is the definition below?
The estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods.
Deferred tax
What are the two concepts of profit that are the key to deferred tax?
The accounting profit
The taxable profit
What is accounting profit?
Reported profit
The value on Profit before tax in the P+L
What is taxable profit?
The figure of profit on which the tax authorities base their caclulations
What are the two things that effect the difference between taxable profit and accounting profit?
- Permanent differences
- Temporary differences
What is defined below?
Differences between the carrying amount of an asset or liability in the statement of financial position and its tax base
Temporary differences
What are a good example of temporary differences?
Non-current assets
What are the first two reasons for recognising deferred tax?
- The accruals concept requires its recognition
- The deferred tax is a liability that will eventually be settled
The third reason we recognise deferred tax is because failing to allow for it can lead to what 3 things?
- Over optimistic dividend payments on inflated profits
- Distortion of KPI’s of EPS and P/E ratio
- Shareholders being mislead
What are the two fundamental principles of deferred tax?
- Entity should recognise when recoverable amount of an asset would increase or decrease future tax payments
- Deferred tax is calculated using the liability method
How do we calculate the temporary difference?
Carrying amount
Less: Tax base
What is the formula for deferred tax?
Deferred tax = temporary difference × tax rate
What is the double entry for an increase in tax provision?
Dr Income tax expense/OCI
CR Deferred tax (SFP)
What is the double entry for an decrease in tax provision?
Dr Deferred tax (SFP)
Cr Income tax expense/OCI
What is described below?
This shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised’
A deferred tax asset
What does IAS 12 require in respect of Deferred tax liabilities?
A deferred tax liability occurs when the carrying amount of an asset exceeds its tax base
The liability is to be calculated and provided in full
No discounting the liability
What is the proforma for income tax
Year end estimate given in question
Under/(Over) provision
Increase/(decrease) in deferred tax
Charge to statement of profit or loss
What is the proforma for Deferred tax?
Balance b/f per TB
Balance c/f (to SFP) (temporary difference X tax rate)
Increase/decrease in deferred tax
