13. Taxation

Question 1

What is IAS 12?

Answer 1

Income taxes

Question 2

What are the two elements of tax that IAS 12 says will need to be accounted for?

Answer 2

Current tax

Deferred tax

Question 3

What is Current tax?

Answer 3

The amount of tax payable/recoverable in respect of the taxable profit or loss for a period

Question 4

What is deferred tax?

Answer 4

An accounting adjustment aimed to match the tax effects of transactions to the relevant accounting period

Question 5

Where will the tax on profits estimate appear in the financial stataments?

Answer 5

Current liabilities
or
Current assets if received

Question 6

What is the double entry to introduce tax payable to a company?

Answer 6

Dr Income tax (in profit or loss)

Cr Income tax payable (In statement of financial position as CL)

Question 7

The balance for taxation on the statement of financial position will be what?

Answer 7

The current years provision

Question 8

How is an under or over provision dealt with?

Answer 8

In the current years tax charge.

Does not effect the year end tax liability

Question 9

How does an under and over provision effect the current years tax charge exactly?

Answer 9

• An under-provision increases the tax charge

- An over-provision decreases the tax charge.

Question 10

The balance brought forward on the TB netted off with the payment.

If the result is a debit then what do we have?

Answer 10

This is an under provision and should be charged to the P+L

Question 11

The balance brought forward on the TB netted off with the payment.

If the result is a credit then what do we have?

Answer 11

This is an over provision and should be credited to the statement of profit or loss

Question 12

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.

Answer 12

Deferred tax

Question 13

What are the two concepts of profit that are the key to deferred tax?

Answer 13

The accounting profit

The taxable profit

Question 14

What is accounting profit?

Answer 14

Reported profit

The value on Profit before tax in the P+L

Question 15

What is taxable profit?

Answer 15

The figure of profit on which the tax authorities base their caclulations

Question 16

What are the two things that effect the difference between taxable profit and accounting profit?

Answer 16

• Permanent differences

- Temporary differences

Question 17

What is defined below?

Differences between the carrying amount of an asset or liability in the statement of financial position and its tax base

Answer 17

Temporary differences

Question 18

What are a good example of temporary differences?

Answer 18

Non-current assets

Question 19

What are the first two reasons for recognising deferred tax?

Answer 19

• The accruals concept requires its recognition

- The deferred tax is a liability that will eventually be settled

Question 20

The third reason we recognise deferred tax is because failing to allow for it can lead to what 3 things?

Answer 20

• Over optimistic dividend payments on inflated profits
• Distortion of KPI’s of EPS and P/E ratio
• Shareholders being mislead

Question 21

What are the two fundamental principles of deferred tax?

Answer 21

• Entity should recognise when recoverable amount of an asset would increase or decrease future tax payments
• Deferred tax is calculated using the liability method

Question 22

How do we calculate the temporary difference?

Answer 22

Carrying amount

Less: Tax base

Question 23

What is the formula for deferred tax?

Answer 23

Deferred tax = temporary difference × tax rate

Question 24

What is the double entry for an increase in tax provision?

Answer 24

Dr Income tax expense/OCI

CR Deferred tax (SFP)

Question 25

What is the double entry for an decrease in tax provision?

Answer 25

Dr Deferred tax (SFP)

Cr Income tax expense/OCI

Question 26

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’

Answer 26

A deferred tax asset

Question 27

What does IAS 12 require in respect of Deferred tax liabilities?

Answer 27

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

Question 28

What is the proforma for income tax

Answer 28

Year end estimate given in question
Under/(Over) provision
Increase/(decrease) in deferred tax

Charge to statement of profit or loss

Question 29

What is the proforma for Deferred tax?

Answer 29

Balance b/f per TB
Balance c/f (to SFP) (temporary difference X tax rate)

Increase/decrease in deferred tax