16 taxation

Question 1

what is accounting profit

Answer 1

The profit or loss for a period before deducting tax expense

i.e. profit before tax

Question 2

what is taxable profit

Answer 2

The profit or loss for a period determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable)

instead of depreciation/NBV we have
- Cost- WDA - AIA

Question 3

what is current tax

Answer 3

The amount of income taxes payable (recoverable) in respect of the taxable profit/(tax loss) for a period

Question 4

what is tax allowance

Answer 4

The tax equivalent of an accounting item.

Question 5

WHAT IS DEFERRED TAX LIABILITY and why do they arise

give the two reasons

Answer 5

Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences which we are booking a provision for

Deferred tax arises because.
Accounting profit ≠ Taxable profit

reasons is due to

• temporary differences
• Permanent differences

Question 6

what is temporary difference

Answer 6

Items that would have been used in calculating accounting profit and taxable profit but in different accounting periods

e.g. depreciation/tax allowances.
IAS 12 considers only temporary differences.

(cost - dep) vs (cost - WDA) will both eventually get down to nil but at different rates

Question 7

what is permanent difference

Answer 7

Items that would have been used in calculating accounting profit but would not be used in calculating taxable profit

e.g. some entertaining expenses

Question 8

how do you calculate deferred tax

Answer 8

1) calculate the temporary difference

Carrying amount x
(tax base) (x)
= temporary diff

2) Apply the tax rate to the temporary difference

= YE defereed tax liability / Closing deferred tax provision

• included in NCL in SoFP
  Dr income tax exp
  Cr Deferred tax provision

3) Account for the movement in deferred tax in tax expense P/L

Tax expense is the difference between the opening DT and closing DT liability

Question 9

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Answer 9

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Question 10

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Answer 10

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Question 11

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Answer 11

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Question 12

what is Accelerated capital allowances

Answer 12

means that NCA are w/o very quickly after purchase

means companies can claim lot of tax relief when NCA are new & but only very little when assets are older

means that tax on profit is delayed, so there is a deferred tax liability

In ST, more tax relief is claimed in the tax calculation that depreciation is in SoP/L

The difference is reversed in the LT when dep catches up with taxable capital allowances