3. IAS 12 - Income Taxes Flashcards
What is IAS 12?
Income taxes
What is actual accounting?
- Transaction recorded when they occur
- During reporting period
- NOT when receive cash
What does IAS 1 par 27-28 say?
- Entity shall prepare AFS
- According to accrual basis
- Recognize elements when satisfy definition and recognition criteria
What are the underlying concepts of IAS 12?
- Match tax expense to PBT
- There are 2 components
- There are 2 statements
What are components of underlying assumptions?
- Current tax
2. Deferred tax
What are the statements regarding income tax?
- Tax expense (PL&OCI)
2. Assets and liabilities (current and deferred)
What is deferred tax?
Where SARS tax and accounting tax do not coincide due to timing differences, deferred tax is the difference between the two.
What is the journal entry for the tax we actually pay to SARS
Dr. Current tax (PL)
Cr. SARS (FP)
What is the entry for deferred tax, where income tax > current tax
Dr. Deferred tax (PL)
Cr. Deferred tax (FP)
What is the journal entry we are suppose to pay to SARS?
Dr. Income tax expense (PL)
Cr. Taxation (FP)
How do we calculate the amount we ACTUALLY pay SARS?
Taxable income x current tax rate
How do we calculate the amount we are SUPPOSE to pay to SARS?
PBT x current tax rate
When we post income taxes to the SOPL&OCI what would it look like?
Profit before tax: PBT amount
(Income tax expense) NOTE
——
Profit for the year
What are the headings for the income tax expense note?
Heading: income tax expense
Subheading: Major components of tax expense
What do we call the tax we ACTUALLY pay to SARS?
Current tax
What do we call the tax we are SUPPOSE to lay to SARS?
Income tax expense
What does the income tax expense note look like?
Current tax expense
Deferred tax expense
———-
Total income tax expense
What does the tax look like in the SOFP?
- Non-current liabilities/assets: deferred tax
2. Current liabilities: SARS
What are the headings of the deferred tax note?
Heading: deferred tax
Subheading: Analysis of temporary difference
What does the deferred tax not look like?
Deferred tax liability
How is taxable income calculated?
PBT
Add: depreciation
Deduct: (wear and tear)
What is the temporary difference?
The difference between that years’ depreciation and wear and tear
What is crucial for deferred tax to exist?
Temporary difference.
If there is none, there is no deferred tax
Why is deferred tax non-current?
Because it takes a few years usually to actually pay off deferred tax
What occurs where wear and tear is greater than depreciation?
Taxable MTD
What occurs when the depreciation is greater than wear and tear?
Deductible MTD
What is the complete formula for current tax expense?
PBT (MTD)/MTD ------- TI x current tax rate ------- Current tax expense
What is the formula to calculate deferred tax?
MTD x current tax rate
What is the SOFP approach to deferred tax calculations?
Look at the movement in the CLOSING balance of deferred tax. If there’s a movement then there’s a journal entry.
What is the journal entry when there is an increase in deferred tax at closing balance?
Dr. Deferred tax (PL)
Cr. Deferred tax (FP)
What is the journal entry when deferred tax’s closing balance decreases?
Dr. Deferred tax (FP)
Cr. Deferred tax (PL)
Are DTA and DTL a balance in SOFP or movement?
Balance
What is a DTA?
Deferred tax asset
Future income tax that is recoverable
What is DTL?
Deferred tax liability
Future income taxes payable
Is DTA taxable or deductible?
Deductible temporary difference
Is DTL taxable or deductible?
Taxable temporary difference
How is the temporary difference calculated?
Carrying amount - tax base
How is DTA / DTL calculated?
Temporary difference x current tax rate
Regarding an asset, when do we get DTA?
Where CA < TB
Regarding a liability, how do we get a DTA?
TB < CA
Regarding an asset, how do we get a DTL
When CA > TB
Regarding a liability, how do we get a DTL
When TB > CA
How would you define a tax base of an asset?
The amount that will be deductible for tax purposes against any taxable economic benefits that will flow into the entity when it recovers the carrying amount of the asset.
What does IAS 12 par 15 say?
A deferred tax should be recognized for temporary differences
EXCEPT
When a deferred tax liability arises from:
1. The initial recognition of goodwill
2. Initial recognition of an asset or liability when the transaction
- Is not a business combination
- At the time of the transaction it affects neither the accounting profit nor taxable profit
What does it mean when deferred tax won’t be recognized when it doesn’t affect accounting profit or tax profit?
It means when the transaction occurs, and the journal entry only affect assets, liabilities or equity and NOT profit and loss, then it won’t be recognized as deferred tax.
What is the definition of a tax base liability?
Carrying amount - any amount that will be deductible
Is there deferred tax where SARS grants deductions?
Yes
Is there deferred tax on an asset that SARS doesn’t allow deductions?
No
There will only be permanent differences and no deferred taxes
What are some examples of assets that don’t have deferred tax?
Land: there’s no depreciation
Admin building that was purchased or built after 1/04/2007: SARS doesn’t allow deductions on these so no deferred tax.
So how do we account for the differences in tax where the difference is permanent?
We use a tax reconciliation note
What does the tax recon note look like?
PBT Tax there on at 30% Depreciation at 30% -------- Income tax expense
What does it mean when the exception is initial transaction that doesn’t affect profit?
If transaction doesn’t affect profit on either accounting or tax, deferred tax won’t be recognized.
