3. IAS 12 - Income Taxes

Question 1

What is IAS 12?

Answer 1

Income taxes

Question 2

What is actual accounting?

Answer 2

• Transaction recorded when they occur
• During reporting period
• NOT when receive cash

Question 3

What does IAS 1 par 27-28 say?

Answer 3

1. Entity shall prepare AFS
2. According to accrual basis
3. Recognize elements when satisfy definition and recognition criteria

Question 4

What are the underlying concepts of IAS 12?

Answer 4

1. Match tax expense to PBT
2. There are 2 components
3. There are 2 statements

Question 5

What are components of underlying assumptions?

Answer 5

1. Current tax

2. Deferred tax

Question 6

What are the statements regarding income tax?

Answer 6

1. Tax expense (PL&OCI)

2. Assets and liabilities (current and deferred)

Question 7

What is deferred tax?

Answer 7

Where SARS tax and accounting tax do not coincide due to timing differences, deferred tax is the difference between the two.

Question 8

What is the journal entry for the tax we actually pay to SARS

Answer 8

Dr. Current tax (PL)

Cr. SARS (FP)

Question 9

What is the entry for deferred tax, where income tax > current tax

Answer 9

Dr. Deferred tax (PL)

Cr. Deferred tax (FP)

Question 10

What is the journal entry we are suppose to pay to SARS?

Answer 10

Dr. Income tax expense (PL)

Cr. Taxation (FP)

Question 11

How do we calculate the amount we ACTUALLY pay SARS?

Answer 11

Taxable income x current tax rate

Question 12

How do we calculate the amount we are SUPPOSE to pay to SARS?

Answer 12

PBT x current tax rate

Question 13

When we post income taxes to the SOPL&OCI what would it look like?

Answer 13

Profit before tax: PBT amount
(Income tax expense) NOTE
——
Profit for the year

Question 14

What are the headings for the income tax expense note?

Answer 14

Heading: income tax expense
Subheading: Major components of tax expense

Question 15

What do we call the tax we ACTUALLY pay to SARS?

Answer 15

Current tax

Question 16

What do we call the tax we are SUPPOSE to lay to SARS?

Answer 16

Income tax expense

Question 17

What does the income tax expense note look like?

Answer 17

Current tax expense
Deferred tax expense
———-
Total income tax expense

Question 18

What does the tax look like in the SOFP?

Answer 18

1. Non-current liabilities/assets: deferred tax

2. Current liabilities: SARS

Question 19

What are the headings of the deferred tax note?

Answer 19

Heading: deferred tax
Subheading: Analysis of temporary difference

Question 20

What does the deferred tax not look like?

Answer 20

Deferred tax liability

Question 21

How is taxable income calculated?

Answer 21

PBT
Add: depreciation
Deduct: (wear and tear)

Question 22

What is the temporary difference?

Answer 22

The difference between that years’ depreciation and wear and tear

Question 23

What is crucial for deferred tax to exist?

Answer 23

Temporary difference.

If there is none, there is no deferred tax

Question 24

Why is deferred tax non-current?

Answer 24

Because it takes a few years usually to actually pay off deferred tax

Question 25

What occurs where wear and tear is greater than depreciation?

Answer 25

Taxable MTD

Question 26

What occurs when the depreciation is greater than wear and tear?

Answer 26

Deductible MTD

Question 27

What is the complete formula for current tax expense?

Answer 27

PBT
(MTD)/MTD
-------
TI x current tax rate
-------
Current tax expense

Question 28

What is the formula to calculate deferred tax?

Answer 28

MTD x current tax rate

Question 29

What is the SOFP approach to deferred tax calculations?

Answer 29

Look at the movement in the CLOSING balance of deferred tax. If there’s a movement then there’s a journal entry.

Question 30

What is the journal entry when there is an increase in deferred tax at closing balance?

Answer 30

Dr. Deferred tax (PL)

Cr. Deferred tax (FP)

Question 31

What is the journal entry when deferred tax’s closing balance decreases?

Answer 31

Dr. Deferred tax (FP)

Cr. Deferred tax (PL)

Question 32

Are DTA and DTL a balance in SOFP or movement?

Answer 32

Balance

Question 33

What is a DTA?

Answer 33

Deferred tax asset

Future income tax that is recoverable

Question 34

What is DTL?

Answer 34

Deferred tax liability

Future income taxes payable

Question 35

Is DTA taxable or deductible?

Answer 35

Deductible temporary difference

Question 36

Is DTL taxable or deductible?

Answer 36

Taxable temporary difference

Question 37

How is the temporary difference calculated?

Answer 37

Carrying amount - tax base

Question 38

How is DTA / DTL calculated?

Answer 38

Temporary difference x current tax rate

Question 39

Regarding an asset, when do we get DTA?

Answer 39

Where CA < TB

Question 40

Regarding a liability, how do we get a DTA?

Answer 40

TB < CA

Question 41

Regarding an asset, how do we get a DTL

Answer 41

When CA > TB

Question 42

Regarding a liability, how do we get a DTL

Answer 42

When TB > CA

Question 43

How would you define a tax base of an asset?

Answer 43

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.

Question 44

What does IAS 12 par 15 say?

Answer 44

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

Question 45

What does it mean when deferred tax won’t be recognized when it doesn’t affect accounting profit or tax profit?

Answer 45

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.

Question 46

What is the definition of a tax base liability?

Answer 46

Carrying amount - any amount that will be deductible

Question 47

Is there deferred tax where SARS grants deductions?

Answer 47

Yes

Question 48

Is there deferred tax on an asset that SARS doesn’t allow deductions?

Answer 48

No

There will only be permanent differences and no deferred taxes

Question 49

What are some examples of assets that don’t have deferred tax?

Answer 49

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.

Question 50

So how do we account for the differences in tax where the difference is permanent?

Answer 50

We use a tax reconciliation note

Question 51

What does the tax recon note look like?

Answer 51

PBT
Tax there on at 30%
Depreciation at 30%
--------
Income tax expense

Question 52

What does it mean when the exception is initial transaction that doesn’t affect profit?

Answer 52

If transaction doesn’t affect profit on either accounting or tax, deferred tax won’t be recognized.