ACCOUNTING FOR INCOME TAX – Part ii

Question 1

Tax losses occur when ?

Answer 1

when allowable deductions exceed taxable profit

Question 2

in dealing with tax losses necessary to ?

Answer 2

distinguish between two events occurring at two different points of time

Question 3

Accounting for future tax consequences =

Answer 3

deferred taxes

Question 4

Accounting for future tax consequences: which section and approach does it apply?

Answer 4

AASB 112 applies the ‘balance sheet’ approach

Question 5

Accounting for future tax consequences - balance sheet approach?

Answer 5

this means the recognition of deferred tax assets and liabilities is based on the differences between accounting and tax values of assets and liabilities

Question 6

Accounting for future tax consequences - balance sheet approach focuses on?

Answer 6

comparing the carrying amount of an entity’s assets and liabilities (determined by accounting rules) with the tax base for those assets and liabilities

Question 7

Accounting for future tax consequences - balance sheet approach involves comparing the …

Answer 7

the balance sheet derived using accounting rules with the balance sheet that would be derived from taxation rules.

Question 8

Balance sheet approach:

carrying amount?

Answer 8

is the amount the asset or liability is recorded at in the accounting records

Question 9

Balance sheet approach: tax base is?

Answer 9

defined as the amount that is attributed to an asset or liability for tax purposes (AASB 112)

Question 10

Balance sheet approach: tax base represents?

Answer 10

the amount an asset or liability would be recorded at if the balance sheet (statement of financial position) were prepared applying taxation rules

Question 11

Balance sheet approach: what is a temporary difference?

Answer 11

Where the carrying amount of an asset or liability is different from the tax base

Question 12

Balance sheet approach: taxable temporary difference ->

Answer 12

deferred tax liability

Question 13

Balance sheet approach: taxable temporary difference:

Answer 13

the carrying amount of an asset exceeds its tax base; OR

[the carrying amount of a liability is less than its tax base];

taxation payments have effectively been deferred to future periods;

tax is reduced or ‘saved’ in early years, but additional tax will need to
be paid later.

Question 14

Balance sheet approach:

Example of a deferred tax liability:

Answer 14

Carrying amount of a non-current depreciable asset exceeds the tax base in early years, as tax deduction for depreciation is greater than accounting depreciation;

this will be reversed in later years when no/smaller tax deductions for depreciation are allowed (in both systems always a total of 100% of cost is depreciated over time).

Question 15

Balance sheet approach

deductible temporary difference ->

Answer 15

deferred tax asset

Question 16

Balance sheet approach: deductible temporary difference?

Answer 16

The carrying amount of an asset is less than its tax base; OR

the carrying amount of a liability exceeds its tax base;

taxation payments have been made ‘in advance’;

tax is reduced or ‘saved’ in later years.

Question 17

Balance sheet approach:

Example of a deferred tax asset:

Answer 17

Tax base of a depreciable asset exceeds the carrying amount in early years, as tax deduction for depreciation is less than accounting depreciation;

this will be reversed in later years when the asset is fully depreciated for accounting purposes, but tax deductions for depreciation are still allowed
(in both systems always a total of 100% of cost is depreciated over time).

Question 18

Relationship between income tax payable and income tax expense:
deferred tax liability/asset affect on income tax expense

Answer 18

An increase (decrease) in a deferred tax liability increases (decreases) income tax expense

An increase (decrease) in a deferred tax asset decreases (increases) income tax expense

Question 19

Relationship between income tax payable and income tax expense:

Answer 19

total income tax expense = income tax payable +/- Change in deferred taxes

income tax expense = accounting profit (after permanent differences) x tax rate

Question 20

Tax rate considerations:

If tax rates are different in future years

Answer 20

the enacted tax rate expected to apply should be used

Question 21

Tax rate considerations

When different tax rates apply to different levels of taxable income

Answer 21

companies are required to use average tax rates expected to apply in periods in which temporary differences reverse

Question 22

Tax rate considerations

When a change in tax rate is enacted

Answer 22

its effect should be recorded immediately.

The effect is reported as an adjustment to tax expense in the period of change.

Question 23

Financial statement presentation: deferred tax accounts reported as?

Answer 23

assets and liabilities

Question 24

Financial statement presentation: steps in process of classying and off-setting deferred taxes

Answer 24

1. Classify all amounts as either current or non-current.
2. Determine net current amount by off-setting* various tax assets and liabilities classified as current
3. Determine non-current amount by off-setting* various deferred tax assets and liabilities classified as non-current

Question 25

Financial statement presentation: Paragraphs 79 and 80 of AASB 112/IAS 12 require the major components of income tax expense to be disclosed. These include:

Answer 25

current tax expense (paragraph 80(a))
deferred tax expense (paragraph 80(c))
deferred tax expense relating to changes in tax rates(paragraph 80(d))
the amount of any benefit arising from a previously unrecognised tax loss(paragraph 80(f)).

Question 26

Summary: Deferred tax assets and liabilities are determined by

Answer 26

comparing the carrying amounts of an entity’s assets and liabilities at the end of a period with their tax bases

Question 27

Summary: A comparison of tax bases and carrying amounts determines

Answer 27

the existence of temporary differences, classified into taxable and deductible temporary differences

Question 28

Summary: Taxable temporary differences give rise

Answer 28

deferred tax liabilities

Question 29

Summary: deductible temporary differences give rise

Answer 29

to deferred tax assets