Deferred Taxes Flashcards
What is deferred Tax?
Deferred Tax how we convert our Tax expense figure from what SARS has actually charged us (based off tax standards) to what they would have charged us based off of accounting standards
What legislation deals with income Taxes?
IAS 12
What should be considered when dealing with Deferred Tax?
What is a deferred Tax Asset and what is a deferred Tax liability?
- deferred Tax liability - It is that we haven’t actually incurred tax owed to SARS but in accounting principles we should have.. so we raise a liability to act as if we do owe SARS but of course we create a deferred tax liability instead of a SARS liability, which shows that we don’t really owe SARS, if we did, we would create the SARS liability account. We would then expense this liability in the correct year
- furthermore, when a deferred Tax liability increases our tax expense, so we add it to the current Tax
- deferred Tax asset - This is when we have actually incurred Tax that we owe to SARS but we should not have if we calculated our profit according to accounting standards, so we want to create an asset because we have actually paid Tax that we haven’t have actually incurred yet (like a prepaid expense) and we have not expensed it yet
- furthermore a deferred Tax asset decreases our tax expense so we subtract it from our tax expense
How do you know if you have a deferred Tax Asset or a deferred tax liability?
- check to see if the temporary difference that is arising creates an increase in your accounting profit or a decrease in your accounting profit, in comparison to SARS profit
- if it is creating an increase in your accounting profit, then it will result in us increasing out tax expense and therefore if we debit tax expense, we will need to credit deferred Tax which means it is a liability; another way to explain it is that we haven’t actually incurred tax owed to SARS but in accounting principles we should have.. so we raise a liability to act as if we do owe SARS but ofcourse we know that we don’t yet but we want to show that we would have this tax expense in the current year if it was based on accounting principles
What are the disclosure requirements for income taxes and their layouts?
- Taxation note with total TAx figure Reconciliation (layout below
- SA normal Tax
– Current Tax
– Deferred Tax
- something to do with assessed losses…
- Tax reconciliation (total tax figure)
– Tax Rate
– Tax on accounting profit before Tax
– Tax effect on permanent differences
— ALL the permanent differences
– final tax expense
– effective tax rate
- Deferred Tax Note with Reconciliation
- Comprises of the following items
– ALL temporary difference items
Deferred Tax reconciliation
- balance at the beginning of the year
- total temporary difference effect
– taxable temporary differences
— ALL taxable temporary differences
– deductible temporary differences
— ALL deductible temporary differences
- Deferred Tax liability/asset at the end of the year
What are the workings required to be able to meet disclosure requirements?
- Profit Before Tax calculation
- simply work out the profit before tax - Accounting profit to SARS profit Recon
- start with profit before tax
- list permanent differences
- list temporary differences
- multiply by tax rate to find current tax and deferred Tax - Deferred Tax balance calculation
- perform the balance sheet method
In what order must one complete the disclosure requirements and needed workings?
- Profit before Tax working
- Accounting profit to SARS profit Recon working
- Deferred Taxation Note AND working
- Taxation Note
I think, the better you get at doing these things, the more you can do each step at the same time
What is the difference between a permanent difference and a temporary difference?
- temporary difference is when the timing of a deduction from income or inclusion in income of an item is different in terms of the accounting profit and the SARS profit, for example, in accounting, we will only include prepaid expense when the item is expensed but SARS says we must deduct it as soon as we pay for it
- permanent difference, lol I don’t care right now
How do you work out what the temporary difference is if there is one?
- For the BALANCE of temporary differences that exists on an item, you would need to use the balance sheet method
- for the temporary difference MOVEMENTS in only the current year, you can simply calculate the item affects PROFIT in Accounting standards and SARS standards and the difference in PROFIT will be the temporary difference
what are the permanent differences you need to remember and why are they permanent?
- no allowance but we still depreciate (because that depreciation expense is an expense that SARS will never allow as a deduction, so those profits will always be different from each other (Accounting and SARS))
- Local Dividends (dividends is exempt from gross income
- Donations, unless told otherwise (no deduction given in some cases)
what are some of the temporary differences you need to remember?
- prepaid insurance
- allowance for Credit losses
How do you calculate the temporary difference on the allowance for credit losses?
Then explain the following example:
allowance 2015 :35000
Allowance in 2016: 50000
only 25% of allowance is deductible
What was the deferred Tax movement, and then balance at the end of the year
- the temporary difference BALANCE of the credit allowance would be the difference between what SARS allows as a deduction and the total contra asset value of the Allowance for credit losses, NOT THE EXPENSE ACCOUNT
- the movement in temporary difference resulting from allowance for credit losses would simply be the difference between the increase or decrease in the allowance contra asset account, which is the expense or income, and then the amount of that, which will be deductible by SARS
- movement in deferred tax is (50000-35000) * 0.25 = 3750; 3750 * 0.28 = 1050
- balance of deferred Tax is 50000 - (50000*0.25%) = 37500 ; 37500 * 0.28 = 10500
Where would the CGT on items that when straight to equity go?
IAS 12.61A says they would also go straight to equity
