IAS 12 Income Taxes Flashcards
2 elements to tax
Current tax
Deferred tax
Current tax
Amount payable to tax authorities in relation to trading activities of the current period
Deferred tax
Accounting measure used to match the tax effects of transactions with the accounting treatment. It is not levied by gov but simply an application of accrual concept
Tax expense
Current +/- movement in deferred tax
Current tax entry
Tax expense dr
Tax payable cr
If actual amount paid is less than the estimate recognised
Reduce current tax expense in next period
If actual amount paid is more than estimate recognised
Increase current tax expense in next period
Permanent differences between accounting and tax profits
Fines
Political donations
Entertainment cost
( disallowed by tax authorities- therefore add back)
Temporary difference
May mean that profits are reported in the financial statements before they are taxable. Or that tax is payable even though profits have not yet been reported in the financial statements.
Temporary difference
Difference between carrying amount of an asset or liability and it’s tax base
Tax base
Amount attributed to asset or liability for tax purposes
Examples of temporary differences
- Tax deductions for the cost of non current assets that have a different pattern to the write off of the asset in the financial statements
- Pension liabilities that are accrued in the financial statements but are allowed for tax only when the contributions are made to the pension funds at a later date.
- Loss is reported in the financial statements and related tax relief is only available by carry forward against future taxable profits
- Assets are revalued upwards in the financial statements but no adjustment is made for tax purposes
- Development costs are capitalized and amortised to profit or loss in future periods but were deducted for tax purposes as incurred
- Cost of granting share options to employees is recognised in profit or loss, but no tax deduction is obtained until the options are exercised
Tax base of an asset
Amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset.
If economic benefit is not taxable , the tax base of an asset is equal to its carrying amount..
Tax base of a liability
It’s carrying amount, less any amount that will be deductible for tax purposes in future periods
In case of revenue received in advance , tax base of the liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods
CA> tax base
Taxable temporary difference which will give rise to a deferred tax liability
Tax base > CA
Temporary difference is a deductible temporary difference which will give rise to a deferred tax asset
Deferred tax should be provided for on all taxable temporary differences, unless deferred tax liability arises from
Goodwill, for which amortization is not tax deductible
Initial recognition of an item that affects neither accounting profits nor taxable profits and which does not result from a business combination
Deferred tax asset should be recognized on all deductible temporary differences unless
Exceptions above
Insufficient taxable profits are expected to be available in the future against which the deductible temporary difference can be utilized
Items giving rise to deferred tax is dealt with in profit or loss
Related deferred tax should be in profit or loss
Items giving rise to deferred tax is dealt with in other comprehensive income
Related deferred tax should also be recorded in other comprehensive income
Presentation
DTA or DTL is presented as non current in soft
DTA and DTL can be offset as long as
- Entity has legally enforceable rights to set off current tax assets and current tax liabilities
- Deferred tax assets and liabilities relate to tax levied by the same tax authority
Revaluations
Should be recognized on the revaluation of property plant and equipment even if
- There is no intention to sell the asset.
- Any tax due on the gain made on any sale of the asset can be deferred by being “rolled over” against the cost of a replacement asset.
Share option scheme
Accounting for share option schemes involves recognizing an annual remuneration expense in profit or loss through out the vesting period
Tax relief granted is based on the intrinsic value of the options
Delayed tax relief means that equity settled share based payment schemes give rise to a deferred tax asset
Intrinsic value of options
Market price of shares - exercise price of the options
Unused tax losses
Deferred tax asset Can be recognized only to the extent that it is probable that future taxable profits will be available against which the unused tax losses can be utilized
Consider
1. Whether an entity has sufficient taxable temporary differences against which the unused tax losses can be offset
2. It is probable the entity will make taxable profits before the tax losses expire
3. Whether the cause of the tax losses can be identified and whether it is likely to recur.
4.whether tax planning opportunities are available
Business combination
Fair value adjustment
- consolidated assets and liabilities are at FV
- tax base is from subsidiary’s individual financial statements
Temporary difference creates deferred tax in consolidated financial statements
1. Temporary difference gives rise to deferred tax in consolidated financial statements
Deferred tax here is treated as part of net assets acquired and as a result impacts the goodwill recognized
Goodwill
Does not give rise to deferred tax
Business combination
Provision for unrealized profit
Unrealized profit remaining with in the group at the reporting date must be eliminated
Adjustment entry
Cost of sale dr
Inventory cr
This reduces CA of inventory in consolidated financial statements
Tax base remains same as its cost in individual financial statements of the purchasing company.
This creates deductible temporary difference - giving rise to deferred tax asset in consolidated financial statements
Unremitted earnings
Temporary differences arise when investment in sub, associate and joint venture is different from tax base
Ca in consolidated f/s = investors share in net asset of investee plus purchase gw
Tax base = cost of investment
Difference = unremitted earning of sub. Associate. Joint venture
Deferred tax should be recognized on it except when
- Investor controls timing of reversal of temporary difference
- Probable that profits will not be distributed in foreseeable future.
Investor can only control div policy of a sub, not other types of investments. Therefore deferred tax does not arise on investment in sub. But may arise on investment in associates and joint ventures.
Financial assets give rise to deferred tax when revalued
Yes
