IAS 12 Income Taxes

Question 1

2 elements to tax

Answer 1

Current tax

Deferred tax

Question 2

Current tax

Answer 2

Amount payable to tax authorities in relation to trading activities of the current period

Question 3

Deferred tax

Answer 3

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

Question 4

Tax expense

Answer 4

Current +/- movement in deferred tax

Question 5

Current tax entry

Answer 5

Tax expense dr

Tax payable cr

Question 6

If actual amount paid is less than the estimate recognised

Answer 6

Reduce current tax expense in next period

Question 7

If actual amount paid is more than estimate recognised

Answer 7

Increase current tax expense in next period

Question 8

Permanent differences between accounting and tax profits

Answer 8

Fines
Political donations
Entertainment cost

( disallowed by tax authorities- therefore add back)

Question 9

Temporary difference

Answer 9

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.

Question 10

Temporary difference

Answer 10

Difference between carrying amount of an asset or liability and it’s tax base

Question 11

Tax base

Answer 11

Amount attributed to asset or liability for tax purposes

Question 12

Examples of temporary differences

Answer 12

1. 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
2. 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.
3. Loss is reported in the financial statements and related tax relief is only available by carry forward against future taxable profits
4. Assets are revalued upwards in the financial statements but no adjustment is made for tax purposes
5. Development costs are capitalized and amortised to profit or loss in future periods but were deducted for tax purposes as incurred
6. Cost of granting share options to employees is recognised in profit or loss, but no tax deduction is obtained until the options are exercised

Question 13

Tax base of an asset

Answer 13

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..

Question 14

Tax base of a liability

Answer 14

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

Question 15

CA> tax base

Answer 15

Taxable temporary difference which will give rise to a deferred tax liability

Question 16

Tax base > CA

Answer 16

Temporary difference is a deductible temporary difference which will give rise to a deferred tax asset

Question 17

Deferred tax should be provided for on all taxable temporary differences, unless deferred tax liability arises from

Answer 17

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

Question 18

Deferred tax asset should be recognized on all deductible temporary differences unless

Answer 18

Exceptions above

Insufficient taxable profits are expected to be available in the future against which the deductible temporary difference can be utilized

Question 19

Items giving rise to deferred tax is dealt with in profit or loss

Answer 19

Related deferred tax should be in profit or loss

Question 20

Items giving rise to deferred tax is dealt with in other comprehensive income

Answer 20

Related deferred tax should also be recorded in other comprehensive income

Question 21

Presentation

Answer 21

DTA or DTL is presented as non current in soft

Question 22

DTA and DTL can be offset as long as

Answer 22

1. Entity has legally enforceable rights to set off current tax assets and current tax liabilities
2. Deferred tax assets and liabilities relate to tax levied by the same tax authority

Question 23

Revaluations

Answer 23

Should be recognized on the revaluation of property plant and equipment even if

1. There is no intention to sell the asset.
2. 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.

Question 24

Share option scheme

Answer 24

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

Question 25

Intrinsic value of options

Answer 25

Market price of shares - exercise price of the options

Question 26

Unused tax losses

Answer 26

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

Question 27

Business combination

Fair value adjustment

Answer 27

• 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

Question 28

Goodwill

Answer 28

Does not give rise to deferred tax

Question 29

Business combination

Provision for unrealized profit

Answer 29

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

Question 30

Unremitted earnings

Answer 30

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

1. Investor controls timing of reversal of temporary difference
2. 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.

Question 31

Financial assets give rise to deferred tax when revalued

Answer 31

Yes