IAS 12 - taxation Flashcards
Do taxation payments related to the accounting period in which they are made?
No, not necessarily
How does a company get around the time delays in tax calculations
They include an estimation of corporation tax payable which will then be subject to adjustments
What are the elements of the tax charge?
Tax payable for the current period
Adjustments to the tax charge for previous accounting periods (i.e. difference between estimated and final calc)
Deferred taxation
What is the T account entry for taxation in yr 1 and yr 2?
Yr 1 - estimated tax
Dr Corporation tax
Cr Tax liability
Yr 2 - Adj for yr 1 change & yr 2 estimate
Dr Corporation tax (change + yr 2)
Cr Tax liab (Change + yr 2)
Payment of yr 1:
Dr Tax liab
Cr cash
What is deferred tax?
The difference that exists between a companies accounting profit and taxable profits
What are some examples of non allowable taxable expenses?
Accounting depreciation, entertainment expenses
What are permanent differences in deferred tax?
They always exist between accounting and taxable profits
What are the main reasons for temporary differences in deferred tax?
The difference between accounting depreciation and tax depreciation
What happens with the extra tax charged due to taxable dep’cn?
Extra tax is put aside in deferred tax account and then used to pay off later taxes. They are purely accounting adjustments on paper, they do not affect the amount paid to the tax authorities
What is the temporary difference approach?
Focus on SOFP. Difference between CV of net assets and written down value of the assets (tax base). Either a deferred tax liab or deferred tax asset
What is a deferred tax liab?
Net assets CV is larger than written down value (tax base)
What is a deferred tax asset?
Net asset CV is smaller than the written down value (tax base)
How do you account for deferred tax?
100 % tax allowance on £500k asset in 1st year of life
Tax = 30%
Asset useful life = 5 years depreciated on a straight line basis
Tax saving of £500k * 30% = £150k
Dr Corp tax liab £150k
Cr Corporation tax (I/S) £150k
However we cannot recognise all the tax benefit in the 1st yr. Must match asset income and expenses to periods in which benefit from that asset. Provision is made to spread tax charge equally
5 years useful life - £30k each year
Dr Corp tax (I/S) £120k
Cr deferred tax liab £120k
To reduce the provision:
Dr Deferred tax liab £30k
Cr Corp tax (I/S) £30k
What is a deferred tax asset?
An amount that can be deducted from a future tax liab to reduce the tax bill
How do you account for deferred tax?
100 % tax allowance on £500k asset at end of useful life
Tax = 30%
Asset useful life = 5 years depreciated on a straight line basis
Deferred tax asset in the balance sheet
Dr Deferred tax asset (SOFP) £30k
Cr Corporate tax £30k
Repeat over and over for next 4 years to build deferred tax asset
In year 5:
Dr Corporate tax £150k
Cr Deferred tax asset £150k
When can a company recognise a tax loss as an asset?
Only recognised it its probable that the business will earn profits in future
What is the calculation for a deferred tax asset?
Value of tax losses * tax rate
$45k in tax losses to carry forward against future taxable profits, expected profits next year = $65k, corp tax = 30%
Calculate deferred tax asset and accounting treatment
Match to current year income
$45k * 30% = $13.5k
Dr deferred tax SOFP $13.5k
Cr Corporate tax $13.5k
What is the other comprehensive income?
A line on the statement of comprehensive income recognising unrealised gains or losses
When is a deferred asset or liab on the OCI?
If it relates to an item that is on the OCI such as an asset that has been revalued. Therefore it is recognised on the
Matches the deferred tax gain or loss with the gain or loss on revaluation
Property purchased worth £300k on 01/x4
Property revalued to current MC of £450k on 01/c9
CV of net assets = £1.2m at 12/x9, tax written down value = £1m (12/x9)
Opening deferred tax liab = £12k, tax rate = 30% (01/x9)
What impact does this have from a deferred tax point of view?
Deferred tax liab c/f
Net assets £1.2m
Tax base £1.0m
Extra charge of tax £200k = deferred tax liab * 30% = £60k
Increased in deferred tax liab
Opening balance £12k
Closing balance £60k = Increase £48k - this is partly due to revaluation
If not due to revaluation the journal would be:
Dr Corp tax £48k
Cr deferred tax liab £48k
However, Property revaluation
Increase in property value * tax rate = £150k * 30% = £45k of tax is due to revaluation so needs to hit OCI too
Final journal entry
Dr corp tax £3k
Dr OCI (income tax) £45k
Cr deferred tax liab £48k
What are share based payments?
Payments to staff or suppliers in shares or share options
When is a deferred tax recognised with regards to share based payments?
Share options have intrinsic value that could be tax deductible
When are tax effects recognised re share options granted to employees?
When award is in-the-money (share price below market price) i.e. employee buys for £5 but market value is £7
What are the deferred tax disclosure requirements under IAS 12?
Current tax charge
Adjustments of over / under provisions
Deferred tax charge or provision release
What additional disclosures are required under IAS 12?
Tax charge relating to any extraordinary items
Tax expense in respect of discontinued ops
Explanation of accounting and taxable profit differences
Temporary differences and the related deferred tax charges
How can unused tax losses be recognised and how are they restricted?
A deferred tax asset can be recognised based on unused tax losses
The deferred tax asset is restricted to the amount of probable future taxable profits
Unused tax losses provide a future tax benefit and so a deferred tax asset should be recognised. A deferred tax asset can be recognised based only on its recoverability - based on probable future taxable profits
