Income Taxes Flashcards
Deferred Tax
The estimated future tax consequences of transactions and events in the current and previous financial periods.
Deferred tax is a basis of allocating tax charges to particular accounting periods. It is an application of the accruals concept aiming to eliminate a mismatch between:
- Accounting profit and Taxable profit
Differences can be caused by:
- Permanent differences: Expenses not allowed for tax purposes.
- Temporary differences: Expenses allowed for tax purposes but in a later accounting period.
Explain what temporary diffrences are
The difference between the carrying amount of an asset or liability in the SOFP and it’s tax base (Opening carrying amount less Tax allowances/depreciation). Tax base is the value of the asset for taxation purposes and therefore differs to accounting depreciation.
If the tax base is lower than the carrying amount this creates a liability, the reverse creates an asset.
Carrying amount (Bal B/f less accounting depreciation)
less: Tax Base ( Bal B/f less Tax allowance)
= Temporary Difference
Temp Diff x Tax Rate = Deferred Liability/Asset
Examples:
- Certain types of income that are taxed on a cash basis rather than an accruals basis. such as certain provisions.
- The difference between depreciation charged on a NCA and the actual tax allowances given.
- This could be due to timing. for instance if the tax allowance is at a faster rate than the depreciation being expensed then tax will be lower in the early years than if it was based on the accounting profit. However this will reverse in the latter years (tax relief ending up slower that depreciation) and a tax charge will be higher than expected that if based on accounting profit.
In this case the timing difference would create a deferred tax liability.
Unutilised Trading Losses
Trading losses can be recognised as a deferred asset in the current period. This can only be recognised against future profits which are probable.
Dr Deferred Asset
Cr Expense on SPL
