Tax Flashcards
What 2 elements is the tax expense in the financial statements made up of?
Current tax - tax payables to authorities in relation to current year activities
Deferred tax - an application of the accruals concept
Tax expense = current tax +/- deferred tax
How do you account for current tax?
Dr Tax expense (SPL)
Cr Tax payable (SFP)
Tax not normally paid until after the year end
Pro forma for tax expense in SPL
Current Year Estimate x
(over)/under estimate* (x)/x
——————————————-
Current tax x
Inc/(dec) in deferred tax x/(x)
——————————————-
Tax expense in SPL x
*diff between last years estimate & amount paid. If you didn’t pay enough add it on
Deferred tax is an application of the accruals concept. It ensures that the tax impact of a transaction is recorded in the same period as the transaction itself. What is a temporary differences and what are the 2 types?
A temporary difference is a difference between the carrying amount of an asset of liability and its tax base.
Temporary differences - deferred tax e.g. capital allowances
Non temporary differences - no deferred tax e.g. disallowable expenses like client entertaining
What is a tax base?
the value of an asset or liability for tax purposes
Carrying amount > tax base (a taxable difference)
Dr Tax expense
Cr Deferred tax liability
Carrying amount < tax base (a deductible difference)
Cr Tax expense
Dr Deferred tax asset
Should deferred tax assets and liabilities be discounted to present value?
No
How do you calculate the deferred tax balance?
multiply the temporary difference by the tax rate in force (or expected to be in force) when the asset is realised of the liability is settled
Pro forma to find taxable profit from profit
Profit x
Add back;
Dep’n x
Disallowable expenses x
Less;
Capital allowances (x)
————————————–
Tax profit x
Deferred tax liabilities should be recognised on taxable temporary differences unless they arise from;
-initial recognition of goodwill
-initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, does not affect accounting profit or taxable profit, and does not create equal taxable and deductible temporary differences
Deferred tax assets should be recognised on all deductible temporary differences bar 2 exceptions, as long as what?
As long as sufficient future profits will be available against which the deductible differences can be utilised
Should deferred tax be recognised on asset revaluations?
Yes - even if there is no intention to sell the asset
Revaluation gains are recorded in OCI, where does the deferred tax arising on the revaluation get recorded?
Also OCI
