Taxation Flashcards
How is tax expense shown in the spl calculated?
Current year estimate X
(Over)/under estimate from prior year (X)/X
Current tax X
Increase/decrease in deferred tax X/(X)
Tax expense in SPL X
What impact movements in deferred tax have on tax expense?
An increase in deferred tax = an increase in the tax charge for the year
A decrease in deferred tax = a decrease in the tax change for the year.
What does IAS 12 cover?
IAS 12 covers the accounting treatment for:
- Current Tax - Tax payable to authorities in relation to profit from current year activities.
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Deferred Tax - An application of the accruals concept. Recognising future tax consequences of recognised transactions and events which give rise to a difference between profit on SPL and taxable profit.
- Where differences are temporary deferred tax will be applicable.
- Where differences are not temporary deferred tax will not apply.
How is deferred tax calculated?
Deferred tax is based on the carrying amounts of a company’s assets and liabilities in comparison to their tax base.
Carrying amount = Cost less accumulated dep’n
tax Base = Cost less cumulative tax allowances.
Where carrying amount > Tax base = deferred tax liability
Where carrying amount < tax base = Deferred tax asset.
The difference will need to be multiplied by the tax rate given.
What about when assets are revalued.
In this situation the carrying amount of the asset will change but the tax base will not.
Gain - Will be recorded in the revaluation reserve (SoFP) and OCI (SPL)
Deferred tax liability arising from revaluation - will be posted to the revaluation reserve (reducing the reserve) and the tax expense for the year.
What are the reasons for recognising deferred tax?
- The deferred asset or liability will eventually need to be settled.
- Failing to allow for deferred tax liabilities can result in profit being overstated:
- Over optimistic dividend payment
- Distortion of earnings per share
- Distortion of Price/earnings ratio
- Shareholders being misled.
