Week 4 - Deferred Tax Flashcards
Temporary v Permanent Difference
Temporary requires deferred tax adjustment, Permanent DO NOT
Permanent difference: Income recognised in statements is not taxes
Expense recognised in statements is not tax deductible
These are quite rare, main example is Client entertaining. IS obviously recognisable as expense in accounts, but it is not a tax deductible expense
Temporary Difference: Income or expense in different accounting periods in the statements compared to when recognised in tax computation
e.g. Depreciating PP&E, accounts might depreciate over 20 years, but tax authority might say have to depreciate over 5 years
Deferred Tax Working Layout
Carrying Value | Tax Base | Difference | Taxable Allowance | Taxable Temp. Difference | Deductible Temp. Diff
At the bottom, have rows of:
- Total
- Net Taxable (Deductible) Temp. Difference
- Deferred Tax Liability @ tax rate ‘x%’
Once this is done, we do a table called: “Calculation of deferred tax charge in IS & OCI”
Deferred Tax at 1/1/XX
DT Items in reserves (if there’s any revaluation gain or loss recognised in the notes, x this by the tax rate)
DT Balancing figure (difference between DT at start + Reserves & new calculated figure)
DT at 31/12/XX (the figure we’ve calculated above)
Goes in Taxable if CV > Tax Base & vice versa
But vice versa if it’s a liability
Capital Allowance for tax purposes > Accounting policy
E.g. Land was £110k at Cost in 2026, currently NBV of £66k in 2028 with a 10% depr. rate.
Capital Allowance for tax is 25%
Take original cost (£110k) x (1-0.25)^n (n = years of depr.)
= £46,406
Taxable Temp. Difference = £66k - £46,406
Goodwill in Deferred Tax Questions
Write “No deferred Tax on Goodwill under IAS12”
Investments
Treat at cost for tax purposes i.e.
If they’ve revalued the investment after a gain, subtract this gain to get the Tax Base
Unrealised Profit in Deferred Tax Calc.
Carrying Value = 0
Tax Base = calculated URP
,’, will be deductible expense as TB>CV
If Tax Treatment is the same as that recognised in the accounts?
Write CV & TB as the same figure, then write “no Deferred Tax as accounting & tax treatment is the same””
Liabilities within the Deferred Tax Calc
If a Liability (e.g. Provision) CV > Tax Base, then Deductible Temp. Difference
No note on an SoFP line item
Ignore
Why is DT different from other liabilities
No present obligation to pay anyone, tax authorities don’t keep track of deferred tax it’s just to ensure matching principle
Matching concept overrides the CF definition of a liability
Criticisms of deferred tax
5
Deferred tax refers to fture tax so should use expected tax rates rather than current. Debators would say too difficult to estimate this and is manipulatable, worsens comparability
Don’t meet the definition of a liability. As there is no obligation to pay as it depends on future profits. Counter is that need to retain accruals outweighs this
Deferred tax isnt discounted, usually future cash flows are in IFRS. Argument is that this is too impractical and complex
Uses a balance sheet approach comparing carrying value tot tax base. Problematic as corp. tax relates to profit not assets/liabilities (Could argue this aligns with Conceptual Framework though)
IAS 12 is not consistent with the concept of Understandability: Users may find deferred tax difficult to
understand as it relates to potential tax paid/received in the future
According to IAS12, when can an entity recognise deferred tax?
When probable that taxable profits will be available in the future e.g. chance more than 50%
Why is deferred tax necessary?
Accounting profit different to taxable profit. Without DT, tax charge may bear little resemblance to the accounting profit e.g. if there’s high capex which is tax deductibe.
DT tries to relieve this, but will never be perfect due to permanent differences (charges that will never be tax deductible) e.g. expensing client entertaining.
Deferred Tax Movement
Difference between opening & closing balance
Opening balance = (opening CV - Opening Tax Base) x Tax %
e.g. Opening CV = £100k, and TB £80k, opening balance = £20k x 20% = £4k
Closing balance same
Movement = the difference between the 2
Land in Deferred Tax
Tax Base is at cost
The intangible asset relates to £10m of paid development costs that were capitalised by Jensen Group plc in 20X4. The development costs are being amortised over 10 years straight line. Jensen Group plc
charged a full year of amortisation in 20X4. Development costs are deducted from taxable profits on a cash paid basis.
What’s the Tax Base?
Tax Base = 0
This is because the costs would have been tax deductible when incurred in 20X4 (i.e., the tax authorities expense rather than capitalise them)
In 20X8, Jensen Group plc sold an asset and realised a capital loss of £500,000. Jensen Group plc has been unable to utilise the capital loss in this year’s tax computation. In the current tax regime, capital
losses can only be carried forward for a maximum of 2 years and can only be offset against capital gains from the same trade. The finance director feels it is unlikely that Jensen Group plc will realise
qualifying capital gains in the next 2 years. The finance director is confident that future profits will exist to offset other deferred tax assets.
What is the TB & CV?
Would they change if the capital loss had been recognised in the tax computation?
The capital losses do not give rise to deferred tax as it is not probable there will be qualifying capital gains to utilise them before they expire in 2 years. Capital losses are not recognised in the carrying values in the accounts. This means both the carrying value and tax base are nil.
Again make sure you show this in your working so you get marks!
If the loss was in the account, the tax base would be 500,000 thus deductible expense
Tax Losses in DT:
The Group hold unused tax losses of £1.2 million at 31 December 2021. The tax losses arose in the year to 31 December 2019. Tax legislation states that tax losses can be carried forward for offset against profit for a maximum of three years. Based on a taxable profit forecast, it is anticipated that 60% of
the unused tax losses will be utilised by the group against taxable profits
arising in the year to 31 December 2022.
CV = 0
TB = 1200*0.6 = 720
The group capitalised £900,000 of development costs that they had paid during the year. These are to be amortised over 10 years, a full year of amortisation has been
charged during the current year. Development costs are deducted from taxable
profits on a cash basis.
What is TB & CV?
TB = 0
CV = 810
