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Topic 9: Accounting for Income Taxes
Financial Accounting BFA201
BFA201_13
2
Readings and references
• Deegan Chapter 18
• AASB 112 Income Taxes
3
Independent Study TasksTutorial questions (for workbooks)• Tutorial Question 1 Deegan 7th ed, Ch. 18, Review Question 6
(p. 655)• Tutorial Question 2 Deegan 7th ed, Ch. 18, Review Question
10 (p. 655)• Tutorial Question 3: Deegan 7th ed, Ch. 18, Challenging
Question 22 (p. 657)• Tutorial Question 4: Deegan 7th ed, Ch. 18, Challenging
Question 23 (p. 658)
Independent study questions• Chapter 18 – Review Question 1• Chapter 18 – Review Question 9• Chapter 18 - Review Question 13• Chapter 18 – Review Question 17
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Learning Objectives
• Identify differences between tax and accounting
• Understand DTA and DTL
• Understand how to account for– changes in tax rates; – tax effect of revaluations; – tax losses
• Evaluation of tax effect accounting
5
Key Concepts• Temporary differences
• Balance sheet approach
• Deferred tax assets/liabilities
• Carrying amount
• Tax base
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The Tax Payable Method
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Tax Payable Method• The method taught in BFA104 (but now we have to learn
about tax effect accounting under AASB 112)
• This method is based on the view that the amount paid to the ATO is an appropriation of profits by the government.
• The income tax expense for the period is the same amount as the income tax payable for the same period.
• A balance day adjustment is recorded for income tax based on an estimate of the tax liability at the end of the financial year.
• Any over/under provision of tax is accounted for when an assessment is received from the ATO
8
Tax Payable Method
• Example: Assume that Freds Ltd has estimated tax payable for the year to be $12,500 as at 30 June 20xx.
•
Date $ $
30 June
Income Tax Expense Income Tax Payable (L)
12 50012 500
An ATO assessment notice assesses the tax to be paid by Fred Ltd at $13,000. This is payable on 10 September:
10 Sept
Income tax Payable (L) Cash
13 00013 000
10 Sept
Underprovision of IncomeTax Payable (E) Income tax payable (L)
500500
9
Why a Revised Tax Effect Standard?• Development of a conceptual framework in which a
balance sheet approach was adopted.
• The definition of expense and revenue is dependent on the definition of assets and liabilities.
• Equity is a function of the definition of assets and liabilities (ie. a residual)
• AASB 112 adopts the balance sheet approach
• The approaches adopted de-emphasise the matching process
10
Why is Net Profit according to GAAP different from Taxable Income?
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Accounting for Income Tax
Accounting Profit (Accounting Standards)Accounting Profit (Accounting Standards)
Taxable Income (Income Tax Legislation)Taxable Income (Income Tax Legislation)
=/
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Accounting Profit and Taxable Income
• Income tax payable is based on assessable/taxable income in accord with the Income tax Assessment Act 1997.
• Accounting profit is determined in line with various accounting rules (AASB conceptual framework, accounting standards, accepted accounting principles)
• Rules are therefore different (eg revenue received in advance)
13
Accounting versus Taxation Income
• Income for taxation purposes is known as taxable income
• Determined in accordance with Australian income tax legislation, not according to general accounting rules
• Differences in accounting and taxation revenue and expenses recognition principles
• Governed by AASB 112
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Accounting
• Revenue• Less expenses• =Accounting Profit
(NPBT)• X tax rate =• INCOME TAX
EXPENSE
• Assessable income
• Less allowable deductions
• = Taxable Income
• X tax rate (less offsets)
• TAX PAYABLE
Tax
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Reconciliation statement
• Need to reconcile accounting profit and taxable income
– Differences in: • Accounting and assessable income• Depreciation • Non deductible expenditure• Exempt income• Special deductions
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Lecture Example 9-1
Accounting profit and taxable income – examples of differences
Transactions Accounting treatment Taxation treatment
Rental revenues Recorded as a liability if received in advance
Assessable when cash is received
Interest revenue Recorded as revenue as it accrues
Assessable when received
Depreciation of assets Expense Deduction allowed, usually at an accelerated rate to accounting, no scrap value included in calculation
Long service leave/sick leave
Recorded as an expense as it accrues overtime
A deduction is allowed when the leave is taken
Entertainment and
Goodwill impairment
Treated as an expense Not a tax deduction in current or subsequent periods
Fines and penalties Recorded as an expense when incurred
A deduction is not allowed
17
Accounting profit and taxable income – cont.
Transactions Accounting treatment Taxation treatment
Insurance costs Recorded as an asset and expensed over time of cover
A deduction is allowed when paid
Product warranties Recorded as an expense and liability on sale of goods
A deduction is allowed when warranty costs are incurred
Bad and doubtful debts Recorded as an expense if doubtful
A deduction is allowed when written off
Revaluation of non-current assets
Recorded depreciation as an expense on the revalued carrying amount
A deduction is only allowed on the original cost, not the revalued amount
Tax losses Not recognised An offset is allowed against future taxable inccome.
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The Balance Sheet Approach under AASB 112: Tax Effect Accounting
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The Balance Sheet Approach Under AASB 112
• Focuses on comparing the carrying value of an entity’s assets and liabilities (determined by accounting rules) with the tax base for those assets and liabilities (determined by taxation rules)
• comparing balance sheet derived using accounting rules with balance sheet derived from taxation rules
• Recognises Deferred Tax Assets and Deferred Tax Liabilities –– i.e. benefits we will get from having paid more tax now –
have an asset to use against any expense we might have in later years – DTA;
– on the other hand we might have an obligation to pay more tax in the future – that obligation is a liability so we are deferring that liability until later- DTL
21
AASB112 prescribes accounting treatment for income taxes
In Balance Sheet:• CURRENT income tax (Tax Legislation)• FUTURE tax consequences**
– “Tax Effect Accounting”…. because accounting and tax rules differ
In Income Statement:• Income tax expense (based on acc profit)
In Other Comprehensive Income Statement:• Tax related to OCI
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AASB112• Accounting for the differences between accounting
and tax rules:
• Two separate calculations are performed each year:
1. Current tax liability (tax payable)2. Movements in deferred tax balances
23
Calculation of current tax
Accounting profit/loss
- accounting revenue not assessable for tax+ accounting expenses not deductible for tax
+/(-) differences between accounting revenue and tax income
+/(-) differences between accounting expenses and tax deductions
= Taxable profit (Taxable Income)x tax rate %
= Current tax liability (Tax Payable)
24
Lecture Example 9-2
Calculation of current tax - example
Profit before tax for PQR Ltd for the year to 30 June 2010 is as follows:
Sales 1,000
Interest revenue 40
Government grant 80
COGS (450)
Depreciation (50)
Goodwill impairment
(20)
Bad debts (30)
Annual leave (10)
Other expenses (260)
NPBT 300
• Depreciation allowed for tax $60.
• Interest has not yet been received.
• Bad debts of $20 were written off during the year.
• Payments of $30 were made to employees in relation to annual leave taken during the year.
• Govt grant exempt for tax.• The tax rate is 30%
Required:• Calculate the current tax
liability of PQR Ltd for 2010
25
Calculation of current tax - example
exempt incomeexempt income
not deductiblenot deductibleAcctg depn 50Tax depn (60)Adj req (10)
Acctg depn 50Tax depn (60)Adj req (10)
B/debts expense-acctg 30B/debts w/off- tax (20)Adj req 10
B/debts expense-acctg 30B/debts w/off- tax (20)Adj req 10
A/L expense- acctg 10Paid- tax (30)Adj req (20)
A/L expense- acctg 10Paid- tax (30)Adj req (20)
Accounting Profit 300
Add (back)
Goodwill impairment (not deductible ) 20Depreciation of plant (Acc NOT Tax) 50Bad debts expense 30Annual leave expense 10
110DeductGovernment grant (tax exempt) (80)Interest (not yet received) (40)Depreciation of plant (for tax purposes) (60)Write off bad debts (20)Annual leave PAID (30)
(230)
Taxable income 180Current tax liability at 30% 54
27
Recording Current Tax Liability
Journal entry:Dr Current income tax expense 54
Cr Current tax liability (or tax payable) 54
• Recognising the current tax liability, based on the current tax income for the year
• Note: Income Tax Expense (accounting)
= Current + deferred tax expense
28
Carrying Amount Vs Tax Base of Asset or Liability
• Carrying amount is the amount the asset or liability is recorded at in the accounting records
• Tax base is defined as the amount that is attributed to an asset or liability for tax purposes
• Where the tax base is different from the carrying amount a ‘temporary difference’ can arise
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Temporary Differences• An assessable temporary difference:
– will result in an increase (decrease) in income tax payable (recoverable) in future periods when the carrying amount of the asset or liability is recovered or settled• creates a liability - deferred tax liability
• A deductible temporary difference:– will result in a decrease (increase) in income tax
payable (recoverable) in future periods when the carrying amount of the asset or liability is recovered or settled• creates an asset - deferred tax asset
30
Deferred Tax Liability Vs Deferred Tax Asset
• Deferred tax liability:– the carrying amount of the asset exceeds the tax base– taxation payments have effectively been deferred to
future periods– tax is reduced or ‘saved’ in early years, but additional tax
will need to be paid later
• Deferred tax asset:– the carrying amount of an asset is less than the tax base– Income tax expense has been higher in the early periods– In a future period, there will be a tax benefit because the
carrying amount will be zero, but there will still be a tax deduction.
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Example of Deferred Tax Liability
• Carrying amount of a non-current depreciable asset exceeds the tax base in early years, as depreciation allowable as a deduction for tax purposes is greater than depreciation for accounting purposes
• This will be reversed in later years when no depreciation is allowable for tax purposes
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Example of Deferred Tax Asset
• Tax base of a depreciable asset exceeds the carrying amount in early years, as depreciation allowable as a deduction for tax purposes is less than depreciation for accounting purposes
• This will be reversed in later years when the asset is fully depreciated for accounting purposes, but depreciation is still allowable as a deduction for tax purposes
33
Income Tax Expense
• Represents the sum of the tax attributable to the taxable income, plus or minus any adjustments relating to temporary differences
• Defined in AASB 112 as:– the aggregate amount included in the
determination of profit or loss for the period in respect of current tax and deferred tax
34
Income Tax Payable
• The amount of tax generally expected to be paid, as a result of the year’s operations, within the next financial period
• Under balance sheet method income tax payable does not necessarily equate to tax expense
• tax expense is affected by temporary differences
35
Calculation of Income Tax Payable
• Income tax payable is based on taxable income
• Calculation of income tax payable:– tax rate multiplied by taxable income
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Journal Entry to Record Income Tax Expense
• If deferred tax asset:– to recognise tax expense that relates to the
temporary difference:Dr Deferred tax asset (temp. difference x tax rate)
Cr Income tax expense
– to recognise tax expense that relates to the entity’s taxable income:Dr Income tax expense
Cr Income tax payable
37
Journal Entry to Record Income Tax Expense
• If deferred tax liability:
– to recognise tax expense that relates to the temporary difference:
Dr Income tax expense
Cr Deferred tax liability (temp. difference x tax rate)
– to recognise tax expense that relates to the entity’s taxable income:
Dr Income tax expense
Cr Income tax payable
38
Reversal in Future Periods
• In future periods, timing differences will reverse
– deferred tax asset will be credited– deferred tax liability will be debited
39
Deferred Tax: Differences
• Permanent or temporary
• Permanent differences = transactions are NEVER recognised as part of taxable profit (or vice versa)– No accounting required for permanent
differences other than disclosure in the notes
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Deferred Tax: Temporary differences
• Deferred tax liabilities (DTLs) and deferred tax assets (DTAs):– Arise because of temporary differences between
the carrying amount and tax base of an asset
– They are removed from the accounts on reversal of the temporary differences
41
Temporary Differences
• These differences are either:–Taxable or deductible
1. The company paying more tax in the future• Taxable temporary differences (TTDs)• Result in deferred tax liabilities (DTLs)
2. The company paying less tax in the future • Deductible temporary differences (DTDs) • Result in deferred tax assets (DTAs)
42
Depreciation example
• Captain Ltd had a depreciable asset costing $100,000 and a zero residual value:– For accounting purposes:
• The asset was depreciated over 4 years on a straight-line basis
– For taxation purposes: • The asset had an effective life of 4 years and was
depreciated on a diminishing value basis.
43
Temporary differences
• Depreciation expenses for accounting and tax purposes:
Depreciation Yr 1 Yr 2 Yr 3 Yr 4Accounting 25,000 25,000 25,000 25,000Tax 50,000 25,000 12,500 6,250
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AASB 112: Balance Sheet approach
COMPARES:
1. carrying amounts for assets and liabilities (determined by accounting rules)
WITH
2. the value that those assets and liabilities would have if a balance sheet was prepared following income tax rules (their tax base).
45
Balance sheet approach: depreciation
• Yr 1 end:Accounting records:
Cost $100,000Accum dep (25,000)Carrying amt $75,000
Yr 1 end:
TAX records:
Cost$100,000
Accum dep (50,000)
TAX BASE = $50,000
Difference = $ 25,000Temporary difference
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Another Small Example of Tax Effect Accounting
47
Example
• Machine cost $200,000 in 2000• Depreciation for accounting purposes: 5 years, no residual,
straight line basis• Tax rate 30%• Depreciation for tax purposes: 4 years, no residual, straight line
basis
After One Year Carrying Amount Tax Base
Cost 200,000 200,000
Less Acc. Depn 40,000 50,000
160,000 150,000
Example: Deferred Tax Liability
48
Second year
After Two Years Carrying Amount Tax Base
Cost 200,000 200,000
Less Acc. Depn 80,000 100,000
120,000 100,000
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Third year
After Three Years Carrying Amount Tax Base
Cost 200,000 200,000
Less Acc. Depn 120,000 150,000
80,000 50,000
50
Fourth Year
After Four Years Carrying Amount Tax Base
Cost 200,000 200,000
Less Acc. Depn 160,000 200,000
40,000 0
51
Fifth Year
After Five Years Carrying Amount Tax Base
Cost 200,000 200,000
Less Acc. Depn 200,000 200,000
0 0
52
In this situation the tax office has granted a greater deduction relative to the consumption of the economic benefit
BUT the tax deduction is over 4 years – in the 5th there is NO deduction.
In the last year, there will be no deduction for tax purposes,
2001 2002 2003 2004 2005
Accounting Profit 500,000 600,000 650,000 700,000 800,000
Add Accounting Depreciation
40,000 40,000 40,000 40,000 40,000
Less Tax Depreciation (50,000) (50,000) (50,000) (50,000)
Taxable Income 490,000 590,000 640,000 690,000 840,000
Tax Payable 147,000 177,000 192,000 207,000 252,000
53
• What you gain in the first 4 years you lose in the 5th
• Reduced tax years 1 to 4 - $10,000 @ 30% = $3,000 per year
• In the fifth year you have run out of tax deductions for depreciation.
• So therefore the tax liability is deferred not eliminated.
54
Income tax expense 3,000
Deferred tax liability 3,000
Income tax expense 147,000
Income tax payable 147,000
First Year
55
Income tax expense 3,000
Deferred tax liability 3,000
Income tax expense 177,000
Income tax payable 177,000
Second Year
56
Income tax expense 3,000
Deferred tax liability 3,000
Income tax expense 192,000
Income tax payable 192,000
Third Year
57
Income tax expense 3,000
Deferred tax liability 3,000
Income tax expense 207,000
Income tax payable 207,000
Fourth Year
58
Deferred tax liability 12,000
Income tax expense 12,000
Income tax expense 252,000
Income tax payable 252,000
Fifth Year
59
Calculation of deferred tax
CA – TB = TTD / (DTD)
• Carrying amount (CA) = asset and liability balances (net of accumulated depreciation, allowances etc) based on ACCOUNTING balance sheet
• Tax Base (TB) – asset and liability balances that would appear in a “TAX” balance sheet
60
Calculating the tax base• For an asset:
CA
– future taxable amounts
+ future deductible amounts
= TB• For a liability:
CA
+ future taxable amounts
- future deductible amounts
= TB
61
Calculating the tax bases of assets and working out the temporary differences
Example – tax base for assets• A depreciable asset, not revalued, intended for use in the business.• Hairy Co purchased an asset on 1 July 2011 for $100,000. For
accounting purposes depreciation is charged at 10% pa straight line and the rate for tax purposes is 25% straight line. Residual value is zero.
• One year later, at 30 June 2012, depreciation is as follows:
Accounting Tax
Cost 100,000 100,000
Less Depreciation 10,000 25,000
Carrying Amount 90,000
Tax Base 75,000
OR
Tax Base = carrying amount – future taxable amount + future deductible amount
= 90,000 – 90,000 + 75,000
= 75,000
62
63
Example – tax base for assets• Carrying amount – tax base• 90,000 – 75,000 = temporary difference $15,000• DTL $4,500 ($15,000 x 30% tax rate)• Deferred tax liability = taxable temporary difference x
tax rate
• The future taxable amount is greater than the future deductible amount therefore more tax is payable in the future.
• Payment of tax is reduced or ‘saved’ in early years, but additional tax will need to be paid later
64
Calculating the tax bases of liabilities and working out the temporary
differences
65
Example – tax base for liabilities
• Provisions for employee benefits such as long service leave
• Hairy Co has a balance in the provision for long service leave of $40,000 at 30 June 2010. This amount is fully deductible when paid.
Accounting Tax
Carrying Amount 40,000
Tax Base ------
OR
Tax Base = carrying amount – future deductible amount + future taxable amount
= 40,000 – 40,000 + 0
= 0
66
Example – tax base for liabilities
• Carrying amount – tax base
• 40,000 – 0 = temporary difference $40,000
• DTA $12,000 ($40,000 x 30% tax rate)
• The future taxable amount is less than the future deductible amount so less tax will be paid in the future
Calculating the tax base - examplesHairy Co CA FTA FDA TB
Prepayment: $3,000
Interest receivable: $1,000
Plant: cost $10,000, acctg a/depn $4,600, tax a/depn $6,500
Trade receivables: $52,000allowance for b/debts: $2,000
Trade payables: $30,000
Annual leave liability: $3,900
3,000 - 3,000 + - = -
1,000 - 1,000 + - = -
5,400 - 5,400 + 3,500 = 3,500
50,000 - - + 2,000 = 52,000
30,000 + - - - = 30,000
3,900 + - - 3,900 = -
68
Important rules
69
Tax base of an asset = Carrying amount + Future deductible amount – Future assessable amount
Tax base of a liability = Carrying amount – Future deductible amount + Future assessable amount
Deferred tax liability
Deferred tax asset
Assets Carrying amount > Tax base
Carrying amount < Tax base
Liabilities Carrying amount < Tax base
Carrying amount > Tax base
70
Deferred Tax Assets and Deferred Tax Liabilities
• Assets:– deferred tax liability arises when:
• carrying amount > tax base– deferred tax asset arises when:
• carrying amount < tax base
• Liabilities:– deferred tax liability arises when:
• carrying amount < tax base– deferred tax asset arises when:
• carrying amount > tax base
Classification of temporary differences and measurement of deferred tax balances.
A B C D
Carrying Amount of asset
>Tax base of asset
Carrying Amount of asset
<Tax base of asset
Carrying Amount of liability
>Tax base of liability
Carrying Amount of liability
<Tax base of liability
Difference =
Assessable temporary difference times the tax rate
= Deferred tax liability = Deferred tax asset = Deferred tax asset = Deferred tax liability
Examples: depreciation, rent/interest receivable, prepaid rent/insurance,
assets revalued upwards from original cost.
Examples: accounts receivable with a
provision for doubtful debts
Examples: provision for long service leave,
annual leave, warranties, rent paid in arrears, rent
received in advance
Examples: hybrid securities such as
convertible notes that are apportioned between
debt and equity components for
accounting purposes but treated as wholly debt
for tax purposes.
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Summary
• Assets:– DTL = Carrying amount > Tax base
– DTA = Tax base > Carrying amount
• Liabilities: – DTA = Carrying amount > Tax base
– DTL = Tax base > Carrying amount
73
Deferred tax assets and liabilities
Calculating a deferred tax asset (DTA)
DTD x tax rate % = DTA
Calculating a deferred tax liability (DTL)
TTD x tax rate % = DTL
Recording a DTA/DTL
Dr Deferred tax asset Dr/Cr Income tax expense (deferred)
Cr Deferred tax liability
The tax rate % is that which is expected to apply when the asset will be realised or the liability settled
The tax rate % is that which is expected to apply when the asset will be realised or the liability settled
BALANCING ITEMBALANCING ITEM
74
Worksheet Methodology
75
Lecture Example 9-3
Calculation of deferred tax exampleThe balance sheet of PQR Ltd at 30 June 2010 is as follows:
Assets Liabilities
Cash 260 Trade payables 296
Trade receivables 300 Loan 485
Allowance for b/debts
(30) 270 A/L liability 15
Interest receivable 40 Deferred tax liability 9
Inventory 100 805
Plant 500 Equity
Accum dep’n (300) 200 Share capital 700
Goodwill 800 R/earnings 175
Deferred tax asset 10 875
1,680
• Accumulated depreciation of plant for tax purposes is $360• Calculate DTA & DTL for 2010 and prepare the journal entries to
record deferred tax movements for the 30 June 2010 year.
Calculation of deferred tax exampleRelevant assets & liabilities
CA FTA FDA TB DTD TTD
Trade receivables 270 - 30 300 30
Interest receivable 40 40 - - 40
Plant 200 200 140 140 60
Goodwill 800 800 - - 800
Annual Leave liability 15 15 0 15 -
Total temporary differences 45 900
Less: excluded differences - (800)
Temporary differences 45 100
DTA; DTL (@ 30%) 13 30
Less: opening balances 10 9
Adjustment 3 21
78
Calculation of deferred tax exampleEntry to record deferred tax movement:
Dr Deferred tax asset 3Dr Income tax expense (deferred) 18
Cr Deferred tax liability 21
Summary:Current tax liability (slide 35) 54Deferred tax movement 18Total income tax expense 72
BALANCEBALANCE
NOTE (from slide 34) : Accounting Profit 300 - (Permanent differences 80 +(20)) = 240 x 30% = 72 (Income tax expense)
79
Changes in tax rates
80
Tax Rate Changes
BFA201_13
Existing DTL
Existing DTA
Existing DTL
Existing DTA
Tax rate
Tax
rat
e
Income
Expense
Income
Expense
81
Tax rate changes exampleFor tax purposes AGRO Co has the following deferred tax balances as at 1 July 2015:
Deferred tax asset $500 000
Deferred tax liability $300 000
The above balances were calculated when the tax rate was 30%. On 1 August 2015 the government reduced the corporate tax rate to 28%.
Provide the journal entries to adjust the carry-forward balances of the deferred tax asset and deferred tax liability.
BFA201_13
82
Tax rate changes exampleBalance at Balance at Change
1 July 2015 1 August 2015DTA $500 000 $500 000
x 28/30 = $466 667 ($33,333)
DTL $300 000 $300 000
× 28/30 = $280 000 ($20 000)
OR 500 000 x (30-28)/30 = 33,333
300 000 x (30-28)/30 = 20,000
The accounting entry at 1 August 2015 would be:
Dr Deferred tax liability 20 000
Dr Income tax exp. (deferred) 13 333
Cr Deferred tax asset 33 333
83
Lecture Example 9-4
Lecture Case Study
Moonray Ltd’s profit before tax for the year ended 30 June 2013 was $310 000. The following information is available:
Assets Cash 20 000 Accounts receivable 80 000 Less provision for doubtful debts 4 000 Accounts receivable (net) 76 000 Prepaid rent 12 000 Machinery – net 126 000 Deferred tax asset 3 000 Liabilities Provision for long service leave 15 000 Loan payable 50 000 Deferred tax liability 8 400 Other information: Moonray recognised 5% of receivables as doubtful debts expense Machinery was purchased on 1 July 2011 for $210 000. It is being
depreciated for accounting purposes over 5 years but for taxation purposes over 3 years. There was no expected residual value
Moonray’s LSL expense for the year was $5,000. No payments have been made in relation to long service leave.
The 2012 tax rate was 30%. For year ended 30 June 2013 it is 28%.
Required Provide the journal entries to account for tax in accordance with AASB 112.
85
Solution to Case Study• Step 1 – Calculate taxable profit
BFA201_13
Taxable income calculationAccounting profit 310,000 310,000Add backDoubtful debts 4,000Deprec (accounting) 42,000Long service leave 5,000 51,000
DeductRent payment 12,000Deprec (tax) 70,000 82,000
279,000Tax x 0.28 78,120
86
Solution to Case Study cont.• Step 2 – Calculate temporary differences
BFA201_13
Carrying amt Tax base DTD TTDAssetsCash 20,000 20,000 0Accounts rec (net) 76,000 80,000 4,000Prepaid rent 12,000 0 12,000Machinery (net) 126,000 70,000 56,000LiabilitiesProv for LSL 15,000 0 15,000Loan payable 50,000 50,000 0Net temp diff 19,000 68,000DTA; DTL @ 28% 5,320 19,040Less Beg Balance (3,000) (8,400)Movement during yr 200 560Adjustment 2,520 11,200
87
Lecture Case StudyDr Cr
Journal entries $ $1. Movement due to tax rate changeDeferred Tax Liability 560 Income Tax Expense (deferred) 360 Deferred tax asset 200
2. Current & deferred income tax for the yearIncome Tax Expense (current) 78,120Current Tax Liability 78,120
Income Tax Expense (deferred) 8,680Deferred tax asset 2,520 Deferred tax liability 11,200
88
Revaluation of non-current assets
89
Revaluation of Non-current Assets
• Revaluations can create temporary differences according to AASB 112 para 20
• Tax base not affected by revaluation as depreciation for tax purposes continues to be based on original cost
• Revaluation of asset which recognises an increase in fair value implies an expected increase in future flow of economic benefits– increase can be taxable and lead to deferred tax liability
if new carrying amount is greater than tax base
90
Revaluation of Non-current Assets
AASB 112 requires that, to the extent that the deferred tax relates to amounts that were previously recognised in equity as either direct credits or direct debits (as is the case with asset revaluations) the journal entry to recognise deferred tax asset or liability be adjusted against the equity account:
Dr Revaluation surplusCr Deferred tax liability
– Entry assumes that the revalued amount of the asset will be recovered by the entity’s continued use of the asset.
91
Revaluation of Non-Current Assets Example
• Tax Ltd acquired land 2 years ago for $450,000
• Its fair value now is $600,000
• The tax rate is 30%
Land 150 000
Revaluation surplus 150 000
Revaluation reserve 45 000
Deferred tax liability 45 000
92
Revaluation of Non-Current Assets Example
Accounting Tax
Cost 600 000 450 000
Accumulated depreciation
- -
Carrying value 600 000
Tax base 450 000
Or
Carrying amount + Future deductible amount – Future taxable amount = Tax base
600 000+ 0 – 450 000= 150 000
If the carrying amount of an asset $600 000 is greater than the tax base of the asset $450 000, this leads to a deferred tax liability of 150 000 x .30 = $45 000
93
Other movements: Revaluations• Revaluations NCA Temporary
difference• Accounting CA ≠ Tax base (no
change)– Acc. depreciation based on revalued amount– Tax depreciation based on original cost
• Revaluation increments Equity• Related tax recognised in OCI & adjusted
against equityDr Revaluation surplus xxx
Cr Deferred tax liability xxx
94
Unused tax losses
95
Unused tax losses
• A deferred tax asset shall be recognised to the extent that:
– It is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised
96
Lecture example• Rebel Ltd records a loss of $400,000 in Year 1.
• It is expected that the company will record profits in future years.
• In fact it does record accounting profits before tax of $360,000 and $500,000 in the next two years.
• • There are no temporary differences between the carrying
amounts of the company’s assets and liabilities and their tax base.
• The tax rate is 30%.
97
SolutionDr Deferred tax asset 120,000
Cr Income tax revenue 120,000
Recording tax loss 400,000 x 30% in Yr 1.
Dr Income tax expense 108,000
Cr Deferred tax asset 108,000
Recording use of tax loss in Yr 2.
Dr Income tax expense 150,000
Cr Deferred tax asset 12,000
Cr Income tax payable 138,000Recording use of tax loss & tax payable in Yr 3.
98
DTA and DTL recognition
• The entity will remain in business (going concern)
• Taxable income will be derived in future years
• Recognition of deferred tax asset same as applied to other assets —reliance on ‘probability’ test
• Probable test will almost always be met with DTL
99
Theoretical consideration of DTL and DTA
100
Evaluation of AASB112• Profit smoothing technique?
• DTA might not be an asset under the AASB framework– No claim against the government for tax?– Does entity ‘control’ the benefit?– Benefit depends on future earnings and no
legislation changes
101
Evaluation of AASB112 cont.
• DTL might not be a liability as entity not presently obliged to pay govt; it is a book entry
• Funds will only be transferred in the future if the company earns sufficient revenue — there is a dependency on future events, not past events
• Assumes no changes in tax legislation
Next Week – Revenue recognition
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