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    BAAFM P30898 AFR Lecture Slides - Taxation

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    Grace Tan
    This document discusses accounting for taxation under IAS 12. It covers current tax, deferred tax, temporary differences between accounting and tax values, and accounting entries for tax expense and deferred tax. It provides an example calculating income tax expense and deferred tax over multiple years as the temporary difference from asset depreciation reverses. The deferred tax is recognized and changes in the deferred tax provision are recorded each year to properly reflect the total tax expense.

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    BAAFM P30898 AFR Lecture Slides - Taxation

    Uploaded by

    Grace Tan
    36 views23 pages
    This document discusses accounting for taxation under IAS 12. It covers current tax, deferred tax, temporary differences between accounting and tax values, and accounting entries for tax expense and deferred tax. It provides an example calculating income tax expense and deferred tax over multiple years as the temporary difference from asset depreciation reverses. The deferred tax is recognized and changes in the deferred tax provision are recorded each year to properly reflect the total tax expense.

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    BAAFM P30898 AFR Lecture Slides_Taxation

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    This document discusses accounting for taxation under IAS 12. It covers current tax, deferred tax, temporary differences between accounting and tax values, and accounting entries for tax expense and deferred tax. It provides an example calculating income tax expense and deferred tax over multiple years as the temporary difference from asset depreciation reverses. The deferred tax is recognized and changes in the deferred tax provision are recorded each year to properly reflect the total tax expense.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    36 views23 pages

    BAAFM P30898 AFR Lecture Slides - Taxation

    Uploaded by

    Grace Tan
    This document discusses accounting for taxation under IAS 12. It covers current tax, deferred tax, temporary differences between accounting and tax values, and accounting entries for tax expense and deferred tax. It provides an example calculating income tax expense and deferred tax over multiple years as the temporary difference from asset depreciation reverses. The deferred tax is recognized and changes in the deferred tax provision are recorded each year to properly reflect the total tax expense.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 23

    Accounting for

    Taxation

    IAS12 INCOME TAXES


    Overview

    IAS 12 Income
    Taxes

    Deferred Tax
    Accounting
    (temporary Current Tax
    Entries
    differences)

    DT Liabilities DT Assets
    Objective of IAS 12

    ►How to account for current and future tax


    consequences of:
    ►Current Tax: Transactions and other events of current
    period that are recognised in an entity’s accounts
    ►Deferred Tax: Future recovery (settlement) of
    carrying amount of assets (liabilities) recognised in an
    entity’s financial statements
    Accounting Entries

    ►Journal for tax charge:


    Dr Income tax expense (Income Statement)
    Cr Income tax payable (SoFP current liability)
    ►Over-provision in prior year reduces tax charge
    ►Under-provision prior year increases tax charge
    Accounting Entries –
    Tax Expense

    ►Estimated tax liability 31 Dec 20X8 = £180,000


    ►20X7 estimate was £150,000

    ►Required: Tax expense (Income Statement) 31


    December 20X8, if 20X7 actual tax liability
    a) £165,000
    b) £140,000
    Accounting Entries –
    Tax Expense

    a) £165,000 = under-provision of £15,000


    £
    20X8 year end estimate 180,000
    Under provision 20X7 15,000
    Tax expense 195,000
    Accounting Entries –
    Tax Expense

    b) £140,000 = over-provision of £10,000


    £
    20X8 year end estimate 180,000
    Over provision 20X7 (10,000)
    Tax expense 170,000
    Permanent and Temporary Differences

    ►TaxableProfit does not equal


    Accounting Profit
    ►Permanent Differences
    Caused
    ► by certain items not being taxable or allowable
    (e.g. entertaining)
    Only
    ► impact on current year accounts
    Will
    ► not reverse over time
    Current
    ► tax credit or charge
    Permanent and Temporary Differences

    ►Temporary Differences
    ►Caused by timing differences between tax
    and accounting allowances
    ►Will impact on future years’ accounts
    ►Will reverse over time
    ►Deferred tax charge
    Temporary Difference

    ►Difference between carrying value CV in


    accounts and tax base
    ►If tax base is greater than CV then we have a
    deferred tax asset
    ►If tax base is less than CV then we have a
    deferred tax liability
    Temporary Difference

    ►Common examples:
    ►Non-current assets
    (depreciation vs capital allowances)
    ►Provisions – bad debts, inventory
    ►Tax losses carried forward
    Deferred Tax Liabilities-Recognition
    ► IAS 12 requires:

    ►A deferred tax liability to be recognised for all


    taxable temporary differences
    ►A taxable temporary difference arises where carrying
    value of asset is greater than its tax base [liability
    method]
    ►Liability calculated using full provision
    ►No discounting
    Deferred Tax Assets - Recognition
    ► IAS 12 requires:

    ►A deferred tax asset to be recognised for all


    deductible temporary differences
    ►Arises where carrying value of asset is less than
    its tax base
    ►To extent that it is probable that taxable profit will
    be available against which deductible temporary
    difference can be utilised
    ►No discounting
    Accounting for Deferred Tax

    ►Step one: calculate temporary difference


    ►Carrying value vs tax base
    ►Step two: calculate deferred tax
    ►Temporary difference x future tax rate
    ►Step three: calculate movement in DT provision
    ►CY provision less PY provision
    Accounting for Deferred Tax

    Increase in DT provision:
    Dr Income Tax expense
    Cr Deferred Tax
    Reduction in DT provision:
    Dr Deferred Tax
    Cr Income Tax expense
    Example 1 Data –
    Ignore Deferred Tax

    Year 1 Year 2 Year 3


    Profit before 1,000 1,000 1,000
    depreciation
    Depreciation (200) (200) (200)

    Profit before 800 800 800


    taxation
    Asset tax 240 210 150
    allowance
    Income tax 30% 30% 30%
    rate
    Working: Calculate Income Tax

    Working 1 Year 1 Year 2 Year 3


    Accounting 1,000 1,000 1,000
    profits
    Depreciation 200 200 200

    Capital (240) (210) (150)


    allowance
    Taxable 960 990 1,050
    profits
    Income tax 288 297 315
    @ 30%
    Suggested Solution –
    Income Statement

    Year 1 Year 2 Year 3


    Profit before 1,000 1,000 1,000
    tax
    Income tax (288) (297) (315)
    expense W1
    Profit after 712 703 685
    taxation
    Example 2 Data –
    Including Deferred Tax

    Year 1 Year 2 Year 3


    Profit before 1,000 1,000 1,000
    depreciation
    Depreciation (200) (200) (200)
    (asset cost £600)

    Profit before 800 800 800


    taxation
    Asset tax 240 210 150
    allowance
    Income tax 30% 30% 30%
    rate
    Working 1:
    Calculate Income Tax (as before)

    Working 1 Year 1 Year 2 Year 3


    Accounting 1,000 1,000 1,000
    profits
    Depreciation 200 200 200

    Capital (240) (210) (150)


    allowance
    Taxable 960 990 1,050
    profits
    Income tax 288 297 315
    @ 30%
    Working 2:
    Calculate Deferred Tax

    Working 2 Year 1 Year 2 Year 3

    Carrying [600 – 200] [400-200] [200-200]


    amount 400 200 0
    Tax base [600-240] [600-240-210] [600-240-210-150]
    360 150 0
    Temporary 40 50 0
    difference
    Deferred tax @ 12 15 0
    30%
    Increase 12 3 (15)
    (Decrease)
    Working 3:
    Calculate Income Tax

    Working 3 Year 1 Year 2 Year 3

    Income tax W1 288 297 315

    Deferred tax 12 3 (15)


    W2
    Income tax 300 300 300
    expense
    Suggested Solution –
    Income Statement

    Year 1 Year 2 Year 3


    Profit before 1,000 1,000 1,000
    tax
    Income tax (300) (300) (300)
    expense W3
    Profit after 700 700 700
    taxation

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