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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.

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BAAFM P30898 AFR Lecture Slides - Taxation

Uploaded by

Grace Tan
37 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.

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© All Rights Reserved
Download as PPTX, PDF, TXT or read online from Scribd
Download as pptx, pdf, or txt
37 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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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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