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Chapt er
9 /
Income Taxes
(l AS
12)
79
Solutio n
$15,000 (30% of the temporary difference of $50,000). The carrying value of the plant and equipment is
$750,000 and the tax written down value will be $700,000, thus giving a taxable temporary difference of
$50,000.
3. CURRENT TAX LIABILITIES AND ASSETS
3.1
Th e Standard also deals wi th curre nt tax liabil ities and current tax assets.
3.2
An entity should recognize a liability in the balance sheet in respect of its current tax ex pense
both fo r the current and pri or years to the ex tent that it is not ye t paid .
4.
ACCOUNTING FOR DEFERRED TAX
4.0.1
To account for deferred tax under lAS 12, first prepare a balance sheet th at shows all the
ass ets and liab ilities in the accounting balance sheet and their tax base.
4.0.2
Also show any other items that may not have been recogni zed as assets or liabilities in the
accounting bal anc e sheet but that may have a tax base. Then take the difference between these val–
ues and the accounti ng values, and calculate the deferred tax based on the se differ en ce s.
4.0.3
Most taxabl e differences arise becau se of d ifferences in the timing of the recognitio n of the
tran sact ion for accounti ng and tax purposes.
Examples
(a) Accumulated depreciation that differs from accumulated tax deprec iation
(b) Employee expenditure recognized when incurred for accounting purposes and when paid fo r
tax purposes
(c) Costs of research and development. which may be expensed in one period for accounting pur-
poses but allowed fo r tax purposes in later periods
4.0.4
Often wh ere assets and liabilities are va lued at fair va lue for accounting purposes, ther e is
no equivalent measureme nt for tax pu rposes.
For
examp le, prop ert y, plant, and equi pme nt may be
revalued to fa ir va lue, but there may be no adj ustment to the tax value for thi s increase or decrease .
Simi larly, assets and liab iliti es can be revalued on a business acquisition, but fo r tax purposes,
again, ther e may be no adjustment to the va lue .
4.1
Summary of Accounting for Deferred Tax
The process of accounting for deferred tax is
( I)
Determine the tax base of the assets and liabilities in the balance sheet.
(2)
Compare the carry ing amounts in the balanc e shee t with the tax base. Any differen ces will
norma lly affec t the deferred taxation calculation .
(3) Identify the tempor ary differences that have not been recogn ized du e to ex ceptio ns in lAS
12.
(4)
Apply the tax rates to the temporary di ffer ences.
(5)
Det ermine the movement between opening and closing deferred tax balances.
(6)
Decide whether the offset of deferred tax as sets and liabi lities between different companies
is acceptable in the co nso lida ted financ ial stateme nts.
(7) Recogn ize the net change in deferred taxation
Case Study 3
Facts
An entity has revalued its property and has recognized the increase in the revaluation in its financial
statements. The carrying value of the property was $8 million and the revalued amount was $ 10 million.
Tax base of the property was $6 million. In this country, the tax rate applicable to profits is 35% and the
tax rate applicable to profits made on the sale of property is 30%. If the revaluation took place at the
entity's year end of December 31, 20X4, calculate the deferred tax liability on the property as of that
date.