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Explanations of Deferred Tax Principle Disclosure

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32 views3 pages

Explanations of Deferred Tax Principle Disclosure

Time golden

Uploaded by

okuhle4002
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Explanations of deferred tax principle

1. Basics first!!

Let us examine an extract of a taxation expense note:

SA normal tax R
Assume a profit before
Current tax 20 000
tax of R100 000 and a
Deferred tax 8 000
tax rate of 28%.
Total tax expense: 28 000

From this note realise the following:

1. The only amount payable to SARS is the current tax i.e. R20 000. Thus deferred
tax never influences the amount payable to SARS!! Deferred tax is simply an
accounting principle that is not used by SARS.
2. With a profit before tax of R100 000 and a tax rate of 28%, we expect to see a tax
expense of R28 000. However the current tax amounts only to R20 000. This
means that our expectations regarding the income tax expenses are not met.
Deferred tax is thus, simply put, a “tool” to enforce matching between our profit
before tax and total tax expense.
3. After adding the deferred tax of R8 000, we now have a total tax expense of R28
000 which makes perfect sense since R100 000 x 28% = R28 000.
4. Deferred tax liabilities are the amounts of income tax expenses payable in future
periods in respect of taxable temporary differences
5. Taxable temporary differences are those differences that will result in the payments
of additional taxes in the future (link to definition in paragraph 5 and 6
6. Deferred tax assets are the amounts of income taxes recoverable in future periods
in respect of deductible temporary differences. For now we focus only on only part
a of the definition in paragraph 5 and 6
7. Deductible temporary differences will result in the payment of lower taxes in the
future, as it is deductible in the future
2. Let’s look at another example

SA normal tax R
Assume a profit before
Current tax 20 000
tax of R100 000 and a
Deferred tax 5 200
tax rate of 28%.
Total tax expense: 25 200

From this note realise the following:

If we assume that the deferred tax calculation is correct, we have a problem seeing that
we still don’t have perfect matching between a profit of R100 000 and a tax expense of
R25 200?

Why is there not perfect matching?

This company received a dividend of R10 000 during the year which is a permanent
difference. Remember that deferred tax can only be levied on temporary differences.
Thus if there are permanent differences the actual tax expense will never equal the
expected tax expense.

The way in which a company explains to a user why there is no matching between the
profit before tax and the tax expense is by preparing a tax rate reconciliation.

The tax rate reconciliation forms part of the tax expense note; this is provided later on

In terms of IAS 12 paragraph 81c an entity is required to disclose the following:

 An explanation between the relationship between tax expense and accounting profit
in either or both of the following:
 A numerical reconciliation between tax expense and the accounting profit
multiplied by the applicable tax rate
 A numerical reconciliation between the average effective tax rate and the
applicable tax rate.

Flag page B584 – B585 B2167 (PART B3) in IAS 12, perfect example of the income tax
and deferred tax disclosures.

1. Tax rate reconciliation Numerical

Tax at standard rate 28 000 (expected tax expense)


Dividend received (10 000 x 29%) (2 800)
Total tax expense 25 200 (actual tax expense)
Effective tax rate (25 200/100 000) 25.2%

2. Tax rate reconciliation Percentage (also refer to your lecture slides)

Tax rate 28%


Dividend received (10 000/100 000)*28 (2.8%)
Effective tax rate 25.2%
3. Format of taxation expense note and deferred tax note

Note to the Statement of


Comprehensive Income
Taxation expense note

20.6 20.5
Rand Rand

South African normal taxation


Current tax xx xx
Deferred tax:
 Temporary differences xx/(xx) xx/(xx)
 Assessed loss (CTA) xx/(xx) xx/(xx)
Effect of change in tax rate (CTA) xx/(xx) xx/(xx)
Applied against profit/loss before tax xx xx These 2 totals
must always be
Normal tax rate reconciliation: the same.
Standard rate
(Loss)/profit before tax x standard rate xx xx
Permanent differences xx/(xx) xx/(xx)
Unprovided debit on deferred tax – estimated xx/(xx) xx/(xx)
assessed loss (CTA)
Other types of taxes Xx xx
Effect of change in tax rate (CTA) xx/(xx) xx/(xx)
Applied against profit/loss before tax xx xx
Calculation: Actual
Effective rate tax expense ÷ profit
before tax x 100

Note to the Statement


of Financial Position
Deferred tax note

Deferred tax comprises of the following:

 Capital allowances xx/(xx) xx/(xx)


 Assessed loss (CTA) xx/(xx) xx/(xx)
 Provisions xx/(xx) xx/(xx)
 Inventory xx/(xx) xx/(xx)
 Income received in advance xx/(xx) xx/(xx)
xx/(xx) xx/(xx)

Unprovided debits: deferred tax

 Assessed loss (CTA) xx/(xx) xx/(xx)

The note shows what items the balance


of deferred tax consists of. The
difference between these 2 balances will
give you the deferred tax movement per
the tax expense note.

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