imary financial statements, incorporating adjustments, in accordance with relevant ndards, in an ethical manner. f relevant international accounting e recognition and measurement of the accordance with IAS 12. ntries, in accordance with relevant dards.‘ACCOUNTING ENTRIES (CURRENT TAX DEFERRED TAX ASSETS 2 IAS 12 Income taxes IAS 12 covers the general principles of accounting for tax. ‘The income tax expense in the statement of profit or loss typical three elements: * current tax expense for the year * under or over provisions in relation to the t period deferred tax. 'ax expense of the ‘The ourrent tax expense, together with under or over proy issessed in F1. A recap can be found in the expanday,. ;s/0nS: are labus focuses on accounting for deterred tax ne text belows a 7 i.it tax is the estimated amo), irterprise for the period sat of tx Payable on the taxable profs Je profits are the Sora dance with the rules of owe Payable, caloulated in | ‘end of every accounting payable in respect of the period, Mise Will estimate the amount | d as a period is estimate is normal eda 9 pence end edlustment by making the folowing double me tax for the period is accrued in one financial period and then din the next. The amount settled often differs from the amount ied in the previous year's financial statements. The difference een the amount accrued (in the previous year) and the amount ed (in the current year) is recorded in the current year's income tax nse as an under or aver provision relating to the prior period ount settled > amount previously recognised => under-provision. This | tes an additional tax expense debit) ple has estimated its income tax liability for the year ended 31 cember 20X4 at $180,000, In the previous year the income tax bility had been estimated as $150,000 culate the tax charge that will be recognised in the statement of profit loss for the year ended 31 December 20X¢ if the amount that was lly agreed and settled with the tax authorities in respect of 20X3(a) $165,000 (b) $140,000 State what the income tax liability would be at 31 each of the above circumstances (a) Under provision Statement of profit or loss charge: Current tax expense for year ‘Add: under-provision relating to prior year (ee 000- 150,000) Income tax expense (b) Over provision Statement of profit or loss charge: Current tax expense for year Less: over-provision relating to prior year (150,000 — 140,000) Income tax expense be $180,000 (reflecting the current year's liability only). By making an adjustment to the income tax ex ‘under/over provision, the remaining balance res of transactions and events of the current and previous ble to the tax authorities. 98 ges to particular accounting icept and aims to eliminate a hen ort lure in the statement of profit iuthorities base their tax and taxable profit can be caused not allowed for tax purposes) 3d for tax purposes but in a iceount when calculating deferred Mean the carrying amount of an ition and its tax base (i.e @harged on a non-current asset ee the expandable text ctemporary efortce ut | pret accounting PUPOSE an st ratitfo2P in purposes that tr the ist as than it would rage witbe ONE, supsequert Years the tax the accounting prot bY higher. iy temporary di {tis important to remember that onl} to deferred tax. ‘ad machinery is purchase Pee ia) on item of plant and 30 for $300 000. sp gssets estimated usefll ife is 6 years, Herald have no residual vaue. Plant ‘and machinery ‘ona straightline basis. “Tax depreciation for his items given at 25% on the straigh for the first 4 years. i figures that would appear in the fl Let us first calculate th ne asset statements over the six-year fe of Financial statements 20X0 20X1 20X2 20X3} Opening carrying value ‘Accounting depreciation charge Closing carving value "250 0X0 20x1 $000 300 75 20x3 20X4)ing the above two tables that | the carrying value | Re carci ite differs from the tax base. The ann ‘we THOR ie applied by the entity (that is, accounting | Beer eet applied in the tax computation. heat ih id ir have caught up, as they both of 0, but tl Vv Kiara s Ape he different treatment over asset, depending on whether the sase or decrease the tax payable. carrying value of net assets is situation where there are .e carrying value of net assets situation there would be ein as been recognised in other tax impact should also be income. This is covered in tailyear 3. Required: tax base. (decrease) the entries t Year SFP carrying value $ 300 (100) 200 (400) 100 (100) 0 The current tax rate is 30% The difference at 30% represents the in the statement of financial position. T temporary difference because the accounting depreciation is the tax depreciation, i. the carrying valve int Messy Ltd has purchased an asset for $300 Over three years on a straight line basis, Prepare the journal entries required to record the, de above asset for years 1, 2 and 3. Y 40 50 The movement in the difference at 30% ror in the deferred tax liability requ 10 be made to the statement off FP is greater’ its the increasel, year. Thesea ————.~. | & ¢ement of profit or loss Year3 none tx eee ete or the year ended 31 of $170,000. At 31 December rary differences of $50,000, i.e an the tax base by this been estimated at $33,000. inancial statements had a er 20X8 the cumulative (00 and current fax for treRequired: For the years ended 31 December 20X8 ong 0 ry to record deferred are the journal en “ Ripics ber 20X8 and 20X9 extracts from the statement of profit o (0) Prepare + December 20X9 and the statement FB Dconbes 2058) BO comparatives, g rere deferred tax would be reflected, ial position includes , Parker Ltd’ statement of financial } ‘and liabilities that give rise to temporary differences, Current reporting date: Property, plant and equipment (1) Held to maturity financial assets (2) Trade receivables (3) Warranty provision (4) | Long-term borrowings (2) (1) Propeny, pant and equipment statements on a straig Gepreciaton is 30% on a reducing va RR try 2st anc ong tom tomowag 8 are using the amortised cost meth. he Pare aeecetvable on interest and any lance basis, Trade receivables have a gross fet Parker Limited has cr $800,000 which is four months «; only become tax deductible atte Parker Limited offers, Costs are tax deductible when wa Jone Year warray income tax rate is 25%‘on the above assets and clearly stating for each item losses carried forward (as are offset against future Ty forward of $75,000. It lum for the next two years but other comprehens:Test your understanding answers 4 (a) Journal entries for deferred tax Year ended 31 December 208 ‘ y = $40,000 * 30% = $12,000 | Deferred tax liabilit Dr Income tax expens® (SPL) i Cr Deferred tax liability (SFP) December 20X9 10 x 30% = $15,000 ‘Year ended 31 Deferred tax liability = $50,00 = $15,000 — $12,000 Expense (increase in liability) . Dr Income tax expense (SPL) (Cr Deferred tax liability (SFP) | (b) Statement of profit or loss for year ended 34 (extract) 20) $ Profit before tax 170, _ Income tax expense (WV/1) (36,006 ! Profit for the year 134,000 Non-current liabilities, Deferred tax liability (from (a)) 15,0 Gurrent liabilities: ' Income tax payableyincome tax exDSHES 31/12/K9 31/12/K8 $ $ current tax 33,000 30,000 peferred tax (from (a)) 3,000 42,000 ides 36,000 42,000 Temporary Deferred Deferred “difference tax tax ” balance liability (25%) asset We $000 $000 property, plant and equipment 8,500 2,125 liability eld to maturity financial assets 4 20 5 liability Frade receivables (800) (200) asset | A (1,200) (300) asset ps (2,700) (675) asset ‘al Warranty provision Long-term borrowings Dr Deferred tax asset (SFP) $15,000 Cr Statement of profit or loss (SPL) $15,000 The temporary difference is $75,000 (the value of the losses available for carry forward). However, a deferred tax asset can only be recognised to the extent itis probable that these losses can be utilised and, based | rcurent estimates, the recoverability is only $50,000 (2 x $25,000 Prot) Therefore a deterred tax asset of only$50,000 = 30% = $15,000 can be Tecognised _(a) Journal entry for deferred tax Deferred tax liability c/f = $27,000 25% = $6,750 ‘of which, amount relating to revaluation surplus on $65,000) x 25% = $3,750 Increase in deferred tax liability to be recorded = $6,7 $4,150 ‘of which $3,750 should be charged to revaluation remainder charged to profit or oss. Dr Income tax expense (SPL) Dr Revaluation reserve (SFP) Cr Deferred tax liability (SFP) to revaluation reserve during the year would b rents in other comprehensive income within th The impact of the movem (1) Income tax expense = $59,400 Current tax expense Decrease in deferred tax liability (3,200 — 2,600) (2) Deferred tax liability at 31 December 20X2 = $1, Temporary difference = 60,000 — 56,250 = 3,750 Deferred tax liability = 30% x 3,750 = 1,125zs a,c and F are true ( The tax base of the asset = $500 - $220 = $280 the cumulative temporary difference = $400 (CV) — $280 = $120 This results in a deferred tax liability of $120 x 30% = $36 @ Deferred tax asset = $30,000 y $ Losses — capped to the extent they are recoverable 120,000 Tax rate x 25% 30,000 (6) Impact in statement of profit or loss = $15,000 credit : $ Deferred tax asset at year end (20% = 350,000) 70,000 Deferred tax asset at start of year (20% * 275,000) 55,000 15,000 Increase in deferred tax asset (6) Dr AFS reserve $7,500 Gr Deferred tax liability $7,500 Temporary difference = $280,000 (CV of asset) less $250,000 (tax base) = $30,000 Deferred tax liability = $30,000 x 25% ‘Gain recorded in AFS reserve, therefore tax effect should also be ‘Tecorded in AFS reserve. The annual movement in the AFS reserve will be detailed as part of OCI within SOPLOC!(7) D The future tax consequence is a deduction, the asset should be recognised. The tax consequence is based on the intrinsic therefore the deferred tax asset should reflect (8 The correct statements are B, C and F Deferred tax liability at 31 December 20x3 ‘i Carrying value of PPE (850,000 + 100,000) Tax base Temporary difference Tax rate Deferred tax reflected in OCI Revaluation surplus Tax rateee Ss Deferred tax impact in profit or loss $ Liability at year end 81,250 Less liability at start of year (62,000) Total increase in deferred tax liability 19,250 Less: relected in OCI (25,000) Credit to SPL (5,750)