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Accounting For Deferred Taxes

The document discusses deferred taxes, which are taxes payable or recoverable in the future due to temporary differences between accounting and tax rules. It explains the concepts of taxable and deductible temporary differences, as well as deferred tax liabilities, which represent future tax payments owed by a company. Examples illustrate how differences in depreciation methods can create deferred tax liabilities and provide a scenario for calculating deferred tax assets or liabilities based on preliminary expenses and tax regulations.

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9 views10 pages

Accounting For Deferred Taxes

The document discusses deferred taxes, which are taxes payable or recoverable in the future due to temporary differences between accounting and tax rules. It explains the concepts of taxable and deductible temporary differences, as well as deferred tax liabilities, which represent future tax payments owed by a company. Examples illustrate how differences in depreciation methods can create deferred tax liabilities and provide a scenario for calculating deferred tax assets or liabilities based on preliminary expenses and tax regulations.

Uploaded by

p81414274
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 PPTX, PDF, TXT or read online on Scribd
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Accounting for

Deferred Taxes
Introduction
• Deferred tax is tax that is payable/ recoverable in the future
• It arises because of temporary differences
• Temporary differences are defined as being differences between the
carrying amount of an asset or liability in the statement of financial
position and its tax base (ie the amount attributed to that asset or
liability for tax purposes).
Temporary Differences
• Temporary differences may be either ‘taxable temporary differences’
or ‘deductible temporary differences’.
• Taxable temporary differences are those on which tax will be charged
in the future when the asset (or liability) is recovered (or settled).
• Deductible temporary differences are those which will result in tax
deductions or savings in the future when the asset (or liability) is
recovered (or settled).
• These differences arise because tax rules and accounting rules are
different
Deferred Tax Liability
• A deferred tax liability is a listing on a company's balance sheet that
records taxes that are owed but are not due to be paid until a future
date.
• The liability is deferred due to a difference in timing between when
the tax was accrued and when it is due to be paid
• For example, it might reflect a taxable transaction such as an
installment sale that took place one a certain date but the taxes will
not be due until a later date.
Deferred Tax Liability
• The deferred tax liability on a company balance sheet represents a
future tax payment that the company is obligated to pay in the future
• It is calculated as the company's anticipated tax rate times the
difference between its taxable income and accounting earnings
before taxes.
• Deferred tax liability is the amount of taxes a company has
"underpaid" which will be made up in the future. This doesn't mean
that the company hasn't fulfilled its tax obligations. Rather it
recognizes a payment that is not yet due.
Examples
• A common source of deferred tax liability is the difference in
depreciation expense treatment by tax laws and accounting rules.
• The depreciation expense for long-lived assets for financial statement
purposes is typically calculated using a straight-line method, while tax
regulations allow companies to use an accelerated depreciation
method. Since the straight-line method produces lower depreciation
when compared to that of the under accelerated method, a company's
accounting income is temporarily higher than its taxable income.
Example
• EXAMPLE 1
A non-current asset with a cost of $2,000 was acquired at the start of year 1. It is
being depreciated on a straight-line basis over four years, resulting in annual
depreciation charges of $500. Therefore, a total of $2,000 of depreciation will be
charged over the life of the asset. The tax depreciation granted by the tax
authorities on this asset are:
• Year 1 $800 Year 2 $ 600 Year 3 $ 360 Year 2 $ 240
Example

Carrying value Tax base


(Cost less (Cost less
accumulated accumulated tax Temporary
Year depreciation) depreciation) difference
$ $ $

1 1,500 1,200 300

2 1,000 600 400

3 500 240 260

4 - - -
Question
• ABC Ltd spent Rs 50,00,000 on project for which it incurred
preliminary expenses of Rs 2,00,000 which will be amortised @20%
from year 2011 whereas as per Section 35D of IT act allowable
preliminary expense is only 2.5% which will be claimed over next 10
years. Tax rate -35%
• should the entire difference amount be treated as timing difference?
• Compute deferred tax asset/liability

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