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SESSION 11

Taxation
IAS 12 Income taxes
Taxation in the statement of profit or loss
Tax charge for the current year = Tax rate x Taxable income
= DR(CR) balance of Current tax Current tax liability/asset
Under(Over) tax provision payable
Increase (Decrease) in tax = Ending balance - Beginning Non-current tax
B/S
deferred liabilities balance liability/asset
Tax credit
Adjustment for tax rate change
Surplus in Property revaluation Tax charge through equity
Profit/loss charge (Income tax
expense) I/S
Example 1: Over/Under provision
In 20X8 Darton Co had taxable profits of $120,000. In the
previous year (20X7) income tax on 20X7 profits had been
estimated as $30,000. The corporate income tax rate is 30%.
Required
Calculate tax payable and the charge to P/L (income tax
expense) for 20X8 if the tax due on 20X7 profits was
subsequently agreed with the tax authorities as
(a) $35,000; or
(b) $25,000.
Any under or over payments are not settled until the following
year's tax payment is due.
Example 2: Deferred tax
In 20X8 Darton Co had taxable profits of $120,000. In the previous year (20X7) income
tax on 20X7 profits had been estimated as $30,000. The corporate income tax rate is
30%.
1. The tax due on 20X7 profits was subsequently agreed with the tax authorities as
$35,000; Any under or over payments are not settled until the following year's tax
payment is due.
2. Darton Co buys equipment for $50,000 on 1 January 20X8 and depreciates it on a
straight-line basis over its expected useful life of five years (20%). It has no other non-
current assets. For tax purposes, the equipment is depreciated at 25% per annum on a
straight-line basis.
Required: calculate
a. Accounting entries related to income tax in 20X7 and 20X8
b. Current tax liability at the end of 20X8
c. Deferred tax liability at the end of 20X8
d. Tax charge to P/L for 20X8
Example 3: Deferred tax
In 20X9 Darton Co had taxable profits of $90,000. In the previous year (20X8) income
tax on 20X8 profits had been estimated as $36,000. The corporate income tax rate is
30%.
1. The tax due on 20X8 profits was subsequently agreed with the tax authorities as
$25,000; Any under or over payments are not settled until the following year's tax
payment is due.
2. No equipment was purchased in 20X9.
Required
a. Accounting entries related to income tax in 20X9
b. Current tax liability at the end of 20X9
c. Deferred tax liability at the end of 20X9
d. Tax charge to P/L for 20X9
Accounting entries
2007
1. At the end of 2007, income tax charged by the tax authorities for 2007 was
estimated as $30,000.
2008
1. In 2008, paid 2007 estimated income tax of $30,000.
2. Paid the under-provision income tax of $5,000 ($35,000 - $30,000).
3. At the end of 2008, income tax expense is determined at $41,750 (=36,000+ 5,000 +
750).
a. Estimated income tax charge for 2008 (120,000 x 30%) $36,000
b. Under tax provision (35,000 – 30,000) $5,000
c. Increase in deferred tax liability (40,000 – 37,500) x 30% $750
2009
1. In 2009, paid 2008 estimated income tax of $36,000.
2. Received tax refund from the tax authorities for over-provision income tax of
$11,000 ($36,000 - $25,000).
3. At the end of 2009, income tax expense is determined at $16,750 (=27,000 -11,000
+ 750).
a. Estimated income tax charge for 2009 (90,000 x 30%) $27,000
b. Over tax provision (36,000 – 25,000) $11,000
c. Increase in deferred tax liability increased $750
Example 4: Revaluation surplus
In 20X8 Darton Co had taxable profits of $120,000. In the previous year (20X7) income
tax on 20X7 profits had been estimated as $30,000. The corporate income tax rate is
30%.
1. The tax due on 20X7 profits was subsequently agreed with the tax authorities as
$35,000; Any under or over payments are not settled until the following year's tax
payment is due.
2. Darton Co buys equipment for $50,000 on 1 January 20X8 and depreciates it on a
straight-line basis over its expected useful life of five years (20%). It has no other non-
current assets. For tax purposes, the equipment is depreciated at 25% per annum on a
straight-line basis.
3. On 31 December 20x8, the equipment was revalued upwards to $45,000 with no
change in useful life.
Required
a. Accounting entries related to income tax in 20X8
b. Current tax liability at the end of 20X8
c. Deferred tax liability at the end of 20X8
d. Tax charge to P/L for 20X8
Unused tax losses and unused tax
credits
An entity may have unused tax losses or credits (ie
which it can offset against taxable profits) at the
end of a period. Should a deferred tax asset be
recognised in relation to such amounts? IAS 12
states that a deferred tax asset may be recognised
in such circumstances to the extent that it is
probable future taxable profit will be available
against which the unused tax losses/credits can be
utilised.
Example 5: Tax current asset
In 20X7 Eramu Co paid $50,000 in tax on its
profits. In 20X8 the company made tax losses of
$24,000.
The local tax authority rules allow losses to be
carried back to offset against current tax of prior
years.
The tax rate is 30%.

 Tax repayment due on tax losses = 30% x


$24,000 = $7,200.
Changes in tax rates

AS 12 requires deferred tax assets and liabilities to be


measured at the tax rates expected to apply in the period
when the asset is realised or liability settled.
Ginger Co has an asset with a carrying amount of $80,000
and a tax base of $50,000. The current tax rate
is 30% and the rate is being reduced to 25% in the next
tax year. Ginger plans to dispose of the asset for
its carrying amount and will do so after the tax rate falls.
The deferred tax on the temporary difference is therefore
$30,000 × 25% = $7,500.
Discounting
Discounting is used to allow for the effect of the
time value of money.
IAS 12 states that deferred tax assets and
liabilities should not be discounted because of
the complexities and difficulties involved.
Discounting is applied to other non-current
liabilities such as provisions and deferred
payments.
Tax Differences
Accounting profits and taxable profits are different. There are
two reasons for the differences.
Permanent differences. These occur when certain items of
revenue or expense are excluded from the computation of
taxable profits
Temporary differences. These occur when items of revenue
or expense are included in both accounting profits and taxable
profits, but not for the same accounting period
Temporary differences are differences between the carrying
amount of an asset or liability in the statement of financial
position and its tax base.
The tax base of an asset or liability is the amount attributed to
that asset or liability for tax purposes.
Deferred tax
Deferred tax is the tax attributable to temporary differences.
Deferred tax liabilities are the amounts of income taxes
payable in future periods in respect of taxable temporary
differences.
Deferred tax assets are the amounts of income taxes
recoverable in future periods in respect of:
Deductible temporary differences
The carry forward of unused tax losses
The carry forward of unused tax credits

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