Transcript Your Unit Title

Topic 9: Accounting for
Income Taxes
Financial Accounting BFA201
BFA201_13
Readings and references
• Deegan Chapter 18
• AASB 112 Income Taxes
2
Independent Study Tasks
Tutorial questions (for workbooks)
• Tutorial Question 1 Deegan 7th ed, Ch. 18, Review Question 6
(p. 655)
• Tutorial Question 2 Deegan 7th ed, Ch. 18, Review Question
10 (p. 655)
• Tutorial Question 3: Deegan 7th ed, Ch. 18, Challenging
Question 22 (p. 657)
• Tutorial Question 4: Deegan 7th ed, Ch. 18, Challenging
Question 23 (p. 658)
Independent study questions
• Chapter 18 – Review Question 1
• Chapter 18 – Review Question 9
• Chapter 18 - Review Question 13
• Chapter 18 – Review Question 17
3
Learning Objectives
• Identify differences between tax and accounting
• Understand DTA and DTL
• Understand how to account for
– changes in tax rates;
– tax effect of revaluations;
– tax losses
• Evaluation of tax effect accounting
4
Key Concepts
• Temporary differences
• Balance sheet approach
• Deferred tax assets/liabilities
• Carrying amount
• Tax base
5
The Tax Payable Method
6
Tax Payable Method
• The method taught in BFA104 (but now we have to learn
about tax effect accounting under AASB 112)
• This method is based on the view that the amount paid to the
ATO is an appropriation of profits by the government.
• The income tax expense for the period is the same amount as
the income tax payable for the same period.
• A balance day adjustment is recorded for income tax based
on an estimate of the tax liability at the end of the financial
year.
• Any over/under provision of tax is accounted for when an
assessment is received from the ATO
7
Tax Payable Method
• Example: Assume that Freds Ltd has estimated tax
payable for the year to be $12,500 as at 30 June 20xx.
Date
30
June
$
Income Tax Expense
Income Tax Payable (L)
$
12 500
12 500
An ATO assessment notice assesses the tax to be paid by Fred Ltd
at $13,000. This is payable on 10 September:
•
10
Sept
Income tax Payable (L)
Cash
10
Sept
Underprovision of IncomeTax Payable (E)
Income tax payable (L)
13 000
13 000
500
500
8
Why a Revised Tax Effect Standard?
• Development of a conceptual framework in which a
balance sheet approach was adopted.
• The definition of expense and revenue is dependent on
the definition of assets and liabilities.
• Equity is a function of the definition
liabilities (ie. a residual)
of assets and
• AASB 112 adopts the balance sheet approach
• The approaches adopted de-emphasise the matching
process
9
Why is Net Profit according to
GAAP different from Taxable
Income?
10
Accounting for Income Tax
Accounting Profit (Accounting Standards)
=/
Taxable Income (Income Tax Legislation)
11
Accounting Profit and Taxable
Income
• Income tax payable is based on assessable/taxable
income in accord with the Income tax Assessment Act
1997.
• Accounting profit is determined in line with various
accounting rules (AASB conceptual framework,
accounting standards, accepted accounting principles)
• Rules are therefore different (eg revenue received in
advance)
12
Accounting versus Taxation Income
• Income for taxation purposes is known as taxable
income
• Determined in accordance with Australian income tax
legislation, not according to general accounting rules
• Differences in accounting and taxation revenue and
expenses recognition principles
• Governed by AASB 112
13
Tax
Accounting
• Revenue
• Less expenses
• =Accounting Profit
(NPBT)
• X tax rate =
• INCOME TAX
EXPENSE
•
Assessable
income
•
Less allowable
deductions
•
= Taxable Income
•
X tax rate (less offsets)
•
TAX PAYABLE
14
Reconciliation statement
• Need to reconcile accounting profit and taxable
income
– Differences in:
• Accounting and assessable income
• Depreciation
• Non deductible expenditure
• Exempt income
• Special deductions
15
Lecture Example 9-1
16
Accounting profit and taxable
income – examples of differences
Transactions
Accounting treatment
Taxation treatment
Rental revenues
Recorded as a liability if
received in advance
Assessable when cash is
received
Interest revenue
Recorded as revenue as it
accrues
Assessable when received
Depreciation of assets
Expense
Deduction allowed, usually
at an accelerated rate to
accounting, no scrap value
included in calculation
Long service leave/sick
leave
Recorded as an expense as
it accrues overtime
A deduction is allowed when
the leave is taken
Entertainment and
Treated as an expense
Not a tax deduction in
current or subsequent
periods
Recorded as an expense
when incurred
A deduction is not allowed
Goodwill impairment
Fines and penalties
17
Accounting profit and taxable
income – cont.
Transactions
Accounting treatment
Taxation treatment
Insurance costs
Recorded as an asset and
expensed over time of
cover
A deduction is allowed when
paid
Product warranties
Recorded as an expense
and liability on sale of
goods
A deduction is allowed when
warranty costs are incurred
Bad and doubtful debts
Recorded as an expense if
doubtful
A deduction is allowed when
written off
Revaluation of non-current
assets
Recorded depreciation as an A deduction is only allowed
expense on the revalued
on the original cost, not
carrying amount
the revalued amount
Tax losses
Not recognised
An offset is allowed against
future taxable inccome.
18
The Balance Sheet Approach under
AASB 112: Tax Effect Accounting
19
The Balance Sheet Approach
Under AASB 112
• Focuses on comparing the carrying value of an entity’s assets
and liabilities (determined by accounting rules) with the tax
base for those assets and liabilities (determined by taxation
rules)
• comparing balance sheet derived using accounting rules with
balance sheet derived from taxation rules
• Recognises Deferred Tax Assets and Deferred Tax Liabilities –
– i.e. benefits we will get from having paid more tax now –
have an asset to use against any expense we might have in
later years – DTA;
– on the other hand we might have an obligation to pay more
tax in the future – that obligation is a liability so we are
deferring that liability until later- DTL
20
AASB112 prescribes accounting
treatment for income taxes
In Balance Sheet:
•
CURRENT income tax (Tax Legislation)
•
FUTURE tax consequences**
– “Tax Effect Accounting”…. because accounting and
tax rules differ
In Income Statement:
• Income tax expense (based on acc profit)
In Other Comprehensive Income Statement:
• Tax related to OCI
21
AASB112
• Accounting for the differences between accounting
and tax rules:
• Two separate calculations are performed each
year:
1.
2.
Current tax liability (tax payable)
Movements in deferred tax balances
22
Calculation of current tax
Accounting profit/loss
- accounting revenue not assessable for tax
+ accounting expenses not deductible for tax
+/(-) differences between accounting revenue and tax
income
+/(-) differences between accounting expenses and tax
deductions
= Taxable profit (Taxable Income)
x tax rate %
= Current tax liability (Tax Payable)
23
Lecture Example 9-2
24
Calculation of current tax - example
Profit before tax for PQR
Ltd for the year to 30 June
2010 is as follows:
Sales
1,000
Interest revenue
40
Government grant
80
COGS
(50)
Goodwill
impairment
(20)
Bad debts
(30)
Annual leave
(10)
NPBT
•
•
•
(450)
Depreciation
Other expenses
•
•
•
(260)
300
•
Depreciation allowed for tax
$60.
Interest has not yet been
received.
Bad debts of $20 were written
off during the year.
Payments of $30 were made
to employees in relation to
annual leave taken during the
year.
Govt grant exempt for tax.
The tax rate is 30%
Required:
Calculate the current tax
liability of PQR Ltd for 2010
25
Calculation of current tax example
Accounting Profit
300
Add (back)
Acctg depn 50
Tax depn (60)
Adj req
(10)
B/debts expense-acctg 30
B/debts w/off- tax (20)
Adj req
10
A/L expense- acctg 10
Paid- tax
(30)
Adj req
(20)
Goodwill impairment (not deductible )
Depreciation of plant (Acc NOT Tax)
Bad debts expense
Annual leave expense
20
50
30
10
not deductible
110
Deduct
Government grant (tax exempt)
Interest (not yet received)
Depreciation of plant (for tax purposes)
Write off bad debts
Annual leave PAID
(80)
(40)
(60)
(20)
(30)
exempt income
(230)
Taxable income
Current tax liability at 30%
180
54
Recording Current Tax Liability
Journal entry:
Dr
Current income tax expense 54
Cr
Current tax liability (or tax payable) 54
• Recognising the current tax liability, based on the
current tax income for the year
• Note: Income Tax Expense (accounting)
= Current + deferred tax expense
27
Carrying Amount Vs Tax Base of
Asset or Liability
• Carrying amount is the amount the asset or liability
is recorded at in the accounting records
• Tax base is defined as the amount that is attributed
to an asset or liability for tax purposes
• Where the tax base is different from the carrying
amount a ‘temporary difference’ can arise
28
Temporary Differences
• An assessable temporary difference:
– will result in an increase (decrease) in income tax
payable (recoverable) in future periods when the
carrying amount of the asset or liability is recovered
or settled
• creates a liability - deferred tax liability
• A deductible temporary difference:
– will result in a decrease (increase) in income tax
payable (recoverable) in future periods when the
carrying amount of the asset or liability is recovered
or settled
• creates an asset - deferred tax asset
29
Deferred Tax Liability Vs Deferred
Tax Asset
• Deferred tax liability:
– the carrying amount of the asset exceeds the tax base
– taxation payments have effectively been deferred to
future periods
– tax is reduced or ‘saved’ in early years, but additional tax
will need to be paid later
• Deferred tax asset:
– the carrying amount of an asset is less than the tax base
– Income tax expense has been higher in the early periods
– In a future period, there will be a tax benefit because the
carrying amount will be zero, but there will still be a tax30
deduction.
Example of Deferred Tax Liability
• Carrying amount of a non-current depreciable asset
exceeds the tax base in early years, as depreciation
allowable as a deduction for tax purposes is greater than
depreciation for accounting purposes
• This will be reversed in later years when no depreciation is
allowable for tax purposes
31
Example of Deferred Tax Asset
• Tax base of a depreciable asset exceeds the carrying
amount in early years, as depreciation allowable as a
deduction for tax purposes is less than depreciation for
accounting purposes
• This will be reversed in later years when the asset is fully
depreciated for accounting purposes, but depreciation is still
allowable as a deduction for tax purposes
32
Income Tax Expense
• Represents the sum of the tax attributable
to the taxable income, plus or minus any
adjustments relating to temporary
differences
• Defined in AASB 112 as:
– the aggregate amount included in the
determination of profit or loss for the period in
respect of current tax and deferred tax
33
Income Tax Payable
• The amount of tax generally expected to be paid, as
a result of the year’s operations, within the next
financial period
• Under balance sheet method income tax payable
does not necessarily equate to tax expense
• tax expense is affected by temporary differences
34
Calculation of Income Tax Payable
• Income tax payable is based on taxable income
• Calculation of income tax payable:
– tax rate multiplied by taxable income
35
Journal Entry to Record Income Tax
Expense
• If deferred tax asset:
– to recognise tax expense that relates to the
temporary difference:
Dr
Deferred tax asset (temp. difference x tax
rate)
Cr Income tax expense
– to recognise tax expense that relates to the entity’s
taxable income:
Dr
Income tax expense
Cr Income tax payable
36
Journal Entry to Record Income Tax
Expense
• If deferred tax liability:
– to recognise tax expense that relates to the temporary
difference:
Dr Income tax expense
Cr Deferred tax liability (temp. difference x tax
rate)
– to recognise tax expense that relates to the entity’s
taxable income:
Dr Income tax expense
Cr Income tax payable
37
Reversal in Future Periods
• In future periods, timing differences will
reverse
– deferred tax asset will be credited
– deferred tax liability will be debited
38
Deferred Tax: Differences
• Permanent or temporary
• Permanent differences = transactions are NEVER
recognised as part of taxable profit (or vice versa)
– No accounting required for permanent
differences other than disclosure in the notes
39
Deferred Tax: Temporary
differences
• Deferred tax liabilities (DTLs) and deferred tax
assets (DTAs):
– Arise because of temporary differences between
the carrying amount and tax base of an asset
– They are removed from the accounts on reversal
of the temporary differences
40
Temporary Differences
• These differences are either:
– Taxable or deductible
1. The company paying more tax in the future
•
•
Taxable temporary differences (TTDs)
Result in deferred tax liabilities (DTLs)
2. The company paying less tax in the future
•
•
Deductible temporary differences (DTDs)
Result in deferred tax assets (DTAs)
41
Depreciation example
• Captain Ltd had a depreciable asset
costing $100,000 and a zero residual
value:
– For accounting purposes:
• The asset was depreciated over 4 years on a
straight-line basis
– For taxation purposes:
• The asset had an effective life of 4 years and was
depreciated on a diminishing value basis.
42
Temporary differences
• Depreciation expenses for accounting and
tax purposes:
Depreciation
Accounting
Tax
Yr 1
25,000
50,000
Yr 2
25,000
25,000
Yr 3
25,000
12,500
Yr 4
25,000
6,250
43
AASB 112: Balance Sheet
approach
COMPARES:
1. carrying amounts for assets and liabilities
(determined by accounting rules)
WITH
2. the value that those assets and liabilities would
have if a balance sheet was prepared following
income tax rules (their tax base).
44
Balance sheet approach:
depreciation
• Yr 1 end:
Accounting records:
Cost
$100,000
Accum dep (25,000)
Carrying amt $75,000

Yr 1 end:
TAX records:
Cost
$100,000
Accum dep
(50,000)
TAX BASE = $50,000
Difference = $ 25,000
Temporary difference
45
Another Small Example of Tax
Effect Accounting
46
Example: Deferred Tax Liability
Example
•
•
•
•
Machine cost $200,000 in 2000
Depreciation for accounting purposes: 5 years, no residual, straight
line basis
Tax rate 30%
Depreciation for tax purposes: 4 years, no residual, straight line
basis
After One Year
Cost
Less Acc. Depn
Carrying Amount
Tax Base
200,000
200,000
40,000
50,000
160,000
150,000
47
Second year
After Two Years
Cost
Less Acc. Depn
Carrying Amount
Tax Base
200,000
200,000
80,000
100,000
120,000
100,000
48
Third year
After Three Years
Carrying Amount
Tax Base
Cost
200,000
200,000
Less Acc. Depn
120,000
150,000
80,000
50,000
49
Fourth Year
After Four Years
Carrying Amount
Tax Base
Cost
200,000
200,000
Less Acc. Depn
160,000
200,000
40,000
0
50
Fifth Year
After Five Years
Carrying Amount
Tax Base
Cost
200,000
200,000
Less Acc. Depn
200,000
200,000
0
0
51
In this situation the tax office has granted a greater deduction relative to the
consumption of the economic benefit
BUT the tax deduction is over 4 years – in the 5th there is NO deduction.
In the last year, there will be no deduction for tax purposes,
2001
2002
2003
2004
2005
500,000
600,000
650,000
700,000
800,000
40,000
40,000
40,000
40,000
40,000
Less Tax Depreciation
(50,000)
(50,000)
(50,000) (50,000)
Taxable Income
490,000
590,000
640,000
690,000
840,000
Tax Payable
147,000
177,000
192,000
207,000
252,000
Accounting Profit
Add Accounting
Depreciation
52
• What you gain in the first 4 years you lose in the 5th
• Reduced tax years 1 to 4 - $10,000 @ 30% = $3,000
per year
• In the fifth year you have run out of tax deductions for
depreciation.
• So therefore the tax liability is deferred not eliminated.
53
First Year
Income tax expense
3,000
Deferred tax liability
3,000
Income tax expense
147,000
Income tax payable
147,000
54
Second Year
Income tax expense
3,000
Deferred tax liability
Income tax expense
Income tax payable
3,000
177,000
177,000
55
Third Year
Income tax expense
3,000
Deferred tax liability
3,000
Income tax expense
192,000
Income tax payable
192,000
56
Fourth Year
Income tax expense
3,000
Deferred tax liability
Income tax expense
Income tax payable
3,000
207,000
207,000
57
Fifth Year
Deferred tax liability
12,000
Income tax expense
12,000
Income tax expense
252,000
Income tax payable
252,000
58
Calculation of deferred tax
CA – TB = TTD / (DTD)
• Carrying amount (CA) = asset and liability
balances (net of accumulated depreciation,
allowances etc) based on ACCOUNTING balance
sheet
• Tax Base (TB) – asset and liability balances that
would appear in a “TAX” balance sheet
59
Calculating the tax base
• For an asset:
CA
– future taxable amounts
+ future deductible amounts
= TB
• For a liability:
CA
+ future taxable amounts
- future deductible amounts
= TB
60
Calculating the tax bases of assets
and working out the temporary
differences
61
Example – tax base for assets
•
A depreciable asset, not revalued, intended for use in the business.
•
Hairy Co purchased an asset on 1 July 2011 for $100,000. For
accounting purposes depreciation is charged at 10% pa straight
line and the rate for tax purposes is 25% straight line. Residual
value is zero.
One year later, at 30 June 2012, depreciation is as follows:
•
Accounting
Cost
Tax
100,000
100,000
Less Depreciation
10,000
25,000
Carrying Amount
90,000
Tax Base
75,000
OR
Tax Base = carrying amount – future taxable amount + future deductible
amount
= 90,000 – 90,000 + 75,000
= 75,000
62
Example – tax base for assets
• Carrying amount – tax base
• 90,000 – 75,000 = temporary difference $15,000
• DTL $4,500 ($15,000 x 30% tax rate)
• Deferred tax liability = taxable temporary difference x
tax rate
• The future taxable amount is greater than the future
deductible amount therefore more tax is payable in the
future.
• Payment of tax is reduced or ‘saved’ in early years, but
additional tax will need to be paid later
63
Calculating the tax bases of
liabilities and working out the
temporary differences
64
Example – tax base for liabilities
• Provisions for employee benefits such as long service
leave
• Hairy Co has a balance in the provision for long service
leave of $40,000 at 30 June 2010. This amount is fully
deductible when paid.
Accounting
Carrying Amount
Tax Base
Tax
40,000
------
OR
Tax Base = carrying amount – future deductible amount + future taxable
amount
= 40,000 – 40,000 + 0
= 0
65
Example – tax base for liabilities
• Carrying amount – tax base
• 40,000 – 0 = temporary difference $40,000
• DTA $12,000 ($40,000 x 30% tax rate)
• The future taxable amount is less than the
future deductible amount so less tax will be
paid in the future
66
Calculating the tax base - examples
Hairy Co
CA
FTA
Prepayment: $3,000
3,000
- 3,000
+
-
=
-
Interest receivable: $1,000
1,000
- 1,000
+
-
=
-
Plant: cost $10,000,
acctg a/depn $4,600,
tax a/depn $6,500
5,400
- 5,400
+
Trade receivables: $52,000
allowance for b/debts:
$2,000
50,000 -
-
+ 2,000
= 52,000
30,000 +
-
-
= 30,000
3,900 +
-
- 3,900
Trade payables: $30,000
Annual leave liability:
$3,900
FDA
TB
3,500 = 3,500
-
=
-
Important rules
68
Tax base of an asset = Carrying amount + Future deductible
amount – Future assessable amount
Tax base of a liability = Carrying amount – Future deductible
amount + Future assessable amount
Assets
Liabilities
Deferred tax
liability
Carrying
amount > Tax
base
Carrying
amount < Tax
base
69
Deferred tax
asset
Carrying
amount < Tax
base
Carrying
amount > Tax
base
Deferred Tax Assets and Deferred
Tax Liabilities
• Assets:
– deferred tax liability arises when:
• carrying amount > tax base
– deferred tax asset arises when:
• carrying amount < tax base
• Liabilities:
– deferred tax liability arises when:
• carrying amount < tax base
– deferred tax asset arises when:
• carrying amount > tax base
70
Classification of temporary differences and measurement of deferred
tax balances.
A
B
C
D
Carrying Amount of
asset
>
Tax base of asset
Carrying Amount of
asset
<
Tax base of asset
Carrying Amount of
liability
>
Tax base of liability
Carrying Amount of
liability
<
Tax base of liability
Difference =
Assessable temporary difference times the tax rate
= Deferred tax liability
= Deferred tax asset
= Deferred tax asset
= Deferred tax liability
Examples: depreciation,
rent/interest receivable,
prepaid rent/insurance,
assets revalued upwards
from original cost.
Examples: accounts
receivable with a
provision for doubtful
debts
Examples: provision for
long service leave,
annual leave, warranties,
rent paid in arrears, rent
received in advance
Examples: hybrid
securities such as
convertible notes that
are apportioned between
debt and equity
components for
accounting purposes but
treated as wholly debt
for tax purposes.
Summary
• Assets:
– DTL = Carrying amount > Tax base
– DTA = Tax base > Carrying amount
• Liabilities:
– DTA = Carrying amount > Tax base
– DTL = Tax base > Carrying amount
72
Deferred tax assets and liabilities
Calculating a deferred tax asset (DTA)
DTD x tax rate % = DTA
Calculating a deferred tax liability (DTL)
TTD x tax rate % = DTL
The tax rate
% is that
which is
expected to
apply when
the asset
will be
realised or the
liability settled
Recording a DTA/DTL
Dr Deferred tax asset
Dr/Cr Income tax expense (deferred)
Cr Deferred tax liability BALANCING ITEM
73
Worksheet Methodology
74
Lecture Example 9-3
75
Calculation of deferred tax example
The balance sheet of PQR Ltd at 30 June 2010 is as follows:
Assets
Liabilities
Cash
260
Trade payables
296
Loan
485
270
A/L liability
15
Interest receivable
40
Deferred tax liability
9
Inventory
100
Trade receivables
300
Allowance for
b/debts
(30)
Plant
Accum dep’n
500
(300)
805
Equity
200
Share capital
700
Goodwill
800
R/earnings
175
Deferred tax asset
10
1,680
• Accumulated depreciation of plant for tax purposes is $360
• Calculate DTA & DTL for 2010 and prepare the journal entries to
record deferred tax movements for the 30 June 2010 year.
875
Calculation of deferred tax example
Relevant assets & liabilities
CA
FTA
FDA
TB
DTD
TTD
Trade receivables
270
-
30
300
30
Interest receivable
40
40
-
-
40
Plant
200
200
140
140
60
Goodwill
800
800
-
-
800
Annual Leave liability
15
15
0
15
-
Total temporary differences
45
900
Less: excluded differences
-
(800)
Temporary differences
45
100
DTA; DTL (@ 30%)
13
30
Less: opening balances
10
9
3
21
Adjustment
Calculation of deferred tax example
Entry to record deferred tax movement:
Dr
Dr
Deferred tax asset
Income tax expense (deferred)
Cr
Deferred tax liability
Summary:
Current tax liability (slide 35)
54
Deferred tax movement
18
Total income tax expense
72
3
18
BALANCE
21
NOTE (from slide 34) : Accounting Profit 300 (Permanent differences 80 +(20)) = 240 x 30% = 72
(Income tax expense)
78
Changes in tax rates
79
Tax Rate Changes
Tax rate
Tax rate
Existing DTL
Existing DTA
BFA201_13
Existing DTL
Existing DTA
Expense
Income
Income
Expense
80
Tax rate changes example
For tax purposes AGRO Co has the following
deferred tax balances as at 1 July 2015:
Deferred tax asset
$500 000
Deferred tax liability
$300 000
The above balances were calculated when the tax
rate was 30%. On 1 August 2015 the government
reduced the corporate tax rate to 28%.
Provide the journal entries to adjust the carryforward balances of the deferred tax asset and
deferred tax liability.
BFA201_13
81
Tax rate changes example
Balance at
1 July 2015
Balance at
1 August 2015
$500 000
x 28/30 = $466 667
DTL $300 000
$300 000
× 28/30 = $280 000
OR 500 000 x (30-28)/30 = 33,333
300 000 x (30-28)/30 = 20,000
Change
DTA $500 000
($33,333)
($20 000)
The accounting entry at 1 August 2015 would be:
Dr
Deferred tax liability
20 000
Dr
Income tax exp. (deferred) 13 333
Cr
Deferred tax asset
33 333
82
Lecture Example 9-4
83
Moonray Ltd’s profit before tax for the year ended 30 June 2013 was $310 000.
The following information is available:
Assets
Cash
20 000
Accounts receivable
80 000
Less provision for doubtful debts 4 000
Lecture Case Study
Accounts receivable (net)
76 000
Prepaid rent
12 000
Machinery – net
126 000
Deferred tax asset
3 000
Liabilities
Provision for long service leave
15 000
Loan payable
50 000
Deferred tax liability
8 400
Other information:

Moonray recognised 5% of receivables as doubtful debts expense

Machinery was purchased on 1 July 2011 for $210 000. It is being
depreciated for accounting purposes over 5 years but for taxation
purposes over 3 years. There was no expected residual value

Moonray’s LSL expense for the year was $5,000. No payments have
been made in relation to long service leave.

The 2012 tax rate was 30%. For year ended 30 June 2013 it is 28%.
Required
Provide the journal entries to account for tax in accordance with AASB 112.
Solution to Case Study
• Step 1 – Calculate taxable profit
Taxable income calculation
Accounting profit
310,000
Add back
Doubtful debts
4,000
Deprec (accounting)
42,000
Long service leave
5,000
Deduct
Rent payment
Deprec (tax)
Tax
BFA201_13
12,000
70,000
x 0.28
310,000
51,000
82,000
279,000
78,120
85
Solution to Case Study cont.
• Step 2 – Calculate temporary differences
Carrying amt Tax base
Assets
Cash
Accounts rec (net)
Prepaid rent
Machinery (net)
Liabilities
Prov for LSL
Loan payable
Net temp diff
DTA; DTL @ 28%
Less Beg Balance
Movement during yr
Adjustment
BFA201_13
DTD
20,000
76,000
12,000
126,000
20,000
80,000
0
70,000
0
4,000
15,000
50,000
0
50,000
15,000
0
19,000
5,320
(3,000)
200
2,520
TTD
12,000
56,000
68,000
19,040
(8,400)
560
11,200
86
Lecture Case Study
Dr
$
Journal entries
1. Movement due to tax rate change
Deferred Tax Liability
Income Tax Expense (deferred)
Deferred tax asset
560
2. Current & deferred income tax for the year
Income Tax Expense (current)
Current Tax Liability
78,120
Income Tax Expense (deferred)
Deferred tax asset
Deferred tax liability
Cr
$
360
200
78,120
8,680
2,520
11,200
87
Revaluation of non-current assets
88
Revaluation of Non-current Assets
• Revaluations can create temporary differences according to
AASB 112 para 20
• Tax base not affected by revaluation as depreciation for tax
purposes continues to be based on original cost
• Revaluation of asset which recognises an increase in fair
value implies an expected increase in future flow of
economic benefits
– increase can be taxable and lead to deferred tax liability
if new carrying amount is greater than tax base
89
Revaluation of Non-current
Assets
AASB 112 requires that, to the extent that the deferred tax
relates to amounts that were previously recognised in equity as
either direct credits or direct debits (as is the case with asset
revaluations) the journal entry to recognise deferred tax asset or
liability be adjusted against the equity account:
Dr Revaluation surplus
Cr
Deferred tax liability
– Entry assumes that the revalued amount of the asset will
be recovered by the entity’s continued use of the asset.
90
Revaluation of Non-Current
Assets Example
•
Tax Ltd acquired land 2 years ago for $450,000
•
Its fair value now is $600,000
•
The tax rate is 30%
Land
150 000
Revaluation surplus
150 000
Revaluation reserve
45 000
Deferred tax liability
45 000
91
Revaluation of Non-Current Assets
Example
Accounting
Cost
600 000
450 000
-
-
Accumulated
depreciation
Carrying value
Tax
600 000
Tax base
450 000
Or
Carrying amount + Future deductible amount – Future taxable amount =
Tax base
600 000+ 0 – 450 000= 150 000
If the carrying amount of an asset $600 000 is greater than the tax base of
the asset $450 000, this leads to a deferred tax liability of 150 000 x .30 =
$45 000
92
Other movements: Revaluations
• Revaluations NCA
difference
• Accounting CA
change)
Temporary
≠
Tax base (no
– Acc. depreciation based on revalued amount
– Tax depreciation based on original cost
• Revaluation increments
Equity
• Related tax recognised in OCI & adjusted
against equity
Dr Revaluation surplus xxx
Cr Deferred tax liability xxx
93
Unused tax losses
94
Unused tax losses
• A deferred tax asset shall be recognised to the
extent that:
– It is probable that future taxable profit will be
available against which the unused tax losses
and unused tax credits can be utilised
95
Lecture example
• Rebel Ltd records a loss of $400,000 in Year 1.
• It is expected that the company will record profits in
future years.
• In fact it does record accounting profits before tax of
$360,000 and $500,000 in the next two years.
•
• There are no temporary differences between the carrying
amounts of the company’s assets and liabilities and their
tax base.
• The tax rate is 30%.
96
Solution
Dr
Deferred tax asset
120,000
Cr
Income tax revenue
120,000
Recording tax loss 400,000 x 30% in Yr 1.
Dr
Income tax expense
Cr
Deferred tax asset
Recording use of tax loss in Yr 2.
108,000
Dr
150,000
Cr
Cr
Income tax expense
Deferred tax asset
Income tax payable
108,000
12,000
138,000
Recording use of tax loss & tax payable in Yr 3.
97
DTA and DTL recognition
•
The entity will remain in business (going
concern)
•
Taxable income will be derived in future years
•
Recognition of deferred tax asset same as
applied to other assets —reliance on
‘probability’ test
•
Probable test will almost always be met with
DTL
98
Theoretical consideration of DTL
and DTA
99
Evaluation of AASB112
• Profit smoothing technique?
• DTA might not be an asset under the AASB
framework
– No claim against the government for tax?
– Does entity ‘control’ the benefit?
– Benefit depends on future earnings and no
legislation changes
100
Evaluation of AASB112 cont.
•
DTL might not be a liability as entity not
presently obliged to pay govt; it is a book entry
•
Funds will only be transferred in the future if the
company earns sufficient revenue — there is a
dependency on future events, not past events
•
Assumes no changes in tax legislation
101
Next Week – Revenue recognition
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