Required: Calculate the current tax payable (for SFP) and relevant current tax expense (for SPL) for the year 2011.

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Jemimah Cobb
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1 IAS 12 Income Taxes CURRENT TAX DEFINITIONS Accounting profit Taxable profit (tax loss) Tax expense (tax income) Current tax is profit or loss for a period before deducting tax expense. is the profit (loss) for a period, determined in accordance with the rules established by the taxation authorities, upon which income taxes are payable (recoverable). is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax (net). is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period. CURRENT TAX LIABILITY / ASSET Current tax for current and prior periods shall, to the extent unpaid, be Liability recognised as a liability. If the amount already paid in respect of current and prior periods exceeds the Asset amount due for those periods, the excess shall be recognised as an asset. Asset due The benefit relating to a tax loss that can be carried back to recover current tax of to carry back a previous period shall be recognised as an asset. Current tax liabilities (assets) for the current and prior periods shall be measured at the amount expected to be paid to (recovered from) the taxation authorities, Measurement using the tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. EXAMPLE 12A (a) Falcon Limited (FL) taxable profits for year 2011 are $80,000. The tax for the year 2010 was under provided by $4,000 (being shown in trial balance as Income tax (debit)). (b) Eagle Limited (EL) taxable profits for year 2011 are $100,000. The tax for the year 2010 was over provided by $6,000 (being shown in trial balance as Income tax (credit)). The tax rate is 30%. Required: Calculate the current tax payable (for SFP) and relevant current tax expense (for SPL) for the year Page 1 of 15 (kashifadeel.com)

2 (c) (d) (e) EXAMPLE 12B Falcon Limited (FL) taxable profits for year 2011 are $ 80,000. During the year 2011, FL paid $ 15,000 as advance tax and $ 4,000 extra paid due to under provision of tax for the year Eagle Limited (EL) taxable profits for year 2011 are $ 100,000. During the year 2011, EL paid $ 43,000 as advance tax and $ 3,000 were paid less due to over provision of tax for the year Shaheen Limited (SL) taxable losses for year 2011 are $ 50,000. During the year 2010, SL paid tax of $ 14,000 on taxable profits of $ 40,000. Applicable tax rate is 35% in all of the above cases. Assume that under the relevant tax jurisdiction the carry back of tax losses is allowed. Required: Calculate the current tax payable / receivable and relevant current tax expense / income for the year Page 2 of 15 (kashifadeel.com)

3 DEFERRED TAX TAX BASE The tax base of an asset or liability is the amount attributed to that asset or liability for Definition tax purposes. Some items have a tax base but are not recognised as assets and liabilities in the Important statement of financial position. For example, research costs are expensed and point charged to profit or loss in the period in which they are incurred (IAS 38) but the tax law may allow these as expense over a longer period. TAX BASE CALCULATION For all assets Carrying amount Less: Future taxable benefits (from recovery of carrying value) Add: Future deductible amounts Tax base XXX (XX) XX XXX For unearned revenue Carrying amount Less: revenue not taxable in future Tax base XXX (XX) XXX For other liabilities Carrying amount Less: future deductible amount Tax base XXX (XX) XXX Page 3 of 15 (kashifadeel.com)

4 EXAMPLE 12C Calculate the tax base for each of the following asset, separately: (a) A machine cost $100. For tax and accounting purposes, depreciation of $30 has already been deducted in the current prior periods and the remaining cost will be deductible in future periods, either as depreciation or through a deduction on disposal. Revenue generating by using the machine is taxable, any gain on disposal of the machine will be taxable and any loss on disposal will be deductible for tax purposes. (b) Interest receivable has a carrying amount of $100. The related interest revenue will be taxed on a cash basis. (c) Trade receivables have carrying amount of $100. The related revenue has already been included in taxable profit (tax loss). (d) Dividends receivables from a subsidiary have a carrying amount of $100. The dividends are not taxable. (e) A loan receivable has a carrying amount of $100. The repayment of the loan will have no tax consequences. EXAMPLE 12D Calculate the tax base for each of the following liability, separately: (a) Current liabilities include accrued expenses with a carrying amount of $100. The related expenses will be deducted for tax purposes on a cash basis. (b) Current liabilities include interest revenue received in advance, with a carrying amount of $100. The related interest revenue was taxed on a cash basis. (c) Current liabilities include accrued expenses with a carrying amount of $100. The related expense has already been deducted for tax purposes. (d) Current liabilities include accrued fines and penalties with a carrying amount of $100. Fines and penalties are not deductible for tax purposes. (e) A loan payable has a carrying amount of $100. The repayment of the loan will have no tax consequences. TEMPORARY DIFFERENCES Temporary differences are differences between the carrying amount of an asset or Definition liability in the statement of financial position and its tax base. Temporary differences may be either taxable or deductible. Taxable Resulting in more tax in future, giving rise to a liability. Deductible Resulting in tax saving in future, giving rise to an asset. GUIDE Assets Liabilities CA > TB CA < TB CA > TB CA < TB Taxable temporary differences Deferred Tax Liability Deductible temporary differences Deferred Tax Asset Deductible temporary differences Deferred Tax Asset Taxable temporary differences Deferred Tax Liability Page 4 of 15 (kashifadeel.com)

5 MEASUREMENT TAX RATE Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. Deferred tax assets and liabilities shall NOT be discounted. This is called liability method and is allowed under IAS 12. Another method is deferral method, which is not allowed under IAS 12 in which tax rates are taken when the temporary difference arises. DEFERRED TAX LIABILITIES Definition Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of taxable temporary differences. A deferred tax liability shall be recognised for all taxable temporary differences, except to the extent that the deferred tax liability arises from: (a) the initial recognition of goodwill; or Recognition (b) the initial recognition of an asset or liability in a transaction which: (i) is not a business combination; and (ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). DEFERRED TAX ASSETS are the amounts of income taxes recoverable in future periods in respect of: (a) deductible temporary differences; Definition (b) the carry forward of unused tax losses; and (c) the carry forward of unused tax credits. A deferred tax asset shall be recognised for all deductible temporary differences unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that: Recognition (a) is not a business combination; and (b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss). A deferred tax asset is recognised to the extent that it is probable that taxable Limit profit will be available against which the deductible temporary difference, unused tax losses or tax credit can be utilized. At the end of each reporting period, an entity reassesses un-recognised deferred Reassessment tax assets. The entity recognises a previously un-recognised deferred tax asset of to the extent that it has become probable that future taxable profit will allow the unrecognized deferred tax asset to be recovered. For example, an improvement in trading deferred tax conditions may make it more probable that the entity will be able to generate assets sufficient taxable profit in the future for the deferred tax asset to meet the recognition criteria. Page 5 of 15 (kashifadeel.com)

6 EXAMPLE 12E King Limited s first statement of financial position since incorporation for the year ended December 31, 2011 is as follows (after current tax but before any effects of deferred tax): Non-current assets $ Land 100 Building 100 Plant Current assets Inventory 50 Trade receivables 40 Cash Equity Share capital 200 Reserves (all) Non-current liabilities Long term loan 35 Current liabilities Trade payables 55 Provision 20 Other payables (a) The building was purchased for $150 and till now accumulated tax depreciation of $120 has been charged. (b) The land is freehold and was purchased for $80 and revalued to $100 during the year. Tax authorities do not consider revaluation of any asset. (c) The tax base of provision is nil and of inventories is $60. (d) Tax base of all other assets and liabilities is equal to their carrying amount. (e) Unused tax losses are of $20 and applicable tax rate is 20% Required: Calculate the deferred tax liability / asset. EXAMPLE 12F King Limited s first statement of financial position since incorporation for the year ended December 31, 2011 is as follows (after current tax but before any effects of deferred tax): Non-current assets $ Land 100 Building 100 Plant 100 Luxurious car Current assets Inventory 50 Page 6 of 15 (kashifadeel.com)

7 Trade receivables 40 Cash Equity Share capital 200 Reserves (all) Non-current liabilities Long term loan 120 Current liabilities Trade payables 55 Provision 20 Government grant 25 Other payables (a) The building was purchased for $ 150 and till now accumulated tax depreciation of $ 60 has been charged. (b) The land is freehold and was purchased for $ 80 and revalued to $ 100 during the year. Tax authorities do not consider revaluation of any asset. (c) The luxurious car was purchased at start of the year for $ 125 and KL intends to use this throughout its useful life of 5 years and then dispose of it for a residual value of nil. Depreciation of car is not deductible for tax purposes. On disposal, any capital gain would not be taxable and any capital loss would not be deductible. (d) The provision relates to accrued product warranty costs. For tax purposes, the product warranty costs will not be deductible until the entity pays claims. (e) The government grant is not taxable, neither when received nor when it will be charged to profit or loss. The depreciation of related asset is considered as if no grant was received, for tax purposes. (f) Inventories have been written down by $ 10 to their NRV. (g) Tax base of all other assets and liabilities is equal to their carrying amount. (h) Unused tax losses are of $ 20 (i) Unused tax credit are $ 5 (j) Applicable tax rate is 20% Required: Calculate the deferred tax liability / asset. Page 7 of 15 (kashifadeel.com)

8 MEASUREMENT - ADVANCED Different tax When different tax rates apply to different levels of taxable income, measure rates using average rates that are expected to apply. The measurement of deferred tax liabilities and deferred tax assets shall reflect Reflect the tax the tax consequences that would follow from the manner in which the entity consequences expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities Present value Deferred tax assets and liabilities shall NOT be discounted. EXAMPLE 12G A plant has a carrying amount of $ 100 and a tax base of $ 60. A tax rate of 20% would apply if the asset were sold and a tax rate of 30% would apply to other income. Required: Calculate the amount of deferred tax liability/asset for each of the following cases: (a) entity expects to sell the asset without further use (b) entity expects to retain the asset and recover its carrying amount through use. CURRENT AND DEFERRED TAX CHARGE Related to Items recognised in other comprehensive income Items recognised directly in equity Business combination Remaining (balancing figure) Charge to Other comprehensive income e.g. tax related to gain or loss on revaluation should be charged to revaluation surplus. Directly in equity e.g. transfer of incremental depreciation from revaluation surplus to retained earnings is made net of deferred tax. Further, change in accounting policy and prior period errors are sometimes adjusted directly in equity and in such cases the related tax should also be charged directly to equity. Goodwill Profit or loss Page 8 of 15 (kashifadeel.com)

9 EXAMPLE 12H Sohail Limited (SL) had balance of deferred tax liability on 1 January 2011 of $ 15,000. During the year 2011, the following transaction occurred: SL revalued its freehold land and created a revaluation surplus of $ 20,000. Tax authorities ignore the revaluation exercise. SL corrected a prior period error in its financial statements by adjusting opening retained earnings by $ 10,000. The corresponding intangible assets were also increased by $ 10,000. Tax authorities do not allow such type of intangible assets and allow deduction of the expense in the period expenditure was made. SL acquired a business near year end for $ 1,000,000. The acquired business had net assets of $ 800,000 (carrying amount and tax base). The fair value of the assets was $ 900,000 at the date of acquisition. The assets acquired have been included in SL financial at fair value. In addition to above transactions, SL had taxable temporary differences of $ 80,000 and deductible temporary differences of $ 40,000 as at December 31, The applicable tax rate is 20%. Required: Deferred tax liability as at December 31, 2011 including movements for the year PRESENTATION Offset of current tax assets and liabilities Offset of deferred tax assets and liabilities Only if entity has legally enforceable right and intention to settle on net (or simultaneous) basis. Only if entity has legally enforceable right and asset / liability relates to income tax levied by same taxation authority on either the same taxable entity or different taxable entities who intend to settle on net (or simultaneous) basis. SHARE OPTION SCHEMES Tax relief on share option schemes IFRS 2 requirement Charge Accounting for share options schemes involves recognising a remuneration expense in the income statement throughout the vesting period. However, tax relief is normally granted at a later date when the options are actually exercised giving rise to a deferred tax asset until tax relief is obtained. IFRS 2 requires that at each reporting period date, an estimate of the future tax relief available should be based upon the intrinsic value of the option (= fair value exercise price.) If the amount of the tax deduction (or estimated future tax deduction) exceeds the amount of the related cumulative remuneration expense, this indicates that the tax deduction relates also to an equity item. The amount up to related cumulative remuneration expense is charged to profit or loss and the excess is charged to equity. Page 9 of 15 (kashifadeel.com)

10 EXAMPLE 12I On 1 January 2002, an entity granted 5,000 share options to an employee vesting two years later on 31 December The fair value of each option measured at the grant date was $3. Tax law in the jurisdiction in which the entity operates allows a tax deduction of the intrinsic value of the options on exercise. The intrinsic value of the share options was $1.20 at 31 December 2002 and $3.40 at 31 December 2003 on which date the options were exercised. Assume a tax rate of 30%. Required Show the deferred tax accounting treatment of the above transaction at 31 December 2002, 31 December 2003 (before exercise), and on exercise. UNREMITTED EARNINGS A temporary difference arises when the carrying amount of investments in subsidiaries, branches, associates or joint ventures is different from the tax base. Issue Treatment The carrying amount in consolidated financial statements is the investor s share of the net assets of the investee, plus purchased goodwill, but the tax base is usually the cost of the investment. Unremitted earnings (i.e. undistributed profits) in the accounts of subsidiaries, branches, associates or joint ventures, will lead to a temporary difference. Deferred tax should be recognised on these temporary differences unless: the parent, investor or venturer is able to control the timing of the reversal of the temporary difference it is probable that the temporary difference will not reverse in the foreseeable future. Page 10 of 15 (kashifadeel.com)

11 (a) FL Current tax payable (in SFP) $24,000 (i.e. $80,000 x 30%) Current tax expense (in IS) $28,000 (i.e. $24, ,000) (b) EL Current tax payable (in SFP) $30,000 (i.e. $100,000 x 30%) Current tax expense (in IS) $24,000 (i.e. $30,000 6,000) ANSWER 12A Sr.# Taxable profit / (loss) Tax rate Current period expense / (income) Under / (over) provision prior years Advance tax Current tax payable / (receivable) Current tax expense / (income) $ % $ $ $ $ $ (a) 80,000 35% 28,000 4,000 15,000 13,000 32,000 (b) 100,000 35% 35,000 (3,000) 43,000 (7,000) 32,000 (c) (40,000)* 35% (14,000) - - (14,000) (14,000) ANSWER 12B *Maximum loss that can be carried back is $ 40,000. The remaining loss of $10,000 shall be carried forwarded. (a) (b) (c) (d) (e) Carrying amount Less: Future taxable benefits (70) (100) Add: Future Deductible amounts Tax base 70 Nil ANSWER 12C (a) (b) (c) (d) (e) Carrying amount Less: Future deductible amount (100) Less: Revenue not taxable in future 0 (100) Tax base Nil Nil ANSWER 12D Page 11 of 15 (kashifadeel.com)

12 Carrying Tax Temp. Tax Deferred Liab. / T/(D) Asset / Liab. amount base Diff. rate tax (Asset) $ $ $ % $ Land T 20% 4 Liability Building T 20% 14 Liability Plant Inventory D 20% (2) Asset Receivable Cash Long term loan Trade payable Provision D 20% (4) Asset Other payables Unused tax losses 20 20% (4) Asset Net Deferred tax liability as at December 31, ANSWER 12E The $4 shall be charged to other comprehensive income (revaluation surplus) and the remaining $4 shall be charged to profit or loss. Page 12 of 15 (kashifadeel.com)

13 Carrying Tax Temp. Tax Deferred Liab. / T/(D) Asset / Liab. amount base Diff. rate tax (Asset) $ $ $ % $ Land T 20% 4 Liability Building T 20% 2 Liability Plant Luxurious car T 20% Note Inventory D 20% (2) Asset Receivable Cash Long term loan Trade payable Provision D 20% (4) Asset Grant D 20% Note Other payables Unused tax losses 20 20% (4) Asset Unused tax credit (5) Asset Total DT asset as at December 31, 2011 (15) Total DT liability as at December 31, Net Deferred tax asset as at December 31, 2011 (9) Tax base calculation: Assets Building $ = $ 90 or $ 150 cost $ 60 accumulated depreciation = $ 90 Land $ = $ 80 Luxurious car $ = $ 0 Inventory $ = $ 60 Liabilities unearned revenue Grant $ 25 $ 25 = $ 0 Liabilities others Provision $ 20 $ 20 = $ 0 ANSWER 12F Note: Temporary differences arising from the initial recognition of asset or liability are not taken into account while recognising deferred tax asset or liability. Page 13 of 15 (kashifadeel.com)

14 Part (a) Temporary difference = $ 100 $ 60 = $ 40 Taxable Applicable tax rate = 20% Deferred tax liability = $ 40 x 20% = $ 8 ANSWER 12G Part (b) Temporary difference = $ 100 $ 60 = $ 40 Taxable Applicable tax rate = 30% Deferred tax liability = $ 40 x 30% = $ 12 Asset / Liab. Carryin g amount Tax base Temp. Diff. T/(D) Tax rate Deferred tax ANSWER 12H Liab. / (Asset) $ $ $ % $ Land 20,000 T 20% 4,000 Liability RS Intangible assets 10, ,000 T 20% 2,000 Liability RE Goodwill 100, ,000 Note Acquired assets 900, , ,000 T 20% 20,000 Liability GW Other 80,000 T 20% 16,000 Liability Other 40,000 D 20% (8,000) Asset Net Deferred tax liability as at December 31, ,000 Deferred tax liability Date Particulars $ Date Particulars $ Profit or loss (β) 7, Balance b/d 15, OCI (Revaluation) 4, Retained earnings 2, Balance c/d 34, Goodwill 20,000 41,000 41,000 Page 14 of 15 (kashifadeel.com)

15 ANSWER 12I On 31/12/2002 Carrying amount $ Nil Tax base of liability (5,000 options x $1.2 intrinsic value x ½ years [tax deduction] $3,000 Temporary difference deductible $3,000 Tax rate 30% Deferred tax asset $900 Cumulative remuneration expense 5,000 options x $3 FV at grant date x ½ years 7,500 Excess of tax deduction over cumulative remuneration expense 0 Journal entry Dr. Deferred tax asset $900 Cr. P&L $900 On 31/12/2003 (before exercise) Carrying amount $ Nil Tax base of liability (5,000 options x $3.40 intrinsic value x 2/2 years [tax deduction] $17,000 Temporary difference deductible $17,000 Tax rate 30% Deferred tax asset $5,100 Cumulative remuneration expense 5,000 options x $3 FV at grant date x 2/2 years 15,000 Excess of tax deduction over cumulative remuneration expense 2,000 Tax on excess $2,000 x 30% - to be charged to equity 600 Journal entry Dr. Deferred tax asset $4,200 <$5,100 - $900> Cr. Equity $600 Cr. P&L $3,600 On exercise, the deferred tax asset shall become current tax asset. Dr. Current tax asset $5,100 Cr. Deferred tax asset $5,100 Dated: 17 August 2016 Page 15 of 15 (kashifadeel.com)

Calculation. Iess. X Applicable Tax Rate = Deferred Tax Asset/ Income Tax Value (Tax Base) Book Value (Carrying Value) Temporary Difference

Calculation. Iess. X Applicable Tax Rate = Deferred Tax Asset/ Income Tax Value (Tax Base) Book Value (Carrying Value) Temporary Difference IAS 12 Income Tax Calculation Book Value (Carrying Value) Iess Income Tax Value (Tax Base) = Temporary Difference Temporary Difference X Applicable Tax Rate = Deferred Tax Asset/ Liability Background Issued