IAS 12 Income Tax Presentation by: CPA John Waihenya Senior Associate, Tax Consulting Grant Thornton

Size: px

Start display at page:

Download "IAS 12 Income Tax Presentation by: CPA John Waihenya Senior Associate, Tax Consulting Grant Thornton"

Sharyl Lynch
6 years ago
Views:

1 IAS 12 Income Tax Presentation by: CPA John Waihenya Senior Associate, Tax Consulting Grant Thornton

2 Introduction 2

3 Course objectives By the end of this course you should; 1. Know the components making up tax expense 2. Have a good understanding of the basic concepts of IAS12 3. Be able to compute deffered tax. 4. Know what disclosures are required under IAS12 5. Be able to prepare a tax reconciliation.

4 Tax expense is the aggregate amount included in the determination of profit or loss for the period in respect of current tax and deferred tax (12.5).

5 Contents Section 1: Accounting for current tax Section 2: Accounting for deferred tax

6 Current tax Current tax is the amount of income tax payable/recoverable in respect of the taxable profit/loss for the period (12.5). Current tax for current and prior periods should, to the extent unpaid, be recognised as a liability (12.12).

7 Deferred tax What is deferred tax? Why do we need it? How is it calculated

8 What is deferred tax accounting.. Accounting for the tax consequences of the future recovery/settlement of the carrying amount of assets/liabilities in a company s balance sheet. IAS 12 (effective from 1998) uses the balance sheet liability method (as opposed to the deferral method) and focuses on temporary differences existing at the balance sheet date (not timing differences )

9 What is deferred tax accounting.. Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base. Temporary differences may be either: (a) taxable temporary differences, (b) deductible temporary differences,

10 Taxable temporary differences,.. taxable temporary differences are temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled

11 Deductible temporary differences,.. deductible temporary differences are temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.

12 The IAS 12 approach to calculating deferred tax.. Carrying amount of asset/liability Less: tax base of asset/liability X (X) Temporary difference tax rate X% Deferred tax asset/liability X

13 What is a temporary difference?.. Temporary difference = [the carrying value of an asset or liability] - [its tax base]: Carrying amount of asset/liability Less: tax base of asset/liability Temporary difference X (X) X

14 Tax base.. the amount attributed to that asset or liability for tax purposes (12.5) The tax base of an asset is the amount that will be deductible for tax purposes when the entity recovers the carrying amount of the asset (12.7). ie Tax base = future deductible amount Note: if the future recovery of the asset is not taxable, the tax base is equal to the carrying amount.

15 Tax base.. the amount attributed to that asset or liability for tax purposes (12.5) The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes in respect of that liability for future periods (12.8).

16 Temporary differences can be. Taxable differences give rise to deferred tax liabilities; or Deductible differences give rise to deferred tax assets

17 Proof of tax. Accounting profit Add back: items not tax deductible in period Sub total Deduct: non-taxable income and allowances Taxable profit Tax computation X (X) X X X

18 Example. Profit as per Accounts as at ,534,632 Add: Current year unrealised exchange loss 195,891,022 Depreciation 6,836,175 Donations 3,159,213 Staff House rent 2,764,386 Expensed capital items 1,907,844 Personal Travelling expenses 1,589,698 Fines and penalties 1,571,922 Staff School fees 1,106,945 Valuation fees 348,000 Staff Housing Expense 289,540 Mobile expenses 30% 159,440 Amortisation on software 14,259 FBT on staff loans 12,530 Theft / damaged 6, ,657, ,192,407 Less: Prior year unrealised exchange losses 199,119,095 Rental income assessed separately 17,044,420 Wear and tear allowance 9,560,289 Unrealised exchange gain 6,441,861 Capital allowances under section 152g 48,015 Sofware allowance 15, ,229,169 Adjusted profit for the year 77,963,238 TOTAL TAXABLE INCOME Adjusted profit for the year 77,963,238 Rental income assessed separately 17,044,420 95,007,658 Tax 30% on Kshs. 95,007,658 28,502,298

19 Example. Deferred tax workings Movement Opening balance Closing balance KShs KShs KShs NBV on Plant, Property & Equipment (PPE) Plant and machinery 10,908,731 5,750,357 5,158,374 Furniture & fixtures 881,410 1,969,076 (1,087,666) Motor vehicles 3,185, ,494 2,317,649 IT Equipment 644,527 1,053,495 (408,968) Computer software 14,539 14,359 Asset Base 15,634,350 9,654,781 (5,979,569) Tax carrying values: Written Down Values-PPE 70,005,585 62,993,722 7,011,864 WDV-Software 61,960 46,470 15,490 WDV-Loose tools - 96,043 (96,043) Total 70,067,545 63,136,235 (6,931,310) Temporary difference on PPE (54,433,195) (53,481,454) 951,741 30% thereon (16,329,958.61) (16,044,436) 285,522 Other temporary differences: Unrealized exchange gain - 6,441,861 6,441,861 Unrealized exchange loss (199,119,095) (195,891,022) 3,228,072 Total other temporary difference (199,119,095) (189,449,162) 9,669,933 30% thereon (59,735,728) (56,834,748) 2,900,980 Total deferred tax (76,065,687) (72,879,185) 3,186,502 Current period deferred tax asset/liability 3,186,502

20 Proof of Tax Test Example. Kshs Kshs Current tax charge - 28,502,298 Deferred Tax Movement 3,186,502 A/cing profit/(loss) before tax 94,534,632 Theoretical tax 30% 28,360,390 Variance 3,328,410 Items Increasing tax charge: Permanent Differences: FBT 12,530 Mobile phone expenses 159,440 Fines and penalties 1,571,922 Staff School fees 1,106,945 Staff House rent 2,764,386 Staff Housing Expense 289,540 Theft / damaged 6,800 Donations 3,159,213 Personal Travelling expenses 1,589,698 PPE recon 86,226 Valuation fees 348,000 11,094,700 30% 3,328,410 Variance 0

21 Example. PPE Recon (WTA VS Depre) Depreciation & amortization 6,850,434 Wear and Tear Allowance 9,560,289 Software allowance 15,490 Section 15(2)g 48,015 (2,773,359) Actual difference (2,773,359) Temp Diff as per def tax 951,741 (1,821,618) Expensed capital items 1,907,844 86,226

22 Loss CF (652,987,535) Deferred Tax Loss as per accounts (264,209,255) Add: Unrealised forex loss 23,344,822 Depreciation 17,516,525 General Penalties and Fines 3,407,482 Increase in bad debts provision 1,298,950 Gifts & Donations 660,000 Expensed Assets 531,771 Amortisation 412,493 Telephone Benefit 298,096 Prior year unrealised Foreign exchange gain 26,723 47,496,862 Less: Unrealised forex gain (27,825,564) Wear and tear allowance (13,267,267) Section 15(2)(g) allowance (131,192) Software allowance (756,626) Prior year Unrealized forex loss (333,121) Gain on disposal (63,062) (42,376,832) Adjusted loss for the year (259,089,225) Loss BF (393,898,309)

23 Total Deferred tax (119,768,469) (197,307,123) (77,538,654) Opening balance Closing balance Movement KShs KShs KShs Deferred Tax NBV on Property, Plant and equipment 70,076,986 59,978,355 (10,098,631) NBV on Software 101,017 3,262,924 3,161,907 Non-qualifying element on motor vehicles (6,535,206) (5,332,659) 1,202,547 63,642,797 57,908,620 (5,734,177) Wear and Tear WDV (66,496,083) (60,824,126) 5,671,957 Software allowance (136,903) (2,950,740) (2,813,837) Section 15(2)(g) (106,074) (91,160) 14,914 Temporary differences on PPE (3,096,262) (5,957,406) (2,861,144) Other temporary differences 30% (928,878.73) (1,787,221.83) (858,343.09) Unrealised exchange loss (333,121) (23,344,822) (23,011,701) Unrealised exchange gains 26,723 27,825,564 27,798,841 provisions (1,927,260) (3,226,210) (1,298,950) Tax Losses (393,898,309) (652,987,535) (259,089,225) (396,131,967) (651,733,003) (255,601,036) 30% (118,839,590) (195,519,901) (76,680,311)

24 Proof oftax KShs Current tax charge - KShs Deferred tax movement (77,538,654) (77,538,654) Accounting profit/(loss) before tax (264,209,255) Theoretical tax 30.0% (79,262,777) Variance 1,724,123 Items increasing tax charge Ineligible depreciation 1,782,426 Permanent diferrences General fines and penalties 3,407,482 Gifts and donations 660,000 Telephone benefit 298,096 PPE differences (337,867) Gain on disposal of assets (63,062) 5,747,075 30% 1,724,123 Variance 0

25 Reconciliation of PPE KShs KShs Depreciation charge for the year 17,516,525 Ammortisation 412,493 Less: Non-qualifying portion: Non-qualifying element of motor vehicles (1,782,426) 16,146,592 Capital allowances Wear and tear allowance (13,267,267) Software allowance (756,626) Section 15(2)(g) (131,192) (14,155,085) Add: Capital items expensed 531,771 Movement in temporary differences on PPE (2,861,144) Variance (337,867)

26 Conclusion Deferred tax = (carrying amount - tax base) x applicable tax rate. Taxable differences give rise to deferred tax liabilities; or Deductible differences give rise to deferred tax assets

Q&A 5 th Floor, Avocado Towers, Muthithi Road, Westlands, Nairobi Kenya T +254 20 3752830 3747681 2402975 F +254 20 3749839

27 Q&A 5 th Floor, Avocado Towers, Muthithi Road, Westlands, Nairobi Kenya T F John Waihenya Senior Associate Tax Consulting Services Cell E ; john.waihenya@ke.gt.com

IAS 12 Income Tax CPA Anthony M. Njiru September Uphold public interest

IAS 12 Income Tax CPA Anthony M. Njiru September 2018 Uphold public interest Objectives Overview of tax Current tax Summary Deferred tax Tax Expense is the aggregate amount included in the determination