Comments

  1. avatar says

    also please explain that if the DT is calculated by calculating the difference between CA less tax base then are we taking the FV in the revaluation example 3.
    (FV – Tax base) *rate% i.e (800-500)*30%

    why don’t we take the CV for calculating the temporary difference.
    I am so confused by reading the article on DT lol… they took the CV for the revaluation example

  2. avatar says

    Dear sir,
    I can’t understand the answer for Q2 of Mini exercise part 8 Taxation. Why do we deduct deferred tax from tax estimated? Can you give me an explanation for the answer?
    Thanks!

    • Profile photo of MikeLittle says

      The second line in the answer should read “Current tax 1,200″

      The question gives us the liability, not the tax charge. The 1,200 transfer from Deferred Tax is because we are reducing the deferred tax provision from 11,200 down to 10,000.

      In prior years we have charged Profit or Loss Accounts / retained earnings with 11,200 deferred tax (charged through the tax charge in the Profit or Loss)

      Now we decide that we didn’t need 11,200. We only need 10,000. So debit the deferred tax account and credit the current tax account. That has the effect of reducing the tax charge in this year’s Profit or Loss but has no affect on the Current Tax liability on the Statement of Financial Position

      • avatar says

        Now, i understand the movement of deferred tax, but i still not clear about the first line of the entry in the answer. If you debit 17100 tax account and then credit it 1200, then tax charge in the SoCI is 15,900. I think the tax charge should be 18700-400-1200=17100

        And the entry i would make is:
        Dr Tax charge 18300
        Dr Deferred tax 1200
        Cr Tax charge 1200
        Cr Tax payable 18300

        I don’t know if i do wrong somewhere. Can you correct me?
        Thanks!

      • Profile photo of MikeLittle says

        Did you read my previous post? In particular, did you read the first line?

        Your comment “still not clear about the first line of the entry in the answer”

        The first line of the answer does not say debit the tax account. It says debit the SoCI (or Statement of Profit or Loss if you prefer to call it that)

        The first line of my previous post says that the second line of the answer should not read “Cr SoCI Taxation” – it should read Cr Current Tax account (or Cr Current Liabilities if you prefer)

        That leaves me with a balance to carry forward on the Current Tax Account of 18,700 liability (given in the question) and a tax charge in the Statement of Profit or Loss of 17,100

        OK?

      • avatar says

        Yes, it is pretty much clear now. I’m sorry for not reading your post carefully, if i did, i would understand it sooner.
        Thanks you very much for the reply.

  3. avatar says

    Dear Mike,

    Request your guidance to understand how do we know the amount of deferred tax to be released in future years. In example 2, 100,000 was DT in 2009, then you released 50,000 each in 2010 and 2011 . why cant we release entire 100,000 in 2010. Thanks

    • Profile photo of MikeLittle says

      Because we’re comparing the company’s book value of their asset with the taxman’s value of their asset (comparing net book value with tax written down value)

      In year 2, according to the working shown at the top of page 177(!) the figures are $200,000 compared with a tax value of $zero

      The difference is now $200,000. Apply the tax rate to that amount and there is a deferred tax liability to carry forward of $200,000 * 25% = $50,000

      But we brought forward a deferred tax liability of 25% * $400,000 = $100,000

      Therefore we can release $50,000 of that $100,000 this year and next year we shall release the remainder

      Is that ok?

    • Profile photo of MikeLittle says

      Well, play it again! And again! There’s no limit to the number of times you can listen to the lecture.

      And, if there’s any particular point that you don’t understand, post your question on this site on the Ask the Tutor page and I’ll get back to you

  4. avatar says

    Hi,

    Please i need help with this question which goes thus:

    In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?

    will this result in any treatment as Non-current asset item?

    Thanks

    • Profile photo of MikeLittle says

      Is this an F7 question? If it is, it almost certainly will not appear in an F7 exam!

      In addition, I think that you have missed off one or two words.

      I’m not really sure what “In a case where my accumulated withholding tax for the year exceeds my current tax asset, what is the acceptable accounting treatment for the over the years?” means

      Are you sure that you have copied the question correctly?

      • avatar says

        Yea its an F7 question.

        What am trying to say is this:

        how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do treat the unrecoupable part as Non-current asset.

      • avatar says

        Yea its an F7 question.

        What am trying to say is this:

        how do you go about an issue where current tax asset has been over provided for. And the time period to recoup the excess is more than a year. Do you treat the unrecoupable part as Non-current asset?

      • Profile photo of MikeLittle says

        Well (I don’t recognise this as any F7 question I remember seeing!) if the time for recovering the overpayment has passed the I imagine you will have to write off that over-payment. It cannot be an asset if the company can no longer recover it

      • avatar says

        I am also sorry MikeLittle, Ya it was a bit fast and my comment was also impulsive. I should not have ignore the fact that you are providing such a precious lectures free of cost from which hundreds of people from least developing countries or those who cannot attend classes due to their busy schedule are getting the benefit from.

        hats off to your work.
        God bless you

        Asheem

  5. Profile photo of tejot says

    Sir I am currently sitting for P2 exam and I got confused with the below question given in the course notes?

    Q1.)Jurgis bought property in old town for $500,000 on 1 January, 2005. On 31 December, 2007 the property had a carrying value of $470,000 and was revalued to $800,000. The tax written down value at 31 December, 2007 was $500,000, and the tax rate is 30%.”

    The Answer in course notes is
    “Property (800,000 – 34,000) 766,000
    Deferred tax liability (300,000 @ 30%) (90,000)
    Revaluation surplus (330,000 – 14,000) 316,000
    NB depreciation of 800 over 47 years = 17 pa
    The 14,000 is 2 years × the difference between new depreciation (17,000) – old depreciation (10,000) ie 2 × (17,000 – 10,000) ”

    However what has been taught in the question in this lecture the treatment should have been

    Dr.Revaluation Reserve 90,000
    Cr. Deferred Tax Liability 90,000

    thereby the ending balance in Revaluation reserve (330,000 – 90,000)=240,000 Cr.

    Please help me understand which treatment is coherent with the latest standards.

    Thank you

  6. avatar says

    Hi,

    I have a small query regarding example 2.

    I understand how we arrive at the deferred tax calculation and that the 100 000 has to be released.

    However I am struggling to understand why the 100 000 is released in amounts of 50 000 each year?

    Also what happens to the deferred tax of 50 000 from 2005?

    Help will be much appreciated.

    Thanks

  7. Profile photo of manonaseriousmission says

    hi melodyamio and hassanhere, i think what i explained here below might help:

    Melodyamio, no the TD in 06 is not 400 but 200. It’s temporary difference being 50 (200×25%)

    Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

    2005:
    CV 2100 – Tax base (2300) = 200 x 25% = 50
    but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

    2006:
    CV 2300 – Tax base (2500) = 200 x 25% = 50
    Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

    So the final computation will look something like this

    2004 2005 2006

    PBT (after taking out deprcn) 1600 2100 2300
    LESS: Income Tax
    – CT (300) (575) (675)
    – DT (100) 50 50

    PAT 1200 1575 1675

    Hope this helps mate

    All the best

    • Profile photo of manonaseriousmission says

      for some weird reason, a key part in my explanation (before i started calculating the DT figure for 2005 and 2006) have yet again been omitted. It is really freaky cos that’s the only bit that keeps getting wiped out, thereby potentially making it a little difficult to follow through my entire explanation. or could it be my computer?
      anyway, if you drop me your email i can send the full explanation and hopefully you will get it right this time.
      cheers

  8. Profile photo of manonaseriousmission says

    melodamiyo and hassanhere, i think what i have explained here might help.

    help I gave on Open Tuition (IAS 12 – F7)

    hi, no the TD in 06 is not 400 but 50.
    Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

    2005:
    CV 2100 – Tax base (2300) = 200 x 25% = 50
    but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

    2006:
    CV 2300 – Tax base (2500) = 200 x 25% = 50
    Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

    So the final computation will look something like this

    2004 2005 2006

    PBT (after taking out deprcn) 1600 2100 2300
    LESS: Income Tax
    – CT (300) (575) (675)
    – DT (100) 50 50

    PAT 1200 1575 1675

    Hope this helps mate

    All the best

  9. avatar says

    I’ve got a question in the example 2, when calculating deferred tax, I think the temporary difference in 06 is 400 and the deferred tax asset is 100, but the number shown in the video clip is 50, how can this be? thx.

      • Profile photo of manonaseriousmission says

        hi, no the TD in 06 is not 400 but 50.
        Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

        2005:
        CV 2100 – Tax base (2300) = 200 x 25% = 50
        but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

        2006:
        CV 2300 – Tax base (2500) = 200 x 25% = 50
        Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

        So the final computation will look something like this

        2004 2005 2006

        PBT (after taking out deprcn) 1600 2100 2300
        LESS: Income Tax
        – CT (300) (575) (675)
        – DT (100) 50 50

        PAT 1200 1575 1675

        Hope this helps mate

        All the best

      • Profile photo of manonaseriousmission says

        I THINK MY COMPUTER OMITTED SOME VITAL PART OF MY EXPLANATION, PLEASE SEE BELOW FOR REVISED. IT SHOULD MAKE MORE SENSE NOW. SORRY FOR ABOVE POST.

        hi, no the TD in 06 is not 400 but 200. It’s temporary difference being 50 (200×25%)

        Firstly, you are right that it is a DT Asset (as the CV of 2300 Tax base, this 100 is a Deferred Tax liability to be deducted when calculating the total income tax in Profit & Loss

        2005:
        CV 2100 – Tax base (2300) = 200 x 25% = 50
        but now because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

        2006:
        CV 2300 – Tax base (2500) = 200 x 25% = 50
        Again, because CV < Tax base, this 50 is a Deferred Tax Asset to be added when calculating the total income tax in Profit & Loss

        So the final computation will look something like this

        2004 2005 2006

        PBT (after taking out deprcn) 1600 2100 2300
        LESS: Income Tax
        – CT (300) (575) (675)
        – DT (100) 50 50

        PAT 1200 1575 1675

        Hope this helps mate

        All the best

  10. avatar says

    hi all -the 100 is the figure for 2004 (400 temporary diff times 25%) – you have to bring it down to 50 (which is 200 temp diff times 25%) in 2005 thus you release 50 only. and then in 2006 you have to bring the 50 of 2005 idown to 0 ( 0 temp diff of 2006 times 25%)
    hope i make sense – took me 2 days to figure out
    fatema

  11. Profile photo of Mahoysam says

    Hi Mr Mike! :)

    I really find this tax topic is a pain!!

    I have a question, when we were calculating the deferred tax, for first year it was $100, for the second year you said “reduced liability of $50″, when you said reduced liability you mean as compared to the $100, but it is still a deferred tax liability, it is not a reduction of liability because we did ignore it at the end, we only released the liability of the $100, I am not sure why. I am also confused about the way we released the $100 liability, why did we release it over two years? Is there a rule or something, or is it left to our choice, why not release the full $100 in next year in one go and that’s it. I am not sure based on what!

    I hope this topic does not come in the exam!

    Thanks a lot!

    Maha

  12. avatar says

    Thank you for the lecture. I have a question from Ex. 2. After releasing the deferred tax liability of 100 in 2005 2006 with 50, 50, what happens to the deferred tax liability of 50 which was in 2005?

  13. Profile photo of crye says

    Thanks.

    Ref. IAS 12 INCOME TAXES, EXAMPLE 2 — Up to the point of DT, everything is totally clear for me. I’m just wondering:

    1-Why is Tax Value = 0? (Only guess is because 100% tax all’nce was claimed and so asset written down to 0?)
    2-Could an amount of DT other than 50 be released in later years 05, 06 etc? In other words, why 50 specifically?

    Thanks!

    • Profile photo of manonaseriousmission says

      Hi, first i noticed you posted this before the June exam and you may well have cleared the paper. But just for others are yet to sit for the exam like myself I will give my opinion.

      I’m presuming that what you are referring to is the Deferred Tax liability value of zero given at the end of 2006, right?

      If so, we have established that the DT for 2004 is 100, DT asset in 2005 of 50 and another DT asset in 2006 of 50.

      Since asset life is only 3 years as per Q, the DT assets of 50 in both 2005 and 2006 would have netted off completely the DT liab of 100 that’s in the first year.

      So in 2004, DT will remain as 100,
      then in 2005, the Deferred Tax liability will be reduced to 50 (since there is a DT ASset of 50), which is why I think Mr Moffat put DT out as 50 in 2005
      and by the final year 2006, there will no longer be any DT liability since the remaining, hence the reason he recorded it as 0

      • avatar says

        Thx Manona for your explanation.
        But you will notice that when the lecturer was computing the DT, he used the carrying value of the asset which was 400, 200, 0, comparing it with the tax value of 0,0,0, thus bringing about the TD of 400,200,0. These give rise to the DT liability of 100 (25% of 400), 50 (25% of 200) and 0 in 2006.
        According to his explanation, he said that out of 100 of 2004, 50 was released in 2005 and another 50 in 2006. My concern still remains, what is the fate of the DT liability of 2005?

      • Profile photo of nari says

        my question is the same as the others (ryanpieblock and Monic)….after the 100 has been released in 05 and 06 , what happens to the 50 that was calculated as 25% of the 200 in 2005??? Please explain. Thanks.

      • avatar says

        I have tried to read and even follow the lecture many times, but up to now I don’t get it. Deferred tax of $100 in Yr 1, then release $50 in Yr 2, implying there is a balance of $50 which is presumably released in Yr 3. What happens to the $50 which was for Yr 2?

  14. avatar says

    ryanpieblock let me explain what I understand from the tutor & the logic too. the 100 deffred tax was crated due to the tax allowance for the year 2X4 this 100 deffred tax is an asset for Andris but for the year 2X5 and 2X6 cretd a liablity of 50 each then this 100 off split the 50 for the year 2X5 and the remaining for the year 2X6

    • Profile photo of nari says

      i understand what u say up to “a liability of 50 each”. After that i’m lost. If u cud explain the last part in another way i wud appreciate it very much , thanks.

  15. avatar says

    hello sir if we release 50 out of the 100 deferred tax liability in 05 and then another 50 in 06. what happen to the deferred tax liability of 50 25% of 200 in 05??? when do we release it???

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