Income taxes (IAS 12)
1 Current tax
Current tax is the amount of income taxes payable (recoverable) in respect of the taxable profit (tax loss) for a period.
2 Recognition
Current tax should be recognised based on the year-end estimate of the tax payable. The income tax expense though profit or loss is adjusted for any under/over provision from the prior year.
Current tax
The following trail balance (extract) relates to Clarion as at 31 March 2015:
$’000 | $’000 | |
Current tax | 400 |
The following notes are also relevant:
A provision for current tax for the year ended 31 March 2015 of $3.5 million is required.
The balance on current tax in the trial balance represents the under/over provision of the tax liability for the year ended 31 March 2014.
Prepare extracts from the statement of profit or loss for Clarion for the year ended 31 March 2015 and from the statement of financial position as at the same date with regards tax.
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3 Deferred tax
Deferred tax arises because;
Accounting profit (PFY) ≠ Taxable profit (PCTCT)
The reasons for this can be split into two categories:
Permanent differences
Items that would have been used in calculating accounting profit but would NOT be used in calculating taxable profit e.g. some entertaining expenses
Temporary differences
Items that would have been used in calculating accounting profit and taxable profit but in different accounting periods e.g. depreciation/tax allowances.
IAS 12 considers only temporary differences and it arises on temporary differences between the carrying value of an asset or liability and its tax base.
Tracy (ignoring deferred tax)
Tracy purchased an item of property, plant and equipment on 1 January 20X5 for $5 million. It was estimated that it had a useful economic life of 5 years but according to the tax authority had a 50% tax allowance in its first year and 20% reducing balance there after.
Tracy made an accounting profit of $2m for the year, which is expected to continue unchanged for the next two years.
Income tax rate 20%
Ignoring deferred tax calculate the profits after tax for Tracy for each of the three years ending 31 December 20X5 to 20X7.
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4 Calculating deferred tax
Calculate the the temporary difference, as being the difference between the carrying vale of the asset or liability and its tax base.
$’000s | |
Carrying value | X |
Tax base | X |
Temporary difference | X |
Calculate the deferred tax position by multiplying the temporary difference by the income tax rate at which the asset or liability will be settled at.
X% x temporary difference = closing deferred tax provision
The closing deferred tax position is either a deferred tax asset or a liability.
A deferred tax liability arises if:
Carrying value > Tax base – taxable temporary difference
A deferred tax asset arises if:
Carrying value < Tax base – tax deductible temporary difference
The movement in the deferred tax position goes through profit or loss.
$’000s | |
Closing position | X |
Opening position | X |
Movement | X/(X) |
Increase in deferred tax | Decrease in deferred tax |
What goes through the income tax expense is the movement in the year, not the closing balance. Work out the closing deferred tax position, deduct the opening balance, and post only the difference — posting the whole closing balance ignores the liability already carried forward. Note also the direction: where the closing position is the smaller, the liability is debited and the income tax expense credited. That is the treatment for a movement that belongs in profit or loss; deferred tax on a revaluation gain follows the gain into other comprehensive income instead, as the Clarke and Darling examples later in this chapter show.
Tracy (incl. deferred tax)
Tracy purchased an item of property, plant and equipment on 1 January 20X5 for $5 million. It was estimated that it had a useful economic life of 5 years but according to the tax authority had a 50% tax allowance in its first year and 20% reducing balance there after.
Tracy made an accounting profit of $2m for the year, which is expected to continue unchanged for the next two years.
Income tax rate 20%
Calculate the profits after tax for Tracy for each of the three years ending 31 December 20X5 to 20X7.
20X5 | 20X6 | 20X7 | |
$’000s | $’000s | $’000s | |
Carrying value | |||
Tax base | |||
Temporary difference |
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Closing deferred tax
Opening deferred tax
Movement
Statement of profit or loss (extracts)
20X5 | 20X6 | 20X7 | |
$’000s | $’000s | $’000s | |
Profit before income taxes | |||
Income tax expense | |||
Current tax | |||
Deferred tax movement | |||
Profit |
Statements of financial position (extracts)
20X5 | 20X6 | 20X7 | |
$’000s | $’000s | $’000s | |
Non-current liabilities | |||
Deferred tax | |||
Current liabilities | |||
Tax payable |
Accelerated capital allowances
Osborne buys an asset for $150,000 at the start of the financial year.
The asset has an estimated life of 6 years and an estimated residual value of $30,000.
Capital allowances are available at a rate of 25% reducing balance and the tax rate is 20%.
Calculate the deferred tax asset/liability to appear in the statement of financial position for the next three years and the debit/credit charged to the tax expense in the statement of profit or loss for the same period.
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Revaluations
Clarke bought a property for $500,000 on 1 January 2013.
On 31 December 2015 the property had a carrying value of $470,000 and was revalued to $800,000.
The tax written down value at 31 December 2015 was $420,000 and the tax rate is 20%.
Explain how the revaluation, including any deferred tax impact, should be dealt with in Clarke’s financial statements for the year-ended 31 December 2015.
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Deferred tax and revaluations
Darling’s PPE consists of land purchased several years ago that originally cost of $250,000. The land has been revalued during the year to $300,000. The tax rate is 20%.
Calculate the revaluation surplus to appear within the statement of financial position at the reporting date.
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Losses
If an entity has unused tax losses to carry forward, a deferred tax asset should be recognised to the extent that it is possible that future taxable profits will be available against which the losses will be offset.
Income taxes (IAS 12)
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