Deferred tax (IAS 12)
Deferred tax arises on temporary differences between the carrying value of an asset or liability and its tax base.
1 Calculating deferred tax
Calculate the temporary difference, as being the difference between the carrying value 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 usually goes through profit or loss.
$’000s | |
Closing position | X |
Opening position | X |
Movement | X/(X) |
Increase in deferred tax
Dr | Income tax expense (SPL) |
Cr | Deferred tax provision |
Decrease in deferred tax
Dr | Deferred tax |
Cr | Income tax expense (SPL) |
Note that the movement sometimes goes to OCI (e.g. revaluations of PPE) or goodwill (e.g. fair value adjustments). These are considered later in the chapter.
Deferred tax requirements want the numbers, not just a conclusion. Set out the carrying amount and the tax base of the item, take the difference and apply the rate; that shows whether the balance is an asset or a liability. Income taxed before it is recognised in profit gives a deductible difference, and so an asset.
2 Individual company accounts
Carrying value | Tax base | |
Property, plant and equipment (IAS 16) | X | X |
Provisions (IAS 37) | (X) | Nil |
Intangibles – development costs (IAS 38) | X | Nil |
Share based payments (IFRS 2) | (X) | Nil |
3 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.
4 Group accounts
Fair value adjustments
The assets and liabilities of the subsidiary are consolidated at fair value, which will give rise to temporary differences as the tax will have been calculated by the tax authorities using their original costs.
The fair values of the consolidated assets and liabilities are usually higher than their book value so the temporary difference will give rise to an additional deferred tax liability (carrying value > tax base).
The deferred tax liability is recorded in the group statement of financial position and the opposing entry taken to consolidated goodwill.
Goodwill
The calculation of goodwill in the consolidated financial statements does not give rise to a temporary difference as the tax authorities will never recognise goodwill. It is therefore considered to be a permanent difference and no deferred tax arises.
PUP adjustments
Profit made on sale between group companies whereby the inventory is still in the group at year end are eliminated as a PUP adjustment. Accordingly therefore any tax on the profit made will need to be eliminated which will give rise to a deferred tax asset.
On subsequent sale of the goods outside of the group in subsequent years the deferred tax asset can be released.
Relevant examiner articles on the ACCA (students) website:
Deferred tax
Topic explainer video: Deferred tax