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Hi All,
I am always been confuse in these 2 item, can somebody help to give example and elaborate more on these two?
ThanksHello Samko!
I think the easiest example is a small company, their only asset is a car which they use as a taxi. It is going to earn 1 Mio € in the future. There are no other costs, only depreciation! The tax rate is 25%. Now, the carrying value under IFRS is 100 k€, under tax law, it is only 50 k€.
As the car will be used, they will have to pay 1 Mio – 50 k€ in taxes, that is 950 k€ x 0,25 = 237,5 k€.
From looking at the balance sheet, one would however think that future taxes will be lowered by 100k€ x 25%, not only 50 k€! Therefore, a business will have to recognize a deferred tax liability of 50 x 0,25 = 12,5 k€!
Hello kangmo, I thought from your example DTL will be 237,5 (CV – TB = TD x TR = DTL, if CV is Asset to the company) as the future allowable tax only 50 so the difference of 950 give rise to a liability to the company?
Dr. Tax expense 237,5
Cr. Deferred Tax Liability 237,5Helly Fairlygladys,
No, that would mean to accrue tax before it is even earned. The balance sheet based model means that you only look at the differences between two balance sheets, the one prepared for IFRS and the one prepared for the tax man.
Think about it: If you have more assets in your IFRS balance sheets, that means, you had more debit bookings on the asset side of the balance sheet. It stands to assume that you had the same debit bookings for the tax-man accounts too – just there, you made them in your P&L! Therefore, you had lower profits and paid lower tax -> So you will have to pay more tax in the future. Maybe that helps to understand the principle, even though it is not a very good analogy.
BR
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