1 International Financial Reporting Standards IFRS for SMEs IFRS Foundation-World Bank 18–20 October 2011 Sarajevo, Bosnia and Herzegovina Copyright © 2010 IFRS Foundation. All rights reserved.

2 The IFRS for SMEs Topic 3.3 and 3.4(b) Quiz and Discussion Liabilities Sections 20 & 29 Michael Wells

3 The IFRS for SMEs Sections 20 Leases

4 Section 20 – Discussion questions Question 1: 10-year non cancellable operating lease over a building. Lease rentals for years 1–5 = 0 & CU5,000 for each of years 6–10. In Y1 the lessee must recognise expense of: a.CU0? b.CU2,000? c.CU2,500? d.CU5,000?

5 Section 20 – Discussion questions Question 1: 10-year non cancellable operating lease over a building. Lease rentals for years 1–5 = 0 & CU5,000 for each of years 6–10. In Y1 the lessee must recognise expense of: a.CU0? b.CU2,000? c.CU2,500? d.CU5,000?

6 Section 20 – Discussion questions Question 2: On 1/1/20X1 A sold a machine to a bank & leased it back for 3 yrs. Facts about the machine & the leaseback: SP = CU200,000; CA = CU70,000; FV = CU200,000; remaining economic life = 3 yrs; residual value = 0; lease payments = CU77,606 per year (payable in arrears); interest rate implicit in the lease = 8% per year. What would A recognise in profit or loss for the year ended 31/12/20X1?

7 Section 20 – Discussion questions Question 2 continued : a.CU130,000 gain on sale of PP&E & CU77,606 lease rental expense. b.CU23,333 depreciation expense & CU16,000 finance cost (no income). c.CU43,333 income (amortised deferred gain on sale of PP&E); CU23,333 depreciation expense; & CU16,000 finance cost. d.CU43,333 income (amortised deferred gain on sale of PP&E); CU66,667 depreciation expense; & CU16,000 finance cost.

8 Section 20 – Discussion questions Question 2 continued : a.CU130,000 gain on sale of PP&E & CU77,606 lease rental expense. b.CU23,333 depreciation expense & CU16,000 finance cost (no income). c.CU43,333 income (amortised deferred gain on sale of PP&E); CU23,333 depreciation expense; & CU16,000 finance cost. d.CU43,333 income (amortised deferred gain on sale of PP&E); CU66,667 depreciation expense; & CU16,000 finance cost.

9 Section 20 – Discussion questions Question 3: Same as question 2, except the remaining economic life of the machine = 30 years & the lease rental = CU23,000 per year of the three year lease term. What would A recognise in profit or loss for the year ended 31/12/20X1?

10 Section 20 – Discussion questions Question 3 continued : a.CU130,000 gain on sale of PP&E & CU23,000 lease rental expense. b.CU23,333 depreciation expense & CU16,000 finance cost (no income). c.CU43,333 income (amortised deferred gain on sale of PP&E); CU23,333 depreciation expense; & CU16,000 finance cost. d.CU43,333 income (amortised deferred gain on sale of PP&E); CU66,667 depreciation expense; & CU16,000 finance cost.

11 Section 20 – Discussion questions Question 3 continued : a.CU130,000 gain on sale of PP&E & CU23,000 lease rental expense. b.CU23,333 depreciation expense & CU16,000 finance cost (no income). c.CU43,333 income (amortised deferred gain on sale of PP&E); CU23,333 depreciation expense; & CU16,000 finance cost. d.CU43,333 income (amortised deferred gain on sale of PP&E); CU66,667 depreciation expense; & CU16,000 finance cost.

12 The IFRS for SMEs Sections 20 Income Tax

13 Section 29 – Quiz and discussion Question 1: Entity has tax loss 30,000 in 20X8 and taxable profit 20,000 in 20X7. Tax rate 40%. Tax loss can be carried back one prior year only (no carryforward). Correct entry? a. Debit Current tax asset 8,000 Credit Current tax income 8,000 b. Debit Current tax asset 12,000 Credit Current tax income12,000 c. Debit Current tax expense 8,000 Credit Current tax liability 8,000 d. Debit Current tax expense 12,000 Credit Current tax liability 12,000

14 Section 29 – Quiz and discussion Question 1: Tax loss 30,000 in 20X8 and taxable profit 20,000 in 20X7. Tax rate 40%. Tax loss carried back one prior year only. Correct entry? a. Debit Current tax asset 8,000 Credit Current tax income 8,000 b. Debit Current tax asset 12,000 Credit Current tax inco me 12,000 c. Debit Current tax expense 8,000 Credit Current tax liability 8,000 d. Debit Current tax expense 12,000 Credit Current tax liability 12,000

15 Section 29 – Quiz and discussion Question 2: What is the correct sequence of the following steps in accounting for deferred taxes? 1.Compute temporary difference and unused tax losses and tax credits 2.Determine tax basis at reporting date 3.Recognise deferred tax assets and liabilities 4.Identify which assets and liabilities will affect taxable profit if recovered or settled for their carrying amount. a b c d

16 Section 29 – Quiz and discussion Question 2: What is the correct sequence of the following steps in accounting for deferred taxes? 1.Compute temporary difference and unused tax losses and tax credits 2.Determine tax basis at reporting date 3.Recognise deferred tax assets and liabilities 4.Identify which assets and liabilities will affect taxable profit if recovered or settled for their carrying amount. a b c d

17 Section 29 – Quiz and discussion Ques. 3: At 31/12/X2 entity has interest receivable 4,000 that will be taxable in X3 when received in cash. Tax rate 20% first 500,000 income and 30% on excess. Taxable profit in X2 = 450,000. Estimated taxable profit X3 = 550,000. What is deferred tax liability 31/12/X2 for receivable? a. 1,200 b. 1,000c. 940 d. 836 e. 800 Hint: Measurement is based on estimated effective tax rate for 20X3.

18 Section 29 – Quiz and discussion Ques. 3: What is deferred tax liability 31/12/X2 for receivable? a. 1,200 b. 1,000c. 940 d. 836* e. 800 Estimated effective tax rate = [(500,000 × 20%) + (50,000 × 30%)] ÷ 550,000 = 115,000 ÷ 550,000 = 20.91%. 4,000 × 20.91% = 836

19 Section 29 – Quiz and discussion Question 4: Tax rate is 30% on operating profit, 0% on capital gains. In 20X1 entity has pre-tax operating profit 50,000 and gain on sale of an asset of 5,000. Entity believes gain is capital gain, but small possibility (estimated 20%) that tax authority says it is operating. What is current tax liability at 31/12/X1? a. 16,500 b. 16,200 c. 15,300 d. 15,000

20 Section 29 – Quiz and discussion Question 4: What is current tax liability at 31/12/X1? a. 16,500 b. 16,200 c. 15,300 d. 15,000 50,000 x 30% = 15,000 tax on oper. profit (5,000 x 80% x 0%) + (5,000 x 20% x 30%) = 300 tax on capital gain

21 Section 29 – Quiz and discussion Ques. 5: Which is the correct use of discounting in measuring income tax assets and liabilities? Choic e Current tax assets and liabilities Deferred tax assets and liabilities aDiscountedNot Discounted b Discounted c dNot Discounted

22 Section 29 – Quiz and discussion Ques. 5: Which is the correct use of discounting in measuring income tax assets and liabilities? Choic e Current tax assets and liabilities Deferred tax assets and liabilities aDiscountedNot Discounted b Discounted c d Not Discounted

23 Section 29 – Quiz and discussion Question 6: Tax rate is 20% on undistributed profit and 30% (extra 10%) on distributed profit. In 20X1 taxable profit = 100,000. Also temporary difference of 30,000 arose in 20X1 that will increase future taxable profits. At 31/12/20X1 entity should recognise...? choices on next slide...

24 Section 29 – Quiz and discussion Question 6: Choices: Current tax liability and expense Deferred tax liability and expense Choice a20,0006,000 Choice b20,0009,000 Choice c22,0006,000 Choice d25,0007,500 Choice e30,0009,000

25 Section 29 – Quiz and discussion Question 6: At 31/12/20X1 entity should recognise...? Choice a (use rate for undistributed profit until distribution): Current tax liability and expense = 20,000 Deferred tax liability and expense = 6,000

26 Section 29 – Quiz and discussion Question 7: Tax year ends 30 June. At 31 March entity must pay provisional tax based on prior years tax. Tax rate is 30%. For y/e 30/6/X4 taxable profit was 50,000, and tax paid was 15,000. Based on this, on 31/3/X5 entity paid 15,000 toward y/e 30/6/X5. Actual taxable profit for y/e 30/6/X5 = 40,000. What is tax expense for y/e 30/6/X5? What is current tax asset at 30/6/X5? What journal entry should be made at 30/6/X5? see next slide...

27 Section 29 – Quiz and discussion Question 7: Tax expense y/e 30/6/X5: 30% x 40,000 = 12,000 Current tax asset at 30/6/X5: 15,000 paid minus 12,000 owed. Tax asset is a receivable from the tax authority. Journal entry at 30/6/X5: Debit current tax asset 3,000 Credit tax expense*3,000 *Assumes that at 31/3/X5 the debit for the 15,000 payment was to Tax Expense.

© 2010 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | 28 Questions or comments? Expressions of individual views by members of the IASB and its staff are encouraged. The views expressed in this presentation are those of the presenter. Official positions of the IASB on accounting matters are determined only after extensive due process and deliberation.

29 This presentation may be modified from time to time. The latest version may be downloaded from: the+trainer+workshops.htm The accounting requirements applicable to small and medium sized entities (SMEs) are set out in the International Financial Reporting Standard (IFRS) for SMEs, which was issued by the IASB in July The IFRS Foundation, the authors, the presenters and the publishers do not accept responsibility for loss caused to any person who acts or refrains from acting in reliance on the material in this PowerPoint presentation, whether such loss is caused by negligence or otherwise.