1. Tax Effect Accounting (IAS 12) Reference: Text , Chapter 11.
Week 3: Lecture 2
Topic:
Tax Effect Accounting (IAS 12)
Reference: Text , Chapter 11.
Complied By: Mrs Maheshwari Chand;T2,2013.

2. What is tax effect accounting
How are companies taxed? What amounts are taxed? How do they? Pay tax? Tax legislations ….. FIRCA - Follow the FITA Companies comply with …. Accounting Standards> So need to adjust accounting profit/ loss to Taxable Profit / Losss.
Complied By: Mrs Maheshwari Chand;T2,2013.

3. Accounting profit vs taxable profit
Accounting profit does not equal taxable profit
Difference caused by different “rules” used for accounting vs tax purposes
ACCOUNTING
TAX
Basis of accounting
Equations
Principally cash basis
Accruals basis
Some exceptions to this
Taxable income (TI) – tax deductions (TD) = Taxable profit
Revenue – Expenses
= Accounting profit
IAS 12 & AASB112 and the Corporations Act are key sources that determine the appropriate accounting treatment of
transactions
The Income Tax Assessment Act
determines the tax treatment of transactions
Text highlighted in red are parts that should be left blank in student version of PPTs – for completion during lectures
Complied By: Mrs Maheshwari Chand;T2,2013.

4. Taxable temporary differences (TTDs)
ITEM
ACCOUNTING
TAX
Passive revenue received in arrears
Depreciation (accelerated for tax)
R&D costs
Prepaid expenses
Recognised as revenue, with corresponding
asset (receivable) when earned
Recognised as TI when cash received
Rent, interest, royalties etc
Recognised as expense based on useful life of asset
Recognised as TD based on predetermined rates
Common for assets to be depreciated over a shorter life for tax purposes than for accounting purposes
Capitalised and
amortised
Recognised as TD when
paid
Recorded as an asset and expensed as incurred
Recognised as TD when
paid
Complied By: Mrs Maheshwari Chand;T2,2013.

5. Deductible temporary differences (DTDs)
ITEM
ACCOUNTING
TAX
Passive revenue received in advance
Depreciation (accelerated for acctg)
Bad/doubtful debts
Employee benefits – eg annual leave
Recorded as liability . Recognised as
revenue when earned.
Recognised as TI when cash received
Recognised as expense based on useful life of asset
Recognised as TD
based on predetermined rates
Possible for accounting useful life to be shorter than tax useful life
Allowance raised and expense recorded when debt considered doubtful
Recognised as a TD
when debt physically
written off
Recognised as TD
when payment made to
staff
Liability raised and expense recorded when debt owing to staff
Complied By: Mrs Maheshwari Chand;T2,2013.
Provisions (eg for warranties) are treated in the same way as employee benefits

6. Accounting for income taxes
The tax consequences of transactions that occur for accounting purposes during a period should be recognised as income or expense during the current period, regardless of when the tax effects will occur
This requires identifying the current and future tax consequences of items recognised in the balance sheet
Two separate calculations are performed each year:
current tax liability
movements in deferred tax balances
Complied By: Mrs Maheshwari Chand;T2,2013.

7. Calculation of current tax
Accounting profit/(loss) - acctg revenue not assessable for tax + acctg expenses not deductible for tax +/(-) differences between acctg revenue and TI +/(-) differences between acctg expenses and TDs = Taxable profit x tax rate % = Current tax liability (CTL)
Complied By: Mrs Maheshwari Chand;T2,2013.

8. Calculation of current tax - example
$60 allowed as a tax deduction for plant.
Interest has not yet been received.
Bad debts of $20 were written off during the year.
Payments of $30 were made to employees in relation to annual leave taken during the year.
The tax rate is 30%
Required:
Calculate the current tax liability of ABC Ltd for 2008
Profit before tax for ABC Ltd for the year to 30 June 2008 is as follows:
Sales
1,000
Interest revenue 40
Government grant 80
COGS
(450)
Depreciation
(50)
Goodwill impairment
(20)
Bad debts
(30)
Annual leave
(10)
Other expenses
(260)
PBT
300
Complied By: Mrs Maheshwari Chand;T2,2013.

9. Calculation of current tax - example
300
Accounting profit before tax
Taxable profit
Current tax liability (CTL) (30%)
Government grant (80)
exempt income
Goodwill impairment
not deductible
Interest not yet received (40)
Adjustment for plant depreciation (10)
Adjustment for bad debt write-offs
Adjustment for annual leave paid (20)
180 54
Acctg depn 50
Tax depn (60)
Adj req (10)
B/debts expense-acctg 30
B/debts w/off- tax (20)
Adj req
A/L expense- acctg 10
Paid- tax (30)
Adj req (20)
Complied By: Mrs Maheshwari Chand;T2,2013.

10. Recording CTL
In our previous example the CTL would be recorded as: Dr Income tax expense (current) 54 Cr Current tax liability 54
Complied By: Mrs Maheshwari Chand;T2,2013.

11. Temporary differences
Arise when the period in which revenue and expenses are recognised for accounting is different from the period in which items are recognised for tax
Arise principally due to the accruals vs cash basis of recognising transactions. Differences either result in:
The company paying more tax in the future
Taxable temporary differences (TTDs)
Result in deferred tax liabilities (DTLs)
The company paying less tax in the future
Deductible temporary differences (DTDs)
Result in deferred tax assets (DTAs)
Complied By: Mrs Maheshwari Chand;T2,2013.

12. Temporary differences
Certain temporary difference are excluded from being recognised.
IAS 12/AASB 112 prohibits temporary differences from being recognised in relation to:
Goodwill
The initial recognition of assets and liabilities that do not arise from a business combination.
Providing certain recognition criteria are met, deductible temporary differences arising from tax losses can lead to the recognition of DTAs.
Complied By: Mrs Maheshwari Chand;T2,2013.

13. Recognition of DTLs and DTAs
Deferred tax liabilities
Deferred tax liabilities must be recognised in full
Deferred tax assets
Deferred tax assets relating to temporary differences and tax losses are recognised only if:
there are sufficient taxable temporary differences for the entity to use against the deductible temporary differences; OR
if it is probable that the entity will have sufficient future taxable profit (against which the tax benefit can be offset)
Complied By: Mrs Maheshwari Chand;T2,2013.

14. Calculation of deferred tax
The existence of temporary differences results in the carrying amounts of an entity’s assets and liabilities being different from the amounts that would arise if a balance sheet was prepared for tax authorities
Carrying amount (CA)-
Tax base (TB)- asset and liability balances that would appear in a “tax balance sheet”.
Temporary differences are calculated as follows:
asset and liability balances (net of accumulated depreciation, allowances etc) based on accounting balance sheet.
CA – TB = TTD/(DTD)
Complied By: Mrs Maheshwari Chand;T2,2013.

15. Recap:
Tax Base – ‘is the amt attributed to an asset or liability for tax purpose’.
Temporary Difference- ‘is the diff bet the CA of an asset or Liability in the statement of financial position and its tax base’.
TTD- ‘Temporary difference that “will result in taxable amounts in determining taxable profit (tax loss) of future periods when carrying amount of an asset or liability if recovered or settled’.
DTD- ‘Temporary differences that ‘will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the CA of an asset or liability is recovered or settled’.
Complied By: Mrs Maheshwari Chand;T2,2013.

16. Recap cont’ Thus Temporary differences are calculated as:
Deferred tax assets- ‘amounts of income taxes recoverable in future periods and arise from deductible temporary differences’.
DTL- ‘are amounts of income taxes payable in the future and arise from taxable temporary differences’.
Thus Temporary differences are calculated as:
TTD/DTD = CA (A/L) – TB (A/L)
DTA/ DTL = DTD/TTD X Tax rate
Complied By: Mrs Maheshwari Chand;T2,2013.

17. Calculating the tax base
Calculating the tax base for an asset CA – future taxable amounts + future deductible amounts = TB Calculating the tax base for a liability + future taxable amounts - future deductible amounts
Complied By: Mrs Maheshwari Chand;T2,2013.

18. Calculate TB for an asset/ liability
1. A machine cost $100. for acc and tax purpose , depreciation is of $30, has already been deducted.
Calculate the Tax base of Machine (A)???
Current liability includes accrued expenses with a carrying amount of $100. The related expense will be deducted for tax purposes on a cash basis.
Calculate the tax base of the accrued exp(L)???
Complied By: Mrs Maheshwari Chand;T2,2013.

19. Calculating the tax base - examples
FTA
FDA TB
Prepayment: $3,000
Interest receivable:$1,000
Plant: cost $10,000,
acctg a/depn $4,600,
tax a/depn $6,500
Trade receivables: $52,000
Allowance for b/debts: $2,000
Trade payables: $30,000
Annual leave liability: $3,900
3, , =
1, , =
5, , ,500 = 3,500
50, ,000 = 52,000
30, = 30,000
3, ,900 = -
Complied By: Mrs Maheshwari Chand;T2,2013.

20. Calculating the tax base – examples
Notes to worksheet:
Prepayments- deductible when paid for tax purposes- therefore no balance would appear as an asset in the “tax” balance sheet.
Interest receivable- assessable when received- therefore no balance would appear as a receivable asset in the “tax” balance sheet.
Plant- WDV for tax purposes = $10,000 - $6,500 = $3,500.
Trade receivables- bad debts not deductible for tax until physically written off- therefore the gross trade receivables amount would appear in the “tax” balance sheet.
Trade payables- no differences in the treatment of trade payables for tax and accounting purposes- therefore CA = TB.
Annual leave liability - deductible when paid for tax purposes- therefore no balance would appear as a liability in the “tax” balance sheet.
Complied By: Mrs Maheshwari Chand;T2,2013.

21. Deferred tax assets and liabilities
Calculating a deferred tax asset (DTA)
DTD x tax rate % = DTA
Calculating a deferred tax liability (DTL)
TTD x tax rate % = DTL
Recording a DTA/DTL
Dr Deferred tax asset
Dr/Cr Income tax expense
Cr Deferred tax liability
The tax rate % is that
which is expected to
apply when the asset
will be realised or the
liability settled
BALANCING ITEM
Complied By: Mrs Maheshwari Chand;T2,2013.

22. Calculation of deferred tax example
The balance sheet of ABC Ltd at 30 June 2008 is as follows:
Assets
Liabilities
Cash
260
Trade payables
296
Trade receivables
300
Loan
485
Allowance for b/debts
(30)
270
A/L liability 15
Interest receivable 40
Deferred tax liability 9
Inventory
100
805
Plant
500
Equity
Accum dep’n
(300)
200
Share capital
700
Goodwill
800
R/earnings
175
Deferred tax asset 10
875
1,680
Complied By: Mrs Maheshwari Chand;T2,2013.

23. Calculation of deferred tax example
The balances in the deferred tax asset and liability accounts are the carried forward closing balances from the prior year
Accumulated depreciation of plant for tax purposes is $360
Required:
Complete the deferred tax worksheet on the following page and prepare the journal to record deferred tax movements for the 30 June 2008 year.
Complied By: Mrs Maheshwari Chand;T2,2013.

24. Calculation of deferred tax example
Relevant assets & liabilities CA
FTA
FDA TB
TTD
DTD
Trade receivables
Interest receivable
Plant
Goodwill
A/L liability
Total temporary differences
Less: excluded differences
Temporary differences
DTL/DTA 30%)
Less: opening balances
Adjustment
(800) -
9 10
Complied By: Mrs Maheshwari Chand;T2,2013.

25. Calculation of deferred tax example
Notes to worksheet:
Items where the CA = TB have been omitted from worksheet (eg cash, payables, loan)
2. IAS 12/AASB 112 does not permit the recognition of a DTL relating to goodwill. The TTD arising is referred to as an “excluded” temporary difference
3. Negative figures in the adjustment section would denote decreases in the DTA/DTL balances during the year
Complied By: Mrs Maheshwari Chand;T2,2013.

26. Calculation of deferred tax example
Entry to record deferred tax movement:
Dr Deferred tax asset 3
Dr Income tax expense 18
Cr Deferred tax liability
Summary:
Current tax liability (slide 10)
Deferred tax movement(DTL &DTA)
Total income tax expense
BALANCE 54 18 72
Complied By: Mrs Maheshwari Chand;T2,2013.

27. Offsetting tax assets and liabilities
Both current and deferred tax assets and liabilities are to be offset against each other and a net figure shown in the balance sheet position for:
Current tax
Deferred tax
Complied By: Mrs Maheshwari Chand;T2,2013.

28. Change in tax rates
When a new tax rate is enacted, that new rate should be applied:
when calculating current tax liability
when calculating adjustments to deferred tax accounts
to carried forward deferred tax balances from previous years
Complied By: Mrs Maheshwari Chand;T2,2013.

29. Tax Losses
Tax losses are created when allowable deductions exceed assessable income
The tax act allows losses to be carried forward and used as a deduction against future taxable income
Tax losses provide future deductions and (subject to recognition criteria) create deferred tax assets
Exempt income cannot contribute to carry forward losses
If prima facie tax loss is $(10 000) but there is exempt income of $2 000 the allowable carry forward loss would be $(8 000)
Complied By: Mrs Maheshwari Chand;T2,2013.

30. Tax Losses
Recoupment occurs as soon as the company earns a taxable income
Tax loss recouped is recorded in the determination of taxable income and a journal entry raised to reverse the DTA
If a prior year’s loss carried forward is being recouped and there is exempt income in the year of recoupment, the exempt income must first be offset against the loss
Complied By: Mrs Maheshwari Chand;T2,2013.

31. Disclosures
Tax assets & liabilities must be classified as current or non-current on the face of the statement of financial position
Current and deferred tax assets and liabilities can be offset in most cases
Tax expense on the statement of comprehensive income .. Refer… IAS 1 Disclosures
Complied By: Mrs Maheshwari Chand;T2,2013.

32. Further Disclosure Standards
IAS 1 Presentation of Financial Statements
IAS 16 Property Plant and Equipment
IAS 12 Income Taxes
Complied By: Mrs Maheshwari Chand;T2,2013.

33. Summary Important concepts: Temporary Differences
Tax bases of assets and Liabilities
Deferred tax assets, Deferred tax liabilities and current tax
Current tax and deferred tax expense (income)
Complied By: Mrs Maheshwari Chand;T2,2013.

34. End of Lecture Refer to illustrative examples for more information
End of Lecture Refer to illustrative examples for more information. Thank You.
Complied By: Mrs Maheshwari Chand;T2,2013.