1. Accounting for Deferred Taxation (LKAS 12)
Rangajewa Herath
B.Sc. Accountancy and Financial Management(Sp.)(USJ)
MBA-PIM(USJ)

2. Introduction to Accounting for Deferred Taxation
Differences between accounting rules and tax rules
Need for accounting for deferred taxation.

3. Accounting Profit vs Taxable Income
Taxable Profit
(Taxable Income)
Permanent Differences
Temporary Differences
Taxable Temporary Differences
Deductible Temporary Differences
Deferred Tax Liability
Deferred Tax Asset

4. Deferred Tax Liability
The amounts of income taxes payable in future periods in respect of taxable temporary differences.
Deferred Tax Assets
The amounts of income taxes recoverable in future periods in respect of :
- deductible temporary differences; and
- the carry forward of unused tax losses; and
unused tax credits.

5. Income Tax Expense - based on Accounting Profit (Rs.’000)
Taxable Temporary Difference and Deferred Tax Liability
Income Tax Expense - based on Accounting Profit (Rs.’000) 1 2 3 4 5
Sales
2,000
Cost of sales
(1,000)
Gross profit
1,000
Depreciation-Accounting
(300)
Profit before tax
700
Income tax-20%
(140)
The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 20% per annum for Accounting purpose.

6. Income Tax Expense - based on Taxable Profit (Rs.’000)
Taxable Temporary Difference and Deferred Tax Liability cont..
Income Tax Expense - based on Taxable Profit (Rs.’000) 1 2 3 4 5
Sales
2,000
Cost of sales
(1,000)
Gross profit
1,000
Depreciation-Tax purpose
(750) -
Profit before tax
250
Income tax-20%
(50)
(200)
The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 50% per annum for tax purpose.

7. Taxable Temporary Difference and Deferred Tax Liability cont..
(Rs.’000) 1 2 3 4 5
Income tax-Based on Accounting Profit
140
Income tax-Based on Taxable Profit 50
200
Deferred Tax Adjustment 90
(60)

8. Accounting for Deferred Tax Liability
Deferred Tax Liability(Rs.’000)
Year 1
C/F 90
Tax Expense
Year 2
B/F
180
Year 3 60
120
Year 4
Year 5

9. Taxable Temporary Differences
The temporary differences that will result in taxable amounts in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.
All taxable temporary differences give rise to a deferred tax liability.

10. Taxable Temporary Difference and Deferred Tax Liability cont..
(Rs.’000) 1 2 3 4 5
Carrying Amount of Asset
1,200
900
600
300 -
Tax base of the Asset
750
Taxable temporary difference
450
Deferred Tax Liability 90
180
120 60

11. Income Tax Expense - based on Accounting Profit (Rs.’000)
Deductible Temporary Difference and Deferred Tax Asset
Income Tax Expense - based on Accounting Profit (Rs.’000) 1 2 3 4 5
Sales
2,000
Cost of sales
(1,000)
Gross profit
1,000
Depreciation-Tax purpose
(750) -
Profit before tax
250
Income tax-20%
(50)
(200)
The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 50% per annum.

12. Income Tax Expense - based on Taxable Profit
Deductible Temporary Difference and Deferred tax Liability cont..
Income Tax Expense - based on Taxable Profit 1 2 3 4 5
Sales
2,000
Cost of sales
(1,000)
Gross profit
1,000
Depreciation-Accounting
(300)
Profit before tax
700
Income tax-20%
(140)
The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500 which will depreciate at 20% per annum for tax purpose.

13. Deductible Temporary Difference and Deferred Tax Asset cont..
(Rs.’000) 1 2 3 4 5
Income tax-Based on Accounting Profit 50
200
Income tax-Based on Taxable Profit
140
Deferred Tax Adjustment 90
(60)

14. Accounting for Deferred Tax Asset
Deferred Tax Asset(Rs.’000)
Year 1
Tax Expense 90
C/F
Year 2
B/F
180
Year 3 60
120
 C/F
 120
Year 4
 60
Year 5

15. Deductible Temporary Differences
The temporary differences that will result in amounts that are deductible in determining taxable profit (tax loss) of future periods when the carrying amount of the asset or liability is recovered or settled.

16. Deductible Temporary Difference and Deferred Tax Asset cont..
(Rs.’000) 1 2 3 4 5
Carrying Amount of Asset
750 -
Tax base of the Asset
1200
900
600
300
Deductable temporary difference
450
Deferred Tax Asset 90
180
120 60