1. Income tax and Deferred tax

2. LAKS 12 specifies the accounting treatment for income taxes, including how to account for the current and future tax consequences.
An entity expects to recover the carrying amount of its assets and to settle its liabilities.
Recovery or settlement of that carrying amount affects the amount of future tax payments a deferred tax liability (or deferred tax asset) is recognised, with certain limited exceptions.

3. LKAS 12
The term ‘income taxes’ covers all domestic and foreign taxes which are based on an entity’s taxable profits, as well as other taxes such as a withholding tax which is payable when an entity pays a dividend.
LAKS 12 Definitions
Current tax: this is defined as the amount of income tax payable, or recoverable, by an entity in respect of its taxable profit, or loss, for a period.
Deferred tax: this is an accounting measure rather than a tax levied by government; it represents tax payable or recoverable in future accounting periods in relation to transactions which have already taken place.
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

4. Income tax: all domestic and foreign tax based on taxable profit
Taxable profit = a net amount in determine in accordance with rules established by the taxation authorities.
Income tax = tax rate × taxable profit

5. Accounting profit VS Taxable profit
Some exceptions to this
Taxable income (TI) – tax deductions (TD) = Taxable profit
Accounting Standards and the Companies Act are key sources that determine the appropriate accounting treatment of
transactions
The Income Tax Act
determines the tax treatment of transactions
Accounting profit does not equal taxable profit
Difference caused by different “rules” used for accounting vs tax purposes

6. Accounting for income taxes – general principles
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

7. Calculation of current tax liability
Accounting profit/(loss) - Accounting revenue not assessable for tax + Accounting expenses not deductible for tax +/(-) differences between Accounting revenue and TI +/(-) differences between Accounting expenses and TDs = Taxable profit Taxable profit x tax rate % = Current tax liability (CTL)

8. VISA Ltd Accounting profit for the year 2013-14 was Rs 12,000Mn.
Accounting profit was determined after deducting following
Depreciation 1000Mn
Bad Debt Mn
Gratuity Mn
Also the above profit includes exempt income of Rs 5,000Mn
Following were found at the time of income tax computation
Tax Depreciation 2000Mn
Actual Bad debt write off 500Mn
Actual Gratuity payments made 1,500Mn
Meal expenses not entitled for deduction 50Mn
Calculate the tax liability of VISA ltd for the year assuming corporate tax rate 28%

9. Deferred Tax - Basic Principles
Accounting profits are typically different from taxable profits, due to either permanent differences (e.g. disallowable expenses), or temporary differences, e.g. differing depreciation rates).

10. Deferred tax liabilities and assets
Arise when the period in which revenue and expenses are recognized for accounting is different from the period in which items are recognized for tax
Arise principally due to the accruals vs cash basis of recognizing 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)

11. 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)- asset and liability balances (net of accumulated depreciation, allowances etc) based on accounting balance sheet.
Tax base (TB)- asset and liability balances that would appear in a “tax balance sheet”.
Temporary differences are calculated as follows:
CA – TB = TTD/(DTD)

12. Temporary differences
Definition
Differences between carrying amount of an asset or liability and its tax base.
Result in taxable amounts in determining taxable profit of future periods
Taxable temporary differences
Deductible temporary differences
Result in amounts that are deductible in determining taxable profit of future periods
Full provision method  Temporary differences provided for in full

13. 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

14. Summary of approach
Set out the carrying amounts of every asset and liability
Calculate the tax base for each asset and liability
Calculate the temporary difference by deducting the tax base from the carrying amount using the following proforma:
Asset/Liability Carrying Tax Temporary
Amount Base Difference
$ $ $

15. Steps to determine Deferred Tax Assets / Liabilities
Tax treatment differs from accounting treatment
Temporary differences
Carrying amount
> tax base
Taxable temporary difference
Deferred tax liability
= tax base
No deferred tax implications
< tax base
Deductible temporary differences
Deferred tax assets
(if recoverable)
Note:
The reverse applied when considering LIABILITIES
Steps to determine Deferred Tax Assets / Liabilities
(ASSET view)

16. Ex Express Cargo Ltd profit before tax for 5 years are as follows
The above profit has been derived after charging accounting depreciation of Rs 200Mn of non current asset. (Company has non current Asset of 1000Mn. )
The companies tax rate is 30% & the Tax authorization allows non current assets to be depreciated over 2 years.
Calculate the tax base, Temporary differences & differed tax liability if any
Year 1
Year 2
Year 3
Year 4
Year 5
Profit Before tax
2,000