Deferred Tax

Hetts

Hi

Please can someone explain what deferred tax is, and how do I account for it?

Thanks

Hetts

Gem7321

This isn't something I'm 100% on so someone please correct me if I'm wrong!

Deferred tax is an accounting entry and is essentially a difference between depreciation charged in the accounts and capital allowances claimed in the tax comp, and timing differences between the recoginition of gains or losses in the accounts and tax comp.

I think..!

Steve Collings

Gem is right. Deferred tax arises when the actual tax consequence of a transaction arises in a different period than the transaction itself. An example is cited by Gem above where fixed asset costs that have a different pattern of tax deductions (capital allowances) to the write off of the asset in the financial statements by way of depreciation. Though other examples could be where pension liabiilties are accrued in the financial statements but allowed for tax only when contributions are made to the fund, unused tax losses (these results in deferred tax assets) and any inter-group profits in stock that are unrealised for consolidation purposes but taxable in the computation of the group company that made the unrealised profit.

In UK GAAP deferred tax is accounted for under FRS 19, under international standards it is dealt with in IAS 12. There are a couple of differences between the two. FRS 19 allows you to discount deferred tax to present day values (though this rarely happens) whereas IAS 12 prohibits discounting.

Also, FRS 19 recognises deferred tax as "timing differences" whereas IAS 12 recognises deferred tax as "temporary differences".

A quick illustration of deferred tax using IAS 12 (FRS 19 also calculates it in the same way) is as follows

Net book value of asset....................6,000
Tax base of the same asset..............(5,000)
Temporary difference........................1,000
Deferred tax balance required @ 30% = 300

Journal = CR deferred tax liability account (bal sheet) DR income tax expense (P&L).

Regards
Steve