IAS 12 - Deferred Tax

Hi Guys

Had a few emails on deferred tax from DFS students who are concerned about this particular area.

Students should be familiar with when deferred tax arises. It is essentially the future tax consequences based on current period transactions. Invariably for DFS purposes, deferred tax would arise when the book values of non-current assets are higher than the values in the tax computation, i.e.:

Carrying amount of PPE per financial statements = $6,000
Tax base of the same PPE = $5,000
Temporary difference = $1,000

Assume the entity pays tax at 30% this would give rise to a deferred tax liability of ($1,000 x 30%) = $300. We would then DR income tax expense in the income statement and CR deferred tax (SoFP).

The simplistic illustration above demonstrates what a 'temporary' difference is and how this gives rise to a deferred tax LIABILITY.

Deferred tax ASSETS under IAS 12 can only ever be recognised if it is 'virtually certain' that there will be sufficient taxable profits in future periods to allow the benefit (or part or all) of that deferred tax asset to be utilised. If asked a discursive question about deferred tax assets you could say that the most common situation that would give rise to a deferred tax asset would be unutilised tax losses as the tax liability will be less in future periods if the losses are offset. Be careful with unutilised tax losses because the mere existence of tax losses could well be an indicator that there are not going to be future taxable profits to offset the benefit. For example if a company makes a loss in year 1 but has secured a lucrative contract in year 2 then it is more likely than not that the entity will be able to offset the taxable loss in year 1 against taxable profits in year 2 and thus recognise a deferred tax asset.

My article will help understand the concept of deferred tax more easily but you should be aware that you are not going to be asked to do detailed deferred tax calculations, but you do need to have an awareness of the IAS 12 provisions.

Keep hammering those questions!!

Kind regards
Steve

Comments

  • Glynis
    Glynis Registered Posts: 488
    Steve I am doing an audit exam in June and read one of your articles where you say we should know about these accounting standards as well as the auditing aspects. Surely that's wrong.
  • A-Vic
    A-Vic Registered Posts: 6,970
    glynis can i read your articles? o sorry i forgot your not qualified and working in practise silly me
  • Glynis
    Glynis Registered Posts: 488
    A-vic what I was trying to ask Steve was to clarify exactly what we are suppose to know. I am exhausted with this paper and really struggling enough without reading steves article which says we need ti know even more than what's in the sylabus. if it is right then I despair.
  • Rachey
    Rachey Registered Posts: 589
    It's just so unfair.
  • Glynis
    Glynis Registered Posts: 488
    Its ridiculous especially when you have a seperate paper for accounting standards. I don't remember having to learn them again when I did audit at AAT.
  • A-Vic
    A-Vic Registered Posts: 6,970
    Glynis wrote: »
    A-vic what I was trying to ask Steve was to clarify exactly what we are suppose to know. I am exhausted with this paper and really struggling enough without reading steves article which says we need ti know even more than what's in the sylabus. if it is right then I despair.

    an so ive been told by my manager who is set to sit her final exam in june that it gets a lot harder.
  • Rachey
    Rachey Registered Posts: 589
    Maybe i should have found a more sarcastic font to use. You need to know the accounting standards whatever unit you're studying because they're relevant no matter what level you're studying at or what unit you do. They're the reasons behind what we do. Have a check out of Steve's or Claire's book, I have a summary of them all but it's hand written. I read a previous post of Steve's and he stated that his book has a summary of all the IAS's. Which I think is just what you need, then when you have the basics you can then read into them in more detail. You'll be fine!
  • Glynis
    Glynis Registered Posts: 488
    Thanks Rachey. I did have steves book when I did DFS but sold it after I passed so now ill have to get another one :(
  • A-Vic
    A-Vic Registered Posts: 6,970
    ive kept everybook ive ever used a lot of them are probly out of date but helps study and for reference more so with tax if ever have to go back a year or two.
  • Rachey
    Rachey Registered Posts: 589
    A-Vic wrote: »
    ive kept everybook ive ever used a lot of them are probly out of date but helps study and for reference more so with tax if ever have to go back a year or two.

    Thats what I do too. I'm only 23 and have a shed load already, including 'bookkeeping for dummies!!' hahaha. I just need to invest in the IFRS book now, but will need to wait until pay day i'm afraid.
  • A-Vic
    A-Vic Registered Posts: 6,970
    Rachey wrote: »
    Thats what I do too. I'm only 23 and have a shed load already, including 'bookkeeping for dummies!!' hahaha. I just need to invest in the IFRS book now, but will need to wait until pay day i'm afraid.

    Wow rachey well done at getting this far and at a young age you be quailfied in no timeand well established in your career wish i had started sooner
  • Rachey
    Rachey Registered Posts: 589
    A-Vic wrote: »
    Wow rachey well done at getting this far and at a young age you be quailfied in no timeand well established in your career wish i had started sooner

    Thats lovely Vic, cheers :-) Doesn't seem 2 minutes since I left school and soon it will be ACCA!! I would have done it sooner but wanted to have my babies first. Its never too late to learn, and you're not even old anyway!!!!!!
  • A-Vic
    A-Vic Registered Posts: 6,970
    my babies have babies trust me not that young lol
  • Gem7321
    Gem7321 MAAT, AAT Licensed Accountant Posts: 1,438
    Glynis, auditing is all about auditing accounts, if you don't have the knowledge of the accounting standards how are you meant to audit them?

    I sat my last exams all the way back in 2008 and I'm now going to invest in Steve's book cos I'm hearing such good things about it! I don't plan on doing any more exams any time soon except for ATT but I'd like to have some reference material. Like A Vic and Rachey I'd never get rid of a book!
  • reddwarf
    reddwarf Registered Posts: 528
    I am bringing this up for reference re Derferred Tax.
  • Esme
    Esme Registered Posts: 711
    I know I'm probably just being really stupid, but I can't get my head around what you mean by 'Tax base of the same PPE' can someone please explain?

    Why does it feel like there is soooo much to learn for DFS!!!
  • Steve Collings
    Steve Collings Registered Posts: 997
    Esme wrote: »
    I know I'm probably just being really stupid, but I can't get my head around what you mean by 'Tax base of the same PPE' can someone please explain?

    Why does it feel like there is soooo much to learn for DFS!!!

    Hi Esme

    The tax base of PPE is the value of the PPE after capital allowances (its tax written down value).

    Regards

    Steve
  • Esme
    Esme Registered Posts: 711
    Thanks Steve.

    I found a good page on wikipedia about deferred tax also, if anyone else is having similar troubles.
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