Deferred Tax

reddwarf

It would seem (and according to guru Steve) that we won't have a deferred tax computation to do in DFS in June but may have to account for it.

I know there are those of you (who may have nothing better to do!) who can explain it in terms that I (having read my text book and Steve's article!) can get a better grip on?

Any contributions welcome!

Thanks!

PGM

Oh its a fun topic.

Its the difference between accounting tax and capital allowances.

Simple example is if you bought an asset for 10k which will last 5 years. In your accounts you would depreciate at 2k per year. But, with capital allowances you could be entitled to large first year allowances.

So in that year you'll pay a lot less tax due to the big capital allowance. What deferred tax does is smooth out the difference between actual tax paid and what you would have expected to pay with your accounting treatment.

The result of this is that your profit for the period (after tax) is not distorted by capital allowances.

Monsoon

I'm going off at a tangent here, but is this a relatively new addition to the syllabus? I did technician in 2005-06 and don't remember ever learning it, I had to learn it myself once I got into practice. First time I ever heard of it was in my ATT exam in Nov 2008 (and simply declined to answer the question as I hadn't a clue!).

Not to worry.... red dwarf, a practical example:

Buy an asset for £1000 which qualifies for AIA and has depreciation of 20% straight line.

Year 1
NBV £800 (£1000- 200 depn)
WDV £0 (£1000 AIA claimeD)
Difference of £800
Deferred tax 21% = £168
Dr P&L, Cr BS

Year 2:

NBV £600 (£800- 200 depn)
WDV £0 (£1000 AIA claimed n prior year)
Difference of £600
Deferred tax 21% = £126

O/bal on Deferred tax liability = £168 Cr
Cl/bal on Def tax liab = £126 Cr
Therefore movement in year £42Dr
Therefore:
Cr P&L £42
Dr BS £42.

Year 3:

NBV £400 (£600- 200 depn)
WDV £0 (£1000 AIA claimed in first year)
Difference of £400
Deferred tax 21% = £84

O/bal on Deferred tax liability = £126 Cr
Cl/bal on Def tax liab = £84 Cr
Therefore movement in year £42Dr
Therefore:
Cr P&L £42
Dr BS £42.

etc.

Hope that helps to understand the effect of it on the P&L by seeing a worked example.

Bluewednesday

It was in technician in 2004 Monsoon, it was only a little section in the DFS paper, just having a basic knowledge of what the standard said.

Monsoon

Thanks BW, I don't remember covering it (but then don't remember much of what I studied. Apart from budget variance analysis, despite my best efforts I can't erase that one!)

reddwarf

thanks Monsoon and PGM, appreciated

reddwarf

Upped for Esme

Esme

Thanks Red Dwarf... I am seriously confused now, but will have a look into it over the weekend.