Deferred Tax

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reddwarf
reddwarf Registered Posts: 528 Epic contributor 🐘
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!

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  • PGM
    PGM Registered Posts: 1,954 Beyond epic contributor 🧙‍♂️
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    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
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    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
    Bluewednesday Registered Posts: 1,624 Beyond epic contributor 🧙‍♂️
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    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
    Monsoon Registered Posts: 4,071 Beyond epic contributor 🧙‍♂️
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    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!) :lol:
  • reddwarf
    reddwarf Registered Posts: 528 Epic contributor 🐘
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    thanks Monsoon and PGM, appreciated
  • reddwarf
    reddwarf Registered Posts: 528 Epic contributor 🐘
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    Upped for Esme
  • Esme
    Esme Registered Posts: 711 Epic contributor 🐘
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    Thanks Red Dwarf... I am seriously confused now, but will have a look into it over the weekend.
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