Taxation

Question 1

Two kinds of income tax IAS 12

Answer 1

• current tax ( the amount of tax payable/recoverable in respect of the taxable profit/loss for a period)
• deferred tax (an accounting adjustment aimed to match the tax effects of transactions to the relevant accounting period)

Question 2

Journal entry for introduction of tax payables

Answer 2

Dr Income tax expense ( in statement of profit or loss)
Cr Income tax payable ( in statement of financial position as current liability)

Question 3

What if provision is under or over?

Answer 3

• an under-provision increases the tax charge Dr
• an over-provision decreases the tax charge Cr

Question 4

What is the deferred tax?

Answer 4

• the estimated future tax consequences of transactions and events recognised in the financial statements of the current and previous periods

Question 5

What is deferred taxation?

Answer 5

• is a basis of allocating tax charges to particular accounting periods

Question 6

What are two concepts of profit?

Answer 6

• the accounting profit (or the reported profit), which is the figure of profit before tax, reported to the shareholders in the published accounts
• the taxable profit, which is the figure of profit on which the taxation authorities base their tax calculations

Question 7

What cause difference between accounting profit and taxable profit?

Answer 7

• permanent differences
• temporary differences

Question 8

What are the temporary differences?

Answer 8

• are differences between the carrying amount of an asset or liability in the statement of financial position and its tax base

Question 9

What is the tax base?

Answer 9

• is the amount attributed to that asset or liability for tax purposes

Question 10

Examples of temporary differences include:

Answer 10

• certain types of income and expenditure that are taxed on a cash, rather than accruals, basis
• the difference between a non-current asset’s depreciation charged and the tax allowances (tax depreciation) given

Question 11

Reasons for recognising deferred tax

Answer 11

• the accruals concept requires its recognition
• the deferred tax is a liability which will eventually be settled
• the overstatement of profit caused by failing to allow for deferred tax liabilities can lead to:
  *over-optimistic dividend payments based on inflated profits
  *distortion of earnings per share and of the price/earnings ratio, both important indicators of a company’s performance
  *shareholders being misled

Question 12

The fundamental principle of IAS 12

Answer 12

• an entity should recognise a deferred tax liability or asset whenever the recovery or settlement of carrying amount of an asset or liability would make future tax payments larger or smaller than they would be if such recovery or settlement were to have no tax consequences
• deferred tax is calculated using the liability method, in which deferred tax is calculated by reference to the tax base of an asset or liability compared to its carrying amount.

Question 13

Calculation of the temporary difference?

Answer 13

carrying amount - tax base

Question 14

Journals for increase in deferred tax provision

Answer 14

Dr Income tax expense / OCI
Cr Deferred tax (SFP)

Question 15

Journals for reduction in deferred tax provision

Answer 15

Dr Deferred tax (SFP)
Cr Income tax expense / OCI

Question 16

Where arises a deductible temporary difference?

Answer 16

• the tax base of an asset exceeds its carrying amount

Question 17

Recognition of a deferred tax asset

Answer 17

• a deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised

Question 18

What IAS 12 require?

Answer 18

• a deferred tax liability to be recognised for all taxable temporary differences, with minor exceptions. A taxable temporary difference arises where the carrying amount of an asset is greater than its tax base
• the liability to be calculated and provided in full
• no discounting of the

Question 19

Workings for income tax

Answer 19

Year end estimate x
Under/(over) provision (figure form trial balance) x/(x)
Increase/(decrease) in deferred tax x/(x)
Equals to Charge to statement of profit or loss

Question 20

What is deferred tax?

Answer 20

• is the estimated future tax consequences of transactions and events in the financial statements of the current and previous periods