Professional Documents
Culture Documents
Advantages
Simple to apply
Reasonable to assume that tax expense for a period is
the tax that must be paid for the period
LO: Understand the perceived problems with the taxpayable method
Criticisms:
- It was believed it resulted in misleading financial
statements
- Changes in profit after tax may not be caused by
changes in performance but by vagaries of the income
tax legislation
Counter argument:
- Tax payable method reflects reality
LO: Apply the statement of financial position approach
to tax allocation
Introduces the idea of a tax base of an asset or liability
- The amount at which an asset or liability would be
shown in a statement of financial position derived from
accounts prepared for tax purposes
In Example 9.1, Captain Ltd had a depreciable asset costing
$100,000 with a zero residual value:
- For accounting purposes:
- The asset was depreciated over four years on a
straight-line basis
- For taxation purposes:
- The asset was depreciated over four years on a
reducing-balance basis
Temporary differences:
In year 1, the depreciation expense recognised for accounting
purposes is $15,000 less than the amount claimed for tax
($25,000 vs $40,000).
As a result, the CA of asset > TB by $15,000 ($75,000$60,000).
This difference between the carrying amount and tax base of
the asset is defined as temporary difference.
The difference is temporary because it will reverse in future
periods. E.g. see the differences between Income tax
expense and Income tax payable over the 4 year periods in
Example 9.1.
The use of reducing-balance depreciation for tax purposes
means that less tax is paid now but more will be paid later.
Assets:
- DTL = Carrying amount > Tax base
- DTA = Tax base > Carrying amount
Liabilities:
- DTA = Carrying amount > Tax base
- DTL = Tax base > Carrying amount
General journal entries to record DTA/DTL:
Dr Deferred Tax Asset
Cr Deferred Income Tax Expense
Dr Deferred Income Tax Expense
Cr Deferred Tax Liability
Permanent differences:
- In addition to the temporary differences, there are also
permanent differences, which are assets or liabilities
that are recognised in either an accounting statement of
financial position or a tax statement of financial position
but are never recognised in the other
- Examples
- Tax exempt income
- Expenses payable with a zero tax base
- Allowable tax deductions that are not recognised
for accounting purposes
- They do not result in DTAs or DTLs
LO: Understand and apply the requirements of AASB
112
Example:
- A non-current asset cost $100,000 and accumulated
depreciation for accounting purposes is $40,000:
- The carrying amount = $60,000
- An amount of $55,000 has been claimed as a
depreciation deduction for tax purposes:
- The tax base = $45,000 (100,000-55,000)
- Temporary difference: Carrying amount - Tax base
= $60,000- $45,000
= 15,000
If the tax rate is 30%: DTL is $15,000 X 30% = $4,500
The general journal entry
(assuming a $3,000 carried-forward DTL balance):
Deferred income tax expense Dr $1,500
Cr
$1,500
Example:
Provision for long-service leave of $100,000
Carrying Amount = $100,000
Tax Base = $nil
Temporary difference = $100,000
DTA = $100,000 X 0.30 = $30,000
Step 1: Calculate taxable income to determine income tax payable
and current income tax expense
Income Tax Payable = Taxable income x Tax Rate*
*Using the tax rates enacted or substantively enacted by the end of
the reporting period (AASB112:46)
Step 2: Identify temporary differences resulting in deferred tax
assets (DTA) and deferred tax liabilities (DTL) to determine the
changes in the DTA and DTL
Step 3: Record the journal entries for income tax payable and
current income tax expense and changes in DTA, DTL and deferred
income tax expense accounts.
Dr Current Income Tax Expense
Cr Income Tax Payable
Dr Deferred Income Tax Expense
Cr Deferred Tax Liability*
(*increase in taxable temporary differences x tax rate)
Dr Deferred Tax Asset**
Cr Deferred Income Tax Expense
(**increase in deductible temporary differences x tax rate)
Revalued assets
Before revaluation:
- Carrying amount $_____
- Tax Base $_____
- Temporary difference $________
- Journal entries for the revaluation:
After revaluation:
- Carrying amount $______
- Tax Base $_______
- Temporary difference $________
- DTA or DTL $________
- Journal entry to record DTA or DTL:
In this case, current tax and deferred tax must be charged or
credited directly to equity (AASB 112.61A, note in particular 61A(a)
and (b)
Refer Example 9.5 (textbook page 257)