Professional Documents
Culture Documents
Income Taxes
1
Taxable profit
use actual basis
based on actual
receipt
Accounting
rules
must depreciate
Tax rules
Answer:
ii) Tax effect acctg
CA for the yr
8m
Depreciation for the yr 2m
Difference CA > depr. 6m
Deferred Tax @ 25%
1.5m additional tax on
the diff btw CA &
depr
PBT
Without tax
effect
With tax
effect
RMm
RMm
18
18
(3)
(3)
(1.5)
(3)
(4.5)
15
13.5
Taxation:
Current income
tax
Deferred tax
PAT
Effective tax
16.7%
25%
Timing Differences
Differences between accounting profits & taxable
profits that arise because the period in which
some items of income & expenses are included in
accounting profits does not coincide with the
Higher income Lower income
period in which they arehigher
included
in taxable
acctg lower
acctg profit
profits
profit butlower buthigher tax
Tax
Lower exp
tax profit
profit ($ already
Higher
exp($
Category
Recognized in accounting
higher acctg
havent
receive)
lower
acctg
profit received) tax
profit butlower
income
effect of timing differences:
tax
less = liability
more = asset
buthigher
tax
tax profit ($
Earlier
Later
profit ($ havent
already paid)
pay) tax more =
Gain/income
Deferred
Deferred tax less =
asset
item
credit/liability debit/asset liability
Loss/expense
item
Deferred
debit/asset
Deferred
credit/liability
9
Permanent Differences
Differences between accounting income and taxable income
that originate in the current period but are not capable of
reversal in any subsequent future period
Arises because items of income/expenses are either included
in accounting profit without a corresponding inclusion in
taxable profit , or vice versa
Tax free income: tax free pioneer dividend, tax free interest
income
Disallowed expenses: depreciation of leasehold land & nonindustrial building, donation to unapproved institution,
entertainment expenses
10
Method of Computation
Liability method
deferred tax provisions are calculated at the
rate at which it is estimated that tax will be
paid/recovered when the TD reverse, on the
basis that they represent amounts of economic
benefit that are expected to flow from/to the
entity
focuses on the B/S
deferred tax provisions are calculated at the
current tax rate
opening deferred tax provisions are revised to
reflect the changes in tax rate over time
11
Basis of Provision
NIL provision
Tax expenses = provision for the current income
tax for the same period
No TD arises
PARTIAL provision
If an entity is not expected to reduce the scale
of its operations significantly, it will have
originating new TD which are at least
equal/more than the reversing old TD.
So, the payment of some taxes will be
permanently deferred
Provide deferred tax only when it is probable
that tax will become payable due to reversal of
TD & only by the amount of reversal
12
foreseeable
Basis of Provision
FULL provision
Tax differences will be recognised in full
Set up a Deferred Tax (Liability) account
- increase provision when defer the payment of
tax
- reduce provision when tax liability crystallizes
Set up a Deferred Tax (Asset) account
- increase provision when accelerate the
payment of tax
- reduce provision when tax asset crystallizes
Steps:
i) Calculate the closing balance on the Deferred
Tax a/c, based on the YE TD
13
15
Carrying value
(CV)
No
No differences
arise
Compare
Different?
Temporary difference
(TD)
Deductible TD
Taxable TD
Asset: CV <
Asset: CV >
TB
TB
Liability: CV
Liability: CV
> TB
< TB
Deferred tax
Deferred tax
asset (DTA)
16liability (DTL)
Carrying Value
CV = the amount recognized in the
statement of financial position at a
particular point in time.
Cost
CV
Fair
value
(FV)
17
18
CV
TB
2011
240
(300-60)
200
2012
180
(240-60)
100
2013
2014
120
60
2015
(180-60)
(120-60)
(60-60)
TD
(CV-TB)
(300100)
(200100)
(100-100)
DT
(TD*25%)
40
10
80
20
120
60
30
15
19
21
Temporary Differences
Result in taxable amounts in
determining taxable profit (tax
loss) of future periods when the
carrying amount of the asset or
liability is recovered or settled.
taxation liability has been
deferred in the past/current
periods pay more later
Taxable
Deductible
24
Temporary Differences
Example (taxable TD):
At the end of year 1, a machine is carried in
the statement of financial position at its net
book value of RM10K. The tax written down
value of the machine on this date is RM4K.
Assume an income tax rate of 28%.
25
Temporary Differences
Answer:
Taxable profit of future
period when the CV of
the machine is
recovered/settled
Entity will be able to
deduct capital allowance
of
Taxable amount
DTL @ 28%
10
CV
(4)
TB
6 CV >
TB
= TTD
1.68 26
Temporary Differences
Example (deductible TD):
A provision for warranty costs is carried in the
statement of financial position at RM8K. The
tax base on this date is zero as tax law allows
such costs to be claimed only when incurred.
Assume an income tax rate of 28%.
27
Temporary Differences
Answer:
When the warranty cost
is paid in future, it does
not affect the taxable
profit
Entity will be able to
deduct the costs when
paid in future
Deductible amount
DTA @ 28%
CV
TB
8 CV >
TB
= DTD
2.24 28
Temporary Differences
Tax effect of temporary
differences:
CV > TB
CV < TB
Asset
Taxable TD /
DTL
Deductible TD
/ DTA
Liability
Deductible TD Taxable TD /
/ DTA
DTL
29
30
above
150K
500K
liability 50K
1.5m
32
Asset Revaluation
TD arising from revaluation
MFRS 116 PPE
Asset revaluation
Do not affect TB
If not going to sell
in future
affect TB
If sell in future
Because
profit/loss on
disposal is
subject to tax
33
Asset Revaluation
TD arising from revaluation
If asset is revalued upwards & is subsequently
sold at revalued amount taxable income &
additional tax to be paid
If asset is revalued downwards & is
subsequently recovered at revalued amount
tax deduction & less tax to be paid
Since revaluation of asset involve Revaluation
Reserve account (equity), any deferred tax
effect should also be accounted for directly in
equity
34
Asset Revaluation
Example:
ABC Bhd acquires a land in 2011 at a cost of
RM10m. On 31 Dec 2014, the land is revalued
to RM12m. Assume that profit(loss) on
subsequent sale of the land will be subject to
RPGT at 5% under the Real Property Gains Tax
Act 1976.
Show the deferred tax effect.
35
Asset Revaluation
Answer:
CV = 12m
TB = 10m
TD = 12m 10m = 2m
DT = 2m*5% = 100K
Journal:
Dr. Land
2m
Cr. Revaluation reserve
2m
Goodwill
TD on goodwill (GW)
GW amortization expense is not deductible
TB = 0
Differences between CV of GW and its TB is a
TD
ButMFRS 112 does not permit the DT
recognition because GW is a residual (left
over), not a real asset
37
Not
recognize
DTA
Recognize
DTA
38
39
40
Balance b/f
Adjustment to opening
balance due to change in
tax rate
Arising in the current
year
Before
After
40
40
(5)*
xxx
xxx
*RM40K
x (40%-35%)/40%
Balance c/f
xxx= RM5K
xxx ~ credit
to P&L
*it is a change in accounting estimate &
41
retained profit is not adjusted
Questions
ABC Bhd has the following assets in its SOFP:
A machine which had originally cost RM150K
with accumulated depreciation of RM50K.
Accumulated tax allowance was RM100K
Trade receivables of RM60K. This amount is net
of an allowance of doubtful debts of RM40K.
Doubtful debts are not deductible for tax
purposes until it is written off
Tax rate 30%. These items will give rise to:
a.
b.
c.
d.
DTA of RM27K
DTL of RM27K
DTA of RM12K & DTL of 15K (net DTL of RM3K)
DTA of RM15K & DTL of RM12K (net DTA of
42
RM3K)
Questions
On 1 Jan 2011, ABC Bhd purchased a machine for
RM350K. The machines useful life is 5 years.
Depreciation on straight line basis. ABC Bhd
claimed capital allowance of 50% of the cost of
the machine in the year ended 31 Dec 2011 &
the remainder in the following year.
Tax rate 30%. What amount will be recognised in
the FS FTYE 31 Dec 2012?
a.
b.
c.
d.
DT
DT
DT
DT
Questions
On 31 Dec 2012, ABC Bhd owns a building with a cost
of RM250K & CV of RM200K. On that date, ABC Bhd
revalued the building to RM375K. Immediately before
the revaluation, the TWDV of the building was
RM175K. This amount is not adjusted as a result of
the revaluation.
Tax rate 30%. What is the journal entry to record the
tax effect on 31 Dec 2012?
a.
b.
Questions
ABC Bhd incurred a tax loss of RM210K for the
year ending 31 Dec 2012. There were DTD of
RM60K. ABC Bhd considered that it was likely
that future taxable profit will be available against
which any unused tax losses could be utilized.
Tax rate 30%. Which of the following is correct?
a.
b.
c.
Questions
ABC Bhd is finalizing its FS FTYE 31 Dec 2012.
During Nov 2012, government changed the tax
rate from 30% to 25% wef. 1 Jan 2013.
At 1 Jan 2012, ABC Bhd has aggregate TTD of
RM160K & at 31 Dec 2012 it has TTD of RM240K.
What is the deferred tax expense to be
recognised in P&L FTYE 31 Dec 2012?
a.
b.
c.
d.
RM12K
RM20K
RM24K
RM60K
46