7- Income taxes

Current tax

Def

The amount of income tax payable on taxable profits for that period

The amount of income tax recoverable on tax loss for that period

Recognition

Recognised as liability when it is unpaid whether for current or prior periods

Recognition as asset when the amounts paid are in excess of the amount due

Deferred tax principles

Accounting measure, used to match the tax effects of transactions with their accounting effect

The amount actually payable to the tax authorities in relation to the trading activities of the entity during the period

Tax effect= Accounting effect

Why entities need to account for deferred tax?

What happens when the settlement or recovery cause future tax payment/recovery to become bigger or smaller than if the settlement or recovery had no tax effect?

Concept of underlying deferred tax

Def of asset and liability

Accrual concept

As a result of past transaction or event, entity has an obligation to pay tax or right to future tax relief. Therefore, it has met the def. of assets and liabilities under the CF and has to recognised them in the FS

The entity needs to record tax in FS in the same period as the tax is paid. If they are diff. then deferred tax adjustment is needed

Tax base

Amount attributed to assets/liabilities for tax purposes

The accounting profit is driven by applying IFRS while taxable profit is driven by applying rule made by the tax authorities. Therefore, there are some differences and there needs to be adjustments in order for the tax charge in the SOPLOCI to not be misleading

It is the same as the carrying amount that would have been calculated by entities in the calculation of tax and liabilities in the FS. Only difference is it is called tax based and the one calculated by the entity in the FS is called carrying amount.

Example of tax rules and tax base

PPE

Entity get their tax relief in the form of tax depreciation

Accrued income

Chargeable for tax on a cash basis that is when it is received, that is it is being recognised in the future, therefore the TB now is 0

Chargeable for tax when it is receivable, then the TB is recognised now and therefore the same as CA

Accrued expense

Attract tax relief when it is being paid, that is, it is being paid in the future, therefore the TB is 0 now

Attract tax relief when it is being payable, that is, it should be recognised now, therefore the TB is the same as the CA

Income received in advance

Cash basis, that is when it is being received, therefore the TB is 0 now.

If tax is charged or can be recovered using a cash basis, there will be an accounting mismatch. This is because the tax expense/income (SOPL) and the tax payable/recoverable (SOFP) will be in diff year. Therefore, to solve the accounting mismatch, deferred tax needs to be recorded in the FS

If deferred tax does not exist, then the tax will be charged using a cash basis, that is the tax is charged or can be recovered in future periods and will also be recorded in future periods. This will create accounting mismatch with the tax payable/recoverable recorded in FS

Temporary diff

Diff between the CA of assets and liabilities recorded in the FS and its TB

If an item is never taxable or recoverable, then the TB will be the same as CA and this cause the temporary diff to be nil and no related deferred tax

Types of temporary diff

TTD

DTD

This arise when the entity's accrued income is accounted for using cash basis, that is the income will be taxable when it is being received in the future

Tax to pay in the future

DTL

This arise when the entity's accrued expense is accounted for using cash basis, that is the tax relief can be attracted when the expense is being paid in the future

Tax savings in the future

DTA

The TB should be the same as CA because both of them are (cost-depreciation). However, there are still temporary diff because the depreciation rates are diff. Tax depreciation rates are higher than accounting depreciation which cause TTD and DTL because CA will be higher than TB

Provisions and allowances for doubtful debts

FS

Provision is included when the criteria in IAS 37 are met

A doubtful debts allowance is recognised in accordance with IFRS 9

Tax treatment

Expenses related to provisions attract tax relief on a cash basis, therefore the TB is 0

Expenses related to doubtful debts attract relief when the debts become irrecoverable and are written off, therefore the TB is 0

DTA Recognition

It is probable that future taxable profits will be available against which the DTD can be utilised

Deferred tax is recognised in the same section of the SOPLOCI as the transaction was recognised

Initial recognition exemption

No DT should be recognised for TD that arise on initial recognition of

Goodwill

An asset or liability, provided that,

The asset and liability was not acquired in a business combination

The transaction has no effect on accounting/taxable profit

Measurement

Tax rate

No discounting

Tax rate that is expected to apply in the reporting period when the asset is realised or liability settled

Should be those that have been enacted or substantively enacted by the end of reporting period

DTA and DTL should not be discounted

Why?

The complexities and difficulties involved will affect reliability

This is inconsistent with IAS 37 which requires discounting if the effect is material