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