ACCA P2

Corporate Reporting

By: Sara Rasool

ACCA (Finalist), MA (Eco), B.Com
https://pk.linkedin.com/in/srasool

Glossary: Taxation

Deferred tax is actually Accrual for tax.

Deferred tax arises due to timing difference between the accounting year in
which income or expenses are recorded in profit/loss statement (accrual

accounting) and the year in which they are taxed.

Its also called difference between Accounting profit and Taxable Profit/Income.
There are two types of differences 1) Permanent difference which includes tax
free government grants, penalties, dividends, fines, goodwill impairment, life
insurance premiums, an intangible asset with finite life etc. These will never
become part of taxable profits. 2) Temporary differences which are timing
differences for example an assets depreciation for accounting and capital
allowances for tax may differ. Temporary difference= Carrying value of asset
Tax Base
Temporary differences

Taxable temporary difference

Deferred tax liability for company
Examples:
CV of Asset > Tax base
CV of Liability < Tax base
Accounting Profits greater than Taxable income
Company will pay more Income tax in future

Deductible temporary difference

Deferred tax asset for company
Examples:
CV of asset < Tax base
CV of Liability > Tax base
Accounting profits less than Taxable income
Company will pay less Income tax in future

ACCA P2
Corporate Reporting

By: Sara Rasool

ACCA (Finalist), MA (Eco), B.Com
https://pk.linkedin.com/in/srasool

Tax Base is the amount attributable to asset or liability for tax purposes.

For Assets (Profit&Loss category e.g. PPE/Prepayments) Tax base is future allowable
expense e.g. Cost of asset $10,000 depreciation 1,000 Capital allowances $2,000.

Tax base= $10,000- $2,000= $8000

CV 9000 > TB 8000 = Temp diff $1,000 Taxable income (liability)

For Assets (Cash category e.g. stocks/Land/Receivables/Commission) Tax base is

Amount not taxable in future. Tax base here is usually ZERO because all the income

when received is taxable.

For Liability ( Charged in P/L e.g advance income) tax base= CV liability not taxable

in future
e.g income received in advance $20,000. This will be taxed in future.
The tax base = CV $ 20,000 (income not taxable in future) 0 = $20, 000
Income not taxable in future is ZERO because all amount is taxable in future.
Thus, CV $20,000 TB $20,000 = TD Zero.
For Liability (by Cash payments/delivering assets e.g. Payables/Provisions/employee
benefits)
tax base = CV-Future allowable expense.
E.g. Payables $40,000 will be deductible when payment is made.
Tax base = CV $40,000- Future allowable expense $40,000= Zero 0
Future allowable expenses all total $40,000 which will be deductible thus ZERO tax
base.

Deductible temporary differences can be utilized against taxable profits when

1. There are sufficient taxable temporary differences
2. Differences relate to same entity and tax authority.
3. Differences are expected to reverse in same period or in which tax loss arising from
deferred tax can be utilized (usage and reversal timing should be same).

ACCA P2
Corporate Reporting

By: Sara Rasool

ACCA (Finalist), MA (Eco), B.Com
https://pk.linkedin.com/in/srasool
Unused tax losses give rise to deferred tax asset. However, the asset should be
recognized to the extent that it is probable that future taxable profits will be
available. The availability is confirmed when there are sufficient taxable temp
differences that will give rise to future taxable profits. The entity should have
taxable profits before the losses expire or impair. The unused tax losses result
from identifiable causes unlikely to recur.
E.g. Tax losses $230,000 x Tax 30% = $69,000 utilize this loss for two years.

Profit before tax

Current tax
Deferred tax
Reverse
Impair
Profit/loss after tax

20x1
(234,000)
0

20x2
$47,000
0

20x3
$135,500
0

$69,000
0

($15,000)
0

($42,000)
($12,000)

($165,000)

$32,000

$81,500

Leases: All finance leases are treated as operating leases for Tax purpose. Tax
authorities do not consider this sale thus lessee is not given a capital allowance (e.g.
wear and tear) against taxable income (this is given to the lesser) but is allowed to
deduct the lease installments when they are paid.

e.g. 20x1 Lease rentals total $1000,000 payable annually in equal installments for 4 years.
Fair value and PV of minimum lease payments is same i.e. $80,000.
First year rentals include $75,000. Depreciation is straight line. Tax rate 30%.
Required: Deferred tax relating to asset at the end of year.
Solution: depreciation charge $800,000/4 = $200,000
Carrying value after one year $800,000-$200,000 = $600,000

Finance lease obligation =

rental payment per year will be $1000,000/4= $250,000
year
b/f
finance charge
rental payment
20x1
$800,000
$75,000
($250,000)
So Asset is $600,000 and Liability is $625,000
Deferred tax calculations

CV

TB

TD

c/f
$625,000

ACCA P2
Corporate Reporting

By: Sara Rasool

ACCA (Finalist), MA (Eco), B.Com
https://pk.linkedin.com/in/srasool
Leasehold asset
$600,000
0
$600,000 taxable income
Finance lease obligation
($625,000)
0
($625,000) deductible
....................................................................................................................................................................
(25,000) deductible
X 30%
$7,500 deferred tax asset

Dr deferred tax asset $7,500

Cr Income tax expense $7,500
Deferred tax implications on Share-based payments
An entity may recognize an expense for share based payments under IFRS 2 but tax deduction
on such expense will not be granted until options are actually exercised. The entity will
receive the tax deduction at the intrinsic value (share MV-exercise price) and not at the
fair value at grant date. Therefore, temp differences will be created.
If the amount of tax deduction is more than cumulative remuneration expense then exceed
will be recognized in Equity.
Measurement: temp diff= Carrying value of expense (usually zero) Tax base at intrinsic value

X tax rate % = deferred tax asset.

Dr
deferred tax asset
Cr I/S Cr Equity(excess of tax deduction over accounting expense)
Reversal at exercise of options Dr I/S Dr Equity
Cr deferred tax asset