AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent...
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Transcript of AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent...
![Page 1: AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance.](https://reader035.fdocuments.net/reader035/viewer/2022072014/56649e895503460f94b8d8bd/html5/thumbnails/1.jpg)
AC303 lecture 18
• Methods of calculating deferred tax
– Deferral method
– Liability method
• Recent international and domestic guidance
![Page 2: AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance.](https://reader035.fdocuments.net/reader035/viewer/2022072014/56649e895503460f94b8d8bd/html5/thumbnails/2.jpg)
Deferral method
• Calculate net timing differences each year
• Tax effect is debited or credited to the tax charge
• Double entry is effected by making an entry to the deferred tax account
• What happens if the rate of corporation tax changes?
• Ignores the effect of changing tax rates on timing differences from earlier periods
• Emphasis on the profit and loss account
![Page 3: AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance.](https://reader035.fdocuments.net/reader035/viewer/2022072014/56649e895503460f94b8d8bd/html5/thumbnails/3.jpg)
Liability method
• Calculate total timing differences anew each period
• Apply the current corporation tax rate to net total timing differences each year. This equates to the asset/liability in the balance sheet.
• Emphasis is on the balance sheet
• Book the balance sheet movement from period to period to the profit and loss account
![Page 4: AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance.](https://reader035.fdocuments.net/reader035/viewer/2022072014/56649e895503460f94b8d8bd/html5/thumbnails/4.jpg)
Recent guidance
• IAS 12 - Liability method and full provision requirements.
• FRS 19 (effective for periods ending after 22 January 2002)
– liability method required (consistent with ASB emphasis on balance sheet)
– full provision required
![Page 5: AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance.](https://reader035.fdocuments.net/reader035/viewer/2022072014/56649e895503460f94b8d8bd/html5/thumbnails/5.jpg)
FRS 19
• Requires full provision to be made for deferred tax assets and liabilities arising from timing differences between recognition of gains and losses in financial statements and their recognition in a tax computation
• Most common types of timing differences– Capital allowances– Expenses booked in financial statements on an accruals
basis but allowable for tax on a cash basis - likewise income taxable on a cash basis
![Page 6: AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance.](https://reader035.fdocuments.net/reader035/viewer/2022072014/56649e895503460f94b8d8bd/html5/thumbnails/6.jpg)
Presentation
• P&L - include within heading for ‘tax on profit on ordinary activities’
• B/S - liabilities to be included under the heading ‘Provisions for liabilities and charges’. Assets to be included in ‘debtors’
• Consider materiality of the deferred tax amount and possible need for separate disclosure
![Page 7: AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance.](https://reader035.fdocuments.net/reader035/viewer/2022072014/56649e895503460f94b8d8bd/html5/thumbnails/7.jpg)
Note disclosure
• P&L taxation note:
– Separately show amount charged or credited for deferred tax, identifying amounts attributable to changes in tax rates and re-assessments of recoverability of deferred tax assets
• Balance sheet note on deferred tax
– Opening balance, movements and closing balance
– Analysis by type of timing difference
– If deferred tax asset is recognised, outline basis of recoverability of the asset
![Page 8: AC303 lecture 18 Methods of calculating deferred tax –Deferral method –Liability method Recent international and domestic guidance.](https://reader035.fdocuments.net/reader035/viewer/2022072014/56649e895503460f94b8d8bd/html5/thumbnails/8.jpg)
FRS 19 matters not covered
• Discounting
• Partial recognition discussion
• Detailed assessment of recoverability of assets
• Timing differences that do not result in deferred tax