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LEARNING OBJECTIVES

Understand concept of deferred tax

Contrast current tax & deferred tax

Compute deferred tax:

Income statement approach

Balance sheet approach

Recognition of deferred tax assets

Disclosure in financial statements

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KEY FOCUS AREAS

Exemptionoffice buildings

Recoupment & Capital profit

Utilisation of assessed losses

Deferred tax assets

Change of intention

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DEFINTION

PROVISION vs EXPENSES

Frameworkdefinitions

IAS 37Provisions & Contingencies

Liability & Asset

Recognition criteria

Probable & Measurement

Expenses [transfer]

APPROACH

Balance sheet [IAS 12 p9]

[Carrying amount vs Tax base]

[Movement = expense/transfer to I/S]

Income statement

[Accounting profit vs Tax profit]

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MEASUREMENTp46

MEASUREMENT

Expected amount paid or recovered

Future liability/asset

Conditions prevailing at year end

Based on future recovery/settlement Probable & reliably measured

TAX RATE

Tax rate at year end

Tax rate substantially enacted In budget speech

Passed by parliament

AC 502in speech

IMPACT

Different rates applied

Company taxactual rate

Deferred taxenacted rate

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MEASUREMENTp46

28/02/X6 Year ended

[Rate at year end]

15/03/X6 Rate enacted

[Effective30/04/X6]

31/03/X6 Year ended

[Co. taxactual rate]

[Defer taxenacted]

30/04/X6 Year ended[Enacted rate]

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RATE CHANGEp47

SUBSTANTIALLY ENACTED

By year end

APPLICATION

Adjust balance at beginning of year

Apply new rate at year end

BALANCE SHEET

Measured at rate enacted

INCOME STATEMENT

Effect of change in rate

Movement for the year

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RATE CHANGEp47

REVALUATION OF ASSETS

Match deferred tax with reserve

Revaluation method

[Revaluation reservebalance sheet]

Fair value method

[Tax expenseincome statement]

CHANGE IN RATE

Adjustment is matched to reserve

Revaluation method

[Revaluation reservebalance sheet] Fair value method

[Tax expenseincome statement]

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EXEMPTIONSp15

GOODWILL [p15(a)] Initial recognition

INITIAL RECOGNITION [p15(b)] Initial recognition of assets & liabilities

Not business combination

Not affect accounting or tax profit

Accounting or tax profit [p15(b)(ii)] Initial recognition of assets & liabilities

At time of transaction

Not affect accounting nor tax profit

e.g. Administrative buildings Depreciated [accounting]

No wear & tear [tax]

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EXEMPTIONSp15(b)

EXCLUSIONS

Revaluation of assets & liabilities

Subsequent to initial recognition

ILLUSTRATION:

BUILDING [OFFICES]

01/01/X4 Purchased [cost] R450 000

31/12/X6 Carrying amount R382 500

[depreciated @ 5% p.a]

[no deduction for tax]31/12/X6 Fair value [NRC] R430 000

Rate = 30%

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EXEMPTIONSp15(b)

ILLUSTRATION: SOLUTION

31/12/X6 Fair value [NRC] 430 000

Tax base Nil .

Temporary difference 430 000

Exempt [based on cost] 382 500

Temporary difference 47 500

Deferred tax @ 30% 14 250

NB: Initial recognition is exempt

[Carrying value based on cost]

Subsequent recognition [valuation]

[Not exemptsubject to deferred tax]

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MEASUREMENTp51

INTENTION Reflect manner liability is settled

Managements intention at year end

Based on future intention of company Value in use [continued future use] Through disposal

VALUE IN USE Through ordinary business

[Assets = depreciation/wear & tear]

THROUGH DISPOSAL

Profit realised on disposal Separate profit between

Recoupment [company tax]

Capital profit [CGT]

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MEASUREMENTp51

CHANGE OF INTENTION

Assess intention at year end

Change of intention

Revalue asset to account for change

Recalculate deferred tax

ILLUSTRATION:

31/12/X6 Original cost R500 000

Carrying value R300 000

Tax base R240 000

Recoverable amount[net sale value] R550 000

Tax rate = 30%

CGT = 50% of tax rate

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MEASUREMENTp51

ILLUSTRATION: SOLUTION

Carrying value 300 000

Tax base 240 000Temporary difference 60 000

Deferred tax [value in use] 18 000

C/value Tax base

Recoverable amount 550 000 550 000Carrying value 300 000 240 000

Profit 250 000 310 000

Recoupment 260 000

Capital profit 50 000

Deferred tax: recoupment 78 000

capital profit 7 500

85 500

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MEASUREMENTp51

ILLUSTRATION: SOLUTION

DR: ACCUM DEPR 260 000

CR: MACHINERY 260 000

[Reversing depreciation on revaluation]

DR: MACHINERY 310 000CR: REVALUE RESERVE 310 000

[Revaluation of machinery]

DR: REVALUE RESERVE 67 500CR: DEFERRED TAX 67 500

[Adjust deferred tax for change of intention]

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ASSESSED LOSSp34

ASSESSED LOSS [IAS 12 p34]

Represents a future tax relief

[Set off against future taxable income]

Give rise to deferred tax asset

DEFERRED TAX ASSETS

Recovery depends on future profit Recognition criteria [IAS 12 p36]

Sufficient temporary differences

Future profitability

Non-recurring cause for loss Tax plan for turn around

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ASSESSED LOSSp34

LIMITATION [IAS 12 p35]

Deferred tax assets is limited to:

Extent of temporay differences

[credit balance of deferred tax]

[reduced to a nil balance]

Sufficient future taxable income

[supporting evidence p82]

ILLUSTRATION:

31/12/X7 Carrying value R450 000

Tax base R120 000(a) Profit R180 000

(b) Loss R50 000

Rate = 30%

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ASSESSED LOSSp34

ILLUSTRATION: SOLUTION

Carrying value 450 000

Tax base 120 000

Temporary difference 330 000

Deferred tax 99 000

(a) (b)

Profit/Loss 180 000

Temp difference

Assessed loss

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ASSESSED LOSSp34

ILLUSTRATION: SOLUTION

(a) (b)

Temp difference 330 000 330 000

Assessed loss

Net Temp difference 180 000

Deferred tax liability 54 000

Deferred tax asset

NB: Deferred tax asset:

Limitationassess loss of R330 000

[Deferred tax asset unrecognised]

Recognisedassess loss R380 000

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ASSESSED LOSSp34

ILLUSTRATION: SOLUTION

(a)

DR: DEFERRED TAX 45 000CR: TAX EXPENSE 45 000

[Deferred tax i.r.o tax loss]

(b) RECOGNISED ASSET

DR: DEFERRED TAX 114 000

CR: TAX EXPENSE 114 000

[Deferred tax i.r.o tax loss]

UNRECOGNISED

DR: DEFERRED TAX 99 000CR: TAX EXPENSE 99 000

[Deferred tax i.r.o tax loss]

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UNRECOGNISEDp37

DEFERRED TAX ASSET

Previously unrecognised

[Limited to zero balance]

Re-assessed at each year end

Recognised to extent:

Future profit are probable

ACCOUNTING TREATMENT

Re-instate unrecognised asset

Re-instate at beginning of year

[current years tax rate] Provide for current years differences

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UNRECOGNISEDp37

ILLUSTRATION:

31/12/X7 31/12/X6

Carrying amount 560 000 730 000

Tax base 750 000 910 000

The tax rate remained 30%.At 31/12/X6 there was uncertainty about the

future taxable income.

At 31/12X7 there was certainty that the

company will earn taxable income in future

years.

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UNRECOGNISEDp37

ILLUSTRATION: SOLUTION

C/value T/base Diff D/tax

31/12/X6 560 000 730 000 -170 000 -51 000

31/12/X7 750 000 910 000 -160 000 -48 000

Provision for year 3 000

31/12/X7:DR: DEFERRED TAX 51 000

CR: TAX EXPENSE 51 000

[Recognise previously unrecognised asset]

DR: TAX EXPENSE 3 000

DR: DEFERRED TAX 3 000

[Deferred tax provision for the year]