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income taxes

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Presented by: …

Presented by:
HAMMAD AHMAD
courtesy :
SIR SAJID SHAFIQ ( FCA),
owner of islamabad college of accounts and finance (ICAF)
PAKISTAN

Published in: Education, Technology, Business

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  • Sir thank u so much wouderfuul cocepts for IAS-12

    My Allah bless u to give me a lot success in ur life
    Naveed ACMA
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  • 1. Everything is uncertain but Death and TaxesSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 1
  • 2. Controlled by an entity ASSET Raised from past event Future economic benefits will flow inSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 2
  • 3. ⁼ An asset represents the value of its future benefitsSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 3
  • 4. CA FB FB FB FB Present value of future benefits (FB)Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 4
  • 5. XYZ (pvt) Ltd. Statement of Financial position As at--------------- PPE xxx Deferred tax liability xxxSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 5
  • 6. XYZ (pvt) Ltd.Statement of Comprehensive incomeFor the year ended-------------- Sales xxx Cost of goods sold (xxx) Gross profit xxx Operating expenses (xxx) Net profit before tax xxx TAX• Current (xxx)• Deferred expense (xxx) Net profit after tax xxxSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 6
  • 7. Present obligationLIABILITY Raised from past event Future economic benefits will flow outSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 7
  • 8. = A liability represents the value of its future outflowsSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 8
  • 9. CA FoF FoF FoF FoF Present value of future outflows (FoF)Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 9
  • 10. XYZ (pvt) Ltd. Statement of Financial position As at--------------- Accrued expenses xxx Deferred tax asset xxxSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 10
  • 11. XYZ (pvt) Ltd.Statement of Comprehensive incomeFor the year ended-------------- Sales xxx Cost of goods sold (xxx) Gross profit xxx Operating expenses (xxx) Net profit before tax xxx TAX• Current (xxx)• Deferred income xxx Net profit after tax xxxSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 11
  • 12. Tax base of Assets Assets Tax base Reason PPE CA- Acmltd The depriciation has already been deducted for depriciation current and prior periods Interest Nil The related interest revenue is taxed on cash basis receivable Trade Full The related revenue has already been included in receivables amount taxable profit / loss Dividends Full Dividends are not taxable receivable amount Loan Full The repayment of loan will have no tax receivable amount consequencesSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 12
  • 13. Tax base of Liabilities Liabilities Tax base Reason Accrued Nil The related revenue will deducted for tax purposes expenses on cash basis Advance Nil The related interest revenue is taxed on cash basis interest revenue Accrued Full The related expense has already been deducted for expenses amount tax purposes Accrued fines Full Fines & penalties are not deductible for tax & penalties amount purposes Loan payable Full The repayment of loan will have no tax amount consequencesSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 13
  • 14. Recognition of Current tax liability and Current tax asset Current tax unpaid Current tax liability Current tax paid in advance Current tax asset Tax loss Tax asset Tax recoverable xxx Tax income xxxSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 14
  • 15. Current Tax Accounting Normal Calculation Mechanics Accounting Profit XXX Add: Accounting Depreciation xxx Provision for expenses xxx In admissible expenses xxx Less: Tax depreciation (xxx) Provisions settled during the year (xxx) Exempt income (xxx) Taxable Profit XXX @ Tax Rate = Current Tax expense XXXSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 15
  • 16. Current TaxIllustration 1An extract from financial records of Green Limited for its first year is given below: Rs 000Building-Cost 35,000Other Fixed Assets-Cost 22,000Product research cost 15,000Product development cost 12,000Profit before tax 10,000i. Depreciation is charged on buildings and other fixed assets at the rate of 15%. The rate of tax depreciation is 30%.ii. Half of the research and development costs are allowable for tax purposes in the first year. The balance amount shall be permanently disallowed.iii. The company amortizes intangible assets over a period of three years. Current year amortization has already been accounted for.iv. The company’s profit is subject to tax at the rate of 35%.v. Interest of Rs. 1.25 million was paid on a short term loan received from directors, which is not an allowable expense under the tax laws.vi. Profit includes a tax exempt gain of Rs 2 million on sale of shares of a listed company.Required: Prepare journal entry for current taxationSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 16
  • 17. Current Tax Illustration 1 Rs 000 Profit Before Taxation (a) 10,000 Add: Accounting Depreciation- Building 5,250 Accounting Depreciation- Other Fixed Assets 3,300 Research Cost 15,000 Amortization of Development cost 4,000 Interest on loan from director 1,250 (b) 28,800 Less: Tax Depreciation- Building (10,500) Tax Depreciation- Other Fixed Assets (6,600) Research Cost (half) (7,500) Development Cost (half) (6,000) Capital gain (2,000) (c) (32,600) Taxable Income sum (a ,b, c) 6,200 @ 35% 2,170Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 17
  • 18. Deferred Tax- RecognitionThe reason that an entity is required to recognize deferred tax is because: A deferred tax liability will ultimately translate itself into an actual liability by, for example, resulting in a larger tax liability in future periods; The matching of items recognized in an entity’s financial statements is consistent with the requirements of IAS 1 on the preparation of an entity’s financial statements; and Ignoring deferred tax may lead to the reported profit in a period being misinterpreted.Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 18
  • 19. Deferred Tax- Recognition and Measurement Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 19
  • 20. Illustration 3 Deferred Tax- RecognitionSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 20
  • 21. DT Recognition and Measurement- Further Issues Revaluations•The act of revaluing an asset will not generally result in a taxable event. However, the future recovery of the asset (through continuing use or through disposal), will lead to taxable amounts being generated by the entity.•The amount that will be deductible for tax purposes, based on cost, will differ from that for accounting purposes, based on the revalued amount.•Consequently, the difference between the CA of a revalued asset and its tax base is a temporary difference.•An upward revaluation of an asset will therefore give rise to a deferred tax liability.•Most transactions creating TD relate to transactions recognized in PL, so the related deferred tax is also recognized in PL. However, where the underlying transaction, such as a revaluation, is recognized in OCI, the deferred tax impact is also recognized in OCI. The expected manner of recovery of an Annual review asset or settlement of liability •The carrying amount of a deferred tax asset•The measurement of deferred tax liabilities (and should be reviewed at the end of each reporting assets) should reflect the tax consequences of how an period to ensure that it continues to be probable entity intends to settle (and recover) the carrying that it will be recovered against future taxable amount of its liabilities (or assets). profits.•For example, different tax rates may apply, depending •If it is no longer probable that sufficient taxable on whether the entity intends to use an asset to profit will be available to utilize the benefit of the generate future benefits for the entity on an ongoing deferred tax asset, then its carrying amount basis or to sell it. The DT amount will therefore be should be written down accordingly. If sufficient calculated using the tax rate relevant to the entity’s profits later become available, then the amount expected use. written down should be reversed. Discounting IAS 12 does not permit deferred tax assets and liabilities to be discountedSunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 21
  • 22. 1. Current and deferred tax movements should be recognized directly in the PL for the period, except where the tax arises from: [IAS 12.58]  a transaction that is accounted for directly in OCI (such as a revaluation); orPresentation and Disclosures- Current and deferred tax  a business combination. ( in that case it adjusts the value of goodwill) 2. The tax expense or income in respect of the PL should be presented in the SCI. 3. The main components of the tax expense, or income, should be disclosed separately in the FS. The main components of the tax expense or income may include, for example: i. current tax expense (income); ii. adjustments recognized in the period for current tax of prior periods; iii. deferred tax expense (income) relating to temporary differences; iv. an adjustment to the deferred tax expense (income) relating to changes in tax rates; and 4. Further disclosures requirements include: [IAS 12.81] i. the amount of income tax relating to each component of OCI; ii. a reconciliation of the tax expense (income) to the amount calculated as the accounting profit multiplied by the tax rate. (or with percentages); iii. the amount of any potential deferred tax asset which has not been recognized because of uncertainties over its recoverability; 5. Deferred tax assets and liabilities should not be disclosed as part of current assets and liabilities. Offsetting  A CT asset and a CT liability should only be offset by an entity where it has a legally enforceable right to set off the amounts and it intends to settle them on a net basis or to be settled simultaneously. [IAS 12.71]  DT assets and liabilities should similarly only be offset where the entity has a legally enforceable right to set off CT assets against CT liabilities and the DT assets and liabilities have arisen on income taxes levied by the same taxation authority. In addition, the amounts should be in relation to the same taxable entity or, where they have arisen in respect of different taxable entities, there should be the right to settle the amounts on a net basis or simultaneously. [IAS 12.74] Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 22
  • 23. Comprehensive Illustration XYZ Limited submits following details to you for calculation of Current and Deferred Tax. Accounting Profit before Tax 4,000,000 The profit has been calculated after incorporating following items Accounting Depreciation for the year 1,000,000 Accumulated Accounting Depreciation at year end 2,000,000 Provision for warranty expenses 800,000 Following information is relevant for tax law purposes Tax Depreciation 2,000,000 Accumulated Tax Depreciation at year end 4,000,000 Inadmissible expenses 900,000 Exempt income 200,000 Warranty cost is deductible only on paid basis Other Information The company first time created provision for warranty expense out of which no payment is made as yet. The applicable tax rate for current year is 40% and was 30% last year. The only depreciable asset of the company was acquired at a cost of Rs 5,000,000Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 23
  • 24. Comprehensive IllustrationCurrent Tax Calculation Accounting Profit 4,000,000 Before Tax Add: Accounting depreciation 1,000,000 Provision for warranty expenses 800,000 Inadmissible expenses 900,000 Less: Tax depreciation (2,000,000) Exempt income (200,000) Taxable Income 4,500,000 Current Tax @ 40% 1,800,000Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 24
  • 25. Comprehensive IllustrationDeferred Tax CalculationYear EndBalancesDescription Carrying Tax Base Temporary Type Amount DifferenceDepreciable 3,000,000 1,000,000 2,000,000 LiabilityAssetProvision for 800,000 Nil (800,000) Assetwarranty expense Net Temporary Difference 1,200,000 Deferred Tax @ 40% 480,000 Liability Opening Deferred Tax 1,000,000 @ 30% (300,000) Liability Deferred Tax expense for the year 180,000Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 25
  • 26. Comprehensive IllustrationAnalysis of Deferred Tax Expense for the yearEFFECT OF CHANGE IN RATES Rs.Opening Temporary Difference 1,000,000 X XChange in Tax Rate (40% -30%)=10% 100,000EFFECT OF CHANGE IN TEMPORARY DIFFERENCEClosing Tax Rate 40% X xChange in Temporary Differences (1,200,000- 800,000 1,000,000)= 200,000 Deferred Tax Expense for the year 180,000Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 26
  • 27. Comprehensive IllustrationReconciliation of Expected and Actual Tax Expense Expected Tax Expense Accounting PBT x Tax Rate 4,000,000 x 40% 1,600,000 In admissible expenses 900,000 x 40% 3,60,000 effect Exempt income effect 200,000 x 40% (80,000) Effect of change in tax rate 1,000,000 x 10% 100,000 Actual Tax Expense (Current + Deferred Tax) (1,800,000+180,000) 1,980,000Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 27
  • 28. Sunday, January 22, 2012 Hammad Ahmad (CA-Module D, MA-Eng Literature part II) 28