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Income taxes


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IAS-12- Income Tax

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Income taxes

  2. 2. LEARNING OUTCOMES• Account for current tax liabilities and assets• Taxable temporary differences on accounting & taxable profits• Calculate & record deferred tax amounts in financial statementsKAPP EDGE SOLUTIONS
  3. 3. CURRENT TAX LIABILITIES ANDASSETS• Current tax is the amount of income tax payable (recoverable) in respect of the taxable profits (tax loss) for a period. For the purposes of this Standard, income taxes include all domestic and foreign taxes which are based on taxable profits.KAPP EDGE SOLUTIONS
  4. 4. EXAMPLE• K Ltd earns profit of $100,000 and a tax is payable @ 30% on profits. During the previous year, it had provided for $50,000 as tax payable. However, upon assessment, the amount of tax payable came as $55,000 and was paid during the current yearKAPP EDGE SOLUTIONS
  5. 5. EXAMPLE• K Ltd earns realised profits of $100,000 during the year 2010. It also has a revaluation gain of $50,000 on revaluation of its PPE. The company pays taxes on both realised and unrealised gains @ 30%. Previous year’s figures of retained earnings and revaluation gain in the SOFP are $65,000 and $10,000 respectively. Show the extracts of SOCI and SOCIE.KAPP EDGE SOLUTIONS
  6. 6. CONCEPT OF DEFERRED TAXES• There are instances when you may have earned the income today but you required to pay taxes only later. This means that the income has been earned but tax payment been deferred, for example, in case of revaluation gains on assets.KAPP EDGE SOLUTIONS
  7. 7. EXAMPLE• K Ltd re-values its assets on 1st January 2011. The carrying amount of assets is $100,000. The fair value of the assets is $300,000. This means that there is an unrealised profit of $200,000 and an increase in the value of assets by the same amount. This means that if K Ltd were to sell this asset, cash received is $300,000. However, there may be some tax applicable, say @ 25% on this gain of $200,000 ($300,000 - $100,000) which is paid at the time of sale. Let us assume that the asset is sold on 1 st January 2012.• Ignoring depreciation or impairment, draft the profit and loss account of K Ltd. KAPP EDGE SOLUTIONS
  8. 8. ACCOUNTING TREATMENT FOR DEFERRED TAXESThe entry for deferred tax is calculated as under:For tax expense (tax payable in future) Debit tax expense xx Credit deferred tax liability xxFor tax income (tax refundable in future) Debit deferred tax asset xx Credit tax expense xx KAPP EDGE SOLUTIONS
  9. 9. EXAMPLEK Ltd earns interest income of $50,000 during 2011 on thefixed deposits made. However, the tax is payable only onreceipt of the interest income and not when these accrue. Themoney is receivable in 2012. Tax rate is 30%.KAPP EDGE SOLUTIONS
  10. 10. EXAMPLEK Ltd has created a provision for warranty expenses of$10,000 in 2011. This provision is charged to the SOCI anda current liability amounting to this provision is created.However, the tax authorities do not permit a provision forwarranty, and will only give a deduction when these costs areactually incurred.K Ltd incurs warrant expenses of $10,000 in 2012. In 2011,K Ltd earned $50,000 before creating this provision. Theprofit amount is same also in 2012.The tax rate is 20%.KAPP EDGE SOLUTIONS
  11. 11. TIMING DIFFERENCES Permanent differences• These differences are permanent in nature and would remain. There does not arise any deferred tax concept on these differences.• Example K Ltd has incurred a cost of $50,000 on employing people from the minority section of the society. The government gives a tax rebate on 125% on the amount spent on such activities. Hence, the deduction from tax is on a permanent basis. The accounting profit would not be affected later. In this case, there is no deferred tax applicable. Temporary differences• Temporary differences are differences which arise due to timing when tax payment happens and when it is created in financial statements. For this reason, temporary differences are also called as timing differences.KAPP EDGE SOLUTIONS
  12. 12. TEMPORARY DIFFERENCES Taxable temporary differences• Where the temporary differences result in a tax liability in the future, that difference is considered as taxable temporary difference. Deductible temporary differences• Where the temporary differences result in a tax deduction in the future, that difference is considered as deductible temporary difference. KAPP EDGE SOLUTIONS
  13. 13. TAX BASE• Tax base is used to identify the temporary differences. In fact, under IAS 12 (Income Taxes), temporary differences are defined as under:Temporary Difference= Carrying amount of asset / liability – Tax base.KAPP EDGE SOLUTIONS
  14. 14. TAX BASE Temporary difference= Carrying amount of asset / liability – tax baseOr, Tax base= Carrying amount of asset / liability – temporary differenceKAPP EDGE SOLUTIONS
  15. 15. TAX BASE• K Ltd has accrued rental income in books of $500. The rent is not yet received. However, rental income is taxable on a receipt basis.• K Ltd has received $500 as rent in advance. This rent is taxed on receipt basis.KAPP EDGE SOLUTIONS