2. Learning Objectives
At the completion of studying this chapter, you will
be able to:
Define tax base and carrying amount
Explain the difference between taxable income and
accounting income
Determine the temporary taxable and deductible
difference
Calculate the deferred taxes
Identify the presentation and disclosure requirements
related to income taxes
2
3. IFRS requires an entity to recognize, at each
reporting date, the tax consequences expected
to arise in future periods in respect of:
the recovery of its assets,
settlement of its liabilities, and
other transactions and events
of current period recognized at that date.
3
4. Basic Concepts
Income tax: It includes all domestic and foreign taxes
which are based on taxable profits.
Accounting profit: It is profit or loss for a period
determined in accordance with IFRS
Taxable profit (tax loss): It is the profit (loss) for a
period, determined in accordance with income tax
law
4
6. Temporary differences arise when there is a
difference between the tax base and the
carrying amount of assets and liabilities.
Permanent differences are differences
between the tax and financial reporting of
revenue or expense items which will not be
reversed in future.
Since they are irreversible, permanent
differences do not give rise to deferred tax
assets or liabilities.
6
7. Temporary differences
Taxable temporary differences Deductible temporary differences
Differences that will increase
future taxable profit and so
give rise to taxable income in
the future
Differences that will decrease
future taxable profit and so
give rise to deductible amounts
in the future
Accounting base
Tax base
8. Balance Sheet Approach
IAS 12 considers deferred tax by taking a “balance
sheet approach” to the accounting problem
It considers temporary differences between the
carrying values and the tax base of assets and liabilities.
The tax base: The amount attributed to that asset or
liability for tax purposes
Carrying amount: The amount attributed to that asset
or liability as per IFRS
8
10. Carrying
Amount
Tax Base Assessment
Asset A 10 8 There is taxable temporary difference
(i.e., the entity recognizes a deferred
tax liability).
Asset B 8 10
There is deductible temporary
difference (i.e., the entity recognizes a
deferred tax asset).
Liability A 10 8
There is deductible temporary
difference (i.e., the entity recognizes a
deferred tax asset).
Liability B 8 10
There is taxable temporary difference
(i.e., the entity recognizes a deferred
tax liability).
10
11. Current tax:
income taxes payable (current tax
expense)or
the amount of income taxes recoverable
(current tax income) in respect of the tax loss
for a period
Tax expense (tax income): It is a combination of
current tax expense (current tax income)
and
deferred tax expense (deferred tax income).
11
12. Example 1
An asset that costs Br 600,000 has a carrying
amount of Br 430,000. Cumulative depreciation for
tax purposes is Br 200,000 and the tax rate is 30%.
1. What is the tax base of the asset?
2. What is the temporary difference?
3. Is it taxable or deductible temporary difference?
4. What is the deferred tax?
5. Is it a deferred tax asset or liability?
12
14. Example 2
At the beginning of 2013, GK Company purchased
equipment for Br 200,000. The equipment had a
carrying amount of Br 180,000 at the beginning of 2014
and Br 160,000 at the end of 2014. The accumulated
depreciation of the item as per the income tax law is Br
50,000 at the beginning of 2014 and Br 80,000 at the
end of 2014. The tax rate is 30%. The accounting
income before tax is Br 700,000 for 2013 and Br
900,000 for 2014.
14
15. 1. What was the tax base of the equipment for 2013
and 2014?
2. What is the taxable income for 2013 and 2014?
3. What is the temporary difference for 2013 and 2014?
Is it taxable or deductible temporary difference?
4. What is the deferred tax for 2013 and 2014? Is it
deferred tax asset or deferred tax liability?
5. What is the current tax expense for 2013 and 2014?
6. What is the deferred tax expense for 2013 and 2014?
7. What is the appropriate journal entry for 2013 and
2014?
15
16. Example 2 Solutions
End of 2013 End of 2014
Carrying value Br 180,000 Br 160,000
Tax base 150,000 120,000
Taxable temporary difference 30,000 40,000
Deferred tax liability (30%) 9,000 12,000
Taxable income 670,000 860,000
16
17. Journal entry at the end of 2013
Income tax expense—Current ………………. 201,000
Income tax expense—Deferred ……………... 9,000
Deferred tax liability…………………………….…………….... 9,000
Income taxes payable …………………………………………201,000
Journal entry at the end of 2014
Income tax expense—Current……………… 258,000
Income tax expense—Deferred ………...... 3,000
Deferred tax liability………………………………………….... 3,000
Income taxes payable …………………………………………258,000
17
19. Example 3
In 2014, its first year of operation, North Company
has pretax financial income of Br 250,000, a total of
Br 28,000 of taxable temporary differences, and a
total of Br 8,000 of deductible temporary
differences. The tax rate is 30%.
In 2015, North Company has pretax financial income
of Br 450,000, aggregate taxable and deductible
temporary differences of Br 75,000 and Br 36,000,
respectively, and the tax rate remains 30%.
19
20. Required:
1. Determine the taxable income for 2014
2. Make the necessary journal entries for 2014 to
record the deferred taxes
3. Determine the taxable income for 2015
4. Make the necessary journal entries for 2015 to
record the deferred taxes
20
21. Example 3 Solution
Taxable income for 2014 is computed as follows:
Pretax financial income Br 250,000
Taxable temporary differences (28,000)
Deductible temporary differences 8,000
Taxable income Br 230,000
21
22. The journal entry to record required amounts for 2014
is:
Income tax expense—Current…. 69,000
Income tax expense—Deferred .. 6,000
Deferred tax asset…………..….……… 2,400
Deferred tax liability……………….………..8,400
Income taxes payable ………….…………69,000
22
23. Taxable income for 2015 is computed as follows:
Pretax financial income Br 450,000
Taxable temporary differences (75,000)
Deductible temporary differences 36,000
Taxable income Br 411,000
23
24. For 2015
Deferred tax liability
Required balance at Dec 31, 2015 (Br 75,000 × 30%)…..Br 22,500
Balances at Dec 31, 2014…………………………………………….. 8,400
Adjustment required ……………………………………………….. Br 14,100
Deferred tax asset
Required balance at Dec 31, 2015 (Br 36,000 × 30%)…..Br 10,800
Balances at Dec 31, 2014…………………………………………………. 2,400
Adjustment required …………………………………………………… Br 8,400
Deferred tax expense (Br 14,100 - Br 8,400)……………. Br 5,700
24
25. The journal entry to record the deferred amounts for
2015 is:
Income tax expense—Current…. 123,300
Income tax expense—deferred….. 5,700
Deferred tax asset……………………. 8,400
Deferred tax liability………………………… 14,100
Income taxes payable ………….…………123,300
25
26. Example 4
Loan receivables has a carrying amount of Br 8 million
for which general bad debt provisions amounting to Br
100,000 have been made. These provisions have not
yet been deducted for tax purposes but are expected
to give rise to future deductible amounts.
1. What is the tax base of the receivable?
2. Is the temporary difference taxable or deductible?
26
27. Example 4 Solution
The tax base of the loan receivable is Br 8.1
million which results in a deductible
temporary difference of Br 100,000.
27
28. Example 5
Current liabilities include accrued fines and penalties
with a carrying amount of Br 500,000. What is the tax
base of such liabilities?
28
29. Example 5 Solution
Since it represents permanent difference (as
fines and penalties are not deductible for tax
purposes), the tax base of the accrued fines and
penalties is the carrying amount itself which
yields zero difference.
29
30. Assets carried at fair value: The difference between
the carrying amount of a revalued asset and its tax
base is a temporary difference and gives rise to a
deferred tax liability or asset
Example 6
A company has revalued its property on December 31,
2015. The revalued amount was Br 10 million. The
carrying value of the property before revaluation was
Br 8 million and the tax base of the property was Br 6
million. The profit tax rate is 30%.
What is the deferred tax liability on the property as
of that date?
30
31. Example 6 Solution
The carrying value after revaluation is Br 10
million, the tax base is Br 6 million, and the
income tax is 30%; therefore, the deferred tax
liability is Br 1.2 million (i.e., Br 10 million minus
Br 6 million multiplied by 30%).
31
32. Loss carry-forward
A deferred tax asset shall be recognized for the
carry forward of unused tax losses if it is
probable (“more likely than not”) that future
taxable profit will be available against which the
unused tax losses can be utilized.
32
33. Example 4
An entity has a tax loss of Br 8 million which can be
carried forward for 5 years. The estimated cumulative
taxable profits for the next five years are Br 6 million. It
is estimated that Br 2 million of the tax loss will expire
unused. The tax rate is 30%.
1. What is the deferred tax asset?
2. What is the journal entry?
33
34. Example 4 Solution
The entity recognizes a deferred tax asset of Br
1.8 million (Br 6 million x 30%)
Deferred Tax Asset…………… 1,800,000
Deferred Tax Income…………………1,800,000
34
35. Presentation
Current tax payable is always shown as a current
liability.
Deferred tax items cannot be shown as current
assets or current liabilities.
Current and deferred tax balances are to be shown
as separate items (offsetting is not allowed).
Deferred tax assets or liabilities should not be
discounted
35
36. Disclosure
current tax expense (or income);
any adjustments recognized in the period:
for current tax of prior periods;
from a previously unrecognized tax loss
from a previously unrecognized temporary
difference
the amount of deferred tax expense (or
income)
36
37. an explanation of the relationship between
tax expense (or income) and accounting
profit
a numerical reconciliation between the
average effective tax rate and the applicable
tax rate
37
