Chapter 17 Accounting for Taxation

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1.1 1.2 1.3 1.! 1.#

Objectives
Account for income taxes in accordance with HKAS 12. Record entries relating to income taxes in the accounting records. Explain the effect of taxable temporar differences on accounting and taxable profit. "alculate deferred tax amounts. Record deferred tax in the financial statements.

*n co m e ( ax

" u rrent ( ax

' eferred ( ax

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R e c o g n itio n $ % ea su re m e nt

& re s e n ta tion

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( em p o rar ' iffere n c es

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R e c o g n itio n

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2.
2.1

Current Tax ( ) under HKAS 12

efinitions .a/ .b/ Accounting profit 0 +et profit or loss for a period before deducting tax expense. Taxab!e profit "tax !oss# 0 (he profit .loss/ for a period1 determined in accordance with the rules established b the taxation authorities1 upon which income taxes are pa able .reco2erable/. Tax expense "tax inco$e# 0 (he aggregate amount included in the determination of net profit or loss for the period in respect of current tax and deferred tax. Current tax 0 (he amount of income taxes pa able .reco2erable/ in respect of the taxable profit .tax loss/ for a period.

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%ecognition and &easure$ent .a/ .b/ %ecognition 0 "urrent tax is recogni'ed as inco$e and expense and included in the income statement for the period. &easure$ent 0 (he are $easured at the a$ount expected to be paid to "recovered fro$# the tax authorities.

2.3

(xa$p!e 1 ) Over and under provision of current tax *n 2311 A)" "o had taxable profits of 41231333. *n pre2ious ear .2313/ income tax on 2313 profits had been estimated as 4331333. %e*uired+ "alculate tax pa able and the charge for 2311 if the tax due on 2313 profits was subse5uentl agreed with the tax authorities as6 .a/ 43#1333 .b/ 42#1333 (ax rate is 337. An under or o2er pa ments are not settled until the following ear8s tax pa ment is due. So!ution+

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.a/ *ncome tax )an9 )al. c:d 4 3#1333 !31333 ,#1333 .b/ *ncome tax )an9 *:S 0 o2erpro2ision )al. c:d 4 2#1333 #1333 !31333 ,31333 )al. b:d *:S .1231333 x 337/ 4 331333 !31333 ,31333 )al. b:d *:S 0 underpro2ision *:S .1231333 x 337/ 4 331333 #1333 !31333 ,#1333

2.!

(xa$p!e 2 ) Tax !osses carried bac, *n 2313 )"" "o paid 4#31333 in tax on its profits. *n 2311 the compan made tax losses of 42!1333. (he local tax authorit rules allow losses to be carried bac9 to offset against current tax of prior ears. %e*uired+ Show the tax charge and tax liabilit for 2311. So!ution+ (ax repa ment due on tax losses ; 337 x 42!1333 ; 4,1233 (he double entr will be6 (ax recei2able .S<&/ (ax repa ment .*:S/ 'r .4/ ,1233 "r.4/ ,1233

(he tax recei2able will be shown as an asset until the repa ment is recei2ed from the

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tax authorities. 2.# -resentation .a/ .b/ *n the statement of financial position1 tax assets and !iabi!ities should be sho.n separate!/ from other assets and liabilities. "urrent tax assets and liabilities can be offset1 but this shou!d happen on!/ .hen certain conditions app!/. .i/ (he enterprise has a !ega!!/ enforceab!e right to set off the recogni=ed amounts. .ii/ (he enterprise intends to sett!e the a$ounts on a net basis 1 or to rea!i'e the asset and sett!e the !iabi!it/ at the sa$e ti$e. (he tax expense .income/ related to the profit and loss from ordinar acti2ities should be shown on the face of the income statement.

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3.1

eferred Tax ( ) ) 1ntroduction

'eferred tax is an application of the $atching concept. >nder the matching concept1 the tax conse5uences of a transaction or other e2ent should be recognised at the same time as the underl ing transaction or other e2ent is recognised. (herefore1 if those tax conse5uences are not recognised through the recognition of current tax in the period1 i.e. the tax authorities will not ac9nowledge the transactions until a future period1 the need to be recognised in the financial statements b accounting for deferred tax. 'eferred tax is a basis of allocating tax expense to particular accounting periods. (he 9e to deferred tax !ies in the differences between the t.o concepts of profit6 the accounting profit and the taxab!e profit. (he two figures of profit are unli9el to be the same because of per$anent differences and te$porar/ differences. efinitions .a/ .b/ eferred tax !iabi!ities are the amounts of income taxes pa able in future periods in respect of taxable temporar differences. eferred tax assets are the amounts of income taxes reco2erable in future periods in respect of6 .i/ 'eductible temporar differences .ii/ (he carr forward of unused tax losses

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3.3

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.iii/ (he carr forward of unused tax credits ./ -er$anent differences ( ) are items included in the accounting profit that will never be taxed or a!!o.ed as reductions1 for example1 di2idends1 non-business entertainment .disallowable/ and traffic fines .disallowable/. &ermanent differences will not re2erse in future periods and thus gi2e rise to no tax effects in other periods. Te$porar/ differences ( ) are differences between the carr ing amount of an asset or liabilit in the statement of financial position and its tax base. (emporar differences ma be either6 .i/ taxab!e te$porar/ difference . / will result in an increase in inco$e tax pa/ab!e in future reporting periods 1 and gi2e rise to a deferred tax !iabi!it/. .ii/ deductib!e te$porar/ difference . / will result in a decrease in inco$e tax pa/ab!e in future reporting periods1 and gi2e rise to a deferred tax asset. Tax base ( ) 0 the tax base of an asset or liabilit is the amount attributed to that asset or liabilit for tax purposes.

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(xa$p!es of taxab!e te$porar/ differences .a/ (ransactions affecting the inco$e state$ent6 .i/ 1nterest revenue recei2ed in arrears1 included in the accounting profit on a time apportionment basis but taxable on a cash basis. .ii/ epreciation of an asset is accelerated for tax purposes. .iii/ eve!op$ent costs ha2e been capitali=ed and will be amortised to the income statement but were deducted for tax purposes as incurred. .i2/ -repaid expenses ha2e alread been deducted on a cash basis for tax purposes but are to be charged in the income statement in a later period. .b/ (ransactions affecting the state$ent of financia! position .i/ Current invest$ents are carried at fair 2alue which exceeds cost but remain at cost for tax purposes. .ii/ 2on3current assets are re2alued upwards for accounting purposes with no ad?ustment for tax purposes. (xa$p!es of deductib!e te$porar/ differences .a/ Accu$u!ated depreciation of an asset in the financial statements is greater than the cumulati2e depreciation allowed up to the balance sheet date for tax purposes. .b/ (he net rea!i'ab!e va!ue of an ite$ of inventor/4 or the recoverab!e amount
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of an item of propert 1 plant or e5uipment1 is less than the pre2ious carr ing amount and an enterprise therefore reduces the carr ing amount of the asset1 but that reduction is ignored for tax purposes until the asset is sold. %esearch costs .or organi=ation or other start up cost/ are recognised as an expense in determining accounting profit but are not permitted as a deduction in determining taxable profit until a later period. 1nco$e is deferred in the state$ent of financia! position but has alread been included in taxable profit in current or prior periods.

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eferred Tax ) %ecognition and &easure$ent

%ecognition HKAS 12 pro2ides that6 .a/ a deferred tax !iabi!it/ shall be recogni'ed for a!! taxab!e te$porar/ differencesA .b/ a deferred tax asset shall be recogni'ed for a!! deductib!e te$porar/ differences to the extent that it is probable that taxable profit will be a2ailable against which the deductible temporar difference can be utili=ed.

"A# !.2

Te$porar/ differences arising fro$ state$ent of financia! position ite$s %ost of the taxab!e te$porar/ differences and deductib!e te$porar/ differences arise because of the difference bet.een the carr/ing a$ount and the tax base of assets and !iabi!ities in the state$ent of financia! position. Tax base of assets HKAS 12 pro2ides that the tax base of an asset is the amount that will be deductible for tax purposes against an taxable economic benefit that will flow to an entit when it reco2ers the carr ing amount of the asset. (xa$p!e 0 ) Accounting depreciation and tax depreciation A)" Btd .with 31 'ecember accounting ear-end/ bought a machiner at a cost of 43331333 on 1 Canuar 2311. <or accounting purposes1 the cost of the machiner is to be depreciated using the

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straight-line method o2er fi2e ears. Assume that tax rules allow the cost of machiner to be claimed o2er three ears commencing 2311 on straight-line method. "omparing the carr ing amount and the tax base of the machiner will ield the following taxable temporar differences .assume a tax rate of 2#7/6 Dear "arr ing amount .4/ 2!31333 1E31333 1231333 @31333 3 (ax base .4/ 2331333 1331333 3 3 3 (axable temporar differences .4/ !31333 E31333 1231333 @31333 3 'eferred tax liabilit .4/ 131333 231333 331333 1#1333 3

2311 2312 2313 231! 231#

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(xa$p!e 5 ) 1nterest inco$e ) Btd .with 31 'ecember accounting ear-end/ recogni=es interest income on accrual basis. Fn 31 'ecember 23111 ) Btd accrues for an interest income recei2able of 41331333. <or tax purposes1 the interest is taxable on a cash basis. "omparing the carr ing amount and the tax base of the interest recei2able account will ield a taxable temporar difference .assume a tax rate of 2#7/6 Dear "arr ing amount .4/ 1331333 (ax base .4/ 3 (axable temporar differences .4/ 1331333 'eferred tax liabilit .4/ 2#1333

2311

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(xa$p!e 6 ) Trade receivab!e " Btd has recorded a trade recei2able account of 42331333 in its statement of

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financial position as at 31 'ecember 2311 arising from sales for the ear. <or tax purposes1 the tax base of the trade recei2able account is 42331333. Since the carr/ing a$ount of the trade receivab!e account e*ua!s its tax base 1 there is ni! te$porar/ differences. Accordingl 1 there will be no deferred tax liabilit as at 31 'ecember 2311. Dear "arr ing amount .4/ 2331333 (ax base .4/ 2331333 (axable temporar differences .4/ 3 'eferred tax liabilit .4/ 3

2311

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(xa$p!e 7 ) 8oan receivab!e ' Btd as a loan recei2able account of 4#331333 in its balance sheet as at 31 'ecember 2311. >nder the tax rules1 the granting and subse*uent repa/$ent of the !oan has no tax conse*uences. *n this case1 since the !oan is not taxab!e1 the tax base of the loan recei2able amount is deemed to be e5ual to its carr ing amount of 4#331333. (here is thus no te$porar/ difference1 and conse5uentl 1 no deferred tax liabilit :asset.

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(xa$p!e 7 ) ividend receivab!e E Btd has a di2idend recei2able account of 41331333 in its balance sheet as at 31 'ecember 2311. Assuming the di2idend is paid out of the exempt profit of the in2estee1 the dividend .i!! not be taxab!e at the hand of E Btd under the rele2ant tax rules. *n this case1 since the di2idend income is not taxable1 the tax base of the dividend receivab!e account is dee$ed to be e*ua! to its carr/ing a$ount of 41331333.

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(here is thus no te$porar/ difference1 and conse5uentl 1 no deferred tax liabilit . (b) !.G Tax base of liabilities HKAS 12 pro2ides that the tax base of a liabilit is its carr ing amount1 less an amount that will be deductible for tax purposes in respect of that liabilit in future periods.

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(xa$p!e 9 ) Accrued expense pa/ab!e A)" Btd has an accrued expense pa able account of 4131333 in its statement of financial position as at 31 'ecember 2311. <or tax purpose1 the related expense will be deductible on cash basis. "omparing the carr ing amount and the tax base of the accrued expense pa able account will ield a deductib!e te$porar/ difference of 4131333 as at 31 'ecember 2311. .Assume a rate of 2#7/ Dear "arr ing amount .4/ 131333 (ax base .4/ 3 'eductible temporar differences .4/ 131333 'eferred tax asset .4/ 2#1333

2311

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(xa$p!e : ) Accrued expense pa/ab!e A)" Btd has an accrued expense pa able account of 4131333 in its statement of financial position as at 31 'ecember 2311. <or tax purpose1 the related expense has alread been deducted. "omparing the carr ing amount of the accrued expense pa able account e5uals its tax base1 there is ni! te$porar/ difference. Accordingl 1 there will be no deferred tax asset as at 31 'ecember 2311. Dear "arr ing amount (ax base 'eductible temporar differences 'eferred tax asset

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.4/ 2311 131333

.4/ 131333

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(xa$p!e 1; ) %ent received in advance A)" Btd has a rent recei2ed in ad2ance account of 4131333 in its statement of financial position as at 31 'ecember 2311. <or tax purpose1 the rental income was taxed on cash basis. "omparing the carr ing amount and the tax base of the rent recei2ed in ad2ance account will ield a deductib!e te$porar/ difference of 4131333 as at 31 'ecember 2311 .assume a tax rate of 2#7/. Dear "arr ing amount .4/ 131333 (ax base .4/ 3 'eductible temporar differences .4/ 131333 'eferred tax asset .4/ 21#33

2311

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<or a liabilit which embodies re2enue:expense which are not taxab!e<deductib!e1 the tax base of the !iabi!it/ shall be dee$ed to be e*ua! to its carr/ing a$ount. (xa$p!e 11 ) -ena!t/ %+F Btd has accrued for a penalt imposed b the go2ernment of 4131333 in its statement of financial position as at 31 'ecember 2311. <or tax purpose1 the penalt is not deductible .permanent difference/. *n this case1 since the penalt is not deductible1 the tax base of the penalt pa able account is deemed to be e5ual to its carr ing amount of 4131333. "omparing the carr ing amount and the tax base of the penalt te$porar/ difference as at 31 'ecember 2311. Dear "arr ing amount .4/ (ax base .4/ 'eductible temporar differences .4/ will ield no

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'eferred tax asset .4/

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2311

131333

131333

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Su$$ar/ *t ma be useful to re$e$ber the funda$enta! princip!e upon which HKAS 12 is based6 that an entit shall1 with certain limited exceptions1 recogni'e a deferred tax liabilit :asset .henever recover/ or sett!e$ent of the carr/ing a$ount of an asset or a !iabi!it/ would $a,e the future tax pa/$ents !arger<s$a!!er than the would be if such reco2er or settlement were to ha2e no tax conse5uences.

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(xercise 1 Assume that HDI Btd commenced operation in Canuar 2311. *ts statement of financial position as at 31 'ecember 2311 showed the following rele2ant items6 .a/ .b/ .c/ carr ing amount of machiner of 4!313331333A pro2ision for doubtful debt of 4213331333A and pro2ision for warrant of 4113331333.

<or tax purposes6 .a/ the tax written down 2alue of the machiner is 43#13331333A .b/ the pro2ision for doubtful debt is deemed to be a general pro2ision and is not allowed deduction until it becomes a specific pro2isionA and .c/ the warrant is deductible onl when incurred. %e*uired+ "alculate the deferred tax liabilit :asset and prepare the ?ournal entries for the abo2e items. So!ution+

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Te$porar/ difference arising fro$ reva!uation of assets >nder the Hong Kong tax rules1 re2aluation of an item of propert 1 plant and e5uipment under HKAS 1@ does not affect the tax base of the asset and the re2aluation surplus is not taxable in the period of re2aluation. Howe2er1 assuming the future reco2er of the carr ing amount with result in an inflow of taxable economic benefits to the entit and the amount that will be deductible for tax purpose will differ from the amount of those economic benefits1 the difference between the carr ing amount of a re2alued asset and in tax base is a temporar difference. HKAS 12 re5uires such temporar differences to be recogni=ed as deferred tax liabilit or asset. Assuming the gain<"!oss# on sa!e of asset is taxab!e<"deductib!e# 1 when an asset is reva!ued up.ards and subse*uent!/ so!d at this reva!ued a$ount 1 there will be a taxab!e profit and additiona! tax to be paid. Fn the other hand1 when an asset is reva!ued do.n.ards and subse*uent!/ recovered at this reva!ued a$ount4 there .i!! be tax deductions and !ess tax to be paid. (hus1 when an asset is re2alued .upwards and downwards/1 it affects the entit 8s tax bills in the future1 a deferred tax liabilit : asset has to be accounted for. Since reva!uation reserve is accounted for direct!/ in e*uit/ 1 the deferred tax effect thereof shall also be accounted for direct!/ in e*uit/. (xa$p!e 12 ) %eva!uation of non3current assets A) Btd ac5uires a piece of land as an in2estment propert in 23H# at a cost of 41313331333. Fn 31 'ecember 23111 the land is re2alued to 41213331333. Assume that when the in2estment propert is sold1 the profit thereof will attract tax at a rate of 2#7. *n this case1 when the land is re2alued1 it gi2es rise to a temporar difference of 42133313331 being the difference between the carr ing amount of 41213331333 and the tax base of 41313331333. .Alternati2el 1 when the land is re2alued and subse5uentl reco2ered at 412133313331 it will gi2e rise to a taxable profit of 4213331333 and an additional tax to be paid1 and therefore a deferred tax liabilit should be recogni=ed at the date of re2aluation./ (hus1 a deferred tax liabilit of

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4#331333 .4213331333 x 2#7/ should be recogni=ed. Since the re2aluation surplus is recorded directl in re2aluation reser2e1 the deferred tax liabilit should similarl be ta9en directl to re2aluation surplus. "onse5uentl 1 the re2aluation in 23H@ will be recorded as follows6 'r. .4/ 213331333 #331333 #331333 "r. .4/ 213331333

Band Re2aluation surplus Re2aluation surplus 'eferred tax liabilit

Subse5uentl 1 how the deferred tax liabilit is accounted for depends on whether or not the gain on sale of land is taxable. Scenario 1 Assume that the land is sold in 2312 for 413133313331 and the profit thereof attracts tax at the rate of 2#7. *n this case1 the taxable profit will be 4313331333 .41313331333 0 41313331333/1 and the tax pa able will be 4,#31333 .4313331333 x 2#7/. Howe2er1 the accounting profit will onl be 4113331333 .41313331333 0 41213331333/1 and the tax expense thereof shall be 42#31333 .4113331333 x 2#7/. (he ?ournal entries to record the sale of land and the tax effect thereof will be as follows6 'r. .4/ 1313331333 "r. .4/ 1213331333 113331333

"ash Band *:S 0 Jain on sale of land .(o record gain on sale of land/

Re2aluation reser2e Retained profit

'r. .4/ 11#331333

"r. .4/ 11#331333

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.(o record reali=ation of re2aluation surplus/ 'r. .4/ 2#31333 #331333 "r. .4/

(ax expense 'eferred tax liabilit (ax pa able .(o record tax effect on gain on sale of land/

,#31333

Scenario 11 Assume that the land is sold in 2312 for 413133313331 and the profit thereof is not taxab!e. (he deferred tax liabilit pre2iousl pro2ided for should be re2ersed. *n this case1 the ?ournal entries related to the sale of land and the tax effect thereof will be as follows6 'r. .4/ "r. .4/ "ash 1313331333 Band 1213331333 *:S 0 Jain on sale of land 113331333 .(o record gain on sale of land/ 'r. .4/ #331333 "r. .4/

'eferred tax liabilit Re2aluation reser2e #331333 .(o record the re2ersal of the deferred tax liabilit pre2iousl pro2ided for./ 'r. .4/ 11#331333 "r. .4/ 11#331333

Re2aluation reser2e Retained profit .(o record reali=ation of re2aluation surplus./

"C# (a) !.23

Other issues Changes in tax rates Khere the corporate rate of inco$e tax f!uctuates fro$ one /ear to another 1 a problem arises in respect of the amount of deferred tax to be credited .debited/ to the

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statement of comprehensi2e income in later ears. HKAS 12 re5uires deferred tax assets and liabilities to be $easured at the tax rates expected to app!/ in the period .hen the assets is rea!i'ed or !iabi!it/ sett!ed 1 based on tax rates and laws enacted at the end of the reporting period. *n other words1 HKAS 12 re5uires the liabilit method to be used. (xa$p!e 10 ) Changes in tax rates *n +o2ember 23111 the go2ernment announced that the tax rate which has been 2E71 will be lowered to 2#7 effecti2e from 1 Canuar 2312. A Btd has to a taxable profit of 41331333 for the ear ended 31 'ecember 2311. *ts taxable temporar differences ha2e increased from 4#31333 as at 31 'ecember 2313 to 4@31333 as at 31 'ecember 2311. *n this case1 the current tax pa able will be 42E13331 measured based on 2E7. (he deferred tax liabilit as at 31 'ecember 2311 will be 41#1333 .4@31333 x 2#7/1 measured based on 2#7. .(he deferred tax liabilit as at 31 'ecember 2313 was 41!1333 .4#31333 x 2E7//. (he ?ournal entr to record the tax expense will be as follows6 'r. .4/ 2G1333 "r. .4/ 11333 2E1333

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(ax expense 'eferred tax liabilit (ax pa able

(he tax expense charged to the income statement for the ear ended 31 'ecember 2311 will therefore be 42G1333. *n the statement of financial position as at 31 'ecember 23111 the current tax pa able will be carried at 42E13331 and the deferred tax liabilit will be carried at 41#1333. (b) !.2@ Discounting HKAS 12 states that deferred tax assets and liabilities shou!d not be discounted because the complexities and difficulties in2ol2ed will affect reliabilit . 'iscounting would re5uire detailed scheduling of the timing of the re2ersal of each temporar

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difference1 but this is often impracticable.

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isc!osure
(he main disclosure are6 .a/ (he tax expense .income/ should be presented on the face of the income statement. .b/ (he ma?or components of tax expense .income/ should be disclosed separatel in a note. .c/ "urrent and deferred tax charged:credited directl to e5uit . .d/ (he amount of income tax relating to each component of other comprehensi2e income. .e/ An explanation of the relationship between tax expense .income/ and accounting profit in either or both of the following forms6 .i/ a numerical reconciliation between tax expense .income/ and the profit of accounting profit multiplied b the applicable tax rate.s/1 disclosing also the basis on which the applicable tax rate.s/ is .are/ computed. .ii/ a numerical reconciliation between the a2erage effecti2e tax rate and the applicable tax rate1 disclosing also the basis on which the applicable tax rate is computed.

(xa$ination St/!e >uestions

>uestion 1 Culian recognised a deferred tax liabilit for the ear end 31 'ecember 23H3 which related solel to accelerated tax depreciation on propert 1 plant and e5uipment at a rate 337. (he net boo9 2alue of the propert 1 plant and e5uipment at that date was 43131333 and the tax written down 2alue was 42331333. (he following data relates to the ear ended 31 'ecember 23H!6 .i/ At the end of the ear the carr ing 2alue of propert 1 plant and e5uipment was 4!@31333 and their tax written down 2alue was 42,31333. 'uring the ear some items were re2alued b 4G31333. +o items had pre2iousl re5uired re2aluation. *n the tax ?urisdiction in which Culian operates re2aluations of assets do not affect the tax base of an asset or taxable profit. Jains due to re2aluations are taxable on sale. Culian began de2elopment of a new product during the ear and capitalised 4@31333 in
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accordance with *AS 3E. (he expenditure was deducted for tax purposes as it was incurred. +one of the expenditure had been amortised b the ear end. .iii/ CulianLs income statement showed interest income recei2able of 4##13331 but onl 4!#1333 of this had been recei2ed b the ear end. *nterest income is taxed on a receipts basis. .i2/ 'uring the ear1 Culian made a pro2ision of 4!31333 to co2er an obligation to clean up some damage caused b an en2ironmental accident. +one of the pro2ision had been used b the ear end. (he expenditure will be tax deductible when paid. (he corporate income tax rate recentl enacted for the following ear is 337 .unchanged from the pre2ious ear/. (he current tax charge was calculated for the ear as 4!#1333. "urrent tax is settled on a net basis with the national tax authorit . %e*uired+ .a/ &repare a table showing the carr ing 2alues1 tax bases and temporar differences for each for the items abo2e at 31 'ecember 23H!. .b/ &repare the income statement and statement of financial position notes to the financial statements relating to deferred tax for the ear ended 31 'ecember 23H!. >uestion 2 .a/ Explain1 with examples1 the nature and purpose of deferred taxation. .13 mar9s/ .b/ (he information below relates to J for the ear ended 31 %arch 23H3. (he balance on the pro2ision for deferred taxation account at 1 April 23H2 was 43#1333. (his represented taxation at 3#7 on cumulati2e timing differences of 41331333 at 1 April 23H2. "apital allowances .tax depreciation/ and depreciation for the ear ending 31 %arch 23H3 are as follows. "apital allowances 4333 23H3 .actual/ 133 'epreciation 4333 G3

(he income tax rate for 23H3 is 337 and is expected to remain at this le2el for the

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foreseeable future. %e*uired+ State1 with reasons1 how to account for deferred tax in the ear ended 31 %arch 23H3. .# mar9s/ .(otal 1# mar9s/ >uestion 0 .a/ HKAS 12 *ncome (axes details the re5uirements relating to the accounting treatment of deferred taxes. %e*uired+ Explain wh it is considered necessar to pro2ide for deferred tax and briefl outline the principles of accounting for deferred tax contained in HKAS 12 *ncome taxes. .! mar9s/ .b/ )owtoc9 purchased an item of plant for 4213331333 on 1 Fctober 23H3. *t had an estimated life of eight ears and an estimated residual 2alue of 4!331333. (he plant is depreciated on a straight-line basis. (he tax authorities do not allow depreciation as a deductible expense. *nstead a tax expense of !37 of the cost of this t pe of asset can be claimed against income tax in the ear of purchase and 237 per annum .on a reducing balance basis/ of its tax base thereafter. (he rate of income tax can be ta9en as 2#7. %e*uired+ *n respect of the abo2e item of plant1 calculate the deferred tax charge:credit in )owtoc9Ls income statement for the ear to 33 September 23H3 and the deferred tax balance in the statement of financial position at that date. .@ mar9s/ +ote. Kor9 to the nearest 4L333. .(otal ; 13 mar9s/ .Amended A""A 2.# <inancial Reporting 'ecember 2333 M#.a// >uestion 5 A) ac5uired non-current assets on 1 April 2333 costing 42#31333. (he assets 5ualified for accelerated first ear tax allowance at the rate of #37 for the first ear. (he second and subse5uent ears were at a tax depreciation rate of 2#7 per ear on the reducing balance
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method. A) depreciates all non-current assets at 237 a ear on the straight line basis. (he rate of corporate income tax appl ing to A) for 2333:3! and 233!:3# was 337. Assume A) has no other 5ualif ing non-current assets. %e*uired+ Appl HKAS 12 *ncome (axes and calculate6 .i/ the deferred tax balance re5uired at 31 %arch 233!A .ii/ the deferred tax balance re5uired at 31 %arch 233#A .iii/ the charge to the income statement for the ear ended 31 %arch 233#. .# mar9s/ .Adapted "*%A &, <inancial Accounting and (ax &rinciples %a 233# M2.a// >uestion 6 )"1 a small entit 1 purchased its onl non-current tangible asset on 1 Fctober 2333. (he asset cost 4G3313331 all of which 5ualified for tax depreciation. )"8s asset 5ualified for an accelerated first ear tax allowance of #37. (he second and subse5uent ears 5ualified for tax depreciation at 2#7 per ear on the reducing balance method. )"8s accounting depreciation polic is to depreciate the asset o2er its useful economic life of fi2e ears1 assuming a residual 2alue of 4#31333. Assume that )" pa s tax on its income at the rate of 337. "alculate )"8s deferred tax balance re5uired in the balance sheet as at 33 September 233# according to HKAS 12 *ncome taxes. .! mar9s/ .Adapted "*%A &, <inancial Accounting and (ax &rinciples +o2ember 233# M1.,/ >uestion 7
"D had the following amounts for 2333 to 233#6
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Dear ended 31 'ecember6 Accounting depreciation for the ear (ax depreciation allowance for the ear

2333 4 11@33 21123

233! 4 11#G3 11E@3

233# 4 11#33 11323 231333 #1333 121#33

At 31 'ecember 23321 "D had the following balances brought forward6 "ost of propert 1 plant and e5uipment 5ualif ing for tax depreciation Accounting depreciation (ax depreciation

"D had no non-current asset ac5uisitions or disposals during the period 2333 to 233#. Assume the corporate income tax rate is 2#7 for all ears. "alculate the deferred tax pro2ision re5uired b HKAS 12 N*ncome (axesO at 31 'ecember 233#. .3 mar9s/

.Adapted "*%A &, <inancial Accounting and (ax &rinciples %a 233@ M1.E/ >uestion 7
Fn 31 %arch 233@1 "H had a credit balance brought forward on its deferred tax account of 4@!21333. (here was also a credit balance on its corporate income tax account of 43113331 representing an o2erestimate of the tax charge for the ear ended 31 %arch 233#. "H8s taxable profit for the ear ended 31 %arch 233@ was 4G!@1333. "H8s directors estimated the deferred tax pro2ision re5uired at 31 %arch 233@ to be 4,#G1333 and the applicable income tax rate for the ear to 31 %arch 233@ as 227. "alculate the income tax expense that "H will charge in its income statement for the ear ended 31 %arch 233@1 as re5uired b *AS 12 *ncome (axes. .3 mar9s/

.Adapted "*%A &, <inancial Accounting and (ax &rinciples %a 233@ M1.23/ >uestion 9
A go2ernment wanted to encourage in2estment in new non-current assets b entities and decided to change tax allowances for non-current assets to gi2e a 1337 first ear allowance on all new noncurrent assets purchased after 1 Canuar 233#. E' purchased new machiner for 4!331333 on 1 Fctober 233# and claimed the 1337 first ear allowance. <or accounting purposes E' depreciated the machiner on the reducing balance basis at 2#7 per ear. (he rate of corporate income tax to be applied to E'8s taxable profits was 227. Assume
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E' had no other temporar differences. "alculate the amount of deferred tax that E' would show in its balance sheet at 33 September 233,. Assume E' had no other temporar differences. "alculate the amount of deferred tax that E' would show in its balance sheet at 33 September 233,. .3 mar9s/

.Adapted "*%A &, <inancial Accounting and (ax &rinciples +o2ember 233, M1.13/ >uestion : ) Te$porar/ differences of assets
(he cost of a machine is HK4113331333. (he carr ing amount of the machine is HK4E3313331 after deducting accumulated depreciation of HK42331333. (he machine is used with other assets to generate taxable operating income. <or tax purposes1 capital allowance of HK43331333 has alread been deducted in the current and prior periods and the remaining tax written 2alue of HK4,331333 will be deductible in future periods1 either as annual capital allowances or a deduction on disposal.

%e*uired+ .a/ .b/ *s there an temporar difference associated with the machineP Explain our answer in detail. How would our answer be different if the carr ing amount of the machine is HK4#331333P

>uestion 1; ) Te$porar/ differences of !iabi!ities (he balance sheet of a reporting entit has the following liabilities6 .1/ an interest pa able with a carr ing amount of HK413313331 the whole amount of which will be deductible for tax purposes when it is paidA .2/ a foreign currenc loan pa able with a carr ing amount of HK4G331333. Fn initial recognition1 the carr ing amount of the foreign currenc loan was HK4113331333. (he carr ing amount was subse5uentl reduced to HK4G331333 to reflect the change in exchange rates1 that is1 a foreign exchange gain was recognised. *n accordance with the rele2ant tax regulations1 exchange gains are taxable onl when the are realised1 that is1 when the entit settles the foreign currenc loanA and .3/ interest recei2ed in ad2ance with a carr ing amount of HK413313331 which has been taxed when the interest was recei2ed.
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%e*uired+ .a/ .b/ *s there an temporar difference associated with these liabilitiesP Explain our answer in detail. How would our answer in a/ for item 3/ be different if the interest recei2ed in ad2ance is not taxable1 either when the interest was recei2ed or in the future period when the interest is recognised as re2enueP .c/ How would our answer in a/ for item 3/ be different if the interest recei2ed in ad2ance has not been taxed when the interest was recei2ed1 but will be taxed in the future period when the interest is recognised as re2enueP >uestion 11 ) &easure$ent of eferred Tax Assets and 8iabi!ities An item of propert 1 plant and e5uipment was ac5uired in 2332 at a cost of HK413313331333. At 31 'ecember 233@1 the accumulated depreciation was HK42313331333 and the asset was re2alued for the first time to HK41#313331333. 'epreciation charge for the HK4#13331333. ear ended 31 'ecember 233@ was

(he re2aluation was disregarded for tax purposes and the cumulati2e depreciation for tax purposes at 31 'ecember 233@ was HK43313331333. *f the asset were sold for an amount greater than or e5ual to cost1 the cumulati2e tax depreciation of HK43313331333 would ha2e been included in the taxable amount1 but sales proceeds in excess of cost would not be taxable .the asset is not sub?ect to capital gain tax/. 'epreciation charge for the HK41313331333. (ax rate is 337. ear ended 31 'ecember 233@ for tax purposes was

%e*uired+ .a/ .b/ Account for an deferred tax arising during the ear ended 31 'ecember 233@1 assuming that the carr ing amount of the asset will be reco2ered through use. How would our answer in 1/ be different if the entit decided to dispose of the asset and the carr ing amount of the asset will be reco2ered through sale .owner-occupation ended at 31 'ecember 233@/P .c/ .d/ How would our answer in 1/ be different if the sales proceeds in excess of the cost of the asset would be taxed at !37P How would our answer in 2/ be different if the sales proceeds in excess of the cost of the asset would be taxed at !37P Assume the entit has adopted HKAS 12 *ncome (axes since 2332.
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Explain our calculations where it is necessar .

>uestion 12 ) &easure$ent of eferred Tax Assets and 8iabi!ities An entit is in a ?urisdiction where income taxes are pa able at a higher rate of #37 on undistributed profits and a lower rate of 3#7 on distributed profits. (he difference is refundable when profits are distributed. At the balance sheet date1 the entit does not recognise a liabilit for di2idends of HK41331333 declared after the balance sheet date. (axable income for the ear is HK4113331333. (he net taxable temporar difference for the ear is HK4!331333.

%e*uired+ How should the entit account for the current and deferred taxes in relation to the di2idends in its financial statements for the current and subse5uent periodP

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