Prepared by J ohn Andrews aka Paddingtonbear

IAS 12 Taxation Current & Deferred Tax

IAS 12 covers current tax in general terms : general principles :
CT is recognised in SoCI . . . unless tax relates to items accounted for in equity
Tax rates used are those enacted by reporting date

CT is tax payable on gains/losses in year +adjustments to tax payable in previous year

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CT and Di vidends :
Outgoing & incoming dividends & interest should NOT include tax credit but SHOULD include tax credits with
parent tax

Tax credit is notional credit given to UK company when it pays dividends
So . . Dividends from UK companies . . Are reported as the CASH amount recei vable / payable

WITHHOLDING TAX is tax on dividends . . . deducted by the payer & paid direct to HMRC on behalf of the
dividend recipient. E.g. UK companies will deduct tax when paying dividends to overseas shareholders.


Illustration :
Paddingtonbear ltd has operating profit of 2m
The company pays debenture interest of 400,000 cash to debenture holders after deduction at source of
100,000 income tax.
The company receives cash dividend of 300,000 from shares it owns in another UK company

The interest cost included in SoCI of Paddingtonbear is the gross amount of 500,000.

Income tax deducted at source is paid over to HMRC quarterly.

Investment income is the 300,000 received OCI

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Under / over provisions : the figure for income tax on profits :
Estimate of the amount that will be eventually paid
Goes to C.L. in SoFP

Dealt with in the followings years tax charge :
Under provision increases the charge
Over provision decreases the charge



Illustration : U / O Provision for Tax
Income tax provision for (31/05/2005) 316,000
Income tax paid (28/02/2006) 263,000
Income tax charge at 30% for y/e (31/05/2006) 383,500

Show entries in income tax account and SoCI for year to 31/05/2006

Dr Income Tax Cr
28/02/2006 263,000 01/06/2005 316,000
31/05/2006 53,000
316,000 316,000
Bal 31/05/2006 53,000

As a t 31/05/2006 before accounting for the current year tax provision, there is already a credit balance on the
income tax a/c due to an over provision of 53,000 from previous year.

This is adjusted for by Cr SoCI for y/e (31/05/2006) with the over provision form last year of 53,000 and Dr
SoCI with current year tax provision of 383,500.

Dr Income Tax Cr
31/05/2006 SoCI 53,000 31/05/2006 bal c/f 53,000

31/05/2006 bal c/f 383,500 31/05/2006 SoCI 383,500
436,500 436,500
01/06/2006 Bal b/f 383,500


Extract ; SoCI for y/e 31/05/2006
Profit x
Tax (330,500)
PAT x


Note to Financial Statements
Income Tax at 30% dr 383,500
Over provision in previous year cr (53,000)
bal 330,500

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Deferred Tax (DT)

Deferred tax : the estimated future tax consequences of transactions and events recognised in financial
statements of current & previous periods

Transactions already recognised in accounts have future tax consequences because of differences arising
between reported PBT and taxable profits

DT is a basis of allocating tax charges to accounting periods : Key to DT is in 2 concepts of profit:

Accounting Profit PBT reported to shareholders in accounts . . . .accruals concept

Taxable Profit profit figure on which HMRC base tax calculations . . . . Tax principles, rules, legislation




Why bother with DT?
Matching of tax expense with economic income earned . . . . . When an event is recognised the tax
consequence of that event should also be recognised i.e. match tax to the same financial period

Illustration : Computation of Tax Expense with & without DT

With DT Tax comp Without DT
Year 1 Year 2 Year 1 Year 2

200 300 Pre tax book income 200 300
0 0 +/- permanent differences 0 0
+100 - 100 +/- temporary differences +100 - 100
300 200 = taxable income 300 200
35% 35% * tax rate 35% 35%
105 70 = current tax expense 105 70
-35 +35 + DT expense or benefit 0 0
70 105 = TATAL TAX EXPENSE 105 70

35% 35% ETR expected tax rate
(105/200)
52.5%
(70/300)
23.3%
Deferring tax &
matching to
when income is
earned







Key terms & concepts :
The difference between accounting profit and tax profit is caused by : Permanent & Temporary difference

Permanent Differences :
One off differences between accounting & tax profits caused by certain items not being taxable
Only impact tax comp of one period
No DT consequences
Client entertainment expenses


Temporary / Timing Differences :
Difference between tax basis of asset/liability and its reported amount resulting in taxable or deductible
amounts in future years when the reported amount is recovered/settled

Revenues or gains that are taxable before or after they are recognised in accounts . .

Expenses or losses that are deductible before or after they are recognised in accounts

Patent royalties
Difference between depreciation charged on NCA that qualifies for tax allowance and the actual allowances
given


IAS 12 states all timing differences must be provided for in full . . [DT -/+ (timing diff * tax rate)= DT
For each period calculate DT . . increases or decreases are dealt with in SoCI (see examples 2 & 3)






Illustration :
At 30/09 Paddingtonbear has NCA with a CV of 1,100,000 but a tax WDV of 700,000
The b/f balance on the DT account is 300,000. Assume tax rate 30%

Compute effect of DT on the financial statements for y/e 30/09?

(CV - WDV = WDA * 30%)= Future DT . . . (1,100,000 - 700,000 = 400,000 * 30%)= 120,000 Future DT liability

DT Account :
Open bal 300,000
Decrease (BALANCING FIGURE) (180,000)
Close bal 120,000


Double entry :
DR DT 180,000
Cr SoCI tax expense 180,000


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IAS 12 requires a DT Liability :
To be recognised for all taxable temporary differences
Taxable temporary difference arises where CV of asset exceeds tax base
Calculate liability using full provision
No discounting of liability

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IAS 12 requires a DT Asset :

DT assets to be recognised for all deductible temporary difference
A deductible temporary difference arise where tax base of asset exceeds CV . . . .
. . To the extent that it is probable taxable profit is available against which deductible temp diff can be
utilised
No discounting of asset
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Tax Losses

If an entity doesnt expect to have tax profits in future it can not recognise the asset in its own accounts
unless . . .

entity is part of a group . . . it may surrender tax losses to other group companies . . then DT assets may be
recognised in group accounts

Asset is equal to tax losses expected to be utilised multiplied by tax rate
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Disclosure

Tax expense recognised in SoCI

Major components of tax expense disclosed in notes to accounts

CT and DT charged directly to equity

Amount of tax relating to each component of Other Comprehensive Income

Explanation relationship between tax expense and accounting profit . . . Tax rate
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Examples 1: DT

Prepare accounts for y/e (31/12/2005)
DT at (31/12/2004) was 63,000 and an increase of 15,000 is needed for 2005.
CT charge for 2005 is 84,000

Required : Prepare SoFP and SoCI extracts for y/e (31/12/2005)

SoFP (31/12/2005) extract
(63 + 15) = 78,000

SoCI (31/12/2005) extract
(84 + 15) = 99,000
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Example 2 : DT

Prepare accounts for y/e (31/12/2005)
DT provision was 78,000 and past cumulative timing difference of 180,000 has accumulated at y/e
CT at 30% is estimated at 254,000

Required : Prepare SoFP and SoCI extracts for y/e (31/12/2005)

SoFP (31/12/2005) extract
[(78 - (180*30%)= (24)] 54,000

SoCI (31/12/2005) extract
[(254 - (180*30%)= (24)] = decrease in provision 230,000

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Example 3 : DT and Over provision
Paddingtonbear has a marmalade factory. The following is a TB extract as at (31/12/2005) :

DR CR
Sales 100,000
Operating Costs 55,000
Dividends Recd 8,000
DT 19,000
Corporation Tax (over provision from previous year) 4,000

A timing difference of 25,000 has accumulated at y/e. Corporation tax is estimated at 30,000 at 20%

Required :
a) prepare SoCI and a note to the accounts
b) prepare the DT SoCI note

SoCI (31/12/2005) extract
Sales 100,000
Operating Costs (55,000)
Operating Profit 45,000

Other Comprehensive Income 8,000
PBT 53,000
CorpTax (note 1) (32,000)
PAT 21,000

1). Note to SoCI :


CT for year 30,000
Less CT previous year over provision (4,000)
DT difference (19,000 - 25,000)= DT increase 6,000
32,000


SoFP (31/12/2005) extract
Open balance DT 19,000
Increase in DT timing difference 6,000
Closing balance DT 25,000
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