MFRS 112

Income Taxes
1

Accounting Rules Tax Rules

Accounting
profit

use accrual basis

recognize first
even though not
receive yet!

Taxable profit
use actual basis
based on actual
receipt

For example: Leasehold property

Accounting
rules

must depreciate

Tax rules

not qualify for tax

allowance

Accounting Rules Tax

Rules
Taxable profit < accounting profit
Payment of tax has been deferred
in the future the tax liability will crystallize
enjoy now pay later
Taxable profit > accounting profit
Payment of tax has been accelerated
in the future the tax asset will crystallize pay
now enjoy later
These 2 scenarios will not alter TOTAL amount of
tax payable they simply alter the timing
Timing Differences
3

Accounting Rules Tax

Rules
Effect of the differences arises:
Amount of current income tax payable
not align with the statutory tax rate
Distort the tax charge in the P&L this
year low, next year high or vice versa
Incomparable results between
companies

Accounting Rules Tax Rules

Example:
ABC Bhd reported profit b4 tax of RM18m for
the current financial YE 31 Dec 2011.
Depreciation charged for the yr is RM2m. For
tax purposes, capital allowances claimed for
the yr is RM8m. Tax rate 25%.
Show the abridged P&L of ABC Bhd for the
2011 financial year if:
i) No tax effect accounting is applied
ii) Tax effect accounting is applied

Accounting Rules Tax Rules

Answer:
i) No tax effect acctg
PBT
18m
+ depreciation
2m
- CA
(8m)
taxable profit
12m
Tax @ 25%
3m consist only current income
tax payable

Accounting Rules Tax Rules

Answer:
ii) Tax effect acctg
CA for the yr
8m
Depreciation for the yr 2m
Difference CA > depr. 6m
Deferred Tax @ 25%
1.5m additional tax on
the diff btw CA &
depr

Accounting Rules Tax Rules

Answer:

PBT

Without tax
effect

With tax
effect

RMm

RMm
18

18

(3)

(3)

(1.5)

(3)

(4.5)

15

13.5

Taxation:
Current income
tax
Deferred tax
PAT
Effective tax

16.7%

25%

Timing Differences
Differences between accounting profits & taxable
profits that arise because the period in which
some items of income & expenses are included in
accounting profits does not coincide with the
Higher income Lower income
period in which they arehigher
included
in taxable
acctg lower
acctg profit
profits
profit butlower buthigher tax
Tax

Lower exp
tax profit
profit ($ already
Higher
exp($
Category
Recognized in accounting
higher acctg
havent
receive)
lower
acctg
profit received) tax
profit butlower
income
effect of timing differences:
tax
less = liability
more = asset
buthigher
tax
tax profit ($
Earlier
Later
profit ($ havent
already paid)
pay) tax more =
Gain/income
Deferred
Deferred tax less =
asset
item
credit/liability debit/asset liability

Loss/expense
item

Deferred
debit/asset

Deferred
credit/liability
9

Permanent Differences
Differences between accounting income and taxable income
that originate in the current period but are not capable of
reversal in any subsequent future period
Arises because items of income/expenses are either included
in accounting profit without a corresponding inclusion in
taxable profit , or vice versa
Tax free income: tax free pioneer dividend, tax free interest
income
Disallowed expenses: depreciation of leasehold land & nonindustrial building, donation to unapproved institution,
entertainment expenses
10

Method of Computation
Liability method
deferred tax provisions are calculated at the
rate at which it is estimated that tax will be
paid/recovered when the TD reverse, on the
basis that they represent amounts of economic
benefit that are expected to flow from/to the
entity
focuses on the B/S
deferred tax provisions are calculated at the
current tax rate
opening deferred tax provisions are revised to
reflect the changes in tax rate over time
11

Basis of Provision
NIL provision
Tax expenses = provision for the current income
tax for the same period
No TD arises
PARTIAL provision
If an entity is not expected to reduce the scale
of its operations significantly, it will have
originating new TD which are at least
equal/more than the reversing old TD.
So, the payment of some taxes will be
permanently deferred
Provide deferred tax only when it is probable
that tax will become payable due to reversal of
TD & only by the amount of reversal
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foreseeable

Basis of Provision
FULL provision
Tax differences will be recognised in full
Set up a Deferred Tax (Liability) account
- increase provision when defer the payment of
tax
- reduce provision when tax liability crystallizes
Set up a Deferred Tax (Asset) account
- increase provision when accelerate the
payment of tax
- reduce provision when tax asset crystallizes
Steps:
i) Calculate the closing balance on the Deferred
Tax a/c, based on the YE TD
13

MFRS 112 Income Taxes

Principle: Whether a deferred tax liability/asset exist?
If an item is accounted for in year 1, but will be taxed (or
tax deductible) in year 2 (or in subsequent year), then, a
deferred tax asset/liability must be accounted for in year 1
If an item is accounted for in year 1, and will be taxed (or
tax deductible) in year 1, then, a tax payable or tax
receivable should be accounted for in year 1
If an item is accounted for in year 1, and will not be taxed
(or tax deductible), then there is no tax effect to be
accounted for
14

MFRS 112 Income Taxes

Principle: Effect of deferred tax liability/asset
Recognize in P&L, if the underlying transaction is
recognize in P&L
Recognize directly in equity, if the underlying transaction is
recognize in equity
Recognize as an adjustment in goodwill, if the underlying
transaction arises from a business combination

15

Balance Sheet Liability

Method
Asset &
liability

Carrying value
(CV)
No

No differences
arise

Compare

Different?

Tax base (TB)

Yes

Temporary difference
(TD)
Deductible TD
Taxable TD
Asset: CV <
Asset: CV >
TB
TB
Liability: CV
Liability: CV
> TB
< TB
Deferred tax
Deferred tax
asset (DTA)
16liability (DTL)

Carrying Value
CV = the amount recognized in the
statement of financial position at a
particular point in time.
Cost
CV

Fair
value
(FV)

17

Tax base of Assets

Amount that will be deductible for tax purposes
against any taxable economic benefit that will
flow to an enterprise when it recovers the
carrying amount of the asset
Only qualifying assets (QA) have TB
Non-qualifying assets (NQA) TB = 0

18

Tax base of Assets

Example:
Machinery bought at a cost of RM300K on 1
Jan 2011.
Depreciation straight line basis over 5 years
Capital allowance over 3 years.
Tax rate 25%
Year

CV

TB

2011

240

(300-60)

200

2012

180

(240-60)

100

2013
2014

120
60

2015

(180-60)
(120-60)

(60-60)

TD
(CV-TB)
(300100)
(200100)

(100-100)

DT
(TD*25%)

40

10

80

20

120
60

30
15

19

Tax base of Assets

Example:
On 31 Dec 2012, B Bhd accrues for an interest
income receivable of RM100K. For tax purpose,
interest is taxable on receipt basis. Tax rate
25%.
Answer:
CV = 100K as per B/S
TB = 0 interest income not yet receive!
TD = CV-TB = 100K
DT = 100K*25% = RM25K
20

Tax base of Liability

Its CV, less any amount that will be deductible
for tax purposes in respect of that liability in
future period
Example:
ABC Bhd has an Accrued expenses payable a/c
of RM10K in its B/S as at 31 Dec 2011. For tax
purposes, the expense will be deductible on
cash basis. Tax rate 25%
Answer:
CV = 10K as per B/S
TB = 0 expenses not yet pay!
TD = CV-TB = 10K
DT = 100K*25% = RM2.5K

21

Tax base of Liability

Example:
ABC Bhd has an Accrued expenses payable a/c
of RM10K in its B/S as at 31 Dec 2011. For tax
purposes, the expense has already been
deducted.
Answer:
CV = 10K as per B/S
TB = 10K expenses already paid!
TD = CV-TB = 0
No DT
22

Tax base of Liability

For revenue received in advance, TB = CV less
amount of the revenue that will not be taxable
in future period
Example:
ABC Bhd has a Rent Received In Advance a/c of
RM10K in its B/S as at 31 Dec 2011. For tax
purposes, the income will be taxed on cash
basis. Tax rate 25%
Answer:
CV = 10K as per B/S
TB = 0 CV 10K amount not taxable in
future 10K
TD = CV-TB = 10K
DT = 100K*25% = RM2.5K
23

Temporary Differences
Result in taxable amounts in
determining taxable profit (tax
loss) of future periods when the
carrying amount of the asset or
liability is recovered or settled.
taxation liability has been
deferred in the past/current
periods pay more later

Taxable

Result in amounts that are

deductible in determining taxable
profit (tax loss) of future periods
when the carrying amount of the
asset or liability is recovered or
settled.
taxation liability has been
accelerated in the past/current
periods pay more now

Deductible
24

Temporary Differences
Example (taxable TD):
At the end of year 1, a machine is carried in
the statement of financial position at its net
book value of RM10K. The tax written down
value of the machine on this date is RM4K.
Assume an income tax rate of 28%.

25

Temporary Differences
Answer:
Taxable profit of future
period when the CV of
the machine is
recovered/settled
Entity will be able to
deduct capital allowance
of
Taxable amount

DTL @ 28%

10

CV

(4)

TB

6 CV >
TB
= TTD
1.68 26

Temporary Differences
Example (deductible TD):
A provision for warranty costs is carried in the
statement of financial position at RM8K. The
tax base on this date is zero as tax law allows
such costs to be claimed only when incurred.
Assume an income tax rate of 28%.

27

Temporary Differences
Answer:
When the warranty cost
is paid in future, it does
not affect the taxable
profit
Entity will be able to
deduct the costs when
paid in future
Deductible amount

DTA @ 28%

CV

TB

8 CV >
TB
= DTD
2.24 28

Temporary Differences
Tax effect of temporary
differences:
CV > TB

CV < TB

Asset

Taxable TD /
DTL

Deductible TD
/ DTA

Liability

Deductible TD Taxable TD /
/ DTA
DTL

29

Fair Value Adjustment

TD arising from fair value adjustment
Relates to MFRS 3 Business Combinations
TD arises when TB of the identifiable assets &
liabilities are not affected by the biz
combination/ are affected differently
Tax effect: DTL/DTA affect the goodwill figure!

30

Fair Value Adjustment

Example:
ABC Bhd acquires the business of DEF Bhd in
2011 for a cash consideration of RM1.5m.
DEF Bhds B/S at the date of
acquisition comprises:
- Share capital & reserve RM1.2m
- Trade debtor RM500K
- Stock RM700K

above

It was mutually agreed that DEF Bhds stock

has a market value of RM900K. Assuming tax
rule requires the stock to be valued at
RM700K.
31

Fair Value Adjustment

Answer:
FV = 900K
TB = 700K
TD = 200K
DT = 200K * 25% = 50K
Journal:
Dr. Goodwill
Dr. Stock
900K
Dr. Trade debtor
Cr. Deferred tax
Cr. Cash

150K
500K
liability 50K
1.5m
32

Asset Revaluation
TD arising from revaluation
MFRS 116 PPE
Asset revaluation
Do not affect TB
If not going to sell
in future

affect TB
If sell in future
Because
profit/loss on
disposal is
subject to tax

33

Asset Revaluation
TD arising from revaluation
If asset is revalued upwards & is subsequently
sold at revalued amount taxable income &
additional tax to be paid
If asset is revalued downwards & is
subsequently recovered at revalued amount
tax deduction & less tax to be paid
Since revaluation of asset involve Revaluation
Reserve account (equity), any deferred tax
effect should also be accounted for directly in
equity

34

Asset Revaluation
Example:
ABC Bhd acquires a land in 2011 at a cost of
RM10m. On 31 Dec 2014, the land is revalued
to RM12m. Assume that profit(loss) on
subsequent sale of the land will be subject to
RPGT at 5% under the Real Property Gains Tax
Act 1976.
Show the deferred tax effect.

35

Asset Revaluation
Answer:
CV = 12m
TB = 10m
TD = 12m 10m = 2m
DT = 2m*5% = 100K
Journal:
Dr. Land
2m
Cr. Revaluation reserve

2m

Dr. Revaluation reserve 100K

Cr. DTL
100K
36

Goodwill
TD on goodwill (GW)
GW amortization expense is not deductible
TB = 0
Differences between CV of GW and its TB is a
TD
ButMFRS 112 does not permit the DT
recognition because GW is a residual (left
over), not a real asset

37

Unused Tax Losses

Should recognize DTA on unused tax
losses?
Not probable
Probable future
future taxable
taxable profit
profit
Assess criteria:
- Sufficient taxable TD
- Probable to have
taxable profit
- Availability of tax
planning opportunity
- Whether the unused tax
losses result from
identifiable causes,
unlikely to recur

Not
recognize
DTA

Recognize
DTA
38

Change in Tax Rate

usually the current tax rate is used as the best
estimate of the DTA/DTL, unless changes in
future tax in known in advance.
DT provisions are revised to reflect the
changes in tax rates over time, so that the
amount provided at the end of each period ties
up with the most current tax rate
How to revise? adjust the DTL/DTA b/f

39

Change in Tax Rate

Example:
ABC Bhd had recognised a DTL of RM40K as
at 31 Dec 2011. the tax rate was 40% in year
2011. In year 2012, the tax rate was changed
to 35%.
Discuss how the DTL b/f will be affected by
the change in the tax rate.

40

Change in Tax Rate

Answer:
The movement in DT account @ 31 Dec
2012:

Balance b/f
Adjustment to opening
balance due to change in
tax rate
Arising in the current
year

Before

After

40

40

(5)*

xxx

xxx

*RM40K
x (40%-35%)/40%
Balance c/f
xxx= RM5K
xxx ~ credit
to P&L
*it is a change in accounting estimate &
41
retained profit is not adjusted

Questions
ABC Bhd has the following assets in its SOFP:
A machine which had originally cost RM150K
with accumulated depreciation of RM50K.
Accumulated tax allowance was RM100K
Trade receivables of RM60K. This amount is net
of an allowance of doubtful debts of RM40K.
Doubtful debts are not deductible for tax
purposes until it is written off
Tax rate 30%. These items will give rise to:
a.
b.
c.
d.

DTA of RM27K
DTL of RM27K
DTA of RM12K & DTL of 15K (net DTL of RM3K)
DTA of RM15K & DTL of RM12K (net DTA of
42
RM3K)

Questions
On 1 Jan 2011, ABC Bhd purchased a machine for
RM350K. The machines useful life is 5 years.
Depreciation on straight line basis. ABC Bhd
claimed capital allowance of 50% of the cost of
the machine in the year ended 31 Dec 2011 &
the remainder in the following year.
Tax rate 30%. What amount will be recognised in
the FS FTYE 31 Dec 2012?
a.
b.
c.
d.

DT
DT
DT
DT

expense RM31.5K & DTL RM31.5K

expense RM31.5K & DTL RM63K
income RM31.5K & DTL RM31.5K
expense RM63K & DTL RM63K 43

Questions
On 31 Dec 2012, ABC Bhd owns a building with a cost
of RM250K & CV of RM200K. On that date, ABC Bhd
revalued the building to RM375K. Immediately before
the revaluation, the TWDV of the building was
RM175K. This amount is not adjusted as a result of
the revaluation.
Tax rate 30%. What is the journal entry to record the
tax effect on 31 Dec 2012?

a.
b.

Dr. DT expense RM60K; Cr. DTL RM60K

Dr. DT expenses RM7.5K; Revaluation reserve
RM52.5K; Cr. DTL RM60K
c. Dr. DT expense RM67.5K; Cr. DTL RM67.5K
d. Dr. Revaluation reserve RM60K; Cr.44DTL RM60K

Questions
ABC Bhd incurred a tax loss of RM210K for the
year ending 31 Dec 2012. There were DTD of
RM60K. ABC Bhd considered that it was likely
that future taxable profit will be available against
which any unused tax losses could be utilized.
Tax rate 30%. Which of the following is correct?
a.
b.
c.

should not recognise a DTA or DTL

should recognise a DTA of RM18K
should recognise a DTA of RM63K for the tax
loss & a DTA of RM18K for the DTD
d. should recognise a DTA of RM63K for the tax
loss & a DTL of RM18K for the DTD 45

Questions
ABC Bhd is finalizing its FS FTYE 31 Dec 2012.
During Nov 2012, government changed the tax
rate from 30% to 25% wef. 1 Jan 2013.
At 1 Jan 2012, ABC Bhd has aggregate TTD of
RM160K & at 31 Dec 2012 it has TTD of RM240K.
What is the deferred tax expense to be
recognised in P&L FTYE 31 Dec 2012?
a.
b.
c.
d.

RM12K
RM20K
RM24K
RM60K

46