Accounting for Deferred Taxation - Understanding Differences and Implications
Exploring the concepts of deferred taxation, this content covers the variances between accounting and tax rules, the significance of deferred tax, and the impact on taxable profit. It delves into topics such as deferred tax assets, liabilities, and income tax expenses.
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Accounting for Deferred Taxation Accounting for Deferred Taxation (LKAS 12) (LKAS 12) Rangajewa Herath B.Sc. Accountancy and Financial Management(Sp.)(USJ) MBA-PIM(USJ) 1
Introduction to Accounting for Deferred Introduction to Accounting for Deferred Taxation Taxation Differences between accounting rules and tax rules Need for accounting for deferred taxation. 2
Accounting Profit vs Taxable Income Taxable Profit (Taxable Income) Accounting Profit Permanent Differences Temporary Differences Taxable Temporary Differences Deductible Temporary Differences Deferred Tax Liability Deferred Tax Asset
Deferred Tax Assets Deferred Tax Liability The amounts of income taxes payable in future periods in respect of taxable temporary differences. The amounts of income taxes recoverable in future periods in respect of : - deductible temporary differences; and - the carry forward of unused tax losses; and unused tax credits. 4
Taxable Temporary Difference and Deferred Tax Liability Income Tax Expense Income Tax Expense - - based on Accounting based on Accounting Profit (Rs. 000) Profit (Rs. 000) 1 1 2 2 3 3 4 4 5 5 Sales 2,000 2,000 2,000 2,000 2,000 Cost of sales (1,000) (1,000) (1,000) (1,000) (1,000) Gross profit 1,000 1,000 1,000 1,000 1,000 Depreciation-Accounting (300) (300) (300) (300) (300) (300) (300) (300) (300) (300) Profit before tax 700 700 700 700 700 Income tax Income tax- -20% 20% (140) (140) (140) (140) (140) (140) (140) (140) (140) (140) The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 20% per annum for Accounting purpose.
Taxable Temporary Difference and Deferred Tax Liability cont.. Income Tax Expense Income Tax Expense - - based on Taxable based on Taxable Profit (Rs. 000) Profit (Rs. 000) 1 2 3 4 5 Sales 2,000 2,000 2,000 2,000 2,000 Cost of sales (1,000) (1,000) (1,000) (1,000) (1,000) Gross profit Depreciation-Tax purpose 1,000 1,000 1,000 1,000 1,000 (750) (750) (750) (750) - - - - - - Profit before tax 250 250 1,000 1,000 1,000 Income tax Income tax- -20% 20% (50) (50) (50) (50) (200) (200) (200) (200) (200) (200) The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 50% per annum for tax purpose.
Taxable Temporary Difference and Deferred Tax Liability cont.. (Rs. 000) 1 1 2 2 3 3 4 4 5 5 Income tax Income tax- -Based on Based on Accounting Accounting Profit Profit 140 140 140 140 140 140 140 140 140 140 Income tax Income tax- -Based on Taxable Profit Based on Taxable Profit 50 50 50 50 200 200 200 200 200 200 Deferred Tax Adjustment Deferred Tax Adjustment 90 90 90 90 (60) (60) (60) (60) (60) (60)
Accounting for Deferred Tax Liability Deferred Tax Deferred Tax Liability(Rs. 000) Liability(Rs. 000) Year 1 Year 1 90Tax Expense Year 2 Year 2 B/F 180Tax Expense Year 3 Year 3 60B/F 120 Year 4 Year 4 60B/F 60 Year 5 Year 5 60B/F Year 1 Year 1 C/F Year 2 Year 2 90 90 90 C/F Year 3 Year 3 Tax Expense C/F Year 4 Year 4 Tax Expense C/F Year 5 Year 5 Tax Expense 180 120 60
Taxable Temporary Differences Taxable Temporary Differences The temporary differences that will 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. All taxable temporary differences give rise to a deferred tax liability. 9
Taxable Temporary Difference and Deferred Tax Liability cont.. (Rs. 000) 1 1 2 2 3 3 4 4 5 5 Carrying Amount of Asset 1,200 900 600 300 - Tax base of the Asset 750 - - - - Taxable temporary difference 450 900 600 300 - Deferred Tax Liability 90 180 120 60 -
Deductible Temporary Difference and Deferred Tax Asset Income Tax Expense Income Tax Expense - - based on based on Accounting Profit (Rs. 000) Accounting Profit (Rs. 000) 1 2 3 4 5 Sales 2,000 2,000 2,000 2,000 2,000 Cost of sales (1,000) (1,000) (1,000) (1,000) (1,000) Gross profit Depreciation-Tax purpose 1,000 1,000 1,000 1,000 1,000 (750) (750) (750) (750) - - - - - - Profit before tax 250 250 1,000 1,000 1,000 Income tax Income tax- -20% 20% (50) (50) (50) (50) (200) (200) (200) (200) (200) (200) The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500,000 which will depreciate at 50% per annum.
Deductible Temporary Difference and Deferred tax Liability cont.. Income Tax Expense Income Tax Expense - - based on based on Taxable Taxable Profit Profit 1 1 2 2 3 3 4 4 5 5 Sales 2,000 2,000 2,000 2,000 2,000 Cost of sales (1,000) (1,000) (1,000) (1,000) (1,000) Gross profit 1,000 1,000 1,000 1,000 1,000 Depreciation-Accounting (300) (300) (300) (300) (300) (300) (300) (300) (300) (300) Profit before tax 700 700 700 700 700 Income tax Income tax- -20% 20% (140) (140) (140) (140) (140) (140) (140) (140) (140) (140) The only expense of the business is depreciation of PPE . The business has PPE of Rs.1,500 which will depreciate at 20% per annum for tax purpose.
Deductible Temporary Difference and Deferred Tax Asset cont.. (Rs. 000) 1 1 2 2 3 3 4 4 5 5 Income tax Income tax- -Based on Based on Accounting Accounting Profit Profit 50 50 50 50 200 200 200 200 200 200 Income tax Income tax- -Based on Taxable Profit Based on Taxable Profit 140 140 140 140 140 140 140 140 140 140 Deferred Tax Adjustment Deferred Tax Adjustment 90 90 90 90 (60) (60) (60) (60) (60) (60)
Accounting for Deferred Tax Asset Deferred Tax Deferred Tax Asset(Rs. 000) Asset(Rs. 000) Year 1 Year 1 90C/F Year 2 Year 2 90C/F 90 Year 3 Year 3 180Tax Expense 120 C/F Year 4 Year 4 120Tax Expense 60 C/F Year 5 Year 5 60Tax Expense Year 1 Year 1 Tax Expense Year 2 Year 2 B/F Tax Expense Year 3 Year 3 B/F C/F Year 4 Year 4 B/F C/F Year 5 Year 5 B/F 90 180 60 120 60 60 60
Deductible Temporary Differences Deductible Temporary Differences The temporary differences that will 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. 15
Deductible Temporary Difference and Deferred Tax Asset cont.. (Rs. 000) 1 1 2 2 3 3 4 4 5 5 Carrying Amount of Asset 750 - - - - Tax base of the Asset 1200 900 600 300 - Deductable temporary difference 450 900 600 300 - Deferred Tax Asset 90 180 120 60 -
