Deferred Tax Flashcards
(7 cards)
Deferred Tax - why we account for it, accounting
It is because accounting profit is different from Tax profits, but we need to match tax consequences of gains and losses in the same period as the gains.
If no deferred tax liability is recognised the financial statements would be incomplete and not a faithful representation.
The inclusion of deferred tax liability is predictive of future cash outflows and so relevant .
This includes gain on sale of assets, impairment losses on PPE,
Tax credit is posted in P&L - CR P&L/DR DTA
Deferred Tax - How we account for it - definition, temporary difference, DTA/DTL
Deferred tax is accounted for on all year end temporary differences between carrying value of assets and liabilities and their TAX base.
The temporary difference is the gain or loss on the asset/ liability. A gain/loss causes a taxable difference and deferred tax liability/ asset.
Accounting losses are deductible temporary differences and create a temporary deferred tax asset
Tax relief is in the future so payment of tax is accelerated
DTA/DTL = gain/loss * tax rate
Accounting gains are taxable temporary differences and create a deferred tax liability, payment of tax is delayed
Depreciation is deducted from carrying value and capital allowance is deducted from tax base
The movement between B/S opening and closing balances is posted to P&L
Deferred Tax - Trading losses - carry backward or forward implication
Losses can be carried forward or backward
Losses carried back creates a current asset (refund)
if carried forward, it creates a deductible temporary difference and a potential DTA
potential because DTA can only be recognised only to the extent that it s probable that future taxable profits will be available to be used against tax losses
Deferred Tax - Share based payments - Intrinsic value
SBP are non cash expenses not allowable for tax purposes
Tax relief in the future when the options are actually exercised deductible temporary difference - DTA
Temporary difference is based on intrinsic value
DTA is measured on the intrinsic value of the option
Intrinsic value = share price - exercise price
Temporary difference = Annual value of options * intrinsic value
DTA = temporary difference * tax rate
Deferred tax liabilities scenarios
Revaluation gains
FVA increasing assets
capital allowances exceeding depreciation
development expenditure capitalised as intangible assets
Deferred tax Assets scenarios
Impairment losses
provisions
accruals for disallowed expenses
inventory written down to NRV
losses carried forward
share based payments
why is tax paid (cashflow) different from tax charge in P&L
- Tax is paid in arrears
- when group has subsidiaries, different subs pay tax at different rates
- The tax charge is not based on the accounting profit but the profits chargeable for tax, so there is deferred tax which is only a part of the tax charge and not cash flow
