Lec 10 Flashcards
(14 cards)
Income tax
Profit for taxation is determined in accordance with national income tax legislation not according to GAAP
Accounting profit = profit under IFRS
Taxable profit= profit under country specifc tax legislation
Two differences between accounting and taxable profit
The two differences of accounting and taxable profits are:
The timing of recognition may be different or
Some revenues or expenses may have special tax treatments
These differences arise for a number of transactions and can be permanent or temporary
Temporary differences
Recognition of deferred tax liabilities:
Temporary differences: differences between accounting and taxable profit that will have an impact on future income taxes
Temporary differences that generate a deferred tax liability
Example 1) amortisation | depreciations
Accounting rules for straight line:
Constant amortisation over time
Constant accounting profits
Constant accounting taxes
Tax rules for accelerated
Higher amortisation expense in initial periods and lower at end
Lower taxable profit at initial periods and higher taxable profits at the end of useful
Life’s
Pay less taxes at begginning and more at end
Temporary differences: revenue recognition
Accounting rules: at maturity
Higher income at maturity year
Higher accounting profit at maturity year
Higher accounting taxes at maturity year
Tax rules at payment
Lower income at maturity year (higher at payment year)
Lower taxable profit at maturity year
Lower taxes at maturity yea r
Example: assume company x presents it’s profit before dep and income taxes = 6000 in both accounting and tax income statements. The company owns 2 machines.
Machine 1 purchased at beginning of year for 5k (useful life 10 years)
Machine 2 purchased at beginning of year for 10k (useful life 10 years)
Company x uses an accelerated dep method to compute dep for income tax purposes (3000 a year) and straight line method for financial reporting purposes.
Assume tax rate of 35%
Financial reporting purposes
Profit before dep and income tax = 6000
Depreciation: 5000/10 + 10000/10 = 1500
Accounting profit = 4500
Tax expense = 4500 x 35% = 1575
Tax reporting purposes
Profit before dep and income tax =6000
Dep = 3000
Taxable profit = 3000
Tax payable = 35% x 3000 = 1050
Difference = 1575-1050=+525
The 525 becomes the temporary difference (the difference is temporary as there will be a day where the dep will be lower under tax rekeying than under financial reporting (diff will be offset)
Tax expense 1575 to taxes payable 1050
Deferred tax liability 525
Deferred tax liability: you are paying less taxes (1050) than you should (1575) in this period. You have an obligation (liability) to tax authorities in the future (525
Accounting is (4 years) Profit before dep and income tax: 200,200,200,200 Depreciation: -25,-25,-25,-25 Acc profit 175,175,175,175 Tax expense (40% 70,70,70.70
Tax is Profit before dep and income tax: 200,200,200,200 Depreciation -44,-33,-15,-8 Taxable profit 156, 167,185,192 Tax payable (40%) 62.4,66.8,73,76.8
Entries:
Tax expense 70 to tax ayable 62.4
Deferred tax liability 7.6
Tax expense 70 to tax payable 66.8
Deferred tax liability 3.2
Tax expense 70 to tax payable 74
Deferred tax liability 4
Tax expense 70 to tax payable 76.8
Deferred tax liability 6.8
Temporary differences that generate A deferred tax asset
Example 1 rent revenue
Accounting rules: at maturity
Lower income in 1st year
Lowe acc profit in 1st year
Lower acc taxes at 1 Stbyear
Tax rules: at payment (usually at 1st moment)
100% income in 1st year
Higher taxable profit at 1st year
Higher taxes at 1st year
Example: company x owns a factory that is not making use of it. It decides to rent it to the tenant y in nov 2014 for 12000 a year(anticipated payment). Additional revenues amount to 60000 and expenses before taxes equal 30000
Financial reporting purposes Rev: 60000+12000/12*2 Expenses 30000 Acc profit 32000 Tax expense (35% x 32000) 11200
Tax reporting purposes Rev: 60000+12000 Expenses 30000 Taxable profit 42000 Tax payable 35% x 42000 = 14700
Difference 11200-14700= -3500 (temporary difference) this is as rent revenue will be higher under financial reporting than under tax reporting Thus the difference will offet in future economic periods.
Tax expense 11200 to taxes payable 14700
Deferred tax asset 3500
Permanent differences: differences between accounting and taxable profit that will NOT have an impact on future income taxes. Thus there are no deferred tax consequences as they will never be resolved
Examine 1 fines and penalties
Accounting rules
An expense
Lower profits
Lower taxes
Tax rules
Fines and penalties are not taxable
Highe profits (less expenses)
Higher taxes
Permanent differences between the taxable and accounting profit:
Example: assume company x presents it’s profit before tax = 6000 in both accounting and tax income statement. In addition, it earned 100 because it invested in municipal bonds. Assume a tax rate =35%
What is the difference between the taxable and accounting profits?
Financial reporting Profit before interest n tax 6000 Interest revenue +100 Profit 6200 Percents differences reverted -100 (tax free income) Profit 6000 Income tax 35% x 6000=2100
Tax reporting purposes Profit before interst n tax 6090 Interst revenue 0(tax free) Taxable profit 6090 Permanent difference reverted 0 Profit 6000 Tax payable 35% c 6000 = 2100
Tax expense 2100 to tax payable 2100
Assume company x presents it’s profit before tax = 6000. In addition, if pid 100 fine because of environmental damages. Assume a tax rate of 35%
What is the difference between the taxable and accounting profit
Financing reporting Rev: 6000 Expenses: 100 Profit 5900 Payments reverted: +100 Profit 6000 Tax expense = 35% x 6000=2100
Tax reporting: Rev : 60000 Expenses 0 Profit 6000 Payment reverted 0 Profit 6000 Tax payable 35% x 6000 = 2100
Tax expense 2100 to tax payable 2100
For permanent differences
Non taxable income (eg iteration municipal bonds) will always be subtracted from acc profit, and non deductible wxpense(fines) will always be added
Ias 12 disclosure
The major components of tax expense shall be disclosed seperately
Current tax expense
Clear identification of deferred tax assets/liabilities
Clear identification of temp/perm differences
Ias 12 definitions
Current tax - amount of income taxes payable (recoverable) in respect of taxable profit (loss)
Deferred tax liabilities: amount of income taxes Payable in future periods in respect of temp differences
Deferred tax assets: amount of income taxes recoverable in future periods in respect of temp differences
Temp differences: differences between accounting and taxable profit that will have an impact on future income taxes
Permanent differences; differences between accounting and taxable profit that will not have an impact on future income taxes
