Deferred Tax

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CareerDeal – IFRS
training
IAS 12 – Income taxes
Introduction
IAS 12 - Income taxes July 2018

PwC Slide 3
Introduction
• Accounting for tax expense can provide a number of challenges to the

accountancy profession
• The following areas will be addressed in the seminar:
- basic understanding of both current and deferred tax
- recognition and measurement of current tax
- recognition and measurement of deferred tax
- presentation and disclosure

PwC Slide 4
Accounting for tax under IFRS and GAPSME
• The following standards, or

sections, address accounting
for an entity’s tax expense: Current tax
- IFRS: IAS 12
- GAPSME: Section 16
• Both frameworks apply the
same conceptual approach to
the recognition and
+ Deferred tax
measurement of tax balances
- Components of tax expense
include deferred tax under
both frameworks = Tax expense
PwC Slide 5
Understanding current and deferred
tax

PwC Slide 6
Accounting profit and taxable profit
• Accounting profit - the profit or loss for a period before deducting tax
expense
• Taxable profit (tax loss) - the profit (loss) for a period, determined in
accordance with the rules established by the taxation authorities,
upon which income taxes are payable (recoverable)
Financial statements Tax accounts
400 Gross profit 400
Costs:
(200) - salaries and wages (200)
(100) - general overheads (100)
(20) - donations -
Accounting profit /
80 Taxable profit 100
PwC Slide 7
Current tax
• Current tax - the amount of income taxes payable (recoverable) in

respect of the taxable profit (tax loss) for a period
Taxable profit 100
Current tax charge at 35% 35

PwC Slide 8
Deferred tax
• In simple terms:
- current tax is the amount of income tax currently due to the tax
authorities in respect of current year’s results
- deferred tax is a method of accounting for tax on an accruals basis,
In other words…
Deferred tax expense (income) is the amount of tax expense (income)
included in the determination of profit or loss for the period in
respect of changes in deferred tax assets and deferred tax liabilities
during the period.

PwC Slide 9
Tax expense
• Tax expense (tax income) - the aggregate amount included in the

determination of profit or loss for the period in respect of current tax
and deferred tax
€
Tax expense:
- current tax expense 35
- deferred tax expense 7
42

PwC Slide 10
Recognition and measurement of
current tax

PwC Slide 11
Current tax
• Current tax expense

- Current tax is the amount of tax payable or recoverable in respect
of the taxable profit or tax loss for the current period
• Current tax assets and liabilities
- If the amount already paid to the tax authorities (eg. through
provisional tax payments) exceeds the amounts due for those
periods, the excess should be recognised as an asset
- Unpaid taxes for current and prior periods should be recognised as
a liability and charged to profit or loss (or equity) as an expense

PwC Slide 12
Provisional tax payments
• Provisional tax payments are a series of advance tax payments in

anticipation of the current tax charge for the period
- if provisional tax payments exceed the current tax charge for the
year, then the excess will be recognised as an asset in the statement
of financial position
◦ a liability will be recognised if the current tax charge for the year
exceeds the provisional tax payments made

PwC Slide 13
Example
• Provisional tax payments were effected as follows:

- April: €200
- August: €300
- December: €500
• Current tax charge for the year is assessed at €850
- in this example, the company has paid €150 more than the current
tax charge for the year, and as a result will recognise a current tax
asset of €150

PwC Slide 14
Example: accounting entries
• As long as the accounting entries are recorded properly, it makes no

difference whether the provisional tax payments are initially
recorded in the statement of financial position or in profit of loss
• Taking the above figures from the example, the accounting entries
could be entered as follows:
- Recording tax payments in the statement of financial position:
◦ Dr Current tax asset €1,000
◦ Cr Cash €1,000
◦ Dr Current tax charge €850
◦ Cr Current tax asset €850

PwC Slide 15
Example: accounting entries - continued
• Recording tax payments in profit or loss:

- Dr Current tax charge €1,000
- Cr Cash €1,000
- Dr Current tax asset €150
- Cr Current tax charge €150

PwC Slide 16
Differences between accounting profit and taxable
profit
• Differences between accounting profit and taxable profit may give

rise to deferred tax implications
• Some common situations giving rise to differences are considered
below:
Accounting Deferred tax
Area treatment Tax treatment implications?
Depreciation Depreciated to Generally
of PPE residual value, over depreciated over
useful life, using a pre-defined life P/O
systematic basis using straight-line
basis
Leases of Recognised as an Expense is capped if
motor expense the motor vehicle is O
vehicles non-commercial
PwC Slide 17
profit - continued

Provisions Movements Only deductible for
for recognised in tax purposes if loss
impairment profit or loss is crystallised as P
of receivables unrecoverable
Fair value Movements Unless trading, only

movements recognised in chargeable (or
on financial profit or loss deductible) if
assets at FV realised upon a P/O
through disposal, and may
profit or loss also be exempt

PwC Slide 18
profit - continued

Fair Recognised in Only chargeable to
valuation of profit or loss tax upon a disposal
investment (under IFRS), or P
property reserve (under
GAPSME)
Donations Recognised as an Disallowed for tax
O
expense purposes
Rental Income, and A maintenance
income from expenses incurred allowance at 20% of
property to generate the rental income is
income, recognised deductible for tax O
in profit or loss purposes/ 15% FWT
PwC Slide 19
Recognition and measurement of
deferred tax

PwC Slide 20
Deferred tax assets and liabilities
• Deferred tax liabilities - the amounts of income taxes payable in

future periods in respect of taxable temporary differences
- eg. entity recognises an unrealised gain of 20 on fair valuation of a
financial investment, with the gain only becoming taxable upon an
eventual disposal of the investment
• Deferred tax assets - the amounts of income taxes recoverable in
future periods in respect of:
- deductible temporary differences,
- the carryforward of unused tax losses, and
- the carryforward of unused tax credits

PwC Slide 21
Temporary differences
• Temporary differences - differences between the carrying amount of

an asset or liability in the statement of financial position and its tax
base, i.e. its value for tax accounting purposes. Temporary
differences may be either:
- taxable temporary difference, or
- deductible temporary difference
• For example, for an item of PPE:
Carrying amount Tax base
100 Cost 100

(20) Accumulated depreciation (25)
80 Carrying amount / Tax base 75
PwC Slide 22
Tax base of an asset
• The tax base of an asset is the amount that will be deductible for tax
purposes against any taxable economic benefits that will flow to an
entity when it recovers the carrying amount of the asset
• If those economic benefits are not taxable, the tax base of the asset is
equal to its carrying amount
• If no amount can be deductible for tax purposes, the tax base of the
asset is zero
Tax base of an asset

Taxable amount Deductible
Tax base of an Carrying arising from amount arising
= - +
asset amount recovery of the from use of the
asset asset

PwC Slide 23
Tax base of a liability
• The tax base of a liability is its carrying amount, less any amount that
will be deductible for tax purposes in respect of that liability in future
periods
• In the case of revenue which is received in advance, the tax base of
the resulting liability is its carrying amount, less any amount of the
revenue that will not be taxable in future periods
Tax base of liability

Deductible Taxable amount
Tax base of a Carrying amount arising arising from
= - +
liability amount from settlement settlement of
of liability liability

PwC Slide 24
Tax bases of assets and liabilities
“Short-cut” to work out the tax base
• A “short-cut” is to ask the following question:

- Is the asset/liability treated differently for tax than it is for
accounting purposes?
• If there is no difference in treatment, then the tax base will equal the
carrying amount

PwC Slide 25
• Where an asset has a higher book value than its tax base, the
temporary difference will be “taxable” because the entity will owe
additional current tax (as a proportion of accounting profit) when it
recovers the asset
- where the tax base exceeds the carrying amount the temporary
difference is “deductible”
• This works the other way round for liabilities in that a carrying
amount higher than the relevant tax base gives rise to a “deductible”
temporary difference, and where the carrying amount is below the
tax base a “taxable” temporary difference arises
• Deductible temporary differences result in deferred tax assets while
taxable temporary differences give rise to deferred tax liabilities

PwC Slide 26
Accounting entries for deferred tax
Movements in the statement of financial position
• Deferred tax assets or liabilities do not represent tax currently due or

receivable from the tax authorities
- it is merely an accruals basis of accounting for future tax
consequences of gains or losses already recognised in the
accounting records
• In accounting for deferred tax, the deferred tax balance in the
statement of financial position will be:
- debited (if there is an increase in a deferred tax asset or a decrease
in deferred tax liability), or
- credited (if there is a decrease in a deferred tax asset or an increase
in deferred tax liability)

PwC Slide 27
Accounting entries for deferred tax
Recognition of the charge or credit for the period
IAS 12 and Section 16 of GAPSME require an entity to account for the

tax consequences of transactions and other events in the same way that
it accounts for the transactions and other events that gave rise to the tax
consequence
Recognition of transaction
giving rise to deferred tax Recognition of deferred tax
Profit or loss Profit or loss
Directly in equity Directly in equity

PwC Slide 28
Other considerations
• Some items are not recognised as assets or liabilities in the statement

of financial position but their tax base may not be zero
- eg. under certain circumstances, development costs would be
expensed in accordance with the provisions of IFRS or GAPSME,
but recognised as an asset for tax accounting purposes

PwC Slide 29
Examples of temporary differences with deferred
tax implications
• Common examples of temporary

differences with deferred tax
implications include the Provision
for
following impairment
of
• Each one will be considered Property, receivables
Unutilised
plant &
separately equipment
group relief
Fair
valuation of
investment
Unabsorbed property Unutilised
capital
investment
allowances /
tax credits
unutilised
(BPA)
tax losses Fair
valuation of
investments

PwC Slide 30
tax implications
Provision for impairment of receivables
• Provision for impairment of Provision

receivables changes the carrying for
impairment
amount but not the tax base of of
the receivable Property, receivables
Unutilised
plant &
group relief
- i.e. any movement in the equipment
Fair
provision is eliminated when valuation of
investment
computing current tax Unabsorbed property Unutilised
capital
investment
allowances /
tax credits
unutilised
(BPA)
tax losses Fair
valuation of
investments

PwC Slide 31
tax implications
Provision for impairment of receivables - continued
• Bad debts are deductible for Provision

current tax purposes when they for
impairment
are actually written off of
Property, receivables
• This creates a difference in plant &
Unutilised
group relief
accounting and taxable profits, equipment
Fair
thus giving rise to a temporary valuation of
investment
difference Unabsorbed property Unutilised
capital
investment
allowances /
tax credits
unutilised
(BPA)
tax losses Fair
valuation of
investments

PwC Slide 32
tax implications
Provision for impairment of receivables: example
• Year 1
• Company A made an accounting profit of €100,000
• The accounting profit of €100,000 is stated after the creation of a
provision of €10,000 against impairment of an overdue receivable
• Taxable profit is €110,000
- the movement in the provision is disallowed for tax accounting
purposes
• In the tax computation:
- an increase in provision for impairment of receivables is always
added back to accounting profit in order to determine taxable
profit
- a decrease in provision is deducted from accounting profit
PwC Slide 33
tax implications
Provision for impairment of receivables: - continued
• Year 2
• The overdue debtor has gone into liquidation, and Company X will
only receive the €1,000 of the amount owed to it
• Company X therefore releases the provision (credit to profit or loss)
of €10,000 that it created in Year 1 and writes off the bad debt of
€9,000 (debit to profit or loss)
• Accounting profit in Year 2 is €80,000
• Taxable profit is €70,000
- the movement in provision is not deductible
- the bad debt write off is however deductible

PwC Slide 34
tax implications
Financial statements Tax accounts
Year 1
110,000 Profit before mvmt in provision 110,000
(10,000) Mvmt in provision for impairment -
100,000 Accounting profit / Taxable profit 110,000
Year 2
79,000 Profit before mvmt in provision 79,000
10,000 Mvmt in provision for impairment -
(9,000) Impairment charge (9,000)
80,000 Accounting profit / Taxable profit 70,000
180,000Aggregate profit 180,000

PwC Slide 35
tax implications
• The current tax charge will be:
Year 1 Year 2 Total

€ € €
Accounting profit 100,000 80,000 180,000
Movement in provision for impairment 10,000 (10,000) -
Taxable profit 110,000 70,000 180,000
Current tax charge @ 35% 38,500 24,500 63,000
Current tax charge as a % of accounting profit 38.5% 30.6% 35.0%

PwC Slide 36
tax implications
• The provision gives rise to a deductible temporary difference, i.e. a

deferred tax asset
• The difference is temporary because the provision will be allowed for
current tax purposes at a later stage, i.e. when the loss materialises
Year 1 Year 2 Total

€ € €
Deferred tax (credit)/charge @ 35% (3,500) 3,500 -

PwC Slide 37
tax implications
• The effect of recognising deferred tax is as follows:
Year 1 Year 2 Total

€ € €
Current tax charge 38,500 24,500 63,000

Deferred tax (credit)/charge (3,500) 3,500 -
Tax expense 35,000 28,000 63,000
Tax expense as a % of accounting profit 35.0% 35.0% 35.0%

PwC Slide 38
Deferred tax case study
• In the case study we will consider a fictional company, Company X

• Company X made an accounting profit of €50,000 in each year under
consideration

PwC Slide 39
Provision for impairment of receivables
• Year 1
• The accounting profit of €50,000 is stated after the creation of a
provision of €1,000 against impairment of an overdue receivable
• Year 2
• Accounting profit is also €50,000. The overdue debtor has gone into
liquidation, and Company X will not receive the €1,000 owed to it

PwC Slide 40
• The current tax charge will be:
Year 1 Year 2 Total

€ € €

Taxable profit 51,000 49,000 100,000

PwC Slide 41
• The deferred tax charge will be:
Year 1 Year 2 Total

€ € €
Deferred tax (credit)/charge @ 35% (350) 350 -

PwC Slide 42
Year 1 Year 2 Total

€ € €

Deferred tax (credit)/charge (350) 350 -
Tax expense 17,500 17,500 35,000

PwC Slide 43
tax implications
Property, plant & equipment
It is important to distinguish Provision

between temporary differences for
impairment
that: of
• give rise to deferred tax plant &
Unutilised
group relief
assets/liabilities equipment
Fair
valuation of
• do not give rise to deferred tax investment
Unabsorbed property
assets/liabilities capital
Unutilised
investment
allowances /
tax credits
unutilised
(BPA)
tax losses Fair
valuation of
investments

PwC Slide 44
tax implications
Property, plant & equipment - continued
Temporary differences that give rise to deferred tax assets / liabilities:

• Depreciation for tax purposes (called “capital allowances”) is
calculated at specific rates as determined by the CIR
• These rates may be different from the accounting rates, thus giving
rise to a temporary difference
• The difference is temporary because, over the course of the asset’s
lifetime, the aggregate accounting and aggregate tax depreciation
charges will converge towards each other until both result in a fully
depreciated asset

PwC Slide 45
tax implications
• In calculating the current tax charge, the accounting depreciation is

added back, and the capital allowances are taken as a charge against
profits
• Deferred tax is provided for at 35% on the resultant temporary
difference
• Similarly, when an item of PPE is disposed:
- the accounting profit/loss on disposal is added back to accounting
profit
- tax profit/loss (“balancing charge/allowance”) is taken instead

PwC Slide 46
tax implications
Temporary differences that do not give rise to deferred tax assets /

liabilities:
• Specific criteria must be met for PPE to be allowed by the CIR for tax
(eg. necessarily incurred in income-generation, etc.)
• If the IRD recognition criteria is not met, then the depreciation for
tax purposes is NIL. In this case, the difference when compared to
accounting depreciation will not reverse over time, and the
accounting depreciation is added back to accounting profits with no
further consequence
• In the case of non-commercial vehicles, €14,000 of the value is
allowed by the IRD for depreciation purposes

PwC Slide 47
tax implications
Property, plant & equipment: example 1
• Beginning of Year 1
• Company B purchases laptop computers costing €6,000
• Accounting depreciation rate is 33.3%
• Rate of capital allowances is 25%
• Years 1 - 4
• Accounting depreciation is €2,000 p.a. with the asset being fully
depreciated at the end of Year 3
• Capital allowances are €1,500 p.a. with the asset being fully
depreciated at end of Year 4
• Company B made a an accounting profit before tax of €20,000 p.a.
PwC Slide 48
tax implications
Property, plant & equipment: example 1 - continued
Accounting Tax Diff
€ € €
Year 1
Purchase of asset 6,000 6,000 -
Depreciation charge at 33.3% / 25% (2,000) (1,500) (500)
Accounting NBV / tax WDV at end of year 4,000 4,500 (500)
Year 2
Accounting NBV / tax WDV at end of year 2,000 3,000 (1,000)
Year 3
Accounting NBV / tax WDV at end of year - 1,500 (1,500)
Year 4
Depreciation charge at 0% / 25% - (1,500) 1,500
Accounting NBV / tax WDV at end of year - - -
PwC Slide 49
tax implications
• The current tax charge will be as follows:
Year 1 Year 2 Year 3 Year 4 Total

€ € € € €
Accounting profit 20,000 20,000 20,000 20,000 80,000
Add back a/cing dep'n 2,000 2,000 2,000 - 6,000
Less capital allowances (1,500) (1,500) (1,500) (1,500) (6,000)
Taxable profit 20,500 20,500 20,500 18,500 80,000
Current tax @ 35% 7,175 7,175 7,175 6,475 28,000
Current tax as a % of profit 35.9% 35.9% 35.9% 32.4% 35.0%

PwC Slide 50
tax implications
• The deferred tax (credit)/charge will be as follows:

€ € € € €
Accounting net book value 4,000 2,000 - -
Tax written down value 4,500 3,000 1,500 -
Temporary difference (500) (1,000) (1,500) -
Mvmt in temporary difference (500) (500) (500) 1,500 -
Def tax (credit)/charge @ 35% (175) (175) (175) 525 -

PwC Slide 51
tax implications
• The effect or recognising deferred tax is as follows:

€ € € € €
Current tax charge 7,175 7,175 7,175 6,475 28,000

Def tax (credit)/charge (175) (175) (175) 525 -
Tax expense 7,000 7,000 7,000 7,000 28,000
Tax as a % of profit 35.0% 35.0% 35.0% 35.0% 35.0%

PwC Slide 52
• Company C purchased a non-commercial motor vehicle at a cost of
€28,000
• Both the accounting depreciation rate and the rate of capital
allowances are 20%
• Tax base of the vehicle is initially €14,000
• Years 1 - 4
• Accounting depreciation is €5,600 p.a.
• Capital allowances are €2,800 p.a.
• The above difference does not give rise to deferred tax
assets/liabilities
• Company C made an accounting profit before tax of €60,000 p.a.
PwC Slide 53
Property, plant & equipment: example 2 -
continued
Accounting Tax Difference

€ € €
Year 1
Purchase of asset 28,000 14,000 14,000
Depreciation charge at 20% (5,600) (2,800) (2,800)
NBV / WDV at end of year 22,400 11,200 11,200
Year 2
Year 3
Year 4
Year 5
NBV / WDV at end of year - - -

PwC Slide 54
continued
Year 1 Year 2 Year 3 Year 4 Year 5 Total

€ € € € € €
Accounting profit 60,000 60,000 60,000 60,000 60,000 300,000
Add back a/cing dep'n 5,600 5,600 5,600 5,600 5,600 28,000
Less capital allowances (2,800) (2,800) (2,800) (2,800) (2,800) (14,000)
Taxable profit 62,800 62,800 62,800 62,800 62,800 314,000
Current tax @ 35% 21,980 21,980 21,980 21,980 21,980 109,900
Current tax as % of profit 36.6% 36.6% 36.6% 36.6% 36.6% 36.6%
The above difference does not give rise to a deferred tax asset. Thus,
the effective rate of 36.6% is the final effective tax rate
PwC Slide 55
• Company D purchased electronic equipment at a cost of €8,000
• Year 1
• Accounting depreciation is €2,667
• Capital allowances are €2,000
• Year 2
• Company D disposes of the asset at the beginning of the year for
proceeds of €5,000
• Company D made an accounting profit before tax of €10,000 p.a.
PwC Slide 56
continued
Accounting Tax Diff

€ € €
Year 1
NBV / WDV at end of year 5,333 6,000 (667)
Year 2
Proceeds 5,000 5,000 -
Loss on disposal / Balancing allowance (333) (1,000) 667
Total impact on results
Depreciation charge / Capital allowances (2,667) (2,000) (667)
Loss on disposal / Balancing allowance (333) (1,000) 667
Aggregate impact on results (3,000) (3,000) -

PwC Slide 57
continued
Year 1 Year 2 Total

€ € €
Add back dep'n / loss on disposal 2,667 333 3,000
Less capital allowances / bal allowance (2,000) (1,000) (3,000)
Taxable profit 10,667 9,333 20,000
Current tax as a % of accounting profit 37.3% 32.7% 35.0%

PwC Slide 58
continued
Year 1 Year 2 Total

€ € €
Accounting net book value 5,333 -
Tax written down value 6,000 -
Temporary difference (667) -
Movement in temporary difference (667) 667 -

PwC Slide 59
continued
Year 1 Year 2 Total

€ € €

Tax expense 3,500 3,500 7,000

PwC Slide 60
Property, plant & equipment: scenario 1
• Company X purchases computer hardware costing €12,000

PwC Slide 61
Property, plant & equipment: scenario 1 - continued
Accounting Tax Diff

€ € €
Year 1
Depreciation charge at 33.3% / 25% (4,000) (3,000) (1,000)
Year 2
Year 3
Accounting NBV / tax WDV at end of year - 3,000 (3,000)
Year 4
Depreciation charge at 0% / 25% - (3,000) 3,000
Accounting NBV / tax WDV at end of year - - -
PwC Slide 62

€ € € € €
Add back a/cing dep'n 4,000 4,000 4,000 - 12,000
Less capital allowances (3,000) (3,000) (3,000) (3,000) (12,000)
Taxable profit 51,000 51,000 51,000 47,000 200,000
Current tax @ 35% 17,850 17,850 17,850 16,450 70,000
Current tax as a % of profit 35.7% 35.7% 35.7% 32.9% 35.0%

PwC Slide 63

€ € € € €
Accounting net book value 8,000 4,000 - -
Tax written down value 9,000 6,000 3,000 -
Temporary difference (1,000) (2,000) (3,000) -
Mvmt in temporary difference (1,000) (1,000) (1,000) 3,000 -
Def tax (credit)/charge @ 35% (350) (350) (350) 1,050 -

PwC Slide 64
• The effect or recognising deferred tax is as follows:

€ € € € €
Current tax charge 17,850 17,850 17,850 16,450 70,000

Def tax (credit)/charge (350) (350) (350) 1,050 -
Tax expense 17,500 17,500 17,500 17,500 70,000
Tax as a % of profit 35.0% 35.0% 35.0% 35.0% 35.0%

PwC Slide 65
• Company X also purchases a non-commercial motor vehicle at a cost
of €21,000
• Both the accounting depreciation rate and the rate of capital
allowances are 20%
• Tax base of the vehicle is initially €14,000

PwC Slide 66
Accounting Tax Difference
€ € €
Year 1
Purchase of asset 21,000 14,000 7,000
Year 2
Year 3
Year 4
Year 5
NBV / WDV at end of year - - -

PwC Slide 67
Year 1 Year 2 Year 3 Year 4 Year 5 Total

€ € € € € €
Accounting profit 50,000 50,000 50,000 50,000 50,000 250,000
Add back a/cing dep'n 4,200 4,200 4,200 4,200 4,200 21,000
Less capital allowances (2,800) (2,800) (2,800) (2,800) (2,800) (14,000)
Taxable profit 51,400 51,400 51,400 51,400 51,400 257,000
Current tax @ 35% 17,990 17,990 17,990 17,990 17,990 89,950
Current tax as % of profit 36.0% 36.0% 36.0% 36.0% 36.0% 36.0%

PwC Slide 68
• Company X also purchases electronic equipment at a cost of €4,000
• Year 2
• Company X disposes of the asset at the beginning of the year for
proceeds of €3,500

PwC Slide 69
Accounting Tax Diff

€ € €
Year 1
NBV / WDV at end of year 2,667 3,000 (333)
Year 2
Proceeds 3,500 3,500 -
Profit on disposal / Balancing charge 833 500 333
Total impact on results
Depreciation charge / Capital allowances (1,333) (1,000) (333)
Profit on disposal / Balancing charge 833 500 333
Aggregate impact on results (500) (500) -

PwC Slide 70
Year 1 Year 2 Total

€ € €
Add back dep'n / deduct gain on disposal 1,333 (833) 500
Less capital allowances / add bal charge (1,000) 500 (500)
Taxable profit 50,333 49,667 100,000

PwC Slide 71
Year 1 Year 2 Total

€ € €
Accounting net book value 2,667 -
Tax written down value 3,000 -
Temporary difference (333) -
Movement in temporary difference (333) 333 -

PwC Slide 72
Year 1 Year 2 Total

€ € €

Tax expense 17,500 17,500 35,000

PwC Slide 73
Examples of temporary differences with deferred tax
implications
Unabsorbed cap. allowances/unutilised tax losses & group relief
• Unabsorbed capital allowances,
unutilised tax losses and
unutilised group relief represent Provision
for
losses that can be offset against impairment
of
future trading profits Property, receivables
Unutilised
plant &
• In future periods when trading equipment
group relief
Fair
profits are registered by the valuation of
company, these tax benefits will Unabsorbed
investment
property Unutilised
be deducted from the taxable capital
allowances /
investment
profits, i.e. tax rate will be unutilised
tax credits
(BPA)
applied to the result after these tax losses Fair
valuation of
deductions investments

PwC Slide 74
tax implications
Unutilised tax losses
• The existence of unused tax losses is
strong evidence that future taxable
Tax
planning profit may not be available
opportunities
• Deferred tax assets arising from
Sufficient unused tax losses or tax credits are
suitable taxable recognised only to the extent that:
profits
available? - the entity has sufficient taxable
temporary differences, or
Suitable taxable - there is convincing other evidence
temporary differences that sufficient taxable profit will
available? (eg. right be available against which the
unused tax losses or unused tax
timing, right character)
credits can be utilised by the
IAS 12 - Income taxes
entity July 2018
PwC Slide 75
tax implications
Unutilised tax losses - continued
• At the end of each reporting period, an entity re-assesses

unrecognised deferred tax assets
• The entity recognises a previously unrecognised deferred tax asset to
the extent that it has become probable that future taxable profit will
allow the deferred tax asset to be recovered, eg. an improvement in
trading conditions

PwC Slide 76
Example
• Year 1
• Company E made an accounting loss of €10,000. There were no
temporary differences and the tax loss is also €10,000
• Year 2
• Company E made an accounting profit of €20,000. Taxable profit is
€10,000 (i.e. €20,000 accounting profit less €10,000 unutilised tax
losses brought forward)

PwC Slide 77
Example - continued
Year 1 Year 2 Total

€ € €
Accounting and tax (loss)/profit (10,000) 20,000 10,000
Unutulised tax losses cf/(bf) 10,000 (10,000) -
Chargeable income - 10,000 10,000
Current tax charge @ 35% - 3,500 3,500
Current tax as a % of accounting (loss)/profit 0.0% 17.5% 35.0%

PwC Slide 78
Example - continued
Year 1 Year 2 Total

€ € €
Unutilised tax losses (10,000) -
Movement in unutilised tax losses (10,000) 10,000 -
Deferred tax (credit)/charge @ 35% (3,500) 3,500 -

PwC Slide 79
Example - continued
• The effect of recording deferred tax is as follows:
Year 1 Year 2 Total

€ € €
Accounting (loss)/profit (10,000) 20,000 10,000
Current tax charge - 3,500 3,500

Tax (income)/expense (3,500) 7,000 3,500
Tax (income)/expense as a % of profit 35.0% 35.0% 35.0%

PwC Slide 80
Examples of temporary differences with deferred tax
implications
Unutilised investment tax credits (BPA)
• Tax credits are utilised to deduct
Deferred tax asset at 100%
the tax charge itself (i.e. the
result of applying the tax rate to
Provision for the taxable income), rather than
impairment
of
to reduce the taxable income as
Property,
receivables in the case of unutilised losses
Unutilised
plant &
equipment
group relief • Tax credits therefore reduce the
Fair
valuation of effective tax rate applicable to
Unabsorbed
investment
property Unutilised
the company
capital
investment
allowances /
unutilised
tax credits • Similar considerations, with
tax losses Fair
(BPA)
respect to recognition, apply as
valuation of
investments for unutilised tax losses

PwC Slide 81
Unutilised investment tax credits
Example
• Year 1
• Company F, which qualifies for investment tax credits, broke even in
Year 1. There were no temporary differences and tax results are also
break-even
• The company qualified for tax credits of €5,000, which remain
unutilised in view of not having taxable income
• Year 2
• Company F made an accounting profit of €30,000. Taxable profit is
also €30,000
• The company does have not any tax credits from Year 2 activity, but
has the €5,000 unutilised tax credits brought forward

PwC Slide 82
Example (continued)
Year 1 Year 2 Total

€ € €
Accounting and tax profit - 30,000 30,000
Current tax charge @ 35% before tax credits - 10,500 10,500

Tax credits utilised - (5,000) (5,000)

PwC Slide 83
Example (continued)
Year 1 Year 2 Total

€ € €
Unutilised investment tax credits (5,000) -
Movement in unutilised invetment tax credit (5,000) 5,000
Deferred tax (credit)/ charge @ 100% (5,000) 5,000

PwC Slide 84
Example (continued)
• The effect of recording deferred tax is as follows:
Year 1 Year 2 Total

€ € €
Accounting profit - 30,000 30,000

Tax expense (5,000) 10,500 5,500
Tax (income)/expense as a % of profit N/A 35.0% 18.3%
• The effective tax rate in Year 2 is 35% because the company did not
have any expenditure that qualified for tax credits.
PwC Slide 85
tax implications
Fair valuation of investment property
• When investment property is Provision

fair valued, besides taking the for
impairment
movement in fair value of the of
investment property in profit or Property, receivables
Unutilised
plant &
loss, we should also adjust for equipment
group relief
Fair
the tax liability that would be valuation of
incurred on its disposal Unabsorbed
investment
property Unutilised
capital
• The tax liability may vary, in allowances /
investment
tax credits
accordance with the local tax unutilised
tax losses
(BPA)
Fair
legislation valuation of
investments

PwC Slide 86
tax implications
Fair valuation of investment property - continued
The deferred tax liability on investment property follows the way an

eventual disposal would be charged to current tax. Current tax would
be charged as follows:
• if acquired prior to 1 January 2004: 10% of the proceeds on sale
• If acquired on or after 1 January 2004: 8% of the proceeds on sale

PwC Slide 87
tax implications
Fair valuation of investment property: example
• Company G acquired investment property in 2002

• Carrying amount at commencement of current year is €240,000,
being the value determined from a valuation carried out in the
previous year
• At the end of the year, the fair value is established at €260,000
- fair value gain, credited to profit or loss, is therefore €20,000
• Deferred tax will be charged to profit or loss @ 10% of the fair value
gain of €20,000, i.e. €2,000
• The deferred tax liability, which stood at €24,000 at the
commencement of the current year (i.e. 10% of previous fair value of
€240,000) will now increase to €26,000
PwC Slide 88
tax implications
Fair valuation of investment property: example - continued
Property value Deferred tax

€ €
Balance at 1 January 240,000 24,000
Fair value increase during the year 20,000 2,000
Balance at 31 December 260,000 26,000
Movement for the year:

Dr Deferred tax charge (P&L) 2,000
Cr Deferred tax liability (B/S) 2,000

PwC Slide 89
tax implications
Fair valuation of investments
Deferred tax asset/liability at 35%, or
no deferred tax
• If investments’ subsequent
disposal would be charged to Provision
current tax, then deferred tax is for
impairment
to be provided for of
• If subsequent disposal would plant &
Unutilised
group relief
not be charged to current tax, equipment
Fair
then no timing difference arises valuation of
investment
and therefore no deferred tax is Unabsorbed
capital
property Unutilised
to be provided for allowances /
investment
tax credits
unutilised
(BPA)
tax losses Fair
valuation of
investments

PwC Slide 90
tax implications
Fair valuation of investments - continued
• Not chargeable/deductible for tax purposes:

- Gain/loss of a capital nature on investments quoted on the MSE
- Gain/loss of a capital nature on fixed income debt securities (eg.
MGS)
• Chargeable to current tax:
- Gain of a trading nature on quoted and unquoted investments
- Gain of a capital nature on unquoted investments
• Deductible against taxable income:
- Loss of a trading nature on quoted and unquoted investments
- Loss of a capital nature on unquoted investments
PwC Slide 91
tax implications
• Year 1
• Company H acquires four securities during the year, each at a cost of
€100. The company does not trade in investments
• Security A is a bond that pays fixed rates of interest, Security B is a
bond that pays floating rates of interest, Security C is listed on the
Malta Stock Exchange, and Security D is listed on the Frankfurt Stock
Exchange
• Company H classifies the securities as Available-for-sale, with fair
value movements taken to an equity reserve
• At end of year, the values of the investments have changed as follows:
- A: €120; B: €85;
- C: €110; D: €115
PwC Slide 92
tax implications
• The fair value movements will give rise to the following deferred tax:
Bond Bond Frankfurt
(fixed) (floating) MSE Exchange Total
€ € € € €
Year 1
Balance at 1 January - - - - -
Cost on date of acquisition 100 100 100 100 400
FV movement during the year 20 (15) 10 15 30
Balance at 31 December 120 85 110 115 430
Disposal charged to current tax? O P O P
Def tax (credit)/charge @ 0% / 35% - (5) - 5 -

• Deferred tax is recognised directly in the revaluation reserve
PwC Slide 93
Deferred tax assets
Exemptions from calculating deferred tax
• A deferred tax asset or liability is not recognised if that deferred tax

arises from:
- the initial recognition of goodwill, or
- the initial recognition of an asset or liability in a transaction that:
◦ is not a business combination, and
◦ at the time of the transaction, affects neither accounting profit
nor taxable profit (tax loss)

PwC Slide 94
Exemptions from calculating deferred tax
• Non-deductible goodwill
• Other exemptions
• Group accounting issues

PwC Slide 95
Deferred tax
Selection of a tax rate
• The basic rule is that it should be the relevant rate that is enacted or
substantively enacted by the end of the reporting period
- this is consistent also with the tax rate to be used for current tax
purposes
• Sometimes the rate will depend on how the entity uses the asset, i.e.
does it recover the asset through use in the business or does it
assume settlement (disposal) at the end of the reporting period?
• Usually an entity recovers the value through use in the business and
therefore the income tax rate (corporation tax rate) is used

PwC Slide 96
Deferred tax
Selection of a tax rate: common exceptions
• Companies might decide to revalue their property, plant and

equipment
- property, plant and equipment means tangible items that:
◦ are held for use in the production or supply of goods or services
or for administrative purposes
◦ are expected to be used during more than one period
• Under both IFRS and GAPSME, the revaluation surplus is recognised
directly in equity
- however to the extent that the revalued carrying amount is below
depreciated cost (and hence there exists an aggregate revaluation
deficit), the deficit is recognised in profit or loss

PwC Slide 97
Deferred tax
Selection of a tax rate: common exceptions - continued
• Difficulties can arise when considering the appropriate tax rate for an
asset that is not depreciated for accounting purposes, e.g. land
- the carrying value of a non-depreciable asset is not recovered
through charges such as depreciation
• When land and buildings classified as property, plant and equipment
are revalued the revaluation should be split between:
- land, and
- buildings

PwC Slide 98
Deferred tax
Land
• When a non-depreciable asset is revalued, the deferred tax arising
from that revaluation is determined based on the tax rate applicable
to the recovery of the asset through sale
- this applies even if the entity does not intend to sell the asset
- the rate to use will therefore depend on whether the land was
acquired prior to 1 January 2004 or otherwise

PwC Slide 99
Deferred tax
Buildings
• The carrying amount of the building is assumed to be recovered
through own use and hence depreciated
- therefore, an entity will still depreciate the building component,
compute capital allowances and provide for deferred tax on the
temporary differences arising
• In fact the deferred tax on the building component is calculated at
35% of the revaluation surplus

PwC Slide 100
Deferred tax
Background information:
• Immovable property acquired ten years ago
• Property is used by the company for administration purposes
• Cost of the property was €200,000
• Revaluation model adopted in current year and property revalued to
€280,000 at end of reporting period
- before considering accumulated depreciation on the buildings, the
surplus is therefore €80,000
- in accordance with applicable standards, this change in accounting
policy is applied prospectively

PwC Slide 101
Deferred tax
Total
€
Cost at acquisition 200,000
Fair value at first revaluation date 280,000

Carrying amount (net of applicable dep'n) 190,000
Revaluation surplus 90,000
Deferred tax rate ?
Deferred tax liability ?

PwC Slide 102
Deferred tax
Land Buidlings Total

€ € €
Cost at acquisition 150,000 50,000 200,000
Fair value at first revaluation date 220,000 60,000 280,000

Carrying amount (net of applicable dep'n) 150,000 40,000 190,000
Revaluation surplus 70,000 20,000 90,000
Deferred tax rate 10% 35%
Deferred tax liability 22,000 7,000 29,000

PwC Slide 103
Measurement of deferred tax assets and liabilities
Can tax assets and liabilities be discounted or offset?
• IAS 12 and Section 16 of GAPSME do not permit:

- deferred tax assets or liabilities to be discounted
- the offsetting of tax assets and liabilities unless they relate to the
same tax authority and satisfy various other conditions

PwC Slide 104
Presentation and disclosure

PwC Slide 105
Presentation
• The tax expense (income) related to profit or loss from ordinary

activities shall be presented on the face of the income statement

PwC Slide 106
Presentation
Offsetting
• An entity shall offset current tax assets and current tax liabilities if,
and only if, the entity:
- has a legally enforceable right to set off the recognised amounts;
and
- intends either to settle on a net basis, or to realise the asset and
settle the liability simultaneously.

PwC Slide 107
Presentation
Offsetting – continued
• An entity shall offset deferred tax assets and deferred tax liabilities if,
and only if:
- the entity has a legally enforceable right to set off current tax assets
against current tax liabilities; and
- the deferred tax assets and the deferred tax liabilities relate to
income taxes levied by the same taxation authority on either:
◦ the same taxable entity; or
◦ different taxable entities which intend either to settle current tax
liabilities and assets on a net basis, or to realise the assets and
settle the liabilities simultaneously

PwC Slide 108
Disclosure
Components of tax expense
• The major components of tax expense (income) shall be disclosed

separately
• Components of tax expense (income) may include, amongst others:
- current tax expense (income),
- any adjustments for current tax of prior periods,
- the amount of deferred tax expense (income) relating to
◦ the origination and reversal of temporary differences,
◦ changes in tax rates or the imposition of new taxes,
- the amount of the benefit arising from a previously unrecognised
tax loss, tax credit or temporary difference

PwC Slide 109
Disclosure
Components of tax expense: illustrative examples

PwC Slide 110
Disclosure
Tax reconciliation
• The following shall also be disclosed separately:

- an explanation of the relationship between tax expense (income)
and accounting profit in either or both of the following forms:
◦ a numerical reconciliation between tax expense (income) and
the product of accounting profit multiplied by the applicable tax
rate(s)
◦ a numerical reconciliation between the average effective tax rate
and the applicable tax rate

PwC Slide 111
Disclosure
Other disclosures: illustrative examples - continued

PwC Slide 112
Disclosure
Other disclosures - continued

- the aggregate current and deferred tax relating to items that are
charged or credited to equity
• The following shall also be disclosed separately in respect of each
type of temporary difference, and in respect of each type of unused
tax losses and unused tax credits:
- the amount of the deferred tax assets and liabilities recognised in
the statement of financial position for each period presented
- the amount of the deferred tax income or expense recognised in
the income statement, if this is not apparent from the changes in
the amounts recognised in the statement of financial position

PwC Slide 113
Disclosure
Other disclosures: illustrative examples

PwC Slide 114
Disclosure

- an explanation of changes in the applicable tax rate(s) compared to
the previous accounting period
- the amount (and expiry date, if any) of deductible temporary
differences, unused tax losses, and unused tax credits for which no
deferred tax asset is recognised in the statement of financial
position
- the aggregate amount of temporary differences associated with
investments in subsidiaries, branches and associates and interests
in joint ventures, for which deferred tax liabilities have not been
recognised

PwC Slide 115
Disclosure

PwC Slide 116
Disclosure

- in respect of discontinued operations, the tax expense relating to:
◦ the gain or loss on discontinuance, and
◦ the profit or loss from the ordinary activities of the discontinued
operation for the period, together with the corresponding
amounts for each prior period presented
- the amount of income tax consequences of dividends to
shareholders of the entity that were proposed or declared before
the financial statements were authorised for issue, but are not
recognised as a liability in the financial statements

PwC Slide 117
Disclosure

PwC Slide 118
Disclosure
• An entity shall disclose the amount of deferred tax asset and the
nature of the evidence supporting its recognition, when:
- the utilisation of the deferred tax asset is dependent on future
taxable profits in excess of the profits arising from the reversal of
existing taxable temporary differences, and
- the entity has suffered a loss in either the current or preceding
period in the tax jurisdiction to which the deferred tax asset relates

PwC Slide 119
Tax reconciliation
Example
It is important to keep in mind that any item that:

• features in only one of accounting profit and tax profit, or
• features in both but is taxed at a rate other than 35%
will necessarily feature in the tax reconciliation unless it is charged to
deferred tax at 35%

PwC Slide 120
Tax reconciliation
Example - continued
Taking Company X in Year 1:

• Accounting profit is €50,000
• An increase of €1,000 provision for impairment of receivables was
recognised
• Depreciation on computer hardware is of €4,000 whereas capital
allowances are €3,000. The temporary difference gives rise to
deferred tax implications
• Depreciation on motor vehicles is of €4,200 whereas capital
allowances are €2,800. The difference does not give rise to deferred
tax implications
• Depreciation on electronic equipment is of €1,333 whereas capital
allowances are €1,000

PwC Slide 121
Tax reconciliation
Example - continued
• Fair value gains on investment property, credited to profit or loss,

amounted to €10,000
• Fair value movements on securities, credited to an equity reserve,
amounted to €100
• In addition, the following information also relates to Company X:
- Interest income of €5,000 was subject to final withholding tax @
15%
- Charitable donations amounting to €100 were made
- Disallowed motor vehicle lease expenditure of €300 was incurred
- Rental income of €5,000 was earned from the investment property
(assume that there is no ground rent payable, or administrative
expenses, related to the rental income that was generated)
PwC Slide 122
€ € Deferred tax?
Accounting profit 50,000
Add back
Donations 100 O
Mvmt in prov for impairment of receivables 1,000 P
Depreciation on computer hardware 4,000 P
Depreciation on motor vehicle 4,200 O
Depreciation on office equipment 1,333 P
Disallowed lease expenditure 300 O
Less
Maintenance allowance (1,000) O
Fair value gains on investment property (10,000) P
Capital allowances on computer hardware (3,000) P
Capital allowances on motor vehicle (2,800) O
Capital allowances on office equipment (1,000) P
(6,867)
Tax profit 43,133
Chargeable @ 15%: €5,000 750 O

Chargeable @ 35%: €38,133 13,347
Current tax charge 14,097
PwC Slide 123
Tax reconciliation
Example - continued
• The deferred tax charge for the year has been computed as follows:
€ €
Deferred tax credits
Provision for impairment of receivables (350)
Computer hardware (350)
Office equipment (117)
Deferred tax charges
Fair value gains on investment property 1,000
Deferred tax charge 183

PwC Slide 124
Tax reconciliation
Example - continued
• The tax expense for the year is as follows:
€

Deferred tax charge 183
Tax expense 14,280
Tax expense as a percentage of accounting profit 28.6%
• Through the tax reconciliation we will be explaining the difference between

the tax charge of €14,280 and the product of accounting profit of €50,000 *
35% = €17,500

PwC Slide 125
Tax reconciliation
Example - continued
• These reconciling items, although adjusted for in the current tax

computation, are charged to deferred tax
- as a result they do not feature in the tax reconciliation
Add back
Donations 100 O
Less

PwC Slide 126
Tax reconciliation
Example - continued
• The fair value gains have been charged to deferred tax (since they are
only chargeable to current tax upon disposal of property). However,
the tax rate is 10%, resulting in a decrease in tax charge of (35% -
10%) * €10,000 = €2,500
Add back
Donations 100 O
Less

PwC Slide 127
Tax reconciliation
Example - continued
• In this particular instance, we saw earlier that the depreciation rate

and the rate of capital allowances are the same, and the above
temporary difference does not give rise to deferred tax implications.
This results in an additional tax charge of 35% * (€4,200 - €2,800) =
€490 € € Deferred tax?
Add back
Donations 100 O
Less

PwC Slide 128
Tax reconciliation
Example - continued
• The above expenditure, in line with tax legislation, is disallowed for

tax purposes. This results in an additional tax charge of 35% * (€100
+ €300) = €140
Add back
Donations 100 O
Less

PwC Slide 129
Tax reconciliation
Example - continued
• Local tax legislation allows for 20% maintenance allowance on rental

income. This reduces the tax charge by 35% of €1,000 = €350
Add back
Donations 100 O
Less

PwC Slide 130
Tax reconciliation
Example - continued
Accounting profit
50,000
• Under local tax
Add back legislation,
Donations 100 O
Mvmt in prov for impairment of receivables 1,000 P withholding tax (at
Depreciation on computer hardware
Depreciation on motor vehicle
4,000
4,200
P
O
15%) on investment
Depreciation on office equipment 1,333 P income is final
Less
• This reduces the tax
Fair value gains on investment property (10,000) P charge by (35% -
Capital allowances on motor vehicle (2,800) O 15%) * €5,000 =
Capital allowances on office equipment (1,000)
(6,867)
P
€1,000
Tax profit 43,133
Chargeable @ 15%: €5,000 750 O

Chargeable @ 35%: €38,133 13,347

PwC Slide 131
Tax reconciliation
Example - continued
• The differences can be summarised as follows:
Fin. stats. @ 35% Tax Appl. tax Diff

€ € € € €
Profit before other items 45,933 16,077 45,933 16,077 -
Mvmt in provision * (1,000) (350) (1,000) (350) -
Depreciation * (9,533) (3,337) (8,133) (2,847) 490
Disallowed lease rentals (300) (105) - - 105
FV gains on inv prop * 10,000 3,500 10,000 1,000 (2,500)
Maintenance allowance - - (1,000) (350) (350)
Interest income 5,000 1,750 5,000 750 (1,000)
Donations (100) (35) - - 35
50,000 17,500 50,800 14,280 (3,220)

PwC Slide 132
Tax reconciliation
Example - continued
The tax reconciliation is now complete:
€
Tax on profit at 35% 17,500

Tax effect of:
Income subject to reduced rates of tax (1,000)
Movement in deferred tax determined on the
basis applicable to tax rules (2,500)
Expenses not deductible for tax purposes 630
Other movements (350)
Tax charge 14,280

PwC Slide 133
Tax reconciliation
Example - continued
€

Tax effect of:
Interest income: (35% - 15%) * €5,000 = €1,000
Tax charge 14,280

PwC Slide 134
Tax reconciliation
Example - continued
€

Tax effect of:
OtherInvestment
movementsproperty: (35% - 10%) * €10,000 = €2,500 (350)
Tax charge 14,280

PwC Slide 135
Tax reconciliation
Example - continued
€

Tax effect of:
Depreciation
Income subjectontonon-qualifying asset:
reduced rates of tax €1,400 * 35% = €490 (1,000)
Disallowed
Movement expenditure:
in deferred 35% * (€100
tax determined + €300) = €140
on the
Tax charge 14,280

PwC Slide 136
Tax reconciliation
Example - continued
€

Tax effect of:
Movement Maintenance
in deferred taxallowance:
determined35%
on the
* €1,000 = €350
Tax charge 14,280

PwC Slide 137
Tax reconciliation
Other items that may commonly feature in a tax
reconciliation
• Under or over provision in tax charge from prior years

• Movement in unrecognised deferred tax asset
• Capital gains or losses made on disposal of certain financial
investments
• Share of associates’ results accounted for using the equity method
• Differences arising from the application of the Flat Rate Foreign Tax
Credit (FRFTC)

PwC Slide 138
Conclusion

PwC Slide 139
Current tax recap
The nine-step approach
• Current tax can be broken down into a nine-step approach:

- Calculate accounting profit
- Identify reconciling items between accounting profit and taxable
profit
- Identify unabsorbed capital allowances, tax losses, and group relief
brought forward
- Calculate taxable profit
- Determine tax rates
- Identify tax credits
- Recognise current tax
- Presentation and offsetting
- Disclosure
PwC Slide 140
Deferred tax recap
The nine-step approach
• Deferred tax can be broken down into a nine-step approach:

- Calculate current income tax
- Determine the tax base
- Calculate temporary differences
- Identify exceptions
- Review deductible temporary differences and tax losses
- Determine tax rates
- Recognise deferred tax
- Presentation and offsetting
- Disclosure

PwC Slide 141
www.pwcacademy.com.mt
This material has been prepared for general guidance on matters of interest only, and does not
constitute professional advice. You should not act upon the information contained in this
material without obtaining specific professional advice. No representation or warranty (express
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Limited, each member firm of which is a separate legal entity.

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IAS 12 - Income taxes July 2018

• Accounting for tax expense can provide a number of challenges to the

IAS 12 - Income taxes July 2018

• The following standards, or

IAS 12 - Income taxes July 2018

• Current tax - the amount of income taxes payable (recoverable) in

Taxable profit 100

Current tax charge at 35% 35

IAS 12 - Income taxes July 2018

IAS 12 - Income taxes July 2018

• Tax expense (tax income) - the aggregate amount included in the

IAS 12 - Income taxes July 2018

IAS 12 - Income taxes July 2018

• Current tax expense

IAS 12 - Income taxes July 2018

• Provisional tax payments are a series of advance tax payments in

IAS 12 - Income taxes July 2018

• Provisional tax payments were effected as follows:

IAS 12 - Income taxes July 2018

• As long as the accounting entries are recorded properly, it makes no

IAS 12 - Income taxes July 2018

• Recording tax payments in profit or loss:

IAS 12 - Income taxes July 2018

• Differences between accounting profit and taxable profit may give

Accounting Deferred tax

Fair value Movements Unless trading, only

IAS 12 - Income taxes July 2018

Accounting Deferred tax

IAS 12 - Income taxes July 2018

• Deferred tax liabilities - the amounts of income taxes payable in

IAS 12 - Income taxes July 2018

• Temporary differences - differences between the carrying amount of

Carrying amount Tax base

100 Cost 100

Tax base of an asset

IAS 12 - Income taxes July 2018

Tax base of liability

IAS 12 - Income taxes July 2018

• A “short-cut” is to ask the following question:

IAS 12 - Income taxes July 2018

IAS 12 - Income taxes July 2018

• Deferred tax assets or liabilities do not represent tax currently due or

IAS 12 - Income taxes July 2018

IAS 12 and Section 16 of GAPSME require an entity to account for the

IAS 12 - Income taxes July 2018

• Some items are not recognised as assets or liabilities in the statement

IAS 12 - Income taxes July 2018

• Common examples of temporary

IAS 12 - Income taxes July 2018

• Provision for impairment of Provision

IAS 12 - Income taxes July 2018

• Bad debts are deductible for Provision

IAS 12 - Income taxes July 2018

IAS 12 - Income taxes July 2018

180,000Aggregate profit 180,000

• The current tax charge will be:

Year 1 Year 2 Total

Current tax charge @ 35% 38,500 24,500 63,000

Current tax charge as a % of accounting profit 38.5% 30.6% 35.0%

IAS 12 - Income taxes July 2018

• The provision gives rise to a deductible temporary difference, i.e. a

Year 1 Year 2 Total