AC2101 Seminar 7-8 Deferred Tax Outline

Nanyang Technological University
Nanyang Business School
AC2101 – Accounting Recognition and Measurement

Semester 2, 2020-21
Outline for Seminars 7 to 8: Deferred Tax
Learning objectives:
➢ Analyse the underlying concept, objective and purpose of deferred tax accounting
➢ Apply the concepts of permanent and temporary differences
➢ Explain the relationship between current tax liability/asset and deferred tax
liability/asset
➢ Apply the balance sheet liability approach to current and deferred tax accounting
➢ Apply the accounting for tax losses carry back and carry forward
➢ Explain the presentation and disclosures of current and deferred taxes
Required readings:
• SFRS(I) 1-12 (exclude SFRS(I) 1-12 paras 19, 21, 21A, 21B, 32A, 38-45, 66-68)
• NCKL on FRS 12 (exclude sections 12-230, 12-240, 12-260; these deal with
deferred tax relating to accounting issues that will be covered in AC3102; NCKL
FRS 12 Illustration 19 is out of scope)
Pre-seminar requirements:
• Go through the required readings

• Go through videos and activities on LAMS
• Read the attached illustrations
• Prepare for the in-class activities
In-class activities:
• Responseware
• Illustration 1 (20x8)
• Illustration 3
• Illustration 6 & 7 (Analytical checks)
• Illustration 8 & 9
• Illustration 11 (Analytical check)
• Illustration 14 & 15
• Seminar questions 1, 2 & 3
1
Write-ups and illustrations:
Illustration 1 (Balance Sheet Liability Approach)
Beauty and the Beast Ltd (“BB”) commenced operation in January 20x7. The following
information pertains to year 20x7, ending 31 December 20x7.
1. BB paid a fine of $15,000 to the authorities for the late filing of company
registration documents. This is not tax-deductible.
2. BB earned interest income of $25,000 from local Singapore banks and these are
tax-exempt.
3. BB bought a machine which costs $300,000 which is to be depreciated over 3
years on a straight line basis, with the first year of depreciation beginning in
year 20x7. For tax purpose, capital allowance is to be claimed over two years,
i.e. $200,000 in the first year and $100,000 in the second year.
4. Accrued expense payable at year-end shows a balance of $10,000. For tax
purpose, the related expense is deductible only when paid in cash.
5. Provision of warranty shows a balance of $20,000. For tax purpose, the
warranty expense is deductible only when there is a warranty claim.
6. Net Accounting Profit before Tax was $2,000,000. Tax rate was 20%.
Step 1: Prepare a tax computation to derive the estimated current tax payable to
the tax authority:
20x7
in $’000s
Accounting Profit before Tax $2,000
**
Add: Depreciation $100
Less: Capital allowances ($200)
Add: Accrued expenses $10
Add: Provision for warranty $20
**
Add: Non-deductible fines $15
Less: Tax-exempt interest income ($25)
Taxable Income $1,920

@Current Tax Rate of 20% $384
The journal entry to record the current tax payable will be as follows:
Dr Current Tax Expense (P/L) 384,000

Cr Current Tax Payable (B/S) 384,000
2
Step 2: Uses information in the balance sheet [and other sources, if applicable] to
determine temporary differences to compute the deferred tax liability/asset.
As at 31/12/x7 Carrying Amount Tax Base** TTD/(DTD)**
$’000 $’000 $’000
Machinery 200
Accrued Expense (10)
Provision for (20)
Warranty
Net TTD/(DTD) 70
A temporary difference, i.e. a difference between the carrying amount and the tax base
of the assets and liabilities have implications for future tax payable. Take, for example,
the machinery in Illustration 1, the difference between the carrying amount (CA) of
$200k and the tax base (TB) of $100k represents the amount of adjustments to be done
to future tax computation, i.e. it increases future taxable income by $100k, which
increases future tax payable by $20k. Hence, this gives rise to a taxable temporary
difference (TTD). This TTD that originates in year 20x7 reduces current taxable income
and current tax payable but will increase future taxable income and hence, future tax
payable. This obligation to pay the higher income taxes in future periods gives rise to a
deferred tax liability (DTL).
Assuming a tax rate of 20%, the required ending deferred tax liability for BB as at 31
December 20x7 is $14,000, i.e. **
Deferred Tax Liability Account:

Required Closing Balance as at 31 December 20x7 $ 14,000 Cr
Less Opening Balance as at 1 January 20x7** ($ 0)
Required adjustment for the year** $_14,000 Cr
The journal entry to record the deferred tax liability will be as follows:
Dr Deferred Tax Expense (P/L) 14,000
Cr Deferred Tax Liability (B/S) 14,000
Step 3: Tax expense (Tax income) is the aggregate amount included in the
determination of profit or loss for the period in respect of current tax and deferred
tax (SFRS(I) 1-12 para 5).
Total Tax Expense = Current tax expense + Deferred tax expense
= $384,000 + $14,000 = $398,000
**Analytical Check: Total tax expense = [Current tax rate*(Accounting profit

adjusted for permanent differences)]+[Current tax rate*Unrecognised tax losses in
the year of origination]-[Current tax rate*Utilisation/recognition of previously
unrecognised tax losses in the year of utilization/recognition]+/- [Adjustments to
applicable temporary differences due to change in tax rate]
3
=($2,000k - $25k + $15k)x20% = $398,000.
The following information pertains to year 20x8, ending 31 December 20x8, in addition
to those provided above.
1. BB learnt their lesson and being more experienced avoided any late filings with
the authorities.
2. BB continued to earn tax-exempt interest income of $30,000
3. BB paid off the balance of $10,000 outstanding in the accrued expense payable
account last year but accrues an additional amount of $10,000.
4. BB paid actual warranty claims of $10,000 and provides an additional provision
of $5,000.
5. Net Accounting Profit before Tax was $2,500,000. Tax rate was 20%.
the tax authority:
20x8 in $’000s
**
Add: Depreciation
Less: Capital allowances
Less: Accrued expenses paid
Add: Accrued expenses
Less: Warranty claims paid
Add: Warranty expense
**
Less: Tax-exempt interest income
Taxable Income
@Current Tax Rate of 20%
The journal entry to record the current tax payable will be as follows:
**
4
As at 31/12/x8 Carrying Amount Tax Base TTD/(DTD)
$’000 $’000 $’000
Machinery
Accrued Expense
Provision for
Warranty
Net TTD/(DTD)
Assuming a tax rate of 20%, the required ending deferred tax liability for BB as at 31
December 20x8 is $__________________________________.
Deferred Tax Liability Account:

Required Closing Balance as at 31 December 20x8 $ Dr/Cr
Less Opening Balance as at 1 January 20x8** ($ )Dr/Cr
Required adjustment for the year** $__________Dr/Cr
Given that the deferred tax liability as at 31 December 20x7 was $14,000, it should be
increased (credited) by $1,000 to arrive at the balance of $15,000 to be shown in the
balance sheet as at 31 December 20x8. The journal entry to record the deferred tax
liability will be as follows:
**
= **
Analytical Check: Total tax expense = [Current tax rate*(Accounting profit adjusted
for permanent differences)]+[Current tax rate*Unrecognised tax losses in the year of
origination]-[Current tax rate*Utilisation/recognition of previously unrecognised tax
losses in the year of utilization/recognition]+/- [Adjustments to applicable temporary
differences due to change in tax rate]
=**
5
Illustration 2 (FVPL Equity Securities)
ABC Ltd acquires 100,000 shares of XYZ Ltd in the Singapore Exchange on 15
November 20x1 for cash consideration of $500,000, which it intends to sell in early
20x2 to take advantage of the expected changes in the share prices. The shares are
classified as “FVPL” securities, and the accounting treatment required under SFRS(I)
9 will be as follow:
15/11/x1
Dr Investment in shares 500,000
Cr Cash 500,000
At its accounting year end on 31 December 20x1, the shares of XYZ Ltd are quoted
at the SGX at $6.00 per share.
31/12/x1
Dr Investment in shares 100,000
Cr Unrealised holding gain on investment in shares (P/L) 100,000
In the statement of financial position as at 31 December 20x1, the Investment in

shares will be presented at its fair value of $600,000.
In the profit and loss account for the year ended 31 December 20x1, the unrealized
holding gain on FVPL securities of $100,000 will be included as part of the net profit
or loss for the year.
Assume that tax rules require the FVPL securities to be carried at cost and the
gain/loss on the investment will be taxed on a “realised” basis, i.e. at disposal. Further
assume that there is no other transaction for the entity and beginning deferred tax
liability balance is zero.
In this case, applying the first principle, comparing the carrying amount of $600,000
and the tax base of $500,000 at 31 December 20x1 will give rise to a temporary
difference of $100,000, and assuming a tax rate of 20%, a deferred tax liability of
$20,000 has to be recorded.
Further, applying the second principle, since the unrealised holding gain has been
recognised in the income statement, the deferred tax effect thereof should also be
recognised in income statement (as part of tax expense).
The journal entry to account for deferred tax under SFRS(I) 1-12 will be as follows:
Dr Deferred Tax Expense (P/L) (underlying account) 20,000

6
Illustration 3 (FVOCI Equity Securities)
Refer to Illustration 2 above. Assume that the shares were designated as FVOCI
securities under SFRS(I) 9.
In this case, the accounting treatments will be as follow:
15/11/x1
Dr Investment in FVOCI securities 500,000
Cr Cash 500,000
31/12/x1
Dr Investment in FVOCI securities 100,000
Cr FV Reserve (OCI) 100,000
In its 20x1 financial statements:

❑ Investment in FVOCI securities will be presented at its fair value of $600,000 in
the statement of financial position.
❑ The FVOCI reserves of $100,000 will be present as part of shareholder’s equity
in the statement of financial position.
Assume that tax rules require the FVOCI securities to be carried at cost and gain/loss
on the investment will be taxed on a “realised” basis, i.e. on disposal. Further assume
that there is no other transaction for the entity and beginning deferred tax liability
balance is zero.
In this case, applying the first principle, comparing the carrying amount of $600,000
and the tax base of $500,000 at 31 December 20x1 will give rise to a temporary
difference of $100,000, and assuming a tax rate of 20%, a deferred tax liability of
$20,000 has to be recorded.
Further, applying the second principle, since the unrealised holding gain has been
recognised in the FVOCI reserves, the deferred tax effects thereof should also be
recognised in the reserve account.
The journal entry to account for deferred tax under SFRS(I) 1-12 will be as follows:
Dr FV Reserve (OCI) (underlying account) 20,000

7
Illustration 4 (Non-“Balance Sheet” Items)
DE Ltd has commenced operations and a new research project in the year 20x3. In
accordance with SFRS(I) 1-38 Intangible Assets, research costs of $10,000 incurred
during the year is charged to its Profit and Loss account for the year ended 31
December 20x3.
For tax purposes, research expenses are deductible only in the later period when the
research project is abandoned or when the new products are sold.
In this case, the tax base of the research expense is $10,000 being the amount that the
tax authority will permit as a deduction in the future periods against taxable economic
benefits in the future.
Deductible
Carrying Deferred tax
Tax base temporary
amount asset @25%
difference
31/12/20x3 $0 $10,000 $10,000 $2,500
Assume that there is no other transaction and that it is probable that there is future
taxable profit:
Dr Deferred Tax Asset (B/S) 2,500

Cr Deferred Tax Income (P/L) 2,500
8
Illustration 5 (Correction of Error)
On 1 January 20x7, FG Ltd bought a computer at a cost of $1,200. The depreciation

policy of the company is to depreciate the computer on a straight line basis over 3
years. Tax form filed for the financial year ended 31 December 20x7 duly claimed
1-year of accelerated capital allowance. Assume a tax rate of 25%. Assume that there
is no other transaction and that the beginning deferred tax liability balance on 1
January 20x7 is 0.
On 1 April 20x8, the auditor realised that the financial accountant has forgotten to
provide for depreciation of this computer in the previous year.
Hence, for the year ending 31.12.20x7, only the following entry, JE1, was passed:
No entry for depreciation.
in $’m CA TB CA - TB TTD TR DTL

Computer 1,200 0 1,200 1,200 25% 300
JE1: Dr Deferred Tax Expense (P/L) $300

Cr Deferred Tax Liability (B/S) $300
Had the financial accountant not forget, in the books for the year ending
31.12.20x7, by right, the following entries, JE2 and JE3, should be passed:
JE2: Dr Depreciation $400

Cr Accumulated Depreciation $400
in $’m CA TB CA - TB TTD TR DTL

Computer 800 0 800 800 25% 200
JE3: Dr Deferred Tax Expense (P/L) $200

Cr Deferred Tax Liability (B/S) $200
For the year ending 31 December 20x8, we have to do the following adjusting
entry, i.e. charge all cumulative effects net of tax to Beginning Retained Profit,
to correct prior period error:
Dr Beginning Retained Profit $300 ($400+$200-$300)

Dr Deferred Tax Liability(B/S) $100 ($300-$200)
Cr Accumulated Depreciation $400 (see JE2)
9
Illustration 6 (Tax losses recognised in year of origination)
H Ltd suffered an accounting loss before taxation of $100,000 in 20x5, and made an
accounting profit before taxation of $300,000 in 20x6. Assume that H Ltd has no
temporary differences in prior and current years. Also assume that the tax rate is 30%
and the tax authority allows firms to carry forward their tax losses indefinitely.
For 20x5
the tax authority:
Since H Ltd has no temporary differences, the taxable income/loss = accounting

income/loss. Given that H Ltd has a tax loss of $100,000 for the year 20x5, there is no
current tax payable to the tax authority. No journal entry.
No balance sheet items or accounting policy changes or fundamental errors giving rise
to temporary difference.
Since the tax authority allows the firm to carry forward tax losses to offset against future
taxable income, there is a benefit relating to the tax loss but the realisation of the benefit
is contingent upon sufficient taxable profit being made in subsequent periods. That is,
without the tax losses in 20x5, H Ltd would have a tax payable of $90,000 (30% x
$300,000) instead of $60,000 in 20x6. The tax loss of $100,000 in 20x5 gives rise to
a future tax saving of $30,000 in 20x6.
It may be appreciated, however, that if H Ltd does not make any taxable profit in all
the years subsequent to 20x5 before it is wound up, then the benefit relating to the
tax loss of $100,000 in 20x5 will never be realised.
SFRS(I) 1-12 para 34 states that a deferred tax asset shall be recognised for the
carryforward of unused tax losses and unused tax credits to the extent that it is
probable that future taxable profit will be available against which tax losses and
unused tax credits can be utilised.
Assume that the company has been operating profitably for the past years, and the
loss in 20x5 is due to a specific transaction that is not expected to recur. It is therefore
probable that the company will again be operating profitably in the year 20x6 and
beyond [SFRS(I) 1-12:36], i.e. it is probable that there is future taxable profit.
In this case, applying the provision of paragraph 34, a deferred tax asset in relation
to the loss will be recognised in 20x5, and the related tax benefit is accounted for in
20x5. Thus, the journal entries will be as follows:
Dr Deferred Tax Asset(B/S) 30,000

Cr Deferred Tax Income(P/L) 30,000
(tax saving c/f relating to the loss for the year)
10
For 20x6
the tax authority:
Accounting income before taxation $300,000

Less: Tax losses b/f ($100,000)
Taxable income $200,000

(tax payable on $200,000 of taxable income)
Dr Deferred Tax Income (P/L) 30,000

Cr Deferred Tax Asset (B/S) 30,000
(Utilisation of tax losses c/f)
(The above entries should, in fact, be combined as follows)
Dr Tax expense (P/L) 90,000

Cr Deferred Tax Asset (B/S) 30,000
(tax for the year)
The relevant accounts will be shown in the financial statements of H Ltd as follows:
Profit or loss account
20x5 20x6
$'000 $'000
Profit/(loss) before tax (100) 300
Less: (Tax expense)/income 30 (90)
Profit/(loss) after tax ( 70) 210
Statement of financial position

20x5 20x6
$'000 $'000
Asset
Deferred tax asset 30 -
Liability
Current tax payable - 60
Analytical Check: Total tax expense = [Current tax rate*(Accounting profit/loss

applicable temporary differences due to change in tax rate].
Hence, for 20x5 = (100k) * 0.3=(30k), and for 20x6, 300k * 0.3=90k.
11
Illustration 7 (Tax losses not recognised in year of origination)
Continuing with the case of H Ltd, but now, assume that H Ltd only commenced
operations in 20x5.
For 20x5
the tax authority:
Since H Ltd has no temporary differences, taxable income/loss = accounting

income/loss. Given that H Ltd has a tax loss of $100,000 for the year 20x5, there is no
current tax payable to the tax authority. No journal entry.
No balance sheet items or accounting policy changes or fundamental errors giving rise
to temporary difference.
Since the tax authority allows the firm to carry forward tax losses to offset against future
taxable income, there is a benefit relating to the tax loss but the realisation of the benefit
is contingent upon sufficient taxable profit being made in subsequent periods. Since the
company is a new start-up, it is therefore not probable that the company will again be
operating profitably in the year 20x6 and beyond [SFRS(I) 1-12:36]. SFRS(I) 1-
12:34 does not allow a deferred tax asset to be recorded in 20x5. Hence, also no
journal entry.
However, note that SFRS(I) 1-12:81(e) requires a disclosure of the amount of

deductible temporary differences, unused tax losses, and unused tax credits for which
no deferred tax asset is recognised in the balance sheet.
For 20x6
the tax authority:
Accounting income before taxation $300,000

Less: Tax losses b/f ($100,000)
Taxable income $200,000
The tax saving relating to the $100,000 loss in 20x5 is accounted for in 20x6 when it
is realised. Thus, the journal entries will be as follows:

(tax payable on $200,000 of taxable income)
12
No journal entry.
The relevant accounts will be shown in the financial statements of H Ltd as follows:
Profit or loss account
20x5 20x6
$'000 $'000
Profit/(loss) before tax (100) 300
Less: (Tax expense)/income 0 (60)
Profit/(loss) after tax (100) 240
Statement of financial position

20x5 20x6
$'000 $'000
Asset
Deferred tax asset - -
Liability
Current tax payable - 60

Hence, for 20x5 = (100k) * 0.3+100k * 0.3 = 0

For 20x6, 300k * 0.3 - 100k * 0.3 = 60k.
13
Illustration 8 (Tax losses recognised to the extent of TTD)
IJ Ltd started operations in 20x1 and has been incurring losses. The tax losses as at 20x4
as reported on the firm’s tax computation filed with the tax authority is $10,000. In
20x5, the accounting profit before taxation is $30,000. It bought a high-tech machine at
$240,000. The tax authority allows them a one-year accelerated capital allowance while
the company depreciates this machine on a straight line basis over two years. The
relevant tax rate is 25%.
For 20x5
the tax authority:
Accounting income before taxation
Add: Depreciation for the year
Less: Unutilised losses b/f from prior
years
Less: Capital Allowance for the year
Unutilised tax losses/credits to be c/f
Given that IJ Ltd has total tax losses/credits of $100,000 to be carried forward for the
year 20x5, there is no current tax payable to the tax authority. No journal entry.
Assume no other balance sheet items and temporary differences,

As at 31/12/x5 Carrying amount Tax base TTD
Machinery
Note that there is no prior opening balance in DTA/DTL, hence,

** Cr Deferred Tax Liability (B/S) 30,000
carryforward of unused tax losses and unused tax credits to the extent that it is
probable that future taxable profit will be available against which tax losses and
unused tax credits can be utilised.
SFRS(I) 1-12 para 35 states that when an entity has a history of recent losses, the
entity recognises a deferred tax asset arising from unused tax losses or tax credits
only to the extent that the entity has sufficient taxable temporary differences. In this
case, there is TTD of $120,000, which is more than the losses/credits of $100,000
carried forward. Hence, the following entry is passed in respect of the unutilised tax
losses/credits of $100,000 carried forward:
**
Cr Deferred Tax Income(P/L) 25,000
(tax saving c/f relating to the tax losses)
The above journal entries can also be combined as follow.

**
14
Illustration 9 (Tax losses recognised to the extent of TTD)
KL Ltd started operations in 20x1 and has been incurring losses. The tax losses as at 20x4
as reported on the firm’s tax computation filed with the tax authority is $70,000. In 20x5,
the accounting profit before taxation is $10,000. It bought a high-tech machine at $80,000.
The tax authority allows them a one-year accelerated capital allowance while the company
depreciates this machine on a straight line basis over two years. The relevant tax rate is
25%.
For 20x5
Step 1: Prepare a tax computation to derive the estimated current tax payable to the
tax authority:
Accounting income before taxation
Add: Depreciation
Less: Unutilised losses b/f from prior years
Less: Capital Allowance
Total tax losses/credits to be c/f
Given that KL Ltd has total tax losses/credits of $100,000 to be carried forward for the year
20x5, there is no current tax payable to the tax authority. No journal entry.
Assume no other balance sheet items and temporary differences,
As at 31/12/x5 Carrying amount Tax base TTD
Machinery
Note that there is no prior opening balance, hence,

**
carryforward of unused tax losses and unused tax credits to the extent that it is probable
that future taxable profit will be available against which tax losses and unused tax credits
can be utilised.
SFRS(I) 1-12 para 35 states that when an entity has a history of recent losses, the entity
recognises a deferred tax asset arising from unused tax losses or tax credits only to the
extent that the entity has sufficient taxable temporary differences. In this case, there is
TTD of $40,000, which is less than the losses/credits to be carried forward. Hence, the
amount of losses/credits recognised is capped. The following entry is passed:
**Cr Deferred Tax Income (P/L) 10,000
(tax saving c/f relating to the tax losses)
Note that SFRS(I) 1-12, para 82 requires disclosure of the amount of the deferred tax
asset and the nature of the evidence supporting its recognition. The effect of the above
two journal entries is, of course, nil. Going forward, the amount of unrecognised losses
that needs to be assessed is $60,000
15
Illustration 10 (Tax losses carried back)
M Ltd has the following taxable profit/(loss) for Year 1 and 2. Assume an applicable tax
rate of 20%.
Year 1 Year 2
Taxable profit/(loss) $80,000 ($100,000)
In Year 2, M Ltd suffered a taxable loss of $100,000 but it expected to have sufficient
taxable profit in Year 3 and beyond to utilize Year 2’s taxable loss.
Assume that M Ltd qualifies and plans to carry back the taxable loss to offset against its
Year 1’s taxable profit.
Dr Current Tax Receivable (B/S) 16,000

Cr Current Tax Income (P/L) 16,000

Cr Deferred Tax Income (P/L) 4,000
Combining the entries:

Dr Current Tax Receivable (B/S) 16,000
Cr Tax Income (P/L) 20,000
16
Illustration 11 (Change in tax rate)
N Ltd has a taxable income of $100,000 for the year ended 31 March 2009. Its taxable
temporary differences have increased from $50,000 as at 31 March 2008 to $60,000
as at 31 March 2009.
On 22 January 2009, Minister of Finance of Singapore announced in the Budget

Speech that corporate tax rate will be reduced from 18% to 17% from Year of
Assessment (YA) 2010, i.e. for the year ending 31 March 2009.
In this case:
❑ the current tax payable will be $17,000, measured based on 17%, and
❑ the deferred tax liability as at 31 March 2009 will be $10,200 ($60,000 x 17%)
(The deferred tax liability as at 31 March 2008 was $9,000 ($50,000 x 18%)).
The journal entry to record the tax expense will be as follow:
Dr Tax expense (P/L) 18,200

The tax expense charged to the income statement for the year ended 31 March 2009
will therefore be $18,200.
In the balance sheet as at 31 March 2009, the current tax payable will be carried at
$17,000 (assuming there is no current tax asset or liability carried forward from the
previous periods), and the deferred tax liability will be carried at $10,200.

Accounting profit =$100,000 + $10,000 = $110,000

**
$110,000 * 17% - ($50,000 * 1%) = $18,200
17
Illustration 12 (SFRS(I) 1-12:51A)
OP Ltd purchased a machine on 1 January 20x1 for $120,000 and accounted for it under
SFRS(I) 1-16 Cost Model. This was subject to straight line depreciation over a period
of 6 years and available for capital allowance with the tax authority on a straight line
basis over two years. A tax rate of 20% would apply if the machine was sold and a tax
rate of 30% would apply to other income.
At the end of 31 December 20x1, if OP Ltd expects to sell the machine, then
in $’000 CA TB CA - TB TTD TR DTL

Machine 100 60 40 40 20% 8
At the end of 31 December 20x1, if OP Ltd expects to retain the machine and recover
its carrying amount through use, then
in $’000 CA TB CA - TB TTD TR DTL

Machine 100 60 40 40 30% 12
18
Illustration 13 Land – Revaluation Model (SFRS(I) 1-12:51B)
QR Ltd acquires a piece of freehold (non-depreciable) land in 20x5 at a cost of

$10,000,000 with cash. It is using the piece of land for business operations purposes
and is accounting for it under SFRS(I) 1-16 Revaluation Model. On 31 December
20x6, the land is re-valued to $12,000,000.
SFRS(I) 1-12 para 51B states that if a deferred tax liability or deferred tax asset arises
from a non-depreciable asset measured using the revaluation model in SFRS(1) 1-
16, the measurement of the deferred tax liability or deferred tax asset shall reflect the
tax consequences of recovering the carrying amount of the non-depreciable asset
through sale, regardless of the basis of measuring the carrying amount of that asset.
Accordingly, if the tax law specifies a tax rate applicable to the taxable amount
derived from the sale of an asset that differs from the tax rate applicable to the taxable
amount derived from using an asset, the former rate is applied in measuring the
deferred tax liability of asset related to a non-depreciable asset.
Scenario A:
Assume that tax rate on the profit from the sale of land is subject to tax at 20% and
tax rate on other income from the use of the land is subject to tax at 30%. In this case,
based on SFRS(I) 1-12 para 51B, the tax rate of 20% is used.
At the point of acquisition in 20x5:

in $’m CA TB CA - TB TTD TR DTL(A)
Land 10 10 10 - 10 0 20% 0
Dr Land 10,000,000
Cr Cash 10,000,000
Subsequently, when the land is re-valued, the revaluation is recorded as follows:
Dr Land 2,000,000
Cr Revaluation reserve 2,000,000
The carrying amount of the land is now $12,000,000. The tax base is the amount that
will be deductible against taxable economic benefits in the future, i.e. $10,000,000.
This gives rise to a taxable temporary difference of $2,000,000, being the difference
between the carrying amount of $12,000,000 and the tax base of $10,000,000.

Land 12 10 12 - 10 2 20% 0.4
If land were to be sold for $12 million, there will be a profit of $2 million, and there
will be additional tax of $400,000 to be paid in the future. Therefore, under 1st
Principle, a deferred tax liability of $400,000 ($2,000,000 x 20%) should be
recognised.
19
Under 2nd principle, since the revaluation surplus is recorded directly in equity, the
deferred tax liability should similarly be taken directly to equity (the underlying
account). Consequently, the revaluation will be recorded as follows:
Dr Revaluation reserve 400,000
Cr Deferred Tax Liability 400,000
(The above journal entries may, of course, be combined as follow)
Dr Land 2,000,000
Cr Deferred Tax Liability 400,000
Scenario B:
Assume that profit upon the sale of land is not subject to tax as the tax rate is 0%, i.e.
tax-exempt.

Land 10 0 10 - 0 10 0% 0
Dr Land 10,000,000
Cr Cash 10,000,000
In this case, when the land is re-valued, the revaluation is recorded as follows:
Dr Land 2,000,000
The carrying amount of the land is now $12,000,000.

Land 12 0 12 - 0 12 0% 0
If land were to be sold for $12 million, there will be a profit of $2 million. However,
this is tax-exempt (0% tax rate). Therefore, no deferred tax liability is recognised.
An alternative analysis is the following: one may argue that the tax base of the asset
is deemed equal to the carrying amount based on SFRS(I) 1-12 para 7 in the case
where the economic benefit embodied in the asset will not be taxable.

Land 12 12 12 - 12 0 0% 0
20
Illustration 14 Investment Property – Fair Value Model (SFRS(I) 1-12:51C)
ST Ltd acquires a piece of freehold (non-depreciable) land in early 20x5 at a cost of

$10,000,000 with cash and is holding it for investment purpose. It is accounting for
it under SFRS(I) 1-40 Fair Value Model. On 31 December 20x5, the land is re-valued
to $12,000,000.
Under SFRS(I) 1-12:51C, if a DTL/A arises from investment property that is

measured using the fair value model in SFRS(I) 1-40, there is a rebuttable
presumption that the carrying amount of the IP will be recovered through sale and
the DTL/A shall reflect the tax consequences of recovering the CA of the IP through
sale.
Scenario A:
Assume that tax rate on the profit from the sale of land is subject to tax at 20% and
tax rate on other income from the use of the land is subject to tax at 30%. In this case,
based on SFRS(I) 1-12 para 51C, the tax rate of 20% is used.

Land 10 10 10 - 10 0 20% 0
Dr Land (IP) 10,000,000

Cr Cash 10,000,000
Subsequently, when the land is re-valued, the revaluation is recorded as follows:
Dr
**Land (IP) 2,000,000
Cr Fair value gain (P/L) 2,000,000
The carrying amount of the land is now $12,000,000. The tax base is the amount that
will be deductible against taxable economic benefits in the future, i.e. $10,000,000.
This gives rise to a taxable temporary difference of $2,000,000, being the difference
between the carrying amount of $12,000,000 and the tax base of $10,000,000.

Land
If land were to be sold for $12 million, there will be a profit of $2 million, and there
will be additional tax of $400,000 to be paid in the future. Therefore, under 1st
Principle, a deferred tax liability of $400,000 ($2,000,000 x 20%) should be
recognised.
Under 2nd principle, since the revaluation gain is recorded directly in P/L, the deferred
tax liability should similarly be taken directly to the P/L (the underlying account).
Consequently, the gain in fair value will be recorded as follows:
** Deferred Tax Liability (B/S)
Cr 400,000
21
Scenario B:
Assume that profit upon the sale of land is not subject to tax as the tax rate is 0%,,
i.e. tax-exempt.

Land 10 0 10 - 0 10 0% 0
Dr Land (IP) 10,000,000

Cr Cash 10,000,000
In this case, when the land is re-valued, the revaluation is recorded as follows:
Dr Land (IP) 2,000,000

Cr Fair value gain (P/L) 2,000,000
The carrying amount of the land is now $12,000,000.

Land 12 0 12 - 0 12 0% 0
If land were to be sold for $12 million, there will be a profit of $2 million. However,
this is tax-exempt (0% tax rate). Therefore, no deferred tax liability is recognised.
An alternative analysis is the following: one may argue that the tax base of the asset
is deemed equal to the carrying amount based on SFRS(I) 1-12 para 7 in the case
where the economic benefit embodied in the asset will not be taxable.

Land 12 12 12 - 12 0 0% 0
22
Illustration 15 (Disclosures required under SFRS(I) 1-12)
U Ltd is in its first year of operations and reports an accounting profit of $1,000,000
for the year ended 31 December 20x5. U Ltd purchased a machine at the start of the
financial year at a cost of $1,000,000. This machine was depreciated on a straight-
line basis over 5 years starting from the current financial year and capital allowance
is claimed on a straight-line basis over 2 years starting from the current financial
year. There was also goodwill impairment of $100,000 included in the accounting
profit (which is not tax deductible). Assume a tax rate of 25%.
the tax authority:
20x5
in $’000s
+/- Current Temporary Differences
Add: Depreciation
Less: Capital allowances
+/- Permanent Differences

Add: Non-deductible goodwill
impairment
Taxable Income
@Current Tax Rate of 25%
As at 31/12/x5 Carrying Amount Tax Base TTD/(DTD)
$’000 $’000 $’000
Machinery
Assuming a tax rate of 25%, the required ending deferred tax liability for U Ltd as at 31
December 20x5 is $75,000, i.e. $300,000x25%.
Deferred Tax Liability/Asset Account:

Required Closing Balance as at 31 December 20x5 $ Dr/Cr
Less Opening Balance as at 1 January 20x5 ($ )__
Required adjustment for the year $ Dr/Cr
23

= $200,000 + $75,000 = $275,000
Analytical Check: Total tax expense = [Current tax rate*(Accounting profit adjusted
for permanent differences)]+[Current tax rate*Unrecognised tax losses in the year of
origination]-[Current tax rate*Utilisation/recognition of previously unrecognised tax
losses in the year of utilization/recognition]+/- [Adjustments to applicable temporary
differences due to change in tax rate]
=**($1000k + $100k) x 25% = $275,000.
It may be appreciated that applying a tax rate of 25% on the accounting profit of
$1,000,000 will yield a tax expense of $250,000. Also, expressing the reported tax
expense of $275,000 as a percentage of the accounting profit of $1,000,000 will yield
27.5%.
In this case, SFRS(I) 1-12 requires disclosure of an explanation of the relationship

between tax expense (income) and the accounting profit in the form of (i) a numerical
reconciliation between tax expense (income), i.e. in this case $275,000 and the
product of accounting profit multiplied by the applicable tax rate(s) amounting to
$250,000, or (ii) a numerical reconciliation between the average effective tax rate,
i.e. tax expense/accounting profit before tax x 100% or 27.5% and the applicable tax
rate of 25%, or both (i) and (ii).
The following is (i) a numerical reconciliation between tax expense (income) and the
product of accounting profit multiplied by the applicable tax rate:
Accounting profit $1,000,000
in $’000s
Tax at 25% 250
Tax effect of goodwill impairment 25
Tax expense 275
The following is (ii) a numerical reconciliation between the effective tax rate and the
applicable statutory tax rate
Accounting profit $1,000,000
Statutory tax rate 25.0%

Tax effect of goodwill impairment 2.5%
Effective tax rate 27.5%
24
Seminar questions:
Seminar Question 1
Assume that A Ltd operated for only three years and income tax was levied on A
Ltd only during the three years of operations. The following are some of the revenue
and expense items used in determining A Ltd’s accounting profit and taxable profit
for the three years.
In
Accounting Profit Taxable Profit
$’000
Year Year Year Year Year Year
1 2 3 1 2 3
Item A 100 0 0 0 0 0
Item B 100 150 200 200 180 70
Item C 0 0 (50) 0 0 0
Item D (30) 0 0 0 (60) 0
Item E (80) (40) 0 0 0 (120)
Item F (70) 20 0 0 0 (50)
Profit 20 130 150 200 120 (100)
Given the treatment of the above six items in determining the annual accounting
profit and taxable profit, state the items that fall into each of the following
categories of differences between accounting profit and taxable profit.
Item #
(a) Permanent difference only………………………………………..
(b) Temporary difference only……………………………………….
(c) Both permanent and temporary difference……………………….
Seminar Question 2 (Team Activity #1)
On 5 May 20x5, A Ltd (the company) acquired 1,000,000 ordinary shares of B Ltd
at $4.00 per share plus transaction costs of $10,000. A Ltd elected to classify B Ltd
shares at fair value through other comprehensive income (FVOCI).
At the company’s accounting year end on 31 December 20x5, ordinary shares of B

Ltd were trading at $5.00 per share.
25
On 6 June 20x6, interim cash dividend of $100,000 was received from B Ltd, which
has opted for the one-tier system of dividend since 1 January 20x5. Under this
system, shareholders will not be taxed on the dividend income.
On 10 October 20x6, the company acquired 1,000,000 ordinary shares of C Ltd

traded on the SGX at $3.00 per share plus transaction costs of $10,000. The shares
in C Ltd were acquired with an intention of resale in early 20x7 to take advantage of
the expected increase in share price.
At the company’s accounting year end on 31 December 20x6, the shares were quoted
on the SGX as follows:
• Ordinary shares of B Ltd: $6.00 per share
• Ordinary shares of C Ltd: $4.00 per share
On 2 February 20x7, the shares in C Ltd were sold for $4,500,000.
On 4 April 20x7, due to cash flow problems, the company sold the investment in B
Ltd for $7,000,000.
The company complies with all SFRS, including SFRS(I) 1-12 Income Taxes and
SFRS(1) 9 Financial Instruments.
The company has agreed with IRAS that gains/losses on the above investments in
shares are subject to tax at a rate of 20% only when they are realised upon disposal.
Transaction costs are deductible when expensed. Assume that the company has
taxable profit in all the years of operations. Also assume that it is probable that the
company will have sufficient taxable profit in the future for the utilization of any
deferred tax asset.
Required
(Show all supporting calculations. Round off all calculations to the nearest $’000.)
(a) Prepare all the journal entries in relation to the company’s investment in the
shares of B Ltd from 5 May 20x5 to 4 April 20x7, in compliance with the
provisions of SFRS(I) 9 and SFRS(I) 1-12. Indicate clearly whether gains/losses
and the related deferred tax effects are taken to the income statement or directly
to a reserve account.
(b) Prepare all the journal entries in relation to the company’s investment in the
shares of C Ltd from 10 October 20x6 to 2 February 20x7, in compliance with
the provisions of SFRS(I) 9 and SFRS(I) 1-12. Indicate clearly whether
gains/losses and the related deferred tax effects are taken to the income
statement or directly to a reserve account.
26
Seminar Question 3 (Team Activity #2)
Lex Ltd reported a pre-tax operating loss of $135 million for financial reporting
purposes in 20x2. Contributing to the loss were:
(a) a penalty of $5 million assessed by the Ministry of the Environment for violation
of an anti-dumping law and paid in 20x2 (this is not tax deductible under the
Income Tax Act), and
(b)a provision for an estimated loss of $10 million. This accrued loss will be tax
deductible when paid in 20x3.
Lex Ltd expects to have sufficient taxable income in 20x3 and beyond to utilize
20x2’s taxable loss. There were no temporary differences at the beginning of the
year and none originating in 20x2 other than those described above.
Taxable income in Lex Ltd’s two previous years of operation was as follows –
Year 20x0: $75 million

Year 20x1: $30 million
The tax rate is 20%. Lex Ltd complies with SFRS(I) 1-12 Income Taxes.
Required
(a) Prepare the journal entries to recognize the tax income or benefit of the
operating loss in 20x2, showing both current and deferred taxes. Lex Ltd always
elects the carryback option first (assume that carryback is allowed up to 2 years
preceding the year of loss with no cap on the amount).
(b) Show the portion of the 20x2 statement of profit or loss that reports the tax
income or benefit of the operating loss.
(c) Prepare the journal entries to record taxes (both current and deferred) in 20x3
assuming that pre-tax accounting income for 20x3 is $60 million. No additional
permanent or temporary differences originate in 20x3.
27
Team Activity #1
As a team, discuss and complete the following computations needed to prepare the
journal entries for Seminar Question 2
Investment in B Shares (FVOCI)
5/5/20x5
Dr Investment in FVOCI shares
Cr Cash
31/12/20x5
Cr Fair value reserve (OCI)
CA TB End For the

in $’000s TTD/(DTD) TR Prior Bal
DTL(A) year
Invm in B
Dr Fair value reserve (OCI)

Cr Deferred tax liability
6/6/20x6
Dr Cash
Cr Dividend income
31/12/20x6
CA TB End For the

DTL(A) year
Invm in B

4/4/20x7

Dr Cash
Cr Investment in FVOCI shares
28
Or, combining the two entries
Dr Cash
Cr Investment in FVOCI shares
CA TB End For the

DTL(A) year
Invm in B
Dr Deferred tax liability

Note that on disposal, tax is payable on the total gains from investment:

Cr Current tax payable
After disposal, the total gains from investment, net of tax, in fair value reserve (OCI)
can be transferred within equity. For example,

Cr Retained earnings
Investment in C Shares (FVPL)
10/10/20x6
Dr Investment in trading shares
Dr Transaction expenses
Cr Cash
31/12/20x6
Dr Investment in trading shares
Cr Mark-to-market gain (P/L)
CA TB End For the

DTL(A) year
Invm in C
Dr Deferred tax expense

2/2/20x7
Dr Cash
Cr Investment in trading shares
Cr Gain on disposal of trading shares
29
CA TB End For the
DTL(A) year
Invm in C 0 20% 0 200 (200)

Cr Deferred tax expense
Note that tax is payable on the gain on disposal.
Dr Current tax expense

Combining the two tax journal entries:

Dr Tax expense
30
Team Activity #2
As a team, discuss and complete the following computations needed to prepare the
journal entries for Seminar Question 3
(a)
Step 1: Prepare a tax computation to derive the estimated current tax payable to the tax
authority.
20x2
Accounting Profit before Tax
Add: Provision for loss

Add: Disallowed penalty expense
Taxable Loss
What is the taxable income/loss for 20x2?
What is the amount of loss carried back for 20x2?
What is the amount of tax recoverable from previous years?
Step 2: Use information in the balance sheet [and other sources, if applicable] to
determine temporary differences to compute the deferred tax liability/ asset.
CA TB TTD/(DTD) TR DTL/(A) Prior For

Bal the
year
Provision
for loss
What is the amount loss carried forward for 20x2?
Can a deferred tax asset be recognised?
Yes / No
31
Why?
How much DTA can be recognised?
Journal Entries for 20x2:
Dr Tax Receivable
Cr Tax expense
Dr DTA
Cr Tax expense
Dr DTA
Cr Tax expense
These journal entries can be combined as follows:
Dr Tax Receivable
Dr DTA
Cr Tax expense
Analytical Check: Total tax expense = [Current tax rate*(Accounting profit

(b)
($ in millions)
Loss before income taxes ________
Less: Income tax credit or benefit from –
Tax refund from loss carryback ________
Future tax benefits ________
Total ________
Net loss ________
32
(c)
Step 1: Prepare a tax computation to derive the estimated current tax payable to the tax
authority.
20x3
Accounting Profit before Tax
Less: Provision for loss
Less: Tax losses b/f
Taxable Income
Tax @20%
Step 2: Use information in the balance sheet [and other sources, if applicable] to
determine temporary differences to compute the deferred tax liability/ asset.
CA TB TTD/(DTD) TR DTL/(A) Prior For

Bal the
year
Provision
for loss
Journal Entries for 20x3:
Dr Tax expenses
Dr Tax expense
Cr DTA
Dr Tax expense
Cr DTA
These journal entries can be combined as follows:
Dr Income tax expense

Cr Tax payable
Cr DTA
Analytical Check: Total tax expense = [Current tax rate*(Accounting profit

33

AC2101 Seminar 7-8 Deferred Tax Outline

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Nanyang Technological University

Nanyang Business School

AC2101 – Accounting Recognition and Measurement

Outline for Seminars 7 to 8: Deferred Tax

• Go through the required readings

Illustration 1 (Balance Sheet Liability Approach)

Taxable Income $1,920

Dr Current Tax Expense (P/L) 384,000

Deferred Tax Liability Account:

Total Tax Expense = Current tax expense + Deferred tax expense

= $384,000 + $14,000 = $398,000

**Analytical Check: Total tax expense = [Current tax rate*(Accounting profit

Deferred Tax Liability Account:

Total Tax Expense = Current tax expense + Deferred tax expense

In the statement of financial position as at 31 December 20x1, the Investment in

Dr Deferred Tax Expense (P/L) (underlying account) 20,000

In this case, the accounting treatments will be as follow:

In its 20x1 financial statements:

Dr FV Reserve (OCI) (underlying account) 20,000

Dr Deferred Tax Asset (B/S) 2,500

On 1 January 20x7, FG Ltd bought a computer at a cost of $1,200. The depreciation

No entry for depreciation.

in $’m CA TB CA - TB TTD TR DTL

JE1: Dr Deferred Tax Expense (P/L) $300

JE2: Dr Depreciation $400

in $’m CA TB CA - TB TTD TR DTL

JE3: Dr Deferred Tax Expense (P/L) $200

Dr Beginning Retained Profit $300 ($400+$200-$300)

Since H Ltd has no temporary differences, the taxable income/loss = accounting

Dr Deferred Tax Asset(B/S) 30,000

Accounting income before taxation $300,000

Dr Current Tax Expense (P/L) 60,000

Dr Deferred Tax Income (P/L) 30,000

(The above entries should, in fact, be combined as follows)

Dr Tax expense (P/L) 90,000

Statement of financial position

Analytical Check: Total tax expense = [Current tax rate*(Accounting profit/loss

Since H Ltd has no temporary differences, taxable income/loss = accounting

However, note that SFRS(I) 1-12:81(e) requires a disclosure of the amount of

Accounting income before taxation $300,000

Dr Current Tax Expense (P/L) 60,000

Statement of financial position

Analytical Check: Total tax expense = [Current tax rate*(Accounting profit/loss

Hence, for 20x5 = (100k) * 0.3+100k * 0.3 = 0

Assume no other balance sheet items and temporary differences,

Note that there is no prior opening balance in DTA/DTL, hence,

The above journal entries can also be combined as follow.

Note that there is no prior opening balance, hence,

Dr Current Tax Receivable (B/S) 16,000

Dr Deferred Tax Asset (B/S) 4,000

Combining the entries:

On 22 January 2009, Minister of Finance of Singapore announced in the Budget

The journal entry to record the tax expense will be as follow:

Dr Tax expense (P/L) 18,200

Analytical Check: Total tax expense = [Current tax rate*(Accounting profit/loss

Accounting profit =$100,000 + $10,000 = $110,000

in $’000 CA TB CA - TB TTD TR DTL

in $’000 CA TB CA - TB TTD TR DTL