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IAS 12 Chapter 11
Accounting for
Income Tax Taxes on Income

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Copyright © 2019 by McGraw-Hill Education (Asia). All rights reserved. 2

Learning Objectives Content

1. Understand the concept of temporary differences, and tax base of 1.

1. Introduction
Introduction
an asset and tax base of a liability;
2. Permanent differences & temporary differences
2. Understand the concept of deferred tax as a liability and an asset;
3. Tax base
3. Apply the balance sheet approach in determining the balances of
4. Accounting for current income tax
a deferred tax liability and a deferred tax asset;
5. Accounting for deferred income tax
4. Check the tax expense analytically;

5. Apply appropriate principles to situations of tax losses;

6. Reconciliation and Analytical Check on Tax Expense

6. Present appropriately the tax effects of other comprehensive

in the Income Statement
income or items taken directly to equity; 7. Accounting for Unused Tax Losses
8. Presentation and Disclosures
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Objective of IAS 12 Content

1. Understand the concept of temporary differences, and tax base of an 1. Introduction

asset and tax base of a liability; 2. Permanent
Permanentdifferences
differences &
& temporary differences
temporary differences
2. Understand the concept of deferred tax as a liability and an asset; 3. Tax base
3. Apply the balance sheet approach in determining the balances of a 4. Accounting for current income tax
deferred tax liability and a deferred tax asset; 5. Accounting for deferred income tax
4. Check the tax expense analytically; 6. Reconciliation and Analytical Check on Tax Expense
5. Apply appropriate principles to situations of tax losses; in the Income Statement
6. Present appropriately the tax effects of other comprehensive income 7. Accounting for Unused Tax Losses
5 or items taken directly to equity; 8. Presentation and Disclosures
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Diferences
Accounting profit/loss Diferences
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Profit or loss for the period before deducting tax expense
 Accounting profit: Net profit or loss
Expenses recognized, but non-deductible for tax purposes for the reporting period before Permanent
Income not recognized, but included tax law deducting income tax expense. differences
Expenses not recognized, but deductible for tax purposes
Income recognized, but not under tax law Differences

Temporary
 Tax profit (loss)- Tax income: The
Taxable profit/loss profit (loss) for taxable period,
differences
determined in accordance with the
rules established by the taxation
Profit or loss for the period determined in accordance with authorities, upon which income
applicable tax rules taxes or payable (recoverable)

Differences

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Differences
Permanent differences & temporary differences
9 
Temporary Differences
Temporary differences arise from:
Permanent differences Temporary differences
 Timing differences
Permanent differences between the X1 X2 X3  Income or expense is included in accounting profit in one period but
accounting profit and taxable profit is included in taxable profit in a different period
arise when income is not taxable or Timing differences  Different bases of revenue/exp recognition in accounting and tax
expenses are not allowed for tax.  For example, accrual accounting versus cash basis
Ex Type of temporary Directions Examples
Deferred tax differences
-Non taxable income: Government Taxable revenue < Completed contracts < Percentage of
bonds often provide tax-free Taxable temporary difference Accounting revenue completion
Tax deduction > Capital allowances > Depreciation
interest income Accounting expense
-Non deductible expense Taxable revenue > Unearned revenue, taxed at the point
Deductible temporary Accounting revenue of collection
Not deferred tax difference Tax deduction < Accrued expenses, deductible only
Accounting expense when paid
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Illustration 11.1 Deferred Tax and

Permanent differences & temporary differences Illustration 11.1
Analytical Check on Tax Expense
Permanent Differences
 Permanent differences arises from:  The following information pertains to Company XYZ (Year 1 -
 Differences in definition of what revenue or expense is 20x1):
 Non-deductible tax items:
in the realm of tax and accounting
 Capital transactions of $15,000
 Repairs and renovations of $20,000 Permannent
Type of permanent Examples Effect on tax
expense  Disallowed expenses relating to entertainment, motor vehicle
differences expenses and fines amounted to $14,000 differences
Non-deductible Fines and penalties, disallowed Increase  Dividends of $10,000 were tax-exempt
accounting expense donations and entertainment  Expenses in respect of general provisions of $180,000 were
expenses disallowed for tax purposes. However, actual claims and
utilizations of $129,500 were deductible Temporary
Non-taxable Tax-exempt interest Decrease
accounting revenue  Depreciation for the year was $80,000,capital allowances
claimed amounted to $708,355. Cost of fixed assets was differences
Tax-deductible item Double- or further-deduction of Decrease $1,500,000
that has no accounting expenses, investment tax credit  Net profit before tax was $4,000,000 and tax rate was 22%
expense equivalent  20x1 was the first year of operations
Taxable revenue that Imputed revenue on non-arm’s length Increase
has no accounting transactions
revenue
11 equivalent 12

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Content Deferred income tax: Tax base

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1. Introduction
Amount attributed to asset/liability for tax purposes
2. Permanent differences & temporary differences
3. Tax
Taxbase
base
Assets Liabilities
4. Accounting for current income tax
5. Accounting for deferred income tax
Amount deductible against Carrying amount
6. Reconciliation and Analytical Check on Tax Expense
any taxable benefits
in the Income Statement Amount deductible for tax
7. Accounting for Unused Tax Losses purposes in the future periods

8. Presentation and Disclosures

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Tax Base of an Asset Tax base of an asset

 Tax statement of financial position is drawn up using tax rules as bases 16
The tax base of an asset is the amount that will be
of measurement for assets and liabilities
deductible for tax purposes against the taxable economic
 Taxable or deductible temporary differences:
 Difference between the amounts of assets and liabilities recognized on the
benefits that will flow to the entity when it recovers the
accounting and tax statement of financial position carrying amount of the asset.
 Examples of assets on statement of financial position:

Tax rules Tax statement of financial position

Cost of asset is deductible over tax useful
lives or tax amortization periods
Asset is not deductible for tax purposes
If these economic benefits will not be taxable, then the
tax base of an asset is equal to its carrying amount, so that
Balance is the unexpired cost or
written down value, after applying tax no deferred tax arises.
depreciation
Balance is zero (non-existent asset)

Cost of asset is fully deductible when sold or Balance is the cost

consumed or realized

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Tax base of an asset Example1- Interest receivable

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Identify the future economic benefits Example: Interest receivable carried on statement of financial
(FEB) position at $100,000
 Scenario 1: Interest income is taxed during the period when it is earned
 Carrying amount
Is the FEB taxable when realized?
 Tax base
 TTD
 Tax treatment and accounting recognition are synchronous
Yes No Now Future
Tax base Tax base
= = Interest income earned Interest income received
future tax deductible Carrying amount Interest income taxed No tax consequence
 Current taxable payable
No deferred tax liability

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Example1- Interest receivable Example1- Interest receivable

 Scenario 2: Interest income is taxed during the period when it is received  Scenario 3: Interest income is tax-exempt

Now Future

Now Future Interest income earned Interest income received

No tax consequence No tax consequence
No change to current or deferred tax liability
Interest income earned Interest income received
 Current taxable payable  Future tax payable
 Deferred tax liability

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Example 3- Construction Work-in-Progress

Example 2 - Fixed Assets  Profit on a long-term project was earned over a three-year period
 Equipment costing $30,000 was purchased on 1 Jan 20x0.
 For tax purposes, profit was taxed only at the completion date at
 Capital allowances were fully claimed in 20x0
the end of 20x2 (i.e. using the completed contracts method)
 Accounting depreciation was computed on a straight line basis over 3 years
20x0 20x1 20x2
20x0 20x1 20x2
Construction WIP:
Cost
Accumulated depreciation Cumulative costs $1,000,000 $1,500,000 $2,000,000
Carrying amount = NBV (1)
Cumulative profits 250,000 375,000 500,000

Carrying amount 1,250,000 1,875,000 2,500,000

Cost
Capital allowances
Tax base 1,000,000 1,500,000 2,500,000
Tax base = tax written down value (2)
Cumulative taxable temporary difference $250,000 $375,000 $0
Cumulative taxable temporary difference = (1) - (2)

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Example 4- Investments at Fair Value Example 4- Investments at Fair Value

Scenario 1 : Investments at Fair Value, Profit from Sale of Investments Scenario 2 : Investments at Fair Value, Profit from Sale of Investments
is Subject to Tax is NOT Subject to Tax
 Entity measures them at fair value at end of each year  Entity measures them at fair value at end of each year
 Assume that the proceeds from the sale of bonds are subject to tax  Assume that the proceeds from the sale of bonds are NOT subject to tax

20x0 20x1 20x2 20x0 20x1 20x2

Investment at cost $1,000,000 $1,000,000 $1,000,000 Investment at cost $1,000,000 $1,000,000 $1,000,000
Fair value adjustment 200,000 (50,000) 300,000 Fair value adjustment 200,000 (50,000) 300,000
Carrying amount: investment at fair value 1,200,000 950,000 1,300,000 Carrying amount: investment at fair value 1,200,000 950,000 1,300,000
Tax base (1,000,000) (1,000,000) (1,000,000) Tax base (1,200,000) (950,000) (1,300,000)
Cumulative taxable (deductible) temporary $200,000 $(50,000) $300,000 Cumulative taxable (deductible) temporary $0 $0 $0
difference difference

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Example 4- Investments (AC) Example 5- Inventory

Scenario 3 : Investments at AC, Proceeds from repayment at maturity
Inventory is Carried at the Lower of Cost and Net Realizable Value;
are NOT Subject to Tax
Profit from the Sale of Inventory is Taxable
 Profit from the sale of inventory is subject to tax

20x0 20x1 20x2

20x0 20x1 20x2 Inventory at Cost $1,200,000 $2,000,000 $2,600,000

Investment at cost (AFS) $1,000,000 $1,000,000 $1,000,000 Inventory at NRV 1,250,000 1,800,000 2,800,000

Tax base (1,000,000) (1,000,000) (1,000,000) Carrying amount 1,200,000 1,800,000 2,600,000
Cumulative taxable (deductible) temporary $0 $0 $0 Tax base (1,200,000) (2,000,000) (2,600,000)
difference Cumulative taxable temporary difference $0 $(200,000) $0

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Tax Base of a Liability Tax base of a liability

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Types of Liabilities Tax Base

Identify the future outflow of resource (FOF)
Future payable Tax base = carrying amount of the liability –
future deduction arising when the liability is
settled Is the FOF tax deductible in the future?
Unearned revenue Tax base = carrying amount of unearned
revenue – revenue that will not be taxable in
future periods
Yes No

Tax base =
Tax base =
Carrying amount -
Carrying amount
future tax deductible

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Example 1 - Provision for Warranties Example 2- Provision for Loss

Deductible on the Basis of Claims Made in the Year of Payment Not Deductible in Any Period
 As at end of 20x0, provision for warranties was $1,000  Provision for litigation loss is $200,000
 Amount represents future claims for rectification works
 Loss is not deductible for tax purposes in the current or future
periods
20x0
20x0
Carrying amount $200,000
Carrying amount $1,000
Tax base $0 Tax base $200,000
Cumulative deductible temporary $1,000
Cumulative deductible temporary difference Nil
difference
Settlement of the provision will not lead to a decrease in future
Provision of warranties not recognized for tax purposes in 20x0 taxable income. No tax benefits arise when the provision is
settled
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Example 3- Accrued Expense Example 4- Unearned revenue

Unearned revenue carried on the statement of financial position at
Deductible in the Year of Expensing $100,000
 Reporting entity accrues expenses of $100,000 in 20x0 which was  Scenario 1: Revenue is taxed during the period when it is earned
paid off in 20x1  Carrying amount
 Expenses are deductible for tax when the expense is recognized  Tax base
 DTD

20x0
Carrying amount Now Future
Tax base
Revenue received Revenue earned
Cumulative deductible temporary difference
Revenue not taxed Revenue taxed
Accounting and tax recognition of the expense are synchronous No deferred tax asset

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State the tax base of each of the following

Example 4- Unearned revenue liabilities???
 Scenario 2: Revenue is taxed during the period when it is received  (1) Current liabilities include accrued expenses with a
carrying amount of $1,000. The related expense will be
deducted for tax purposes on a cash basis.
 (2) Current liabilities include interest revenue received in
advance, with a carrying amount of $1,000. The related
interest revenue was taxed on a cash basis.
 (3) Current liabilities include accrued expenses with a
Now Future carrying amount of $2,000. The related expense has already
been deducted for tax purposes.
Revenue received Revenue earned  (4) Current liabilities include accrued fines and penalties with
Revenue taxed Revenue not taxed a carrying amount of $100. Fines and penalties are not
 Current tax payable deductible for tax purposes.
 Deferred tax asset  (5) A loan payable has a carrying amount of $1m. The
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repayment
34 of the loan will have no tax consequences.

Content Current income tax

Amount of income taxes payable (recoverable) in respect
1. Introduction of the taxable profit (tax loss) for a period

2. Permanent differences & temporary differences

3. Tax base
Taxable
4. Accounting
Accounting for
forcurrent
currentincome taxtax
income Tax rate
profit/loss
5. Accounting for deferred income tax
6. Reconciliation and Analytical Check on Tax Expense Debit: Expenses in the net P/L/or
Tax asset Credit: Tax liability/ or
in the Income Statement
Income in the net P/L
7. Accounting for Unused Tax Losses
8. Presentation and Disclosures 36
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Illustration 11.1 Deferred Tax and

Illustration 11.1
Example 1 Analytical Check on Tax Expense
 The following information pertains to Company XYZ (Year 1 -
 Accounting profit before tax: $486million 20x1):
 Non-deductible tax items:
 The firm receives a tax- free $4million grant to employ  Capital transactions of $15,000
Permannent
more staff.  Repairs and renovations of $20,000
 Disallowed expenses relating to entertainment, motor vehicle
differences
 It is later also fined $1million for environmental misuse, expenses and fines amounted to $14,000
 Dividends of $10,000 were tax-exempt
after illegally discharging chemicals into a river. The fine  Expenses in respect of general provisions of $180,000 were
cannot be deducted for tax. disallowed for tax purposes. However, actual claims and
Temporary
utilizations of $129,500 were deductible
 Tax rate: 20%  Depreciation for the year was $80,000,capital allowances
claimed amounted to $708,355. Cost of fixed assets was differences
$1,500,000
 Net profit before tax was $4,000,000 and tax rate was 22%
 20x1 was the first year of operations

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Illustration11.1
Illustration 11.1 Deferred Tax and Analytical
KẾ TOÁN THUẾ TNDN HIỆN HÀNH
Check on Tax Expense
(a) Prepare a tax computation to determine the tax payable
Company XYZ Lưu ý:
Tax computation for year ended 31 Dec 20x1
Temporary  Phải trả về thuế thu nhập hiện hành > Thuế đã trả
Accounting income 4,000,000 difference
Add / (less): => Phải trả về thuế thu nhập
Expenses relating to general provisions 180,000
Utilization of general provisions (129,500)  Phải trả về thuế thu nhập hiện hành < Thuế đã trả

Depreciation
50,500
80,000
=> Phải thu về thuế thu nhập
Capital allowances (708,355)  Chênh lệch ước tính và thực tế thuế TNDN năm trước
(628,355)
Expenses relating to deemed capital transactions 15,000 được điều chỉnh vào chi phí thuế thu nhập hiện hành
Repairs and renovations
Disallowed expenses
20,000
14,000
Permannently
disallowed or
của kỳ báo cáo.
Tax-exempt dividends (10,000) exempted
Taxable income 3,461,145 items
Tax payable at 22% 761,452
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KẾ TOÁN THUẾ TNDN HIỆN HÀNH Content

Thí dụ: Trong năm tài chính kết thúc ngày 31/12/20X1,
1. Introduction
công ty A có thông tin như sau:
 Chi phí thuế TNDN hiện hành của năm 20X0 được ước 2. Permanent differences & temporary differences
tính cao hơn thực tế là $30.000 3. Tax base
 Tổng số tiền nộp thuế TNDN hiện hành trong năm 20X1 4. Accounting for current income tax
là $390.000 bao gồm $90.000 của năm 20X0 và
5. Accounting fordeferred
Accounting for deferredincome
income
taxtax
$300.000 của năm 20X1
 Công ty A ước tính chi phí thuế TNDN hiện hành của 6. Reconciliation and Analytical Check on Tax Expense
năm 20X1 là $750.000 in the Income Statement
Yêu cầu: Thuế TNDN hiện hành phải trả tại ngày 7. Accounting for Unused Tax Losses
31/12/20X1?
41 8. Presentation and Disclosures
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Phân loại chênh lệch tạm thời Temporary differences & deferred tax

Chênh lệch Chênh lệch - There are the differences that:

thuế và
tạm thời (1) Result in amounts being deductible in determining taxable
kế toán
profit/loss in future periods,
(2) When the carrying amount of asset or liability in recovered
or settled
Chênh lệch tạm thời được khấu trừ
- Thus, deferred tax asset will arise when:
(hướng khấu trừ trong tương lai) (1) Carrying amount of asset < its tax base, or
(2) Carrying amount of liability > its tax base.
Chênh lệch tạm thời phải chịu thuế
(hướng nộp thuế trong tương lai)
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44 Deferred tax asset

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Temporary differences & deferred tax
-It results in payment of tax when carrying amount of asset
or liability is settled
- Thus, deferred tax liability will arise when:
(1) Carrying amount of asset > its tax base, or
(2) Carrying amount of liability < its tax base.
Deferred tax liability
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Example 2
 An entity acquired plant and equipment for $1 million
on January 1, 20X4. The asset is depreciated at
25% a year on the straight-line basis, and local tax
legislation permits the management to depreciate
the asset at 30% a year for tax purposes.
 what is the tax base of the asset (31/12/20X4)?
 Measurement & recognition of deferred tax
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Example 1
 A company purchased an asset costing $1,500. At
the end of 20X8 the carrying amount is $1,000. The
cumulative depreciation for tax purposes is $900 and
the current tax rate is 25%.
 what is the tax base of the asset?
 Measurement & recognition of deferred tax
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Example 3
- Company A has profit before tax of $100.000 (2021) &
$100.000 (2020).
-Company A purchased an asset (an item PPE) for $5.000
on the first day of 2020. The useful life of the asset is 2
years with zero residual value.
- Tax rule allows a 100% deduction for this type of asset
in the first year.
what is the tax base of the asset?
Measurement & recognition of tax exp.
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Example 4 Content
 A company recently re-valued a non-current
asset from is carrying amount of $300,000 to a 1. Introduction
revalued amount of $ 400,000. The revaluation 2. Permanent differences & temporary differences
surplus is $ 100,000. The tax rate is 25%.
3. Tax base
 Required: Calculate the deferred tax liability.
4. Accounting for current income tax
5. Accounting for deferred income tax
6. Reconciliation and
Reconciliation andAnalytical
AnalyticalCheck on on
Check TaxTax
Expense
in thein
Expense Income Statement
the Income Statement
7. Accounting for Unused Tax Losses

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8. Presentation and Disclosures
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Total tax
Tax % income
Accounting profit/loss expense Tax Reconciliation
Profit or loss for the period before deducting tax expense
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Expenses recognized, but non-deductible for tax purposes  Tax expense = Profit before tax x Current tax rate
Income not recognized, but included tax law  Effective tax rate = tax expense/profit before tax
Expenses not recognized, but deductible for tax purposes = current tax rate
Income recognized, but not under tax law  The above relationship does not hold if there are:
Current  Permanently disallowed items or tax-exempt income; or
tax
income  Changes in tax rates:
Taxable profit/loss Tax %
expense Changes in Impact on deferred tax liability Impact on deferred tax asset at
tax rates at the beginning of the year the beginning of the year
Profit or loss for the period determined in Increase • Liability at the beginning of the • Asset at the beginning of
accordance with applicable tax rules year will be adjusted upwards the year will be adjusted upwards
deffered
tax • Tax expense increases • Tax expense decreases
Temporary income
differences Tax % Decrease • Liability at the beginning of the • Asset at the beginning of
Differences expense the year will be adjusted
year will be adjusted downwards
downwards
Permanent • Tax expense decreases
• Tax expense increases
differences
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Tax Expense Reconciliation

Tax Expense Reconciliation
 In the analytical check, the following additional items have
to be included as reconciliation items: Tax expense in the income statement (without tax loss)

 Utilization of previously unrecognized deferred tax assets
 Unutilized tax losses are not recognized in the year of the loss if
they are deemed less than probable
 In a subsequent year when a profit is made, the unrecognized tax
losses are utilized to reduce taxable income
 This causes a mismatch in the relationship between tax expense
and accounting income (loss)
 Use of different tax rates
 May cause the average effective tax rate of the group to be
different from the statutory tax rate of the parent company
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= Tax rate x (Profit before tax +/– Permanently disallowed items (tax-
exempt income))
+/– (Increase (decrease) in tax rate x Cumulative taxable (deductible)
temporary differences at the beginning of the reporting period)
Tax expense in the income statement (with tax loss utilization)
= Tax rate x (Profit (loss) before tax +/– Permanently disallowed items
(tax-exempt income))
+/– (Increase (decrease) in tax rate x Cumulative taxable (deductible)
temporary differences at the beginning of the reporting period)
+/– Tax rate x Unrecognized loss in the year of origination / (tax rate x
recognized loss)
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Illustration 11.1 Deferred Tax and Analytical Check Illustration 11.1 Deferred Tax and Analytical Check
on Tax Expense on Tax Expense
(a) Prepare a tax computation to determine the tax payable
Company XYZ
 The following information pertains to Company XYZ (Year 1 - 20x1):
Tax computation for year ended 31 Dec 20x1
 Non-deductible tax items:
 Capital transactions of $15,000 Accounting income 4,000,000
 Repairs and renovations of $20,000
Add / (less):
Expenses relating to general provisions 180,000
 Disallowed expenses relating to entertainment, motor vehicle Utilization of general provisions (129,500)
expenses and fines amounted to $14,000 50,500
 Dividends of $10,000 were tax-exempt Depreciation 80,000
 Expenses in respect of general provisions of $180,000 were
Capital allowances (708,355)
(628,355)
disallowed for tax purposes. However, actual claims and utilizations
Expenses relating to deemed capital
of $129,500 were deductible transactions 15,000
 Depreciation for the year was $80,000,capital allowances claimed Repairs and renovations 20,000
amounted to $708,355. Cost of fixed assets was $1,500,000 Disallowed expenses 14,000
Tax-exempt dividends (10,000)
 Net profit before tax was $4,000,000 and tax rate was 22%
Taxable income 3,461,145
 20x1 was the first year of operations Tax payable at 22% 761,452
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Illustration 11.1 Deferred Tax and Analytical Check on Tax Illustration 11.1 Deferred Tax and Analytical Check
Expense on Tax Expense

(b) (c) Movement in deferred tax liability

(b)Determine
Determinethe
thedeferred tax liability
difference between using the balance
carrying amountsheet
andapproach
the tax base
Balance, 1 Increase /
Cumulative taxable Jan (decrease) Balance, 31 Dec
Carrying amount Tax base (deductible) temporary
difference Deferred tax = 22% x $577,855
Balance Balance
liability Nil $127,128 = $127,128
= Cost – Accumulated = Cost – Capital
Property, depreciation allowances to date $628,355
31 Dec 20x1
plant and Dr Tax expense 888,580
= $1,500,000 – $80,000 = $1,500,000 – $708,355
equipment
= $1,420,000 = $791,645 Cr Current Tax payable 761,452
Cr Deferred tax liability 127,128
Balance Balance
= Provision – Claims Nil ($50,500)
(d) Perform an analytical check on tax expense
Provisions = $180,000 – $129,500
Tax expense = 22% x ($4,000,000 + $39,000 Permanent differences)
= (50,500)
= $888,580
Net taxable temporary differences $577,855
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Accounting for Unused Tax Losses and

Content
Unused Tax Credits
1. Introduction • Deferred tax asset should be recognized to the extent that unused
tax losses and unused tax credits will be utilized to set off probable
2. Permanent differences & temporary differences
future taxable profit
3. Tax base – Deferred tax asset has to pass the test of “probable” likelihood of future
4. Accounting for current income tax profits

5. Accounting for deferred income tax Now Future

6. Reconciliation and Analytical Check on Tax Expense Loss Taxable profit, hence utilization of loss
 DTA (if deemed probable)  Current tax payable
in the Income Statement
 Tax expense  DTA
7. Accounting
7. Accountingfor
forUnused Tax –Losses
income tax some cases
8. Presentation and Disclosures
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Accounting for Unused Tax Losses
Does the company have a
history of recent losses?
Yes
Does the company have
other convincing evidence to
support that future profit
exists?
No
Accounting for Unused Tax Losses
Example:
No
Recognize deferred tax asset in full • Company has tax losses of $1,000,000
• Cumulative net taxable temporary differences (CTD) of $600,000
Yes Recognize deferred tax asset to the extent of losses • Tax rate is 20%
that may be used to offset the probable future profits
that are projected
Now Future

Does the company have
cumulative net taxable
temporary differences?
No
No deferred tax asset is
recognized
Yes Recognize deferred tax asset in full if: Cumulative CTD $600,000 Reversal, taxable income  $600,000
taxable temporary differences > Tax loss carry-
Tax losses $1,000,000 Utilization of loss, taxable income  $600,000
forward
In view of future effects,
Recognize partially to the extent of cumulative recognize DTA = DTL = $120,000
taxable temporary differences on hand if: cumulative
taxable differences < tax loss carry-forward Tax loss of up to $600,000 can be used to offset the future taxable income
of $600,000 arising from the cumulative net taxable temporary differences.

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Illustration 11.3-Accounting for tax loss

Illustration 11.3-Accounting for tax loss
 The tax computation of XYZ is provided below ($). The amount of cumulative Movement in net taxable temporary differences and DTL:
taxable differences as 1/1/X1 is 100,000$
20X1 20X2 20X1 20X2
Net profit/loss before tax (200,000) 620,000 TTD DTL TTD DTL
Add depreciation 120,000 120,000 Balance, 1 Jan (given) 100,000 25,000 280,000 70,000
Less capital allowances (300,000) (50,000) Change 180,000 45,000 (70,000) (17,500)
Taxable income/loss (380,000) 690,000 Balance, 31 Dec 280,000 70,000 210,000 52,500
Loss and unused capital allowances, 1 Jan 0 (380,000)
Net taxable income/loss and unused capital allowances 31/12 (380,000) 310,000
Tax payable at 25% 0 77,500

Determine the DTA and DTL under 2 assumptions:

1. Future profitability is probable to fully absorb the tax loss
2. Future profitability is less than the probable

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Illustration 11.3-Accounting for tax loss- solution Illustration 11.3-Accounting for tax loss- solution

1. Future profitability is probable to fully absorb the tax loss: 2. Future profitability is less than the probable
20X1: DTA= DTL = 70.000

20X1 20X2 20X1 20X2

TTD DTL DTA TTD DTL DTA TTD DTL DTA TTD DTL DTA
Balance, 1 Jan Balance, 1 Jan
Change Change
Balance, 31 Dec Balance, 31 Dec
31/12/X1 31/12/X2 31/12/X1 31/12/X2

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Illustration 11.3-Accounting for tax loss- solution

Content
Future profitability is probable Future profitability is less than
to fully absorb the tax loss: the probable 1. Introduction
(tax expense/income) (tax expense/income)
2. Permanent differences & temporary differences
20X1
20X2 3. Tax base
Total 4. Accounting for current income tax
5. Accounting for deferred income tax
6. Reconciliation and Analytical Check on Tax Expense
in the Income Statement
7. Accounting for Unused Tax Losses
8.
8. Presentation
Presentationand
and Disclosures
Disclosures
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Presentation and Disclosures
• Major disclosure items (IAS 12:77 – 88) includes:
– Tax expense (income) relating to ordinary activities
presented on the face of the income statement
– Aggregate current and deferred tax relating to items that
are charged or credited directly to equity
– An explanation of the relationship between tax expense
and accounting profit
– Amount of deductible temporary differences, unused tax
losses and unused tax credits for which no deferred tax
asset is recognized in the statement of financial position
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Tax Effects of Other Comprehensive
Income and Items Taken Directly to Equity
• Tax attributable to other comprehensive income and
items credited or charged directly to equity is deducted
from the related item and disclosed separately
• Amount taken to equity will be on a “net of tax” basis
– Tax relating to the revaluation surplus is not taken to the
income statement but is deducted from the revaluation
surplus in other comprehensive income
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