Chapter 1 - Income Tax

12/27/2022
IAS 12
Income Tax
Nguyễn Thị Thu Hiền
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Objective of IAS 12
1. Understand the concept of temporary differences, and tax base of an

asset and tax base of a liability;
2. Understand the concept of deferred tax as a liability and an asset;
3. Apply the balance sheet approach in determining the balances of a

deferred tax liability and a deferred tax asset;
4. Check the tax expense analytically;
5. Apply appropriate principles to situations of tax losses;
6. Present appropriately the tax effects of other comprehensive income
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Content
Contents
1. Accounting for current income tax

2. Differences
3. Accounting for deferred income tax
4. Tax base
5. Tax Expense Reconciliation
6. Accounting for income tax – some cases
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Current tax
Amount of income taxes payable (recoverable) in respect of
the taxable profit (tax loss) for a period
Taxable
Tax rate
profit/loss
Debit: Expenses in the net P/L/or

Tax asset Credit: Tax liability/ or
Income in the net P/L
Exception: Equity/OCI
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Accounting profit/loss
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Profit or loss for the period before deducting tax expense
Expenses recognized, but non-deductible for tax purposes
Income not recognized, but included tax law
Expenses not recognized, but deductible for tax purposes
Income recognized, but not under tax law
Taxable profit/loss
Profit or loss for the period determined in accordance with

applicable tax rules
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Example 1
 Accounting profit before tax: $486million

 The firm receives a tax- free $4million grant to employ more
staff.
 It is later also fined $1m for environmental misuse, after
illegally discharging chemicals into a river. The fine cannot be
deducted for tax.
 Tax rate: 20%
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Example 1: Solution
$m
Accounting Profit 486
Less grant -4
Plus fine +1
=Taxable profit 483
Tax charge = 483 * 20% = 96,600
I/B DR CR
Tax expense I 96,600
Accrual for income tax B 96,600
Tax expense for the period
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Illustration 11.1 Deferred Tax and

Illustration 11.1
Analytical Check on Tax Expense
 The following information pertains to Company XYZ (Year 1 -
20x1):
 Non-deductible tax items:
 Capital transactions of $15,000
 Repairs and renovations of $20,000
 Disallowed expenses relating to entertainment, motor vehicle
expenses and fines amounted to $14,000
 Dividends of $10,000 were tax-exempt
 Expenses in respect of general provisions of $180,000 were disallowed
for tax purposes. However, actual claims and utilizations of $129,500
were deductible
 Depreciation for the year was $80,000,capital allowances claimed
amounted to $708,355. Cost of fixed assets was $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
Check on Tax Expense
(a) Prepare a tax computation to determine the tax payable
Company XYZ
Tax computation for year ended 31 Dec 20x1
Accounting income 4,000,000

Add / (less):
Expenses relating to general provisions 180,000
Utilization of general provisions (129,500)
50,500
Depreciation 80,000
Capital allowances (708,355)
(628,355)
Expenses relating to deemed capital transactions 15,000
Repairs and renovations 20,000
Disallowed expenses 14,000
Tax-exempt dividends (10,000)
Taxable income 3,461,145
Tax payable at 22% 761,452
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Content
Contents

2. Differences
4. Tax base
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Differences
Accounting profit/loss
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Taxable profit/loss
Profit or loss for the period determined in accordance with

applicable tax rules
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Diferences
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 Accounting profit: Net profit or loss

for the reporting period before Permanent
deducting income tax expense. differences
Differences
Temporary
 Tax profit (loss)- Tax income: The differences
profit (loss) for taxable period,
determined in accordance with the
rules established by the taxation
authorities, upon which income
taxes or payable (recoverable)
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Diferences Differences
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Permanent differences Temporary differences
Permanent differences between the 2012 2013 2014
accounting profit and taxable profit
arise when income is not taxable or Timing differences
expenses are not allowed for tax.
Different bases
Ex
Unused Tax Losses
-Non taxable income: Government
bonds often provide tax-free
interest income Deferred tax
-Non deductible expense
Not deferred tax

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Temporary differences
 Temporary Differences
Temporary differences arise from:
 Timing differences
 Income or expense is included in accounting profit in one period but is included in taxable
profit in a different period
 Different bases of revenue recognition in accounting and tax
 For example, accrual accounting versus cash basis
Type of temporary Directions Examples

differences
Taxable revenue < Accounting Completed contracts < Percentage of
Taxable temporary revenue completion
difference
Tax deduction > Accounting Capital allowances > Depreciation
expense
Taxable revenue > Accounting Unearned revenue, taxed at the point of
Deductible temporary revenue collection
difference
Tax deduction < Accounting Accrued expenses, deductible only when paid
expense
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Permanent differences
Permanent

Differences
Permanent differences arises from:
 Differences in definition of what revenue or expense is in the realm of tax and accounting
Type of permanent Examples Effect on tax

differences expense
Non-deductible accounting Fines and penalties, disallowed donations Increase
expense and entertainment expenses
Non-taxable accounting Tax-exempt interest Decrease
revenue
Tax-deductible item that has Double- or further-deduction of expenses, Decrease
no accounting expense investment tax credit (*)
equivalent
Taxable revenue that has no Imputed revenue on non-arm’s length Increase
accounting revenue transactions
equivalent
(*) Investment tax credits were introduced in 1962, to protect American

business from emerging foreign competition
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Illustration 11.1 Deferred Tax and

Illustration 11.1
Analytical Check on Tax Expense
 The following information pertains to Company XYZ (Year 1 -
20x1):
 Capital transactions of $15,000 Permannent
 Disallowed expenses relating to entertainment, motor vehicle differences
expenses and fines amounted to $14,000
 Expenses in respect of general provisions of $180,000 were disallowed
for tax purposes. However, actual claims and utilizations of $129,500 Temporary
were deductible
differences
 Depreciation for the year was $80,000,capital allowances claimed
amounted to $708,355. Cost of fixed assets was $1,500,000
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Content
Contents

2. Differences
4. Tax base
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Thí dụ 1 Thí dụ 1
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Ngày 1/1/X0 Doanh nghiệp (theo CMKT) mua công cụ, dụng cụ đưa vào sử
dụng, trị giá 200 triệu và DN đã phân bổ 100% vào chi phí kinh doanh trong kỳ
(p/l). Theo luật thuế DN phải tính vào chi phí của 2 năm (tức là phân bổ cho 2
năm)
P/L:
Tổng doanh thu: 1.000
Tổng chi phí (chưa bao gồm chi phí CCDC): 600
Lợi nhuận trước thuế và CP CCDC: 400
Thuế suất 25%
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Không ghi nhận ảnh hưởng của thuế

Thí dụ 1- Không xét ảnh hưởng của thuế
19 20X0 20X1
Lợi nhuận trước thuế và CP CCDC (1) 400 400
Chi phí CC,DC theo kế toán (2) -200 0
Lợi nhuận kế toán trước thuế (3=1-2) -IAS 200 400
Chi phí CCDC theo mục đích tính thuế (4) -100 -100
Thu nhập chịu thuế (5=1-4) (tax law) 300 300
Thuế TNDN hiện hành phải nộp (6=5 * 25%) 75 75
Chi phí/thu nhập thuế TNDN (hiện hành) -75 -75

Lợi nhuận sau thuế 125 325
Tax expense/profit before tax (%) 37,5% 18,75%
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Thí dụ 1- Xét ảnh hưởng của thuế

Xét ảnh hưởng của thuế
20 20X0 20X1
Lợi nhuận trước thuế và CP CCDC (1) 400 400
Chi phí CC,DC theo kế toán (2) -200 0
Lợi nhuận kế toán trước thuế (3=1-2) 200 400
Chi phí CCDC theo mục đích tính thuế (4) -100 -100
Thu nhập chịu thuế (5=1-4) 300 300
Thuế TNDN hiện hành phải nộp (6=5 * 25%) 75 75
Chi phí/thu nhập thuế TNDN (p/l) -50 -100

Chi phí/thu nhập thuế TNDN (hiện hành) -75 -75
Chi phí/thu nhập thuế TNDN (hoãn lại) 25 -25
Lợi nhuận sau thuế 150 330
Tax expense/profit before tax (%) 25% 25%
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X0: 31/12 – phát sinh thuế HL X1: 31/12: hoàn nhập thuế HL
TK- NP trả thuế HH
(b/S) TK- CP thuế HH (P/l TK- NP trả thuế HH TK- CP thuế HH
cash:75 SD:75 (3)75

75 (1) (1)75
75(3)
SD: 75
SD:75 Dr DTExp: 25
TK- TS thuế HL
(b/S) TK- CP thuế HL (P/l) Cr DTA: 25
TK- TS thuế HL
25 (2) (b/S) TK- CP thuế HL (P/l)
25(2)
SD: 25
SD: 25 25 (4) (4)25
SD: 0
Tổng CP thuế: -50
Tổng CP thuế: -100
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Example 2
On 1 January 20X1, Jonquil Co buys equipment for $600,000 and
depreciates it on a straight line basis over its expected useful life of three
years.
20X1 20X2 20X3

Profit before depretiation & tax 800 800 800
Acounting depreciation expense 200 200 200
Tax depreciation expese 400 150 50
❖ Tax rate 25%
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No tax affect
20X1 20X2 20X3
Profit before depretiation & tax (1) 800 800 800
Acounting depreciation expense (2) -200 -200 -200
Profit before tax (3=1-2) 600 600 600
Tax depreciation expense (4) -400 -150 -50

Taxable income (5=1-4) 400 650 750
Current tax liability (6=5 * 25%) 100 162,5 187,5
Tax expese -100 -162,5 -187,5

Current tax expense -100 -162,5 -187,5
Profit after tax 500 437,5 412,5

Tax rate/profit
23 before tax (%) 23
17%
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20X1 20X2 20X3

Profit beforetax 600 600 600
Taxable income 400 650 750
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B/s
PPE (CA: carying amount)
PPE (tax base)- TB
Temporary Difference (CA-TB)
Current tax asset/liability
Deferred tax asset/liability
Profit/loss statement
Profit before depretiation & tax
Taxe expense/income
- Current tax expense/income
- Deferred tax expense/income
Profit after tax
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20X1 20X2 20X3

Profit before tax 600 600 600
Taxable income 400 650 750
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PPE (CA: carying amount) (1/1) 600 400 200

PPE (tax base)- TB 400 250 200
TeemporarydDifference (CA-TB) 200 150 0
Current tax asset/liability -100 -162,5 -187,5
Deferred tax asset/liability -50 -37,5 0
Profit/loss statement
Profit before tax 600 600 600
Taxe expense/income -150 -150 -150
- Current tax expense/income -100 -162,5 -187,5
- Deferred tax expense/income -50 12,5 37,5
Profit after tax 450 450 450
4600 – 600*25% = Accounting profit BT – (Accounting Profit BT*25%)

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20X1 20X2 20X3
Curr. Tax Curr. Tax

Payable Expense Curr. Tax P Curr. Tax E Curr. Tax P Curr. Tax E
26 100(1) 100 162,5 162,5 187,5 187,5
Def. Tax Def Tax Def Tax

Liability Expense Def. Tax L Income Def. Tax L Def Tax I
B: 50 B: 37,5
50 (2) 50 12,5 12,5 37,5 37,5
B: 50 B: 37,5 B: 0
Total Tax
Expense Total Tax E Total Tax E
150 150 150
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Example 2
On 1 January 20X1, Jonquil Co buys equipment for $600,000 and
depreciates it on a straight line basis over its expected useful life of three
years. Tax rate 25%
20X1 20X2 20X3

Profit before depretiation & tax 800 800 800
Acounting depreciation expense 200 200 200
Tax depreciation expese 400 150 50
CA (BV) (31/12) 400 200 0
Tax base (31/12) 200 50 0
Taxable temporary diffrences (31/12) 200 150 0
Deffered tax liability(31/12) 50 37,5 0
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Acconting for deferred tax

 Principle:  Temporary differences
 Matching  Taxable temporary
 Financial position difference
approach  Deductible temporary
 Tax base difference
 TB of an asset  Deferred tax:
 TB of a liability  Deferred tax asset
 Deferred tax liability
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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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- There are the differences that:

(1) Result in amounts being deductible in determining taxable
profit/loss in future periods,
(2) When the carrying amount of asset or liability in recovered
or settled
- Thus, deferred tax asset will arise when:
(1) Carrying amount of asset < its tax base, or
(2) Carrying amount of liability > its tax base.
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CA TB TD DT
Asset CA> TB + Taxable Liability
CA< TB - Deductible Asset
Liability CA> TB Deductible Asset
CA< TB Taxable Liability
Income received in CA> TB Deductible Asset
advance CA< TB Taxable Liability
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Content
Contents

2. Differences
4. Tax base
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4. Tax Base
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Deferred income tax: Tax base
Amount attributed to asset/liability for tax purposes
Assets Liabilities
Amount deductible against Carrying amount

any taxable benefits
Amount deductible for tax
purposes in the future periods
Some items are not recognized as assets/liabilities, but do have a tax base
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Tax Base of an Asset

 Tax statement of financial position is drawn up using tax rules as bases of
measurement for assets and liabilities
 Taxable or deductible temporary differences:
 Difference between the amounts of assets and liabilities recognized on the
accounting and tax statement of financial position
 Examples of assets on statement of financial position:
Tax statement of financial Taxable temporary

Tax rules
position difference (TTD)
Cost of asset is deductible over tax Balance is the unexpired cost TTD = Net book value –
useful lives or tax amortization or written down value, after Tax written down value
periods applying tax depreciation
Asset is not deductible for tax Balance is zero (non-existent TTD = Carrying amount –
purposes asset) Zero tax base
Cost of asset is fully deductible Balance is the cost TTD = Carrying value –
when sold or consumed or realized Cost
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Tax base definition of an asset

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The tax base of an asset is the amount that will be deductible
for tax purposes against the taxable economic benefits that
will flow to the entity when it recovers the carrying amount of
the asset.
If these economic benefits will not be taxable, then the tax

base of an asset is equal to its carrying amount, so that no
deferred tax arises.
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Identify the future Inventory:
Cost: 100
economic benefits (FEB) NRV (net Realizable value): 90
-> CA: 90
Is the FEB taxable when FEB: Revenue of inventory
realized? Revenue: taxable
(CGOS: cost of good sold)

Taxable income= revenue – CGOS
Yes No -> TB: CGOS
Tax base TB: 100
Tax base
=
=
future tax deductible DTD: (-) 100
Carrying amount
DTA: 25
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Identify the future Trade receivable:
Cost: 100
economic benefits (FEB) RV (recoverable value): 90
Impairmenet: 10
Is the FEB taxable when -> CA: 90
realized?
FEB: Cash: 100
Non - taxable
Yes No TB= CA=90

Tax base
Tax base Non – deffered tax
=
=
future tax deductible
Carrying amount
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Example1- Interest receivable
Example: Interest receivable carried on statement of financial position

at $100,000
 Scenario 1: Interest income is taxed during the period when it is earned
 Carrying amount 100,000 The proceeds from the realization is
Tax base 100,000 not taxed. Thus, tax base is equal to
TTD 0 carrying value
 Tax treatment and accounting recognition are synchronous
Now Future
Interest income earned Interest income received

Interest income taxed No tax consequence
 Current taxable payable
No deferred tax liability
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 Scenario 2: Interest income is taxed during the period when it is received
 Carrying amount 100,000

The interest income is to be taxed in a
Tax base 0 future period. Thus, tax base is equal
TTD 100,000 to zero
 There is a misalignment between tax and accounting recognition
Now Future

 Current taxable payable  Future tax payable
 Deferred tax liability
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 Scenario 3: Interest income is tax-exempt
 Carrying amount 100,000 The future receipt of interest income
Tax base 100,000 is “tax-exempt”. Thus, tax base is
TTD 0 equal to carrying value
Now Future

No tax consequence No tax consequence
No change to current or deferred tax liability
Permanent difference
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Example2 - Fixed Assets

Example 2: Fixed Assets
 Equipment costing $30,000 was purchased on 1 Jan 20x0.
 Capital allowances were fully claimed in 20x0
 Accounting depreciation was computed on a straight line basis over 3 years
20x0 20x1 20x2
Cost $30,000 $30,000 $30,000
Accumulated depreciation (10,000) (20,000) (30,000)
Carrying amount = NBV (1) (31/12) $20,000 $10,000 $0
Cost $30,000 $30,000 $30,000

Capital allowances (30,000) (30,000) (30,000)
Tax base = tax written down value (2) (31/12) $0 $0 $0
Cumulative taxable temporary difference = (1) - (2) $20,000 $10,000 $0
Deffered tax liability (tax rate: 20%) $ 4.000 $ 2.000 $0
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Example 3- Construction Work-in-Progress

Example 3: Construction Work-in-Progress
 Profit on a long-term project was earned over a three-year period
 For tax purposes, profit was taxed only at the completion date at the end of 20x2
(i.e. using the completed contracts method)
20x0 20x1 20x2 (*)
Construction WIP:
Cumulative costs $1,000,000 $1,500,000 $2,000,000
Cumulative profits 250,000 375,000 500,000
Carrying amount (31/12) 1,250,000 1,875,000 2,500,000
Tax base (31/12) 1,000,000 1,500,000 2,500,000
Cumulative taxable temporary difference $250,000 $375,000 $0
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Example4- Investments at Fair Value

Scenario 1 : Investments at Fair Value, Profit from Sale of Investments
is Subject to Tax
 Entity classifies bonds as AFS investments and measures them at fair value at end of
each year
 Assume that the proceeds from the sale of bonds are subject to tax
20x0 20x1 20x2

Investment at cost (AFS) $1,000,000 $1,000,000 $1,000,000
Fair value adjustment 200,000 (50,000) 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)
Cumulative taxable (deductible) temporary $200,000 $(50,000) $300,000
difference
AFS: available for sale

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Example 4- Investments at Fair Value

Scenario 2 : Investments at Fair Value, Profit from Sale of Investments
is NOT Subject to Tax
 Entity classifies bonds as AFS investments and measures them at fair value at end of
each year
 Assume that the proceeds from the sale of bonds are subject to tax
20x0 20x1 20x2

Investment at cost (AFS) $1,000,000 $1,000,000 $1,000,000
Fair value adjustment 200,000 (50,000) 300,000
Carrying amount: investment at fair value 1,200,000 950,000 1,300,000
Tax base (1,200,000) (950,000) (1,300,000)
Cumulative taxable (deductible) temporary $0 $0 $0
difference
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Example 4- HTM- Investments

Scenario 3 : Investments at HTM, Proceeds from repayment at maturity
are NOT Subject to Tax
 Entity classifies bonds as HTM and carries them at cost
 The proceeds from the principle repayment at maturity are not subject to tax
20x0 20x1 20x2

Investment at cost (HTM) $1,000,000 $1,000,000 $1,000,000
Tax base (1,000,000) (1,000,000) (1,000,000)
Cumulative taxable (deductible) temporary $0 $0 $0
difference
HTM: held to maturity
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Example5- Inventory
Example 5: Inventory is Carried at the Lower of Cost and Net Realizable Value;
Profit from the Sale of Inventory is Taxable
 Profit from the sale of inventory is subject to tax
20x0 20x1 20x2

Inventory at Cost $1,200,000 $2,000,000 $2,600,000
Inventory at NRV 1,250,000 1,800,000 2,800,000
Carrying amount 1,200,000 1,800,000 2,600,000
Tax base (1,200,000) (2,000,000) (2,600,000)
Cumulative taxable temporary difference $0 $(200,000) $0
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Tax Base of a Liability
Types of Liabilities Tax Base
Future payable Tax base = carrying amount of the liability –

future deduction arising when the liability is
settled
Unearned revenue Tax base = carrying amount of unearned
revenue – revenue that will not be taxable in
future periods
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Tax base definition of a liability

48 Identify the future outflow Trade liability: CA: 100
FOF: 100 ( cash)
of resource (FOF)
Is the FOF tax Deductible? -> NOT
deductible in the future?
TB= CA= 100
TTD = 0
No deffered tax
Yes No
Tax base =
Tax base =
Carrying amount -
Carrying amount
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Tax base definition of a liability

49 Identify the future outflow Warranty provision (Liability): CA: 100
of resource (FOF) FOF: 100 ( cash/ inventory)
Is the FOF tax Deductible? -> Yes: 100

deductible in the future? TB= 100-100= 0
DTD= 100-0= 100
Yes No
DTA= 100 * tax rate
Tax base =
Tax base =
Carrying amount -
Carrying amount
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Tax base definition of income received in advance

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Unearned revenue Tax base = carrying amount of unearned revenue

– revenue that will not be taxable in future periods
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Example 1- Unearned revenue
Example 1: Unearned revenue carried on the statement of financial

position at $100,000
 Scenario 1: Revenue is taxed during the period when it is earned
Revenue is taxed in the future. Thus,
Tax base 100,000 tax base = 100,000 – 0
DTD 0
 No DTD as tax recognition is the same as accounting recognition
Now Future
Revenue received Revenue earned

Revenue not taxed Revenue taxed
No deferred tax asset
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Example 1- Unearned revenue

 Scenario 2: Revenue is taxed during the period when it is received
Revenue is not taxable in the future.
Tax base 0 Thus, tax base = 100,000 – 100,000
DTD 100,000
 Tax and accounting treatment are asynchronous
Now Future

Revenue taxed Revenue not taxed
 Current tax payable
 Deferred tax asset
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Example1- Unearned revenue

 Scenario 3: Revenue is tax-exempt
 Carrying amount 100,000 Revenue will not be taxable in future

Tax base 0 period. Thus tax base = $100,000 –
$100,000 = 0
DTD 100,000
 However, IAS 12 Para 24 prohibits the recognition of this deductible temporary
differences because it arises on initial recognition of the liability
 DTD = 0
Now Future

Revenue not taxed Revenue not taxed
 Deferred tax asset (not recognized)
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Example 2 - Provision for Warranties
Example 2: Provision for Warranties; Deductible on the Basis of Claims

Made in the Year of Payment
 As at end of 20x0, provision for warranties was $1,000
 Amount represents future claims for rectification works
20x0
Carrying amount $1,000
Tax base $0
Cumulative deductible temporary difference $1,000
Provision of warranties not recognized for tax purposes in 20x0
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Example 3- Provision for Loss
Example 3: Provision for Loss; Not Deductible in Any Period

 Provision for litigation loss is $200,000
 Loss is not deductible for tax purposes in the current or future periods
20x0
Tax base $200,000
Cumulative deductible temporary difference Nil
Settlement of the provision will not lead to a decrease in future taxable income. No
tax benefits arise when the provision is settled
Permanent difference
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Example 4- Accrued Expense
Example 4: Accrued Expense; Deductible in the Year of Expensing

 Reporting entity accrues expenses of $100,000 in 20x0 which was paid off in 20x1
 Expenses are deductible for tax when the expense is recognized
20x0
Tax base $100,000
Cumulative deductible temporary difference Nil
Accounting and tax recognition of the expense are synchronous
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Content
Contents

2. Differences
4. Tax base
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Total tax
Tax % income
Accounting profit/loss expense
58
Current
tax
Taxable profit/loss Tax % income
expense
Profit or loss for the period determined in

accordance with applicable tax rules
deffered
tax
Temporary income
differences Tax %
Differences expense
Permanent
????
differences
Assume:
- That the only differences between accounting income and taxable income are
timing differences
- No changes in tax rates
- Only taxable temporary differences exist
Change in
Tax Current Taxable Current
= tax rate x + x temporary
expense income tax rate differences
Change in
Tax Current Taxable temporary
= tax rate x +
expense income differences
Tax Current Taxable Accounting Taxable

= tax rate x + -
expense income income income
Tax Current Accounting

= tax rate x
expense income
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Match between tax expense & accounting income
No match between tax expense & accounting income
Some differences between taxable & accounting income are not

“timing”
-> differences in the definition:
(i) Tax – exempt income (Government bond interest income)
(ii) disallowed items (entertainment expense, fines, donations
-> Permanent differences
-> No effect on future taxes
-> Effect on tax expense
Tax Current Permanently Permanently

= x Accounting + - exempt
expense tax rate income Disallowed
items items
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Tax Reconciliation
 Tax expense = Profit before tax (*) Current tax rate
 Effective tax rate = tax expense/profit before tax = current tax rate
 The above relationship does not hold if there are:
 Permanently disallowed items or tax-exempt income; or
 Changes in tax rates:
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
Increase • Liability at the beginning of the • Asset at the beginning of
year will be adjusted upwards the year will be adjusted upwards
• Tax expense increases • Tax expense decreases
Decrease • Liability at the beginning of the • Asset at the beginning of
year will be adjusted downwards the year will be adjusted
downwards
• Tax expense decreases
• Tax expense increases
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Tax Expense Reconciliation

 In the analytical check, the following additional items have to be included as
reconciliation items:
 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 Expense Reconciliation

Tax expense in the income statement (without tax loss)
= 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

on Tax Expense
 The following information pertains to Company XYZ (Year 1 - 20x1):
 Capital transactions of $15,000
 Disallowed expenses relating to entertainment, motor vehicle expenses and fines
amounted to $14,000
 Expenses in respect of general provisions of $180,000 were disallowed for tax
purposes. However, actual claims and utilizations of $129,500 were deductible
 Depreciation for the year was $80,000,capital allowances claimed amounted to
$708,355. Cost of fixed assets was $1,500,000
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on Tax Expense
Company XYZ

Add / (less):
50,500
Depreciation 80,000
(628,355)
Expenses relating to deemed capital transactions 15,000
Repairs and renovations 20,000
Disallowed expenses 14,000
Tax-exempt dividends (10,000)
Taxable income 3,461,145
Tax payable at 22% thuhien-ueh 761,452
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Illustration 11.1 Deferred Tax and Analytical Check on Tax

Expense
(b) Determine the difference between carrying amount and the tax base
(b) Determine the deferred tax liability using the balance sheet approachCumulative taxable
Carrying amount Tax base (deductible) temporary
difference
Balance Balance
= Cost – Accumulated = Cost – Capital
Property,
depreciation allowances to date $628,355
plant and
equipment = $1,500,000 – $80,000 = $1,500,000 – $708,355
= $1,420,000 = $791,645
Balance Balance
= Provision – Claims Nil ($50,500)
Provisions
= $180,000 – $129,500
= (50,500)
Net taxable temporary differences thuhien-ueh $577,855

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on Tax Expense
(c) Movement in deferred tax liability

Balance, 1 Jan Increase / (decrease) Balance, 31 Dec
= 22% x $577,855
Deferred tax liability Nil $127,128 = $127,128
31 Dec 20x1
Dr Tax expense 888,580
Cr Tax payable 761,452
Cr Deferred tax liability 127,128
(d) Perform an analytical check on tax expense
Tax expense = 22% x ($4,000,000 + $39,000 Permanent differences)

= $888,580
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on Tax Expense (cont- 20X2)
 The following information pertains to Company XYZ (Year 2 - 20x2):
 Disallowed items included entertainment expenses of $ 10.000, repairs &
renovation of $ 12,500 and amortization expenses of $14,000
 Interest income on government bonds of $ 80.000 was tax- exempt
 Depreciation for the year was $80,000,capital allowances claimed amounted to
$15,455.
 Expenses relating general provisions of $120,000 were disallowed for tax purposes.
However, actual claims and utilizations of $ 160,500 were deductible
 Net profit before tax ( the year ended 31/12/X2) was $2,500,000 and tax rate was
20% in X2 ( The tax rate change was announced and enacted only during the year
ended 31/12/X2)
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on Tax Expense
Company XYZ

Add / (less):
(40,000)
Depreciation 80,000
64,545
entertainment expenses 10,000 (43,500:
Repairs and renovations 12,500 permanently
amortization expenses 14,000 disallowed or
Interest income on government bonds (18,000) exempted
Taxable income 2,481.045 items
Tax payable at 20% 496,209
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Illustration 11.1 Deferred Tax and Analytical Check on Tax

Expense
(b) Determine the difference between carrying amount and the tax base
(b) Determine the deferred tax liability using the balance sheet approachCumulative taxable
Carrying amount Tax base (deductible)
temporary difference
Balance Balance
= Cost – Accumulated = Cost – Capital
Property, depreciation allowances to date $ 563,810
plant and
= $1,500,000 – $80,000 - $ = $1,500,000 – $708,355-
equipment
80,000 $15,455
= $1,340,000 = $776,190
Balance Balance
Nil ($10,500)
Provisions
= 50,500 + 120,000 –160.000
= 10,500
thuhien-ueh
Net taxable temporary differences 70 $553,310

on Tax Expense
(c) Movement in deferred tax liability

Balance, 1 Jan Increase / (decrease) Balance, 31 Dec
= 20% x $553,310
Deferred tax liability $127,128 ($ 16,466) = $110,662
31 Dec 20x2
Dr Tax expense 479,743
Dr Deferred tax liability 16,466
Cr Tax payble 496,209
(d) Perform an analytical check on tax expense
Tax expense = 20% x ($2,500,000- 43,500) -2% * 577,855

= 491,300 – 11,557
= 479,743
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Content
Contents

2. Differences
4. Tax base
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7. Accounting for deffered tax- Some cases

7.1. Temporary Differences Arising from Initial Recognition of
Assets and Liabilities
7.2. Assets Carried at Fair Value
7.3.Accounting for Unused Tax Losses and Unused Tax Credits
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6.1. Temporary Differences Arising from Initial

Recognition of Assets and Liabilities
 When part or all of the cost of an asset is not deductible for tax purposes:
 A temporary difference will arise on the first day an asset or liability is
recognized
 The initial recognition of a deferred tax liability is prohibited under IAS 12

Para 15
 A deferred tax liability or asset is never recognized from:
(a) The initial recognition of goodwill;
(b) The initial recognition of an asset or liability that is
(i) Not a business combination; and
(ii) At the time of the transaction, affects neither accounting profit nor
taxable profit (or tax loss)
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Non-deductible Expenditures on an Intangible Asset

Example:
 Development expenditures of $300,000 were capitalized on 1 Jan 20x0:
 Amortized over a 3-year period commencing 1 Jan 20x0; and
 Was not deductible for tax purpose
 Assumed tax rate of 20%
Balance sheet liability approach 1 Jan 20x0 31 Dec 20x0

Intangible asset $300,000 $300,000
Accumulated amortization 0 (100,000)
Carrying amount $300,000 $200,000
Tax base 0 0
Cumulative taxable temporary difference $300,000 $200,000
Deferred tax liability 60,000 40,000
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Example 11.8 Non-deductible Expenditures on an Intangible

Asset
• Without the prohibition in IAS 12, the deferred tax liability had to be
recognized on Jan 20x0 as follows:
Dr Intangible asset 60,000
Cr Deferred tax liability 60,000
• This adjustment will makes the financial statements “less transparent”
− capitalization of tax expense in asset cost on initial recognition implies
that the initial outlay on the asset goes beyond actual expenditures
− Tax burden arising from the non-deductibility of the actual expenditures
is included in the cost of the asset
• Thus under IAS 12, the deferred tax liability is ignored
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6.2.Assets Carried at Fair Value

 Taxable or deductible temporary differences may arise from assets carried
at fair value if:
 The tax base of the revalued assets remain at cost
 IAS 12 requires the recognition of deferred tax liability/asset even if:

 The entity does not intend to dispose off the asset
 The fair value adjustments will be realized through use rather than disposal
 The entity does not have to pay capital gains tax on disposal
 If the proceeds will be reinvested in similar assets which will generate taxable profit
from use or ultimate sale, the deferred tax liability on the fair value change is
recognized
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6.2.Assets Carried at Fair Value

 IAS 12 sets the basis of recovery for two types of assets:
 Non-depreciable asset measured using the revaluation model
 Deemed to be recovered through sale
 Reporting entity should use the tax rate and the tax base that are consistent with the
expected manner of recovery or settlement
 Investment property measured using the fair value model of IAS 40

 Deemed to be recovered through sale unless business model for holding the
investment property is to consume substantially all the benefits of the property
through time than through sale
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6.3. Accounting for Unused Tax Losses
Does the company have a No

history of recent losses? Recognize deferred tax asset in full
Yes
Does the company have Yes Recognize deferred tax asset to the extent of losses
other convincing evidence to that may be used to offset the probable future profits
support that future profit
exists? that are projected
No
Does the company have Yes Recognize deferred tax asset in full if: Cumulative
cumulative net taxable taxable temporary differences > Tax loss carry-
temporary differences? forward
Recognize partially to the extent of cumulative
No taxable temporary differences on hand if: cumulative
taxable differences < tax loss carry-forward
No deferred tax asset is
recognized
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6.3. Accounting for Unused Tax Losses

Example:
• Company has tax losses of $1,000,000
• Cumulative net taxable temporary differences (CTD) of $600,000
• Tax rate is 20%
Now Future
CTD $600,000 Reversal, taxable income  $600,000

Tax losses $1,000,000 Utilization of loss, taxable income  $600,000
In view of future effects,
recognize DTA = DTL = $120,000
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

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

20X1: DTA= 380,000*25% = 95.000
20X1 20X2
TTD DTL DTA TTD DTL DTA
Balance, 1 Jan 100,000 25,000 0 280,000 70,000 (95,000)
Change 180,000 45,000 (95,000) (70,000) (17,500) 95,000
Balance, 31 Dec 280,000 70,000 (95,000) 210,000 52,500 0
31/12/X1 31/12/X2
Dr- DTE: 45,000 Dr- Curr Tax Exp:77,500
Cr- DTL: 45,000 Cr- Tax payable : 77,500
Dr-DTA: 95.000 Dr- DTL: 17,500
Cr- DTE: 95,000
Dr- DTE: 77,500
Cr- DTA: 95,000
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2. Future profitability is less than the probable

20X1: DTA= DTL = 70.000
20X1 20X2
TTD DTL DTA TTD DTL DTA
Balance, 1 Jan 100,000 25,000 0 280,000 70,000 (70,000)
Change 180,000 45,000 (70,000) (70,000) (17,500) 70,000
Balance, 31 Dec 280,000 70,000 (70,000) 210,000 52,500 0
31/12/X1 31/12/X2 Dr- Curr Tax Exp:77,500
Cr- Tax payable : 77,500
Dr- DTA: 70,000
Cr- DTE: 25,000 Dr- DTL: 17,500
Cr- DTL: 45,000 Dr- DTE: 52,500
Cr- DTA: 70,000
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Future profitability is probable to Future profitability is less than

fully absorb the tax loss: the probable
(tax expense/income) (tax expense/income)
20X1 (50,000) (25,000)
20X2 155,000 130,000
Total 105,000 105,000
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Summary
➢ IAS/IFRS: Accounting profit (before tax) Vs Tax law: Taxable profit (Tax
income)
➢ Differences: Permanent differences Vs Temporary differences
➢ Taxable temporary differences Vs deductible Temporary differences
➢ Current Income tax vs Deferred tax:
➢ B/s: Deferred tax asset - deferred tax liability Vs tax payable
(current income tax liability)
➢ P/L: income tax expense: current tax expense/income Vs
deferred tax expense/income
Summary
➢ accounting models for income taxes: Income approach Vs Balance sheet liability
approach
➢ Income approach (the timing difference approach: deferred tax is recognised for timing
differences ): (Deferral method vs Liability method)
➢ Timing differences are differences between taxable profit and accounting profit that
originate in one period and reverse in one or more subsequent periods.
➢ Balance sheet liability approach (also known as the ‘temporary difference approach’):
deferred tax liabilities and deferred tax assets are recognized for temporary differences
➢ All timing differences are temporary differences but some temporary differences are not
timing differences
➢ temporary difference: Carrying amount – Tax base
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Chapter 1 - Income Tax

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12/27/2022

Nguyễn Thị Thu Hiền

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

2. Understand the concept of deferred tax as a liability and an asset;

3. Apply the balance sheet approach in determining the balances of a

4. Check the tax expense analytically;

5. Apply appropriate principles to situations of tax losses;

6. Present appropriately the tax effects of other comprehensive income

2 (OCI) or items taken directly to equity; thuhien-ueh

1. Accounting for current income tax

Debit: Expenses in the net P/L/or

Profit or loss for the period determined in accordance with

 Accounting profit before tax: $486million

Illustration 11.1 Deferred Tax and

Accounting income 4,000,000

1. Accounting for current income tax

Profit or loss for the period determined in accordance with

 Accounting profit: Net profit or loss

Not deferred tax

Type of temporary Directions Examples

Type of permanent Examples Effect on tax

(*) Investment tax credits were introduced in 1962, to protect American

Illustration 11.1 Deferred Tax and

1. Accounting for current income tax

Không ghi nhận ảnh hưởng của thuế

Chi phí/thu nhập thuế TNDN (hiện hành) -75 -75

Thí dụ 1- Xét ảnh hưởng của thuế

Chi phí/thu nhập thuế TNDN (p/l) -50 -100

cash:75 SD:75 (3)75

Tổng CP thuế: -50

Tổng CP thuế: -100

20X1 20X2 20X3

Tax depreciation expense (4) -400 -150 -50

Tax expese -100 -162,5 -187,5

Profit after tax 500 437,5 412,5

20X1 20X2 20X3

20X1 20X2 20X3

PPE (CA: carying amount) (1/1) 600 400 200

4600 – 600*25% = Accounting profit BT – (Accounting Profit BT*25%)

20X1 20X2 20X3

Curr. Tax Curr. Tax

26 100(1) 100 162,5 162,5 187,5 187,5

Def. Tax Def Tax Def Tax

150 150 150

20X1 20X2 20X3

Acconting for deferred tax

 Deferred tax liability

Temporary differences & deferred tax

-It results in payment of tax when carrying amount of asset or

Deferred tax liability

Temporary differences & deferred tax

- There are the differences that:

Temporary differences & deferred tax

1. Accounting for current income tax

Amount attributed to asset/liability for tax purposes

Amount deductible against Carrying amount

Tax Base of an Asset

Tax statement of financial Taxable temporary

Tax base definition of an asset

If these economic benefits will not be taxable, then the tax

Tax base definition of an asset

(CGOS: cost of good sold)

4600 – 60025% = Accounting profit BT – (Accounting Profit BT25%)