Notes for writing ahead of Friday class

Deferred tax refers to future tax consequences of transactions recognised in the current and previous
periods.

Deferred tax arises because tax authorities base their tax computations on taxable profits which varies
from accounting profits.

The difference between accounting and taxable profits may be caused by permanent or temporary
differences.

⮚ Permanent differences do not have deferred tax consequences. They arise from transactions that
are not taxable or deductible for tax purposes.

⮚ Temporary differences have deferred tax consequences.

Temporary differences are differences between the carrying amount of assets and liabilities and their tax
base (tax net book value). They arise when an expense is allowed for both tax and accounting purposes
but the timing of the allowance is different.

⮚ Temporary difference = Carrying amount - tax base.

⮚ Tax base is the amount of an asset or liability for tax purposes.

⮚ Deferred tax = Temporary difference x tax rate.

⮚ Deferred tax can be either an asset or a liability.

Deferred tax liability.

Are amounts of income taxes payable in future periods in respect of taxable temporary differences.

Taxable temporary difference are differences that will result in future taxable profits when determining
taxable profits or loss of an entity when the carrying amount of an asset is or liability is recovered or
settled.

When the carrying amount exceeds the tax base, the difference is a taxable temporary difference which
leads to deferred tax liability.

Deferred tax asset

Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
● deductible temporary differences;
● the carryforward of unused tax losses; and
● the carryforward of unused tax credits.

Deductible temporary differences are differences that will result in future deductible amounts when
determining taxable profits or loss of an entity when the carrying amount of an asset is or liability is
recovered or settled.
When the carrying amount is less than the tax base, the difference is deductible temporary difference,
which leads to deferred tax asset.

A deferred tax asset is recognised for all deductible temporary differences to the extent that it is probable
that taxable profit will be available against which the deductible temporary difference can be utilised.

Measurement of deferred tax.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period
when the asset is realised or liability is settled, based on tax rates (and tax laws) that have been enacted or
substantively enacted by the end of the reporting period.

Impact of deferred tax to financial statements.

● Statement of financial statements.

Deferred tax assets or liabilities are presented as either non-current assets or non-current liabilities
respectively.

● Statement of profit or loss.

Movement between two accounting dates is taken to profit or loss account as part of income tax expense.

Revised income tax expense.

Corporate tax /current tax XX
Under provisions/(over provisions) XX/(XX)
Movement in deferred tax XX/(XX)
Income tax expense XX

Understanding impact of deferred tax movement to income tax expense

Movement Impact to income tax expense
Deferred tax liability Increase Increases the expense
Decrease Decreases the expense
Deferred tax asset Increase Decreases the expense
Decrease Increases the expense

Summary

Income tax expense is a movement of both current and deferred tax.

Opening balances Closing balances

Current tax XX XX
Deferred tax XX XX
Totals XX (A) XX (B)

Income tax expense = A - B