PRINCE DANIELS 2023

IAS 12 QUESTION WITH ANSWERS

Shalom Ltd is a manufacturing company that prepares financial statements to 31 March each year.
On 1stApril 2013, Shalom Ltd purchased equipment for K 4,800 million with a useful economic life
of 4 years. Shalom Ltd depreciates equipment on a straight line basis.

Shalom Ltd’s financial statements show profit before tax of K 8, 000 million in each of the years
2014, 2015, 2016 and 2017. This profit is stated after charging depreciation of K 1,200 million per
annum. The company does not have any other Non-Current Assets other than the equipment
purchased on 1 April 2014.

The tax allowances granted in relation to this asset by the Zambia Revenue Authority at 31 March
each year for the period 2014 to 2017 are:

Year 2014 K 1,620 million

Year 2015 K 1,380 million

Year 2016 K 1,020 million

Year 2017 K 780 million

Income tax is calculated as 30% of taxable profits

Apart from the above depreciation and tax allowances there are no other differences between
the accounting and taxable profits.

Required:
i. Ignoring deferred tax, prepare the income statement extracts in for each of the years
2014, 2015, 2016 and 2017
ii. Accounting for deferred tax, prepare the income statement and statement of Financial
Position extracts for each of the years 2014, 2015, 2016 and 2017 in accordance with
the requirements of IAS 12 Income tax with an assumption that the tax charge for the
pervious accounting year is paid on 1st April the following year.
iii. Comparing your results in ii) and iii) above and in relation to the Income statement
extracts, explain why is it necessary for Shalom Ltd to take in to account deferred tax
consequences in relation to this assets so as to enhance the qualitative characteristic of
comparability as stated in the IASB Conceptual Framework
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Part (b)
Crispin Plc’s draft statement of comprehensive income for the year to 31 March 2014 shows
an income tax expense of K 55,000. The draft statement of financial position shows a non-
current liability of K 280,000 for deferred tax but does not show a current tax liability.

After investigations, it was found that the tax on the profit for the year to 31 March 2014 is
estimated at K 260,000, and the deferred tax liability of K 280,000 is for the year ending 31
March 2013. The K 55,000 in the draft statement of comprehensive income is the underestimate
for the year to 31 March 2013. The carrying amount of Crispin’s net assets at 31 March 2014
is K 1.4m more than their tax base on that date. The tax rate is 20%

Required:

i. Restate the figures which should appear in relation to the tax expense that will be shown
in the statement of comprehensive income for the year to 31 March 2014, the deferred
tax figure and the current tax liability as at 31 March 2014
ii. Distinguish between permanent differences and temporary differences

SOLUTION

i. Ignoring deferred tax

Income Statement Extracts

2014 2015 2016 2017

K’m K’m K’m K’m
Profit before tax 8,000 8,000 8,000 8,000
Tax (w1) (2,274) (2,346) (2,454) (2,526)
Profit after tax 5,726 5,654 5,546 5,474

ii) Taking deferred tax into account

Income Statement Extracts
2014 2015 2016 2017
K’m K’m K’m K’m
Profit before tax 8,000 8,000 8,000 8,000
Tax (w3) (2,400) (2,400) (2,400) (2,400)
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Profit after tax 5,600 5,600 5,600 5,600

Statement of Financial Position extracts

2014 2015 2016 2017

K’m K’m
K’m K’m

Non-Current Assets
0
Property, Plant and Equipment 3,600 2,400 1,200

Non-Current Liabilities:
0
Deferred Tax 126 180 126

Current Liabilities

Income Tax 2,274 2,346 2,454 2,526

iii) IAS 12 requires entities to provide for deferred tax on a full provision basis and uses
the liability method to calculate deferred tax by making reference to the tax base of
an asset or liability compared to its carrying value.

Shalom Ltd has the same profit before tax of K 8,000m for each of the four years
and so one would expect that the profit after tax to be the same as the tax rate (30%)
is the same through out the four years. Looking at the results in ii), the profits after
tax figures are different and this is because of the temporary differences between
accounting ad taxable profits. This will have an effect on the comparability of these
Financial Statements for the four years under consideration. To remedy this effect,
one has to take deferred tax into account and this can be seen in the income
statement extracts in iii), where the profit after tax is the same through out the four
years.

Workings

1. Tax amount for the year

2014 2015 2016 2017

K’m K’m K’m K’m

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Accounting profits 8,000 8,000 8,000 8,000

Add: Depreciation 1,200 1,200 1,200 1,200

Less: Capital Allowances (1,620) (1,380) (1,020) (780)

Profit before tax 7,580 7,820 8,180 8,420

Income Tax @ 30% 2,274 2,346 2,454 2,526

2. Temporary differences

Year end

2014 2015 2016 2017

K’m K’m K’m K’m

Accounting base 3,600 2,400 1,200 0

Tax base 3,180 1,800 780 0

Tem differences 420 600 420 0

Deferred tax provision @30% 126 180 126 0

54 (54) (126)
Increase (decrease) 126

3. Tax Expense with deferred tax consideration

Year end

2014 2015 2016 2017

K’m K’m K’m K’m

Income Tax 2,274 2,346 2,454 2,526

Deferred Tax (w2) 126 54 (54) (126)

Tax for the year 2,400 2,400 2,400 2,400

From the above example, it can be seen that deferred tax is a means of allocating tax charges
fairly to particular accounting periods.

Part b
Crispen Plc
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There is a taxable temporary difference of 1.4m between the carrying amount and the tax base
of the company’s assets. This gives rise to a deferred tax liability of 1.4m x
20% = 280, 000. So the deferred tax figure shown in non-current liabilities should be 280,000.
The statement of financial position should also show a current liability of 260,000 in relation
to current tax

The deferred tax liability has not changed from last year and no movement is recorded in the
income statement in as far as deferred tax is concerned. The tax expense shown in the statement
of comprehensive income should be 315,000(55,000 +260,000)