IAS 12

Chapter 6 - Deferred Taxation

Part 1:
Definitions, measurement, year-
end accruals & provisions
1
 Example of deferred tax
A Ltd received R100 cash in 2022 in advance for
services they provided in 2023.

There were no other transactions in 2022 and

2023.

For tax purposes, this income is taxable at the

earlier of when it was received or earned.

Required: perform the current tax computation

and draw up the SOCI for 2022 and 2023
2
 Solution to Example of deferred tax
• Current Tax Computation
2023 2022
Profit before tax 100 0
- IRIA ** - 100 + 100
Taxable profit 0 100
Current tax at 30% 0 30

Journal Entry 2022: DR Tax expense R30

CR CTP R30

Journal Entry 2023: None

3
 Solution to Example of def tax: SOCI
without def tax
SOCI 2023 2022
Profit before tax 100 0
Less: current tax 0 (30)
Accounting profit after tax 100 (30)

4
 Solution to Example of def tax: SOCI with def tax
2023 2022
Accounting profit 100 0
Less: Tax (30) 0
- Current tax 0 30
- Deferred tax 30 (30)

Accounting profit after tax 70 0

The tax expense must reflect the full tax

consequences of the amounts recognised in profit
or loss 5
 ACCRUAL BASIS OF ACCOUNTING
• the effect of transactions must be
recognised when they occur.

THEREFORE
• tax expense in FS’s must reflect the tax
consequences of the amount’s recognised
in that financial year
• IRRESPECTIVE of whether that amt is
included in taxable income in the current yr.
6
 Solution to Example of def tax:
Deferred Tax Journal Entries
2022 DR CR
Deferred tax asset: SOFP 30
Tax expense: SOCI 30
Deferred tax adjustment for 2022

2023 DR CR
Tax expense: SOCI 30
Deferred tax asset: SOFP 30
Deferred tax adjustment for 2023
7
TOTAL NORMAL TAX (incurred):
Current Deferred
(charged) (adjustment)

(book entry:
(amt SARS charges; amount over/
based on Tax Act) under charged)
DR TE, CR CTP DR/CR TE;
CR/DR DT

8
 Calculated in
accordance with
Tax Act

Doesn’t normally =
27% x PBT because: CURRENT Estimated by
• Non-temp & (NORMAL) accountant during
year: 1st PP; 2nd
• Temp diff’s TAX PP; finalising F/S’s

Est’ed amt is confirmed

or otherwise when a/mt
arrives nxt yr resulting in
under/over prov.
TEMPORARY NON-TEMPORARY
DIFFERENCES DIFFERENCES

Income: Income Income that will never

received in adv? Profit be taxed: Dividend
on sale vs recoup income; Portions of
capital profits

Expenses : Expenses
prepaid? Provisions? Expenses that will
Depreciation vs never be deducted:
w&t? Loss on sale vs Some donations; Fines
scrapping allowance
Deferred tax asset
(debit balance)
Accountant believes that
tax has been charged by
SARS, but not yet incurred
by entity
This early tax charge must
be deferred (postponed) =
similar to treatment of
prepaid exp
J/E to create DTA (future tax
relief):
DR DTA (SOFP); CR TE (SOCI)
Deferred tax liability
(CR bal)
Accountant believes that
tax has been incurred,
but SARS hasn’t charged
entity yet.
This amt will be charged
by SARS in the future =
similar to the treatment
of expense payable
J/E to create DTL (future tax
owing):
DR TE (SOCI); CR DTL (SOFP)
 DEF TAX BALANCE vs CTP BALANCE

CTP bal = amt DT bal = extra amt

currently accountant believes
owing to/by to still be owing
SARS based on to/by SARS based on
Tax Act concept of accrual
VS  this amt is not yet
 treated as a
current liab or payable/recoverable
asset i.t.o. Tax Act
treated as non-
current liab/ asset
12
 Basic E.g. 2: Creating a DTA (DR bal) – GG
PG: 273
• The estimated current tax charged by SARS in 20X1 is
R30 000
• Accountant calculates the tax incurred in 20X1 to be:
R24 000 (i.e. to be shown on face of SOCI)
• Excess of R6 000 is deferred to future years
• No other comprehensive income

Required
• Ledger accounts
• Disclose tax expense & deferred tax for 20X1
13
 Solution to Basic E.g. 2: Creating a
DTA (DR bal)
Statement of comprehensive 20X1
income
Profit before tax XXX
Income tax expense 4. (24 000)
(current 30 000 –
deferred 6 000)
Profit for the period XXX
Other Comprehensive income 0
Total Comprehensive income XXX

14
Solution to Basic E.g. 2A: Creating a
DTA (DR bal)
Statement of Financial C
Position
ASSETS
Non-current assets
- Deferred tax: normal tax 6 000

15
Solution to Basic E.g. 2: Creating a DTA (DR
bal)
Entity Name
Notes to the financial statements for the year ended …20X1
4. Taxation R
Income Taxation 24 000
Expense
- Current 30 000
- Deferred (6 000)

16
Basic E.g.4: Creating a DTL (CR bal)
• Expected tax charged by SARS in 20X1 is R15000
• Accountant calculates the tax incurred in 20X1 to be
R22 000 i.e. based on IFRS (ie to be shown on face of
SOCI)
• No other comprehensive income

Required:
• Ledger accounts
• Disclose tax expense & deferred tax for 20X1

17
 Solution Basic E.g. 3A: Creating a
DTL (CR bal)
SOCI 20X1
Profit before tax XXX
Taxation expense 4. ( 22000)
(current 15 000 +
deferred 7 000)
Profit for the period XXX
Other Comprehensive income 0
Total Comprehensive income XXX

18
 Solution Basic E.g. 3A: Creating a DTL (CR
bal)
Entity Name
Notes to the financial statements for the year ended …20X1
4. Taxation R
Income Taxation 22 000
Expense
- Current 15 000
- Deferred 7 000

19
 Solution Basic E.g. 3A: Creating a
DTL (CR bal)
Notes to the Financial Statements
SOFP C
LIABILITIES
Non-current liabilities 4
- Deferred tax: normal tax 7 000
Current liabilities
- Current tax payable: 15 000
normal tax

20
Methods for measuring Def Tax – GG
PG: 278
Bal Sheet approach Income stm approach

Compare carrying amt Compare accounting

& tax base of each of
the entity’s assets &
liabilities.
Only use this method
(IAS 12 doesn’t
mention IS approach).
profits and taxable
profits.
I/S method is still
useful: helps you to
understand concept
of DT; can use it to
check your B/S calc’s

21
 The Income Statement Approach – GG Pg. 278
Profit before tax (accounting profit) X
Adj’ed for permanent differences X
- less exempt inc (certain cap profits, div inc) (X)
- add non-ded exp’s (donations, fines) X

= accounting profits that are taxable (A x 28% = tax E incurred) A

* add depreciation X
* less wear & tear (X)
* add IRIA (closing bal) if taxed when rec’d X
* less IRIA (o/ bal): if taxed when rec’ed (X)
* Etc other temp diff’s (eg exp’s p/pd; provisions) X

= Taxable profits (B x 28% = current tax charge) B

 The Income Stm Approach cont. – GG Pg. 279

Accounting = Profit before tax

profits

+/- Non-temporary diff’s

Taxable Portion of acc profits
accounting = that are taxable but x30% = Tax expense
profits not necessarily now
Def tax
+ - Temp diff’s x30% = exp /
income
Taxable Profits that are
profits = taxable now, based x30% = Current
expense
tax
purely on tax laws
 The Balance Sheet Approach –
GG Pg. 281

1st Calculate the def

2nd Calculate the def
tax balances on tax adj
SOFP (movement
from o/bal to
c/bal)
 The Balance Sheet Approach cont.
Compare the carrying amt’s of assets & liabilities
to the tax bases of these assets and liabilities →
any difference is a temporary difference:

CA balances of
TB “taxman’s
assets & liab’s carrying
amount”
recognised in calculated
SOFP based using the tax
on IFRS law
 The Balance Sheet Approach cont.
– GG Page 284

Difference btwn opening & closing def tax bal in SOFP

will give you: DT journal adjustment

CA: o/b TD x 30% = DT bal: bgn of yr

TB: o/b

M/mt:
DT jnl
adj

CA: c/b TB: c/b

TD x 30% = DT bal: end of yr
Useful format for calc’ing DT using BS approach:
CA TB Temp Def Tax Def tax
(SOFP) Diff bal / adj
(a) (b) (c) = (d) =
(b)–(a) (c)x30%
O/ bal
(SOFP)
M/m: DT
(SOCI)

C/ bal
(SOFP)
TAX BASES (definitions per IAS 12) – GG
Pg. 287

ASSET The amt that LIABILITY

will be
CA less future
deducted in the
tax deductions
future: “Future
tax deductions”
Asset that
Rev rec’ed in adv =
represents an
CA less any amt of
income = CA less
rev not taxable in
portion that will be
the future
taxed in the future
 Example 7: INCOME RECEIVED IN ADVANCE
– GG PG: 284

• R120 000 is received in year 20x1 in respect of rent

earned in 20X2 .
• There is no other income & no expenses in either yr.

Required:

Calculate the deferred tax adjustment for both years

Solution to Example 7: INCOME RECEIVED IN ADVANCE – – GG PG: 262

• C. Deferred tax: balance sheet approach

– Rule for liabilities: income received in advance

– The tax base of revenue received in advance is the
carrying amount less that portion representing
income that will not be taxed in the future.

– Applying the rule: tax base of income received in

advance = 0
30
 Solution to Example 7: INCOME RECEIVED IN
ADVANCE – – GG PG: 284

20X1 tax base C

Carrying amount 120 000
Less portion that won’t be taxed (120 000)
in the future (taxed in 20X1)
0

20X2 tax base C

Carrying amount 0
Less that won’t be taxed in the future 0
0

31
 Solution to Example 7: INCOME RECEIVED IN
ADVANCE – – GG PG: 284
Calculation of deferred tax
Income CA TB TD DT balance/
received in (a) (b) (c) (d) adjustmen
advance (b)–(a) (c)x30 t
%
O/balance:yr 1 0 0 0 0
Movement (120) 0 120 36 Dr DT
Cr Tax (E)
C/balance:yr 1 (120) 0 120 36 Asset
Movement 120 0 (120) (36) Cr DT
Dr Tax (E)
C/balance:yr 2 0 0 0 0

32
 Solution to Example 7: INCOME RECEIVED IN
ADVANCE – – GG PG: 285
E. Disclosure
Statement of comprehensive Yr 2 Yr 1
income
Profit before tax 120 000 0
Taxation 4. (36 000) 0
Profit after tax 84 000 0

Statement of financial position Yr 2 Yr 1

Non-current assets
 Deferred tax: normal tax 0 36 000
Current liabilities
 Current Tax Payable: normal tax 36 000 36 000
 Income Received in Advance 0 120 000
33
Solution to Example 7: INCOME RECEIVED IN ADVANCE –
– GG PG: 285/286

Notes to the financial Yr 2 Yr 1

statements
4. Taxation
SA Normal Taxation 36 000 0
- Current 0 36 000
- Deferred 36 000 (36000)
5. Deferred taxation Asset
comprises:
• year-end accruals 0 36 000

34
 Example 8: EXPENSES PREPAID
– GG PG: 288
• Electricity of R8 000 in respect of Jan 20x2 is paid in
December 20x1
• SARS allows this payment as a deduction in year 1.
• Profit before tax was R20 000 in yr 1 & yr 2 BEFORE taking
into account the above. No other expenses

Required:
A. Calculate the deferred tax bal’s & adjustments.
B. Calculate the CNT for both years
C. Show the tax related T-accounts.
D. Disclose in the financial statements.
 Solution to Example 8: EXPENSES PREPAID
– GG PG: 288
• C. Deferred tax: balance sheet approach

– Rule for assets: expenses prepaid

– The tax base of an asset (representing an expense) is the
amount that will be deducted for tax purposes = (CA less
any amt that wont be deducted in the future)against any
taxable economic benefits that will flow to an enterprise
when it recovers the carrying amount of the asset.
– If those economic benefits will not be taxable, the tax base
of the asset is equal to its carrying amount (e.g. an
investment that renders dividend income).
36
 Solution to Example 8: EXPENSES PREPAID
– GG PG: 288

20X1 tax base C

Carrying amount 8 000
Less amount that won’t be deducted for (8 000)
tax purposes in the future (all deducted
in year 1)
0

20X2 tax base C

Carrying amount 0
Less deductible in the future 0
0

37
 Solution to Example 8: EXPENSES PREPAID – GG PG:
288
Calculation of CA TB TD DT balance/
Deferred Tax: (a) (b) (c) (d) adjustme
Expenses (b)–(a) (c)x30% nt
prepaid
O/balance: yr 1 0 0 0 0
Movement 8 0 (8) (2.4) Cr DT; Dr
Tax (exp)
C/ balance: yr 1 8 0 (8) (2.4) liability
Movement (8) 0 8 2.4 Dr DT; Cr
Tax (exp)
C/ balance: yr 2 0 0 0 0

38
 Solution to Example 8: EXPENSES PREPAID
– GG PG: 289
B. Calculation of current normal tax
Year 1 Profits Tax @ 30%
Profit before tax 20 000
Adjust for permanent 0
differences:
Taxable accounting profits 20 000 6 000 (NT)
Adjust for temporary (8 000) (2 400) (DT)
differences:
Less expenses prepaid (c/bal) (8 000)
Add expenses prepaid (o/bal) 0
Taxable profit in current year 12 000 3 600 (CT)

39
 Solution to Example 8: EXPENSES PREPAID
– GG PG: 289
Year 2 Profits Tax @ 30%
Profit before tax (20 000 – 8 000) 12 000
Adjust for permanent 0
differences:
Taxable accounting profits 12 000 3 600 (NT)
Adjust for temporary differences: 8 000 2 400 (DT)
Less expenses prepaid (c/bal) 0
Add expenses prepaid (o/bal) 8 000
Taxable profit in current year 20 000 6 000 (CT)

40
 Solution to Example 8: EXPENSES PREPAID
– GG PG: 290

• T-Accounts: Tax Adjustments

Taxation (E)
Yr 1
CTP 3 600 P&L 6 000
DT 2 400
Yr 2
CTP 6 000 DT 2 400
P/L 3 600

41
 Solution to Example 8: EXPENSES PREPAID
– GG PG: 290
CTP
Bank 3 600 Yr 1 Tax 3 600
Yr2 Tax 6 000

Bank
Yr2 CTP 3 600

Deferred taxation (L)

Yr 2 Yr 1
Tax 2 400 Tax 2 400

42
 Solution to Example 8: EXPENSES PREPAID
– GG PG: 291
E. Disclosure
Statement of Yr 2 Yr 1
comprehensive income
Profit before tax 12 000 20 000
Taxation 4. (3 600) (6 000)
Profit after tax 8 400 14 000

43
 Solution to Example 8: EXPENSES PREPAID –
GG PG: 291
Notes to the financial statements Yr 2 Yr 1
4. Taxation
SA Normal Taxation 3 600 6 000
- Current 6 000 3 600
- Deferred (2 400) 2 400

5. Deferred taxation A/ (L)

comprises:
• year-end accruals 0 (2 400)

44
 Solution to Example 8: EXPENSES PREPAID
– GG PG: 291

Statement of financial position Yr 2 Yr 1

ASSETS
Current Assets
Expenses Prepaid 0 8 000
LIABILITIES
Non-current liabilities
 Deferred tax: normal tax 0 2 400
Current liabilities
 Current Tax Payable: normal tax 6 000 3 600

45
Useful format for calc’ing DT using BS approach:
CA TB Temp Def Tax Def tax
(SOFP) Diff bal / adj
(a) (b) (c) = (d) =
(b)–(a) (c)x30%
O/ bal
(SOFP)
M/m: DT
(SOCI)

C/ bal
(SOFP)
 Example 10: EXPENSES PROVIDED OR
PROVISIONS GG PG 295
The accountant raises provision for warranty costs of 4K in yr 1.
SARS won’t allow deduction of ‘provided’ expense until it is paid.

• Warranty costs of 4 000 were only paid in yr 2

• PBT in yr 1 and yr 2 before taking the above into account is R20 000.
There are no other expenses.
Required:
A. Calculate the deferred tax bal’s & adjustments.
B. Calculate the taxable profit and current tax.
C. Show the tax related T-accounts.
D. Disclose in the financial statements.
What is the journal to record the provision in year 1?
Dr Warranty costs
Cr Provision for warranty costs
 Solution to Example 10: EXPENSES PROVIDED –
GG PG 295
• C. Deferred tax: balance sheet approach

– Rule for liabilities: expenses provided

– The tax base of liability (representing expenses) is

the carrying amount less any amount that will be
deductible for tax purposes in the future.

– Applying the rule: tax base of expenses payable = 0

48
Solution to Example 10: EXPENSES PROVIDED –
GG PG 295
Year 1 tax base C
Carrying amount 4 000
Less deductible in the future (to be (4 000)
deducted: yr 2)
0

Year 2 tax base C

Carrying amount 0
Less deductible in the future (0)
0

49
 Solution to Example 10: EXPENSES PROVIDED
– GG PG 295
Provisions CA TB TD DT balance/
(a) (b) (c) (d) adjustmen
(b)–(a) (c)x30% t
O/balance: yr 1 0 0 0 0
Movement (4) 0 4 1.2 Dr DT;
Cr Tax
(exp)
C/ balance: yr 1 (4) 0 4 1.2 asset
Movement 4 0 (4) (1.2) Cr DT
Dr Tax
(exp)
C/balance:yr 2 0 0 0 0

50
 Solution to Example 10: EXPENSES PROVIDED
– GG PG 296
B. Calculation of current normal tax
Year 1 Profits Tax @ 30%
Profit before tax (20 000 – 4 000) 16 000
Adjust for permanent 0
differences:

Taxable accounting profits 16 000 4 800 (NT)

Adjust for temporary differences: 4 000 1 200 (DT)
Add expenses provided (c/bal) 4 000
Less expenses provided (o/bal) 0
Taxable profit in current year 20 000 6 000 (CT)

51
 Solution to Example 10: EXPENSES PROVIDED
– GG PG 296
Year 2 Profits Tax @ 30%
Profit before tax 20 000
Adjust for permanent 0
differences:

Taxable accounting profits 20 000 6 000 (NT)

Adjust for temporary (4 000) (1200) (DT)
differences:
Add expenses provided (c/bal) 0
Less expenses provided (o/bal) (4 000)

Taxable profit in current year 16 000 4 800 (CT)

52
 Solution to Example 10: EXPENSES PROVIDED
– GG PG 297
E. Disclosure

Statement of Yr 2 Yr 1
comprehensive
income
Profit before tax 20 000 16 000
Taxation 4. (6 000) (4 800)
Profit after tax 14000 11 200

53
 Solution to Example 10: EXPENSES PROVIDED
– GG PG 297
Notes to the financial Yr 2 Yr 1
statements
4. Taxation
SA Normal Taxation 6 000 4 800
- Current 4 800 6 000
- Deferred 1 200 (1 200)

5. Deferred taxation A/ (L)

The deferred tax balance
comprises temporary
differences resulting from:
- Provisions 0 1 200

54
 Solution to Example 10: EXPENSES PROVIDED
– GG PG 297

Yr 2 Yr 1
Statement of financial position
Non-current assets
 Deferred tax: normal tax 0 1 200
Current liabilities
 Current Tax Payable: normal 10 800 6 000
tax (6000 +4800)
 Provision for warranties 0 4 000

55
 Borne out
of ‘accrual
concept’

Current tax
Movement in charge versus
temp diff’s
(I/S) Tax
DT incurred(exp)

RECAP

Not
Temp diff’s
permanent
(B/S)
differences
 • A present economic resource
Controlled by the entity Resulting
from past events Note 1: An
DEFINITION economic resource is defined as: a
right that has the potential to
OF AN ASSET produce economic benefits

• must only be recognised if the user

would find this information useful,
RECOGNITION i.e. we only recognise the elements
CRITERIA if it means we are providing
information that is: relevant; and a
faithful representation.

57
 ACCRUAL BASIS OF ACCOUNTING
the effect of transactions must be recognised when they occur.

THEREFORE
tax expense in FS’s must reflect irrespective of whether that
the tax consequences of the amount is included in taxable
amt’s recognised in that fin yr income in the current year.
 Non-current assets and deferred tax
Many different kinds of non-current assets: PPE,
investment property, intangible assets etc

• cost of these assets are

Deductible deductible for tax purposes over a
period of time (eg w&t, capital
assets allowances) at rates set out in tax
legislation

Non-ded • cost of these assets are not

deductible for tax purposes
assets
 Assets that are tax deductible AND depreciable

Where the accountant Where SARS allows

writes off the cost of a non
current asset →
accounting profit and asset’s
carrying amt is reduced =
depreciation expense
deduction of the cost of a
non current asset →
taxable profit and asset’s tax
base is reduced =
w&t / capital allowance

If the depreciation rate and the w&t rate on

the same asset are different = different
carrying amt and tax base for that asset =
temporary difference
 Eg A: Depreciable & deductible assets
PBT is R50 000, according to the accountant and SARS in 2008 &
2009, before taking the following into account:
• Machine that cost R120 000 was purchased on 1/1/2008.
• Depreciation rate is 20%; w&t rate is 33 ⅓ %
• Tax rate = 30%

The co. paid SARS the current tax owing in the yr after it was
charged.

Required:
A. Calculate the taxable profit and current tax.
B. Calculate the deferred tax bal’s & adjustments.
C. Show the tax related T-accounts.
D. Disclose in the financial statements.
 Assets that are not tax deductible
(not in scope of ACCT211/212)

Tax base = zero A non-ded asset may

either be depreciable or
non-depreciable

Def tax is normally

In both cases, the CA starts
provided on all temp diff’s.
off at cost (tax base = zero)
BUT: IAS 12.15: temp diff
so there is an immediate
caused by the purchase of
temp diff.
non-ded assets is exempt
When a non-current asset is
sold:
Tax records could
Accounting records show a taxable
could show either a profit (recoupment
profit (capital and/or capital gain)
and/or non-capital) or a deductible loss
or loss (scrapping
allowance)
 IFRS & ACC RECORDS TAX ACT & TAX RECORDS
Total profit / loss Total profit /loss
Proceeds X Proceeds X
Less carrying amt (X) Less tax base (X)
Profit /(loss) on sale X Profit /(loss) on sale X
Capital & non-cap portions Capital & non-cap portions
Proceeds X Proceeds X
Less cost (X) Less base cost (X)
Capital profit X Capital gain X
Inclusion rate (co’s) 50%
Taxable cap gain X
Proceeds ltd to cost X Proceeds ltd to cost X
Less carrying amt (X) Less tax base (X)
Non-cap profit/(loss) X Recoup/(scrap all)(non cap) X
 Normal tax
expense:
Current tax;
Adj’ed for def
Non-temp Diff’s: tax
Current tax:
Exempt cap
profit; div inc; PBT adj’ed for
donations non-TD’s &
(most); fines TD’s
SUMMARY

Temp diff’s: Def tax:

EPP; IRIA; Prov’s; Temp diff’s
Cap all’s
 Eg : w&t, recoup’s &capital gains
• Machine cost C600 000 on 1/1/20X1.
• W&t = 4 years on the straight-line method.
• Depr = str-line method over 3 yrs to nil res val’s.
• Machine was sold on 31/12/20X3 for C700 000.
• PBT (correctly calculated) for the last 3 years: 20X1 =
R700 000; 20X2 = R720 000; 20X3 = R750 000
• No payments were made to SARS in 20X1/2/3.
• Tax rate = 30%
• Inclusion rate for capital gains = 50%
 Eg continued: required
a) Calc the current normal tax in 20X1  20X3;
assuming that, in 20X3, the base cost was: (i) Equal
to the original cost; (ii) C650 000; (iii) C750 000.
b) Calculate all deferred tax balances & adj’s.
c) Show the t-accounts for years 20X1 & 20X2.
d) Show the t-accounts for years 20X3 assuming that,
in 20X3, the base cost was: (i) Equal to the original
cost; (ii) C650 000; (iii) C750 000
e) Disclose tax in the fin stm’s for 20X1 & 20X2.
f) Disclose tax in the fin stm’s for 20X3.
 Rate changes and deferred tax
DEFERRED TAX BALANCE
• = estimate of tax owing to SARS, or tax savings
expected from SARS, in the long-term
• This estimate = (m/ment in temp diff’s) X (std tax %)
• If tax rate changes = estimate will also change
• If a company has a def tax bal at the bgn of a year, and
the tax rate changes during that year = have to re-est
the opening bal of def tax
• The tax expense account in the CY will include an adj to
the def tax balance from the PY
• therefore the effective tax rate in the CY won’t equal
the applicable tax rate → need a tax rate recon
Enacted vs Substantively enacted rates

DATE OF SUBSTANTIVE ENACTMENT

• Date that Min of Fin announces rate change
• If before y/e = adjust deferred tax balance

EFFECTIVE DATE
• When the new tax rate will apply
• Current tax payable balance is only adj’ed if
effective date is before y/e
 Eg A: rate change (CR bal, decrease in rate)
• Deferred tax (1/1/20X2): C90 000 credit (caused
purely by capital allowances)
• Tax rate in 20X2: 35% (20X1: 45%)
• Profit before tax in 20X2: C200 000
• Other permanent/ temporary differences: none

Required:
1. Calculate the related tax
2. Show in the t-accounts
3. Disclose in the notes to the fin statements.
(comparatives not required)
 Eg B: rate change (DR bal, increase in rate)
• Deferred tax (1/1/20X2): C90 000 debit (caused
purely by temporary differences)
• Tax rate in 20X2: 50% (20X1: 45%)
• Profit before tax in 20X2: C200 000
• Other permanent/ temporary differences: none

Required:
1. Calculate the related tax
2. Show in the t-accounts
3. Disclose in the notes to the financial statements.
(comparatives not required)
Revision slides

72
 Recap Example 1:
• Profit before tax: 100 000
Assume all
• income is taxable & all expenses are deductible – (i.e.
there are no permanent differences) and
• taxable and deductible in the current year (i.e. there
are no temporary differences).

Required:
• Calculate the current tax, deferred tax & normal tax
for the year.
 Recap Example 2
• Profit before tax: 100 000
• There are no temp diff’s (i.e. all income is taxable &
all expenses are deductible in the current yr).
There are no non-temp diff’s (i.e. all income is taxable
& all expenses deductible) except for:
• Div income of 20 000 is included (exempt).
• Donations of 10 000 are included (non-ded)

Required:
• Calculate the current tax, deferred tax & normal tax
for the year.
 Recap Example 3:
• Profit before tax (yr 1): 100 000
• There are no perm diff’s (i.e. all income is taxable and
all expenses are deductible).
There are no temp diff’s (i.e. all income is taxable & all
expenses are deductible in yr 1) except for:
• Expenses paid in respect of year 2: 10 000 – these
allowed as a deduction by SARS in year 1
• Income received in yr 1 in respect of year 2: 20 000
(SARS will tax this in yr 1).
Required:
• Calculate the current, def & normal tax for the yr.
 Comment on examples 1 – 3 Recap egs
• no non-temp diff’s (therefore no
E.g. 1 rate recon) and no temp diff’s
(therefore no def tax)

• only non-temp diff’s (therefore

E.g. 2 rate recon is required) and no
temp diff’s (therefore no def tax)

• No non-temp diff’s (therefore rate

E.g. 3 recon not required); only temp
diff’s (therefore there is def tax)
 TAX BASES (REMINDER)

ASSETS LIABILITIES

Non-current asset IRIA: taxable when

(eg machine): received
Capital allowances

Prepaid expense: Expenses payable (eg

deductible when creditor): tax &
paid accounting treatment
same
Income receivable
(eg debtor): Tax & Provisions (eg provision
accounting for warranty costs):
treatment same deductible when paid
 Exempt
income
Rate changes Non-ded
expenses

SUMMARY:
Other taxes:
RECONCILING
• STC
ITEMS
• Foreign tax
“Exempt”
Temp Diff’s
Under/ over
prov’s of tax in
 E.g. 4 (non-temporary & temporary differences):
• The following info relates to year 1 of Company A
Sales income (650 000 received; 50 000 receivable) 700 000
Rent income: all received: 120 000 (yr 1) + 20 000 (yr 2) 140 000
Capital profit on sale of machine (100% exempt) 50 000
Dividend income 100 000
Electricity and water (40 000 paid; 30 000 payable) 70 000
Telephone (all pd: 30 000 for yr 1 & 10 000 for yr 2) 40 000
Cost of sales 300 000
Donations to SPCA 15 000
Fines 10 000

Required: a) Calculate PBT (to be shown in the SOCI)

b) Calculate the taxable profit and current tax
c) Disclose in the financial statements.
 SOCI according to:
GAAP
Sales 700 000
Cost of sales (300 000)
Other income:
Rent income 120 000
Profit on sale of machine 50 000
Dividend income 100 000
Less:
Electricity and water (70 000)
Telephone (30 000)
Donations (15 000)
Fines (10 000)
Profit before tax/ taxable profit 545 000

80
 Calculation of current tax Profits Tax @ 30%

Profit before tax 545 000

Adjust for permanent differences:
 Less exempt income:
- Profit on sale of machine (50 000)
- Dividend income (100 000)
 Add back non-deductible expenses:
- Donations 15 000
- Fines 10 000

Portion of profit before tax that is taxable 420 000 126 000 (NT)
Adjust for temporary differences: 10 000 3 000 (DT)
 Add income received in advance (c/bal) 20 000
 Less expenses prepaid (c/bal) (10 000)
 Add back portion of provision not allowed yet N/A

 Add back depreciation N/A

 Less wear and tear N/A

Taxable profit in current year 430 000 129 000 (CT) 81

 SOCI according to:
Tax Act
Sales 700 000
Cost of sales (300 000)
Other income:
Rent income 140 000
Profit on sale of machine 0
Dividend income 0
Less:
Electricity and water (70 000)
Telephone (40 000)
Donations 0
Fines 0
Profit before tax/ taxable profit 430 000

Current tax at 30% 129 000 82

Expenses prepaid CA TB TD DT balance/ adj
O/balance: yr 1 0 0 0 0
Movement (3) Cr DT; Dr TE
C/ balance: yr 1 10 0 (10) (3) liability

Income received in adv CA TB TD DT balance/ adj

O/balance: yr 1 0 0 0 0
Movement 6 Dr DT; Cr TE
C/ balance: yr 1 (20) 0 20 6 asset

Total EPP + IRIA = DT balance/

adjustment

O/balance: yr 1 0 0 0
Movement 3 Dr DT; Cr TE
C/ balance: yr 1 (3) 6 3 Asset

83
Statement of comprehensive income
Profit before tax 545 000
Taxation 4. 126 000
Profit after tax 419 000

Year 1
Statement of financial position

Assets
Non-current assets:
 Deferred tax 5. 3 000

Equity and Liabilities

Current liabilities
 Current tax payable: normal tax (etc) 129 000

84
 4. Taxation
SA Normal Taxation 126 000
- Current 129 000
- Deferred (3 000)
Rate reconciliation:
Standard tax rate 30%
Tax effects of:
Profit before tax (545 000 x 30%) 163 500
Exempt dividend income (100 000 x 30%) (30 000)
Exempt capital profits (50 000 x 30%) (15 000)
Non-deductible donations (15 000 x 30%) 4 500
Non-deductible fines (10 000 x 30%) 3 000
Tax expense as per SOCI 126 000
Effective tax rate (126 000 / 545 000) 23,12%
85
 Notes to the Financial
Statements

4. Deferred taxation Year 1

The deferred tax balance comprises:
 Year-end accruals 3 000

86
 E.g. 5 (non-temporary & temporary differences):
PBT of 150 000 for year 1 of Company A has been
calculated by the inexperienced bookkeeper. Included in
this amt are:
• General expenses accrued of 10 000 not yet paid by y/e;
• Included in rent expense is R15 000 that had been pd
i.r.o. Jan of yr 2;
• Income accrued of 20 000 that had not been rec by y/e;
• Income included an income item of 50 000 that was
received in yr 1 but will only be earned in year 2;
• Depreciation on machines costing 120 000 that are
depreciated over 2 years straight-line with no residual
value (wear and tear is provided at 33 1/3% on cost using
the straight-line basis). Machines had a carrying amount
 E.g. 5 (non-temporary & temporary differences):
• Dividend income of 40 000
• Fines of 25 000.
The following opening bal’s are still in the trial balance at
31/12/Year1 and have not been reversed:
• Income received in advance: 30 000
• Expense prepaid: 20 000
Calculate the:
a) Correct ‘profit before tax’
b) Taxable profits and current tax
c) Deferred tax adjustments and balances
d) Disclose
Profit before tax (given) 150 000

Adjustments required for year-end accruals

 Expense prepaid (for year 2) (c/balance) 15 000

 Expense prepaid (opening balance) (20 000)

 Income received in advance (for year 2) (50 000)

(c/balance)

 Income received in advance (opening balance) 30 000

Profit before tax (correct) 125 000

89
 Profits Tax
Profit before tax (corrected) 125 000
Adjust for permanent differences:
 Dividend income (40 000)
 Fines 25 000
Taxable accounting profits 110 000 33 000
Adjust for temporary differences:
 Expense prepaid (for year 2) (c/balance) (15 000)
 Expense prepaid (opening balance) 20 000
 Income received in advance (for year 2) 50 000
(c/balance)
 Income received in advance (opening balance) (30 000)
 Depreciation (120 000 / 2) 60 000
 Wear and tear (120 000 / 3) (40 000)

Taxable profit in current year 155 000 46 500 90

Expenses CA TB TD DT bal/ adj
prepaid
O/balance: yr 1 20000 0 (20 000) (6 000) L
Movement
C/ balance: yr 1 15000 0 (15 000) (4 500) L

Income received in adv CA TB TD DT bal/ adj

O/balance: yr 1 (30 000) 0 30000 9 000 A
Movement
C/ balance: yr 1 (50 000) 0 50000 15000 A

PPE CA TB TD DT bal/ adj

O/balance: yr 1 60000 80000 20000 6 000 A
Movement
C/ balance: yr 1 0 40000 40000 12000 A

91
Total EPP IRIA PPE DT bal/ adj

O/balance: yr 1 (6 000) 9000 6000 9 000 Asset

Movement 13500 Dr DT; Cr TE

C/ balance: yr 1 (4 500) 15000 12000 22500 Asset

92
Statement of comprehensive income C
Profit before tax 125000
Taxation 4. 33 000
Profit after tax 92 000

CY PY
Statement of financial position
Statement of comprehensive income C
Assets Profit before tax 125000
Non-currentTaxation
assets:
Profit after tax
4. 33 000
92 000
 PPE 0 60 000
 Deferred tax 22500 9 000
Equity and Liabilities
Current liabilities
 Current Tax Payable: normal tax (etc) 46500 0

93
4. Taxation
SA Normal Taxation 33 000
- Current 46 500
- Deferred (13 500)

Rate reconciliation:
Standard tax rate 30%
Tax effects of:
Profit before tax (125 000 x 30%) 37 500
Exempt dividend income (40 000 x 30%) (12 000)
Non-deductible fines (25 000 x 30%) 7 500
33 000
Effective tax rate (33 000 / 125 000) 26.4%
94
4. Deferred taxation CY PY
C C
The deferred tax balance
comprises:
 Capital allowances 12 000 6 000
 Year-end accruals 10 500 3 000
 Provisions 0 0
22 500 9 000

95
 Accrued income & Accrued expense
examples
• The next two examples do not give rise to any
temporary differences

96
 Example 6: EXPENSES PAYABLE – GG PG: 292
• Telephone expense of R4 000 is incurred in year 20x1 but
paid for in year 20x2.
• Income in year 20x1 and year 20x2 was R20 000 before
taking into account the above.
• There were no other income or expense items.

Required:
A. Calculate the deferred tax bal’s & adjustments.
B. Calculate current tax.
C. Show the tax related T-accounts.
D. Disclose in the financial statements.
 Solution to Example 6: EXPENSES PAYABLE
– GG PG: 292

• C. Deferred tax: balance sheet approach

– Rule for liabilities: expenses payable

– The tax base of liability (representing expenses) is
the carrying amount less any amount that will be
deductible for tax purposes in the future.

• Applying the rule: tax base of expenses

payable = 0
98
 Solution to Example 6: EXPENSES PAYABLE
– GG PG: 292
20X1 tax base C
Carrying amount 4 000
Less deductible in the future (all (0)
deducted in yr 1)
4 000

20X2 tax base C

Carrying amount 0
Less deductible in the future 0
0

99
 Solution to Example 6: EXPENSES PAYABLE
– GG PG: 292
Expenses payable CA TB TD DT balance/
(a) (b) (c) (d) adjustmen
(b)–(a) (c)x30% t
O/balance:yr 1 0 0 0 0
Movement (4) (4) 0 0
C/balance:yr 1 (4) (4) 0 0
Movement 4 4 0 0
C/balance:yr 2 0 0 0 0

100
 Solution to Example 6: EXPENSES PAYABLE
– GG PG: 294
E. Disclosure
Statement of Yr 2 Yr 1
comprehensive income
Profit before tax 20 000 16 000
Taxation 4. (6 000) (4 800)
Profit after tax 14 000 11 200

4. Taxation Yr 2 Yr 1
SA Normal Taxation 6 000 4 800
- Current 6 000 4 800
- Deferred 0 0
101
 Solution to Example 6: EXPENSES PAYABLE
– GG PG: 294

Yr 2 Yr 1
Statement of financial position
Liabilities
Current liabilities
• Expenses Payable 0 4 000
 Current Tax Payable: normal tax 6 000 4 800

102
 Example 8: INCOME RECEIVABLE – GG PG 298
• Interest income R 6000 is earned in year 1 but only
received in year 2.
• Tax authority will tax interest income when earned.
• There is no other income & no expenses in either yr.
• PBT is R20 000 before taking the above into account

Required:
A. Calculate the deferred tax bal’s & adjustment.
B. Calculate the taxable profit and current tax.
C. Show the tax related T-accounts.
D. Disclose in the financial statements.
 Solution to Example 8: INCOME RECEIVABLE
– GG PG 298

• C. Deferred tax: balance sheet approach

– Rule for assets: income receivable

– The tax base of an asset (that represents income) is

the carrying amount less that portion that will be
taxed in the future.

– Applying the rule: tax base of income receivable =0

104
 Solution to Example 8: INCOME RECEIVABLE
– GG PG 298

20X1 tax base C

Carrying amount 6 000
Less portion that will be taxed in the 0
future (all taxed in 20X1)
6 000

20X2 tax base C

Carrying amount 0
Less portion that will be taxed in the 0
future
0
105
 Solution to Example 8: INCOME RECEIVABLE
– GG PG 299
Calculation of deferred taxation:
Income CA TB TD DT balance
receivable (a) (b) (c) (d) /
(b)–(a) (c)x3 adjust
0% ment
O/balance: Yr1 0 0 0 0
Movement 6 6 0 0
C/balance: Yr1 6 6 0 0
Movement (6) (6) 0 0
C/balance: Yr2 0 0 0 0

106
 Solution to
Example 8: INCOME RECEIVABLE – GG PG 299
E. Disclosure
Statement of comprehensive Yr 2 Yr 1
income
Profit before tax 20 000 26 000
Taxation 4. (6 000) (7 800)
Profit after tax 14 000 18 200

Notes to the financial statements

4. Taxation Yr 2 Yr 1
SA Normal Taxation 6 000 7 800
- Current 6 000 7 800
- Deferred 0 0
107
 Solution to
Example 8: INCOME RECEIVABLE – GG PG 299

Yr 2 Yr 1
Statement of financial position

Current Assets
 Income Receivable 0 6 000

Current liabilities
 Current Tax Payable: normal tax 6 000 7 800

108
 • A present economic resource
Controlled by the entity Resulting
from past events Note 1: An
DEFINITION economic resource is defined as: a
right that has the potential to
OF AN ASSET produce economic benefits

• must only be recognised if the user

would find this information useful,
RECOGNITION i.e. we only recognise the elements
CRITERIA if it means we are providing
information that is: relevant; and a
faithful representation.

109