Topic_7_Part_2
ACCT5013. Advanced Accounting M
Topic 7: Accounting for Income
Tax: Part 2
Overview of this lecture ?Recall last lecture
?AASB 112 Overview & Rationale
?Steps in Tax effect accounting:
?1. Current tax consequences
?Taxable profit and current tax
?2. Future Tax consequences
2F t T
?Continue Future Tax Consequences ?Use worksheet
?Journal entries
?Future years
Other issues e.g. recognition ?Other issues e g recognition
Future Tax Consequences
?‘Balance sheet’ approach
y g
?Analysing the assets and liabilities recorded in the statement of financial position
?Where carrying amounts(accounting) differ from tax bases(ie temporary differences exist)
i t)
?Temporary differences arise for items when accounting and tax treatments differ eg depreciation rates
d i ti t
Two Step Process
?Step 1 –Current Tax Consequences
?Calculate current taxable profit
(I)C l l t t t bl fit
?(II)Calculate current tax liability
(III)Prepare journal entries for current tax
?(III) Prepare journal entries for current tax
consequences
Step 2 Future Tax Consequences
?Step2–Future Tax Consequences
?(I)Determine carrying amount and tax base of assets/ liabilities
?(II) Identify and classify temporary differences
?(III) Calculate deferred tax assets and liabilities
?(IV) Prepare journal entries for future tax
consequences
Recall Step 2 –(I)CA and Tax Base of
Assets/ Liabilities ?Assets:
A t
Tax Base CA FTA + FDA
Tax Base=CA–FTA+FDA ?Liabilities:
Tax Base = CA –FDA
?Revenue Rec’d in Advance:
R R’d i Ad
Tax Base = CA –Rev. rec’d in advance
and not taxable in
future periods.
future periods
Step 2-
Step 2(II) Temporary Differences ?Identify
?Compare CA and Tax Base
Temporary differences
?Temporary differences
?Accounting balances differ from tax
ba a ces
balances
?eg accounting balance of depreciable asset
different from tax balance
?Classify
Deductible……..Deferred Tax Asset
?Deductible……..Deferred Tax Asset
(DTA)
Taxable…… Deferred Tax Liability (DTL)?Taxable……Deferred Tax Liability(DTL)
Temporary Differences
Temporary differences are classified as :?Taxable temporary differences:
p y p y
?If the company will pay more tax in the
future
g
?Recognised as deferred tax liabilities ?Deductible temporary differences:
If the company will pay less tax in the future ?If the company will pay tax in the future ?Recognised as deferred tax assets
Taxable Differences
Assets Liabilities CA>TB CA Taxable Temporary Difference More tax payable in future DTL Examples of Taxable Differences ?Items which give rise to taxable temporary differences (assuming tax on cash basis) (g) are: ?Revenue receivables ?Prepaid expenses y p ?Initially where Tax depreciation rates > accounting rates ?Development costs capitalised and amortised (Refer Appendix A. AASB 112) Deductible Differences Assets Liabilities CA Temporary Deductible Temporary Difference Less tax payable in future DT A Examples of Deductible Differences ?Items which give rise to deductible temporary differences (assuming tax on temporary differences(assuming tax on cash basis) are for example: ?Accrued expenses A d ?Unearned revenue I iti ll h A ti d i ti t ?Initially where Accounting depreciation rates > tax rates ?Provisions for LSL Provisions for LSL ?Tax losses(we do not consider these) (Refer Appendix B. AASB 112) (Refer Appendi B AASB112) You Need to Remember………… ?Asset: ?If CA > TB = Taxable Temp. Diff. = DTL If CA < TB Deductible Temp. Diff. DTA ?If CA If CA TB Deductible Temp. Diff. DTA ?If CA>TB=Temp.Diff.= ?If CA < TB = Taxable Temp. Diff. = DTL (p) (Refer para 16 & 25) Step 2: (III) Calculate D TA/DTL ?Measurement ?Deferred Tax Asset= ?Deductible temporary difference x tax rate ?Deferred Tax Liability= Deferred Tax= ?Taxable temporary difference x tax rate ?Example ?If taxable temporary difference is $1000 ?Tax rate is 30% T t i30% ?Deferred tax liability is $300 Step 2: (IV) Prepare Journal entries for Future Tax Consequences Deferred tax liabilities/assets ?Deferred tax liabilities/assets = (temporary differences) x (current tax rates)p47?and deferred tax shall be recognised as income current and deferred tax shall be recognised as income or an expense and included in the profit and loss for the pe od(S pa a58) period (AASB 112 para. 58) Change in DTL Dr Income tax expense XX ?Change in DTL Dr Income tax expense CR Deferred tax liability XX ?Change in DTA Dr Deferred tax asset XX CR Income tax income XX Income tax income XX Recognition Summary ?Recognise as R i p ?Tax expense or income ?Current and deferred tax for period Tax payable ?Tax payable ?Tax payable for current period ?Deferred tax assets/liabilities Deferred tax assets/liabilities ?Change in DTA/DTL ?Increase DTL/decrease DTA=tax expense Increase DTL/decrease DTA = tax expense ?Decrease DTL/increase DTA = tax income Recall Steps –Future Tax consequences ?Step 2 –Future Tax Consequences ()y g ?(I)Determine carrying amount and tax base of assets/ liabilities ()y y y ?(II) Identify and classify temporary differences ?(III) Calculate deferred tax assets and liabilities ?Do these in worksheet ?(IV) Prepare journal entries for future tax ()p j consequences Worksheet ?Used to: ?Calculate tax bases for items ?Calculate temporary differences for items ?To Summarise: p y ?Total taxable temporary differences ?Total deductible temporary differences ?May need to exclude if exempt y ?Calculate amounts of DTA & DTL you need to show at THIS balance date ?Determine change in DTA/DTL & associated tax expense/incomes required to be accounted for Determination of Tax Assets and Liabilities : Worksheet Item Carrying amount Future Taxable amount Future Deductible amount Tax base Taxable Temporary Difference Deductible Temporary Difference Asset Liability Temporary Diff Differences Exempt TDs Net Temp Difs This relates to movement DTL****** DTA****** Beginning movement during year –we do not consider in Beginning Balances Movement**Adj t t consider in this topic Adjustment Example: Extract from Statement of Financial Position The machine was purchased Assets Cash 105,000 ?The machine was purchased one year ago and originally cost $10,000. Depreciation is calculated at 25% for Accounts Receivable 14,000Machine 7500accounting purposes but at 50% for taxation purposes ?$12,000 of consulting i d i Machine 7,500Liabilities Accounts payable 5,000revenue was received in advance. $3,000 is included as revenue. Tax includes this as income when the cash is p y Loan 100,000 Interest accrued 4,000 Consulting revenue 9000as income when the cash is received.?The interest relates to a loan taken out on 1 January this Consulting revenue received in advance 9,000 y year for $100,000. Interest is calculated at 8% per annum and is payable on December 31Tax only allows interest 31. Tax only allows interest as a deduction when paid . amount amount diff’s diff’s 14000 14000 Accounts 14,000 0 0 14,000 0 - 2,500 ?Go through each asset and:g ?Determine tax base ?Compare to carrying amount p y g ?Classify any temporary difference