FR CH17 2024-25

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Chapter 17

IAS 12 Income Taxes

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Key to chapter content ICONS

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CHAPTER 17:
IAS 12 Income Taxes

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Current Tax
Current tax
The amount payable to tax authorities in relation to trading and other
activities of the year

Dr Tax expense
Cr Liability

When settled:
• If payment < liability, the balance on the liability account is an
overprovision  a reduction in P/L expense of following year.
• If payment > liability, the balance on the liability account is an
underprovision  increases P/L expense of following year
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Change in Accounting Estimate

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Deferred Tax
Deferred tax
An accounting measure used to match the tax effects of transactions
with their accounting impact and so produce less distorted results.

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Temporary Differences

SOPL SOFP
Accounting expense/income Carrying amount
v v
Tax expense/income Tax base

A Co: A Co:
 Accounting income $10,000  Receivable carrying amount $10,000
 Tax income $0  Tax base $0

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Activity: Tax Base

What is the tax base and temporary


difference on these items?

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Answer to Activity: Tax Base

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Activity: Non-current Assets

What is the carrying amount, tax base and temporary difference each year?

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Answer to Activity: Non-current Assets

$ Carrying Tax base Temporary


amount difference
1 Jan X6 9,000 9,000
Depreciation (3,000) (4,000)
31 Dec X6 6,000 5,000 1,000
Depreciation (3,000) (3,000)
31 Dec X7 3,000 2,000 1,000
Depreciation (3,000) (2,000)
31 Dec X8 0 0 0

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Approach to Deferred Tax
St • Compare carrying amount and tax base
ep
1
St • Resulting taxable temporary difference or
ep deductible temporary difference
2
St • Apply tax rate to temporary difference to give
ep deferred tax liability or asset
3
St • Recognise deferred tax
ep
4
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Step 2: Temporary Differences

Taxable temporary difference Deductible temporary difference

 Arises where carrying amount  Arises where carrying amount


> tax base < tax base
 Carrying amount is recoverable in  Carrying amount is recoverable in
the form of taxable income the form of taxable income
 Tax base is the amount that will  Tax base is the amount that will
get tax relief in the future get tax relief in the future
 Taxable income > tax relief and  Taxable income < tax relief and
therefore there will be future tax therefore there will be future tax
payable. receivable.

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Step 3: Deferred Tax Liability or Asset

Taxable temporary difference x tax rate = Deferred tax liability

Deductible temporary difference x tax rate = Deferred tax asset

• Rate expected to apply when asset realised/


liability settled based on tax laws in place at Discounting is NOT permitted
the reporting date
• Should reflect manner of recovery

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Temporary or Deductible?

$ Carrying Tax Temp T or x Dr Cr


amount base difference D? 20%
1 Jan X6 9,000 9,000 0 - 0
Depreciation (3,000) (4,000)
31 Dec X6 6,000 5,000 1,000 T 200 Tax expense DT liability
Depreciation (3,000) (3,000)
31 Dec X7 3,000 2,000 1,000 T 200 - -
Depreciation (3,000) (2,000)
31 Dec X8 0 0 0 - 0 DT liability Tax
expense

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Step 4: Recognise Deferred Tax

Taxable temporary Deductible


Items in SOFP temporary
difference
difference

Deferred tax liability Deferred tax asset

Offset if
• Legally enforceable right to
settle net
• Same tax authority
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Real world example

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Step 4: Recognise Deferred Tax – Additional Issues

1. Only record the increase or decrease in the deferred tax


balance from year to year.

2. There are restrictions on the recognition of a net deferred tax


asset (must meet the definition of an asset)

3. Corresponding entry is recognised in the same way as the


underlying transaction:
 In P/L
 In OCI
 In equity

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The Revaluation Issue

 If an accounting revaluation is recognised


and the same revaluation is recognised No additional
for tax purposes temporary difference

Additional temporary
 If an accounting revaluation is recognised difference and so
and the same revaluation is NOT deferred tax liability,
recognised for tax purposes recognised in OCI

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Activity: Revaluation

The following amounts relate to Zebra Co’s property, plant and equipment:

Carrying amount Tax base

$000 $000
31 December 20X7
1,000 800
31 December 20X8
1,250 650

The carrying amount at 31 December 20X8 includes a $350,000 revaluation


surplus recognised on that date in respect of a property.
Zebra pays tax at 30% © ACCA 20
Answer to Activity: Revaluation

Carrying amount Tax base


Taxable Deferred tax
difference liability
$000
$000 $000 $000
31 December 20X7 1,000 800
200 60
31 December 20X8 1,250 650
600 180

Increase in deferred tax liability


120
Due to revaluation (350 x 30%)
(105)
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Exam focus
Balance in TB will be
b/f liability
Calculations
Section C
or words in Notes provide info to
single
OTQs calculate c/f liability
company FS
(Section A (SoFP)
preparation
and B)

Calculate amounts for


SoPL and OCI

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Technical articles: Deferred tax

Click the link below to


open the article on
accaglobal

Technical article

Deferred tax

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Chapter 17: Summary
 Current tax is the amount payable for a year +/– any under/over provision
relating to a previous period (accounting estimate)
 Deferred tax is an accounting adjustment for temporary differences
 Carrying amount v Tax base  Temporary difference
For an asset:
Carrying amount > Tax base  Taxable temporary difference
Carrying amount < Tax base  Deductible temporary difference
 Taxable temporary difference  tax rate = Deferred tax liability
Deductible temporary difference  tax rate = Deferred tax asset
 Changes in the net deferred tax liability/(asset) are usually recognised in
profit or loss
 Deferred tax relating to a revaluation of PPE is recognised in OCI.

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Chapter 17: Practice questions

Study Question Bank

Shep (I), (II), (III) & (IV)

For FR
Attempt the Study Question Bank questions listed above after studying this chapter
Attempt Revision Question Bank questions in your revision phase, after studying all chapters

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Thank you

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