INCOME TAXES

1. INRODUCTION

 ACCOUNTING TREATMENT
DEBIT Tax charge (statement of profit or loss)
CREDIT Tax liability (statement of financial position)
 when we consider the future tax consequences of what is going on in the accounts
now. ( MAIN PROBLEM ) ( DEFERRED TAX )
2. IAS 2 INCOME TAXES
 COVERS FOR BOTH CURRENT AND DEFERRED TAX
3. DEFINITONS

amount actually payable to the tax authorities in relation to the trading activities of
the entity during the period. CURRENT TAX
 accounting measure, used to match the tax effects of transactions with their
accounting impact and thereby produce less distorted results DEFERRED TAX
4. RECOGNITION OF CURRENT TAX LIABILITES AND ASSETS
 IAS 2  UNPAID TAX  CURRENT OR PRIOR PERIOD  LIABILITY
 EXCESS TAX  CURRENT OR PRIORPERIOD  WHICH IS DUE  ASSET
  Any tax loss  that can carried back  to recover current tax of prvious period (
recognised as Asset )
This is because  probable the benefit will flow to entity and it can be realibly
measured.

5. MEASUREMENT
 At amound expected to be paid to (recovered from) the tax authorities.  current
tax liabities ( assets ) for the current and prior period.
6. RECOGNITION OF CURRENT TAX
 Normally recognised as income or expenses
Except for two cases
- Tax arising fro a business combination ( tax assets or liabilities of the acquired
subsidiary will form part of the goodwill calculation )
- Tax arising from a transaction or event  directly recognised in equity
For example, IAS 8  adjustment is made to the opening balance of retained
earnings due to either a change in accounting policy that is applied
retrospectively, or to the correction of a material prior period error
7. PRESENTATION
 SOFP, TAX ASSET AND LIABILITIES  SHOWN SEPARATELY FROM OTHER A & L
 Current tax A & L can be offset ; certain conditon apply
- Has legally enforceable right to set off
- Intends to settle amount on a net basis, or to realise the asset and settle liability
on the same time
 Tax expense and income  ordinary activities  SOPL
2. Deferred tax

2. DEFINITION

3. TAX BASE

 Tax base of an asset is the amount will be deductible for tax purposes againt any
taxable economic benefits  flow to entity  when it recovers the CA of the asset
 Economic benefits  not taxable  tax base is the same  CA
 CA and the tax base  different  temporary difference exits
 Liabilty  tax base  CA – any amount tht will deducted for tax purpose in relation
to the tax liabilty in future periods
 Revenue received in advance  CA – any amount of the revenue that will not be
taxable in future periods.

 Ias 2  examples of circumstances CA of an A & L will be = to its tax base & no

temporary difference arise,
 Accrued expenses which have already been deducted in determining an entity's
current tax liability for the current or earlier periods
 A loan payable which is measured at the amount originally received and this
amount is the same as the amount repayable on final maturity of the loan
 Accrued expenses which will never be deductible for tax purposes
 Accrued income which will never be taxable
4. Temporary difference

 #Accounting profits form the basis for computing taxable profits ( Tax L for the year is
calculated )
 Acc profits and taxable prifts are difference because of
- Permanet difference : Certain items of revenue or expenses are excluded from
the computation of taxable profits ( eg : entaintment expenses )
- Temporary differences : items of revenu & expenses are included in both acc
profits and taxable profits, but not for same acc period
Eg : an expense which is allowable as a deduction in arriving at taxable profits
for 20X7 might not be included in the financial accounts until 20X8 or later. In
the long run, the total taxable profits and total accounting profits will be the
same (except for permanent differences) so that timing differences originate in
one period and are capable of reversal in one or more subsequent periods.
 Deferred tax is the attributable to temprary differences
2. Taxable temporary differeces

- Reasoning behind the recognition of deferred tax liabilities om taxable tempoarary

differeces
a) When the asset is recognised  expect CA ( recovered in the form of economic beneifits
that floe to the entity in future periods.
b) CA of the Asser is > tax base, taxable eco benefits will also > amount will be allowed as
deduction for tax purpose
c) Diff is  taxable temporary difference ( obligation to pay resulting income tax in future
periods  deffered tax liablity )
d) Entity recovers the CA of the asset, taxable temporary difference will reverse and the
enitty will have taxable profit
e) Probable economic benefit will flow from the entity in the form of tax payments 
recognition of deferred tax liabilites  IAS 12
4. Timing difference

- Temporary difference  Timing differences

- When income or expenses is included in accounting profit in one period in taxable profits in a
different period.

- Main types of taxable temporary differences  timing diffences  defered tax liabilites are ;

a) Interest received – accounted for on an accrual basis, but which for tax purposes is included on a
cash basis.

b) Accelerated depreciation for tax purposed

c) Capitalised and amortised development cost

5. Revalued asset

- IAS 16 asset may be revalued

- Does not change tax base even changes the CA

- taxable economic benefits to the entity as CV of the asset is recovered will differ from the amount
that will be deductible for tax purposes.