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And because of this difference of these two worlds, DEFERRED TAX came into this world!
Income will match with (result in) Tax Expense i.e. Income Increases Tax Expense Increases
Expense will match with (result in) Tax Benefit i.e. Expense Increases Tax Benefit Increases
DIFFERENCE
TEMPORARY NON-TEMPORARY
4. Issue Cost (Loan Notes) 4. Goodwill in Business Combination (Tax Dept. treats P. Co.’s
6. IAS 38 – Capitalized Development Cost recognize goodwill and so amortization. But in accounting
7. IFRS – 16 Leases (Tax Dept. treats all leases as Operating books, we record goodwill impairment as an expense & if we
Lease) go to Tax Dept., they will say ABHI NAHI AUR KABHI NAHI. In
8. Convertible loan notes (Tax Dept. treats it as a pure loan) Tax world, goodwill is taken as Investment in Shares)
Service Cost)
1. Because of which future taxable profit increases 1. Because of which future taxable profit decreases
2. You need to pay tax in future. 2. You get tax benefit in future.
SOFP APPROACH:
DEDUCTABLE TEMPORARY
Liability
DIFFERENCE
Note: Answers will be same in Income Statement Approach & SOFP Approach. As whatever comes in
Income Statement goes later to SOFP.
E.g. Receivables XXX
Sales XXX
D.T.A, due to unused tax losses, can only be recognized, if it is probable that they will set off
future taxable profits. In some jurisdictions, there is an expiry date of unused losses. In that
case, it must be probable that future taxable profits arises before the expiry date.
IMPORTANT POINTS:
In any case, D.T.A can only be booked, if it’s probable that company will get tax benefit
Any change in D.T.A or D.T.L is adjusted prospectively
D.T.A & D.T.L can be offset, if company has legal & enforceable right to offset current tax
payment
That’s why normally, D.T.A in P. Co.’s books and D.T.L in S. Co.’s books can’t offset each other.
For deferred tax, use those tax rates which are enacted before reporting date.
REASONS FOR DIFFERENCE IN ACTUAL TAX RATE & EFFECTIVE TAX RATE