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Financial Accounting 202_S2_2023

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IAS 12 - Income taxes

The book holds content for week 1-3

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Topic title: IAS 12 Income tax Sub-topic title: Measurement –

temporary differences  


 Competence/Attributes Temporary (timing) differences

1.      Account for income taxes  Occur where an amount (income or

expense) forms part of accounting
Learning Outcomes:
profit in a different reporting period to
1.      Understand the meaning of timing that in which it is included in the
differences computation of taxable profit.

These differences occur due to;

2.      Account for timing differences
accounting system of accrual,
caused by accrual
accountant’s measurement of
depreciation and tax losses.

Timing differences caused by

accrual

Examples

◦        Income received in advance &

accrued income

◦        Prepaid and accrued expense

◦        Provisions

◦         Gross income is defined as

the ‘…total amount, in cash or
otherwise, received by or accrued to
or in favour of…’ the taxpayer in a
year of assessment.

This aspect of the definition means

that the receipt of an amount – and
its inclusion in the computation of
taxable income – may precede its
inclusion in accounting profit which
is measured using the accrual
basis…THEREFORE a TIMING or
TEMPORARY difference arises. 

Expenditure or losses were actually

incurred during the year of
assessment in the production of
income and not of a capital nature.
In terms of tax principles, expenses
arising from the recognition of, or
adjustment to, accounting provisions
(such as a provision for warranty
claims or provision for staff bonuses)
are not considered to be ‘actually
incurred’ during the year of
assessment for tax purposes,
although they may be perfectly
legitimate under accounting
recognition rules. For tax purposes,
these would generally qualify as
deductions in subsequent periods
when they are actually paid. Note
Content Prerequisites that this situation will mostly apply in
the case of accounting provisions
-        Meaning of -        IAS1 and does not imply that all expenses
timing differences  Presentation of must be paid before a tax deduction
financial statement can be claimed.
Prescribed text:
-        Conceptual Accountants recognizes income
-        Service C. L
framework  when it’s earned and expenses when
(Latest) Gripping
it’s incurred (accrual basis). Tax
GAAP: Your Guide Remark
authority recognizes income when it
to International
-        Read up on the is received (cash basis) or earned
Financial Reporting
examples of timing (accrual basis), whichever happened
Standards,
differences form the first and When incurred (cash basis)
LexisNexis
prescribed text. unless the expense was prepaid in
  which case it might be allowed.
 
  Illustration:

  G Ltd received 12,000 rental income

in December 2016 related to
  January 2017 rental of their building.
Profit before tax was 120,000 in both
 
2016 and 2017. Tax rate is 30%. 1.
Show the journals to record the
transaction. 2. Calculate the current
tax payable: ‘16 and ‘17

 
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