IAS 12: INCOME TAX

FINANCIAL REPORTING
LEVEL 2
PAPER SEVEN

BY- KIMULI FRED

Lecture notes - 2023

0752818204 / 0787818404

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Objective of IAS 12
In meeting this objective, IAS 12 notes the following:
 It is inherent in the recognition of an asset or liability that that asset or liability will be recovered
or settled, and this recovery or settlement may give rise to future tax consequences which
should be recognised at the same time as the asset or liability
 An entity should account for the tax consequences of transactions and other events in the same
way it accounts for the transactions or other events themselves.
Key definitions
Tax base The tax base of an asset or liability is the amount attributed to that
asset or liability for tax purposes

Temporary Differences between the carrying amount of an asset or liability in the

differences statement of financial position and its tax bases

Taxable Temporary differences that will result in taxable amounts in

temporary determining taxable profit (tax loss) of future periods when the
differences carrying amount of the asset or liability is recovered or settled

Deductible Temporary differences that will result in amounts that are deductible
temporary in determining taxable profit (tax loss) of future periods when the
differences carrying amount of the asset or liability is recovered or settled

Deferred tax The amounts of income taxes payable in future periods in respect of
liabilities taxable temporary differences

Deferred tax The amounts of income taxes recoverable in future periods in

assets respect of:

a. deductible temporary differences

b. the carry forward of unused tax losses, and
c. the carry forward of unused tax credits

Accounting Profits: is a result of operating and non-operating activities of the company. It is the
actual financial gain obtained after reducing total expenses from total revenue of the business.

Taxable Profits: the amount of profit which is taxable as per the Income Tax Act 2017 as amended
under profit and gains from business or profession.

Timing differences: the concept of accounting that occurs due to transition problems. It’s frequently
used in financial reporting or for taxation purposes. An example is the method of calculating in both
financial accounting and taxation.

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Current tax
Current tax for the current and prior periods is recognised as a liability to the extent that it has not
yet been settled, and as an asset to the extent that the amounts already paid exceed the amount
due.
The benefit of a tax loss which can be carried back to recover current tax of a prior period is
recognised as an asset.
Current tax assets and liabilities are measured at the amount expected to be paid to (recovered
from) taxation authorities, using the rates/laws that have been enacted or substantively enacted
by the balance sheet date.

Calculation of deferred taxes

Formulae
Deferred tax assets and deferred tax liabilities can be calculated using the following
formulae:
Temporary difference = carrying amount

Deferred tax asset or liability = temporary difference.

The following formula can be used in the calculation of deferred taxes arising from
unused tax losses or unused tax credits:

Deferred tax asset = Unused tax loss or unused tax credits.

Tax bases
The tax base of an item is crucial in determining the amount of any temporary difference, and
effectively represents the amount at which the asset or liability would be recorded in a tax-based
balance sheet.

IAS 12 provides the following guidance on determining tax bases:

 Assets. The tax base of an asset is the amount that will be deductible against taxable economic
benefits from recovering the carrying amount of the asset. Where recovery of an asset will have
no tax consequences, the tax base is equal to the carrying amount.
 Revenue received in advance. The tax base of the recognised liability is its carrying amount,
less revenue that will not be taxable in future periods
 Other liabilities. The tax base of a liability is its carrying amount, less any amount that will be
deductible for tax purposes in respect of that liability in future periods
 Unrecognized items. If items have a tax base but are not recognised in the statement of
financial position, the carrying amount is nil
 Tax bases not immediately apparent. If the tax base of an item is not immediately
apparent, the tax base should effectively be determined in such as manner to ensure the future
tax consequences of recovery or settlement of the item is recognised as a deferred tax amount
 Consolidated financial statements. In consolidated financial statements, the carrying
amounts in the consolidated financial statements are used, and the tax bases determined by
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 reference to any consolidated tax return (or otherwise from the tax returns of each entity in the
group).
Examples
The determination of the tax base will depend on the applicable tax laws and the entity's
expectations as to recovery and settlement of its assets and liabilities. The following are some
basic examples:
o Property, plant and equipment. The tax base of property, plant and equipment that is
depreciable for tax purposes that is used in the entity's operations is the unclaimed tax
depreciation permitted as deduction in future periods
o Receivables. If receiving payment of the receivable has no tax consequences, its tax base
is equal to its carrying amount
o Goodwill. If goodwill is not recognised for tax purposes, its tax base is nil (no deductions
are available)
o Revenue in advance. If the revenue is taxed on receipt but deferred for accounting
purposes, the tax base of the liability is equal to equal to nil (as there are no future taxable
amounts). Conversely, if the revenue is recognised for tax purposes when the goods or
services are received, the tax base will be equal its carrying amount
o Loans. If there are no tax consequences from repayment of the loan, the tax base of the
loan is equal to its carrying amount. If the repayment has tax consequences (e.g. taxable
amounts or deductions on repayments of foreign currency loans recognised for tax
purposes at the exchange rate on the date the loan was drawn down), the tax consequence
of repayment at carrying amount is adjusted against the carrying amount to determine the
tax base (which in the case of the aforementioned foreign currency loan would result in
the tax base of the loan being determined by reference to the exchange rate on the draw
down date).

Recognition and measurement of deferred taxes

Recognition of deferred tax liabilities

The general principle in IAS 12 is that a deferred tax liability is recognised for all taxable temporary
differences. There are three exceptions to the requirement to recognise a deferred tax liability, as
follows:
 Liabilities arising from initial recognition of goodwill.
 liabilities arising from the initial recognition of an asset/liability other than in a business
combination which, at the time of the transaction, does not affect either the accounting or the
taxable profit and at the time of the transaction, does not give rise to equal taxable and
deductible temporary differences.
 Liabilities arising from temporary differences associated with investments in subsidiaries,
branches, and associates, and interests in joint arrangements, but only to the extent that the
entity is able to control the timing of the reversal of the differences and it is probable that the
reversal will not occur in the foreseeable future.

Example

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 An entity undertaken a business combination which results in the recognition of goodwill in
accordance with IFRS 3 Business Combinations. The goodwill is not tax depreciable or
otherwise recognised for tax purposes.
As no future tax deductions are available in respect of the goodwill, the tax base is nil.
Accordingly, a taxable temporary difference arises in respect of the entire carrying amount of
the goodwill. However, the taxable temporary difference does not result in the recognition of
a deferred tax liability because of the recognition exception for deferred tax liabilities arising
from goodwill.

Recognition of deferred tax assets

A deferred tax asset is recognised for deductible temporary differences, unused tax losses and
unused tax credits to the extent that it is probable that taxable profit will be available against which
the deductible temporary differences can be utilised, unless the deferred tax asset arises from:
 The initial recognition of an asset or liability other than in a business combination which, at the
time of the transaction, does not affect accounting profit or taxable profit.
Deferred tax assets for deductible temporary differences arising from investments in subsidiaries,
branches and associates, and interests in joint arrangements, are only recognised to the extent that
it is probable that the temporary difference will reverse in the foreseeable future and that taxable
profit will be available against which the temporary difference will be utilised.
The carrying amount of deferred tax assets are reviewed at the end of each reporting period and
reduced to the extent that it is no longer probable that sufficient taxable profit will be available to
allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction is
subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be
available.
A deferred tax asset is recognised for an unused tax loss carry forward or unused tax credit if, and
only if, it is considered probable that there will be sufficient future taxable profit against which the
loss or credit carry forward can be utilised.

Measurement of deferred tax

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the
period when the asset is realized or the liability is settled, based on tax rates/laws that have been
enacted or substantively enacted by the end of the reporting period.
The measurement reflects the entity's expectations, at the end of the reporting period, as to the
manner in which the carrying amount of its assets and liabilities will be recovered or settled.

IAS 12 provides the following guidance on measuring deferred taxes:

 Where the tax rate or tax base is impacted by the manner in which the entity recovers its assets
or settles its liabilities (e.g. whether an asset is sold or used), the measurement of deferred
taxes is consistent with the way in which an asset is recovered or liability settled
 Where deferred taxes arise from revalued non-depreciable assets (e.g. revalued land), deferred
taxes reflect the tax consequences of selling the asset
 Deferred taxes arising from investment property measured at fair value
under IAS 40 Investment Property reflect the rebuttable presumption that the investment
property will be recovered through sale

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 If dividends are paid to shareholders, and this causes income taxes to be payable at a higher
or lower rate, or the entity pays additional taxes or receives a refund, deferred taxes are
measured using the tax rate applicable to undistributed profits

Deferred tax assets and liabilities cannot be discounted.

Recognition of tax amounts for the period

Amount of income tax to recognise

The following formula summarizes the amount of tax to be recognised in an accounting period:
Tax to recognise for the period = current tax for the period + movement in deferred

Where to recognise income tax for the period

Consistent with the principles underlying IAS 12, the tax consequences of transactions and other
events are recognised in the same way as the items giving rise to those tax consequences.
Accordingly, current and deferred tax is recognised as income or expense and included in profit or
loss for the period, except to the extent that the tax arises from:
 Transactions or events that are recognised outside of profit or loss (other comprehensive income
or equity) - in which case the related tax amount is also recognised outside of profit or loss.
 a business combination - in which case the tax amounts are recognised as identifiable assets or
liabilities at the acquisition date, and accordingly effectively taken into account in the
determination of goodwill when applying IFRS 3 Business Combinations.

Example
An entity undertakes a capital raising and incurs incremental costs directly attributable to the equity
transaction, including regulatory fees, legal costs and stamp duties. In accordance with the
requirements of IAS 32 Financial Instruments: Presentation, the costs are accounted for as a
deduction from equity.
Assume that the costs incurred are immediately deductible for tax purposes, reducing the amount
of current tax payable for the period. When the tax benefit of the deductions is recognised, the
current tax amount associated with the costs of the equity transaction is recognised directly in
equity, consistent with the treatment of the costs themselves.
IAS 12 provides the following additional guidance on the recognition of income tax for the period:
 Where it is difficult to determine the amount of current and deferred tax relating to items
recognised outside of profit or loss (e.g. where there are graduated rates or tax), the amount
of income tax recognised outside of profit or loss is determined on a reasonable pro-rata
allocation, or using another more appropriate method.
 In the circumstances where the payment of dividends impacts the tax rate or results in taxable
amounts or refunds, the income tax consequences of dividends are considered to be more
directly linked to past transactions or events and so are recognised in profit or loss unless the
past transactions or events were recognised outside of profit or loss
 The impact of business combinations on the recognition of pre-combination deferred tax assets
are not included in the determination of goodwill as part of the business combination, but are
separately recognised.
 The recognition of acquired deferred tax benefits subsequent to a business combination are
treated as 'measurement period' adjustments (see IFRS 3 Business Combinations) if they qualify
for that treatment, or otherwise are recognised in profit or loss
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 Tax benefits of equity settled share based payment transactions that exceed the tax effected
cumulative remuneration expense are considered to relate to an equity item and are recognised
directly in equity.

Presentation
Current tax assets and current tax liabilities can only be offset in the statement of financial position
if the entity has the legal right and the intention to settle on a net basis.
Deferred tax assets and deferred tax liabilities can only be offset in the statement of financial
position if the entity has the legal right to settle current tax amounts on a net basis and the deferred
tax amounts are levied by the same taxing authority on the same entity or different entities that
intend to realise the asset and settle the liability at the same time.
The amount of tax expense (or income) related to profit or loss is required to be presented in the
statement(s) of profit or loss and other comprehensive income.
The tax effects of items included in other comprehensive income can either be shown net for each
item, or the items can be shown before tax effects with an aggregate amount of income tax for
groups of items (allocated between items that will and will not be reclassified to profit or loss in
subsequent periods).
Disclosure

IAS 12. Requires the following disclosures:

 major components of tax expense (tax income) Examples include:
 current tax expense (income)
 any adjustments of taxes of prior periods
 amount of deferred tax expense (income) relating to the origination and reversal of
temporary differences
 amount of deferred tax expense (income) relating to changes in tax rates or the imposition
of new taxes
 amount of the benefit arising from a previously unrecognized tax loss, tax credit or
temporary difference of a prior period
 write down, or reversal of a previous write down, of a deferred tax asset
 Amount of tax expense (income) relating to changes in accounting policies and corrections
of errors.

IAS 12. Requires the following disclosures:

 aggregate current and deferred tax relating to items recognised directly in equity
 tax relating to each component of other comprehensive income
 explanation of the relationship between tax expense (income) and the tax that would be
expected by applying the current tax rate to accounting profit or loss (this can be presented as
a reconciliation of amounts of tax or a reconciliation of the rate of tax)
 changes in tax rates
 amounts and other details of deductible temporary differences, unused tax losses, and unused
tax credits
 temporary differences associated with investments in subsidiaries, branches and associates, and
interests in joint arrangements

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 for each type of temporary difference and unused tax loss and credit, the amount of deferred
tax assets or liabilities recognised in the statement of financial position and the amount of
deferred tax income or expense recognised in profit or loss
 tax relating to discontinued operations
 tax consequences of dividends declared after the end of the reporting period
 information about the impacts of business combinations on an acquirer's deferred tax assets
 Recognition of deferred tax assets of an acquiree after the acquisition date.
Other required disclosures:
 details of deferred tax assets
 Tax consequences of future dividend payments.
In addition to the disclosures required by IAS 12, some disclosures relating to income taxes are
required by IAS 1 Presentation of Financial Statements, as follows:
 Disclosure on the face of the statement of financial position about current tax assets, current
tax liabilities, deferred tax assets, and deferred tax liabilities
 Disclosure of tax expense (tax income) in the profit or loss section of the statement of profit or
loss and other comprehensive income (or separate statement if presented).
sample question
Question 1
MCL purchased a piece of equipment on 1 July, 2017 at a cost Shs 500 million and it is depreciated
at 10% and 20% per year on a straight-line basis for accounting and tax purposes respectively.
The equipment was revalued at the end of the year ended on 30 June, 2019 to Shs 550 million.
Management did not compute deferred tax for the year ended 30 June, 2019. The deferred tax
liability in the financial statement is in relation to deferred tax determined at 30 June, 2018 in
respect of the same equipment. The company pays corporation tax at the rate of 40%. Please note
that deferred tax is limited to this equipment.

Question 2
Brados Ltd (Brados), which was incorporated in Uganda with a 31 March reporting date, bought
equipment for Shs 200 million and depreciates it on straight line basis over its expected useful life
of 5 years. For tax purposes, the equipment is depreciated at 20% per annum on declining balance
basis. Tax losses are carried forward against taxable profits of subsequent years. In year 1 Brados’
accounting profit was Shs 100 million and is expected to grow at 5% per annum. The tax rate
throughout the period is expected to be 30%. Brados will recover the carrying amount of the
equipment through using it to manufacture goods for sale. Brados recognises the deferred tax asset
and liability and the deferred tax income and expense. You are the accountant of Brados and the
finance director has asked you to use the information given to compute the current tax, deferred
tax and income tax charge for each of the years 1 to 5 to help him make justifications during a
meeting to evaluate the expenditure budgets.

Question3
On 30 June, 2018 Tanga Ltd’s building that was acquired 1 July, 2008 at a cost of Shs 350 million,
had a recoverable amount of 185 million. Depreciation is chargeable on a straight-line basis over a
35 year period. The tax base and carrying amounts of the non-current assets before the impairment
write down were identical. The impairment of the non-current assets is not allowable for tax
purposes. Tanga Ltd has not made any impairment or deferred tax adjustment for the above and
expects to make profits for the foreseeable future and the tax rate is 30%.

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Question 4
By the year end, WEUL had a debt instrument with a nominal value of Shs 2 billion. The fair value
of the instrument on 30 April, 2018 was Shs 1.8 billion. WEUL has determined that there is a
deductible temporary difference of Shs 200 million and intends to hold the instrument until maturity
on 30 April, 2019 and that the Shs 2 billion will be paid in full. This means that the deductible
temporary difference will reverse in full. In addition, WEUL has Shs 600 million of taxable temporary
differences that will also reverse in full in 2019. WEUL expects the bottom line of its tax return to
show a tax loss of Shs 400 million. The corporation tax rate is 30%.

Advise WEUL on the accounting treatment in above in accordance with relevant financial reporting
standards.

Question 5
During the review of the trial balance as at 20 June 2020 extracted by a junior Accountant, you
noticed the following:
a) The deferred tax accounts had a credit balance Shs 200 million which was the closing balance
of the previous financial year.
b) The interest receivable account balance was Shs 500 million which was interest earned during
the financial year. Interest receivable is, however, taxed on cash basis.
c) During the year, BCL made a provision Shs 250 million in respect of a product warranty.
Provisions are not tax deductible until the claims have been paid.
From your inquiry, these were the only items with deferred tax implications. BCL pays corporate
tax at 25%.
Discuss, with suitable computations, how the transactions 1 to 3 above would be treated in the
financial statements of BCL for the year ended 30 June 2020.

Question 6
Rackoko purchased a building to be used as a warehouse in Eastern Uganda on 1 January, 2018
for Shs 100 million and expects to use it for ten years. The building qualified for a government
grant Shs 20 million which has been treated as a deferred credit in the financial statements.
Tax allowances of 25% on reducing balance basis can be claimed on the building. The tax
allowances are reduced by the amount of the grant.

There are additional temporary differences of Shs 400 million in respect of deferred tax liabilities at
the year end. In addition Rackoko has unused tax losses of Shs 700 million. The directors of Rackoko
are unsure as to whether a provision for deferred taxation is required.
Required:
Discuss the appropriate treatment for each of the outstanding financial reporting issues relating to
Rackoko Ltd. (Justify your answers with suitable workings in accordance with the relevant
accounting standards).

Question 6
On 30 June 2020, AXL carried out an exercise to value its noncurrent assets. The results of the
exercise were as follows:
a) The fair value less costs to sell of industrial buildings was Shs 5.5 billion. The buildings were
acquired on 1 July 2015 at a cost Shs 6 billion and revalued to Shs 4.5 billion on 30 June 2020.
It is the group’s policy to depreciate these buildings at 5% per year on straight-line basis. For
tax purposes, industrial buildings are depreciated at 20% on reducing balance basis.
b) The fair value less costs to sell of property was Shs 1,500 million. The company acquired the
property on 1 July 2017 at a cost Shs 2.5 billion. The group policy is to depreciate property at
10% on straight-line basis. For tax purposes, property is depreciated at 30% on reducing
balance basis.
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c) The balance on the deferred tax account at the beginning of the year was Shs 777.93 million.
The accountant reported the tax implications of the above non-current assets in the financial
statements for the year ended 30 June 2020 as if the valuation exercise did not take place.
d) Note that these are the only transactions to be considered for tax purposes. Corporation tax is
30%.
Discuss the accounting treatment of the above transactions in accordance with the relevant financial
reporting standards and show extracts from the financial statements of PBL as at 31 December,
2019. (Show clearly all the necessary workings).

Question 7
On 1 July 2016, KUL purchased machines for its production facility that have tax implications, at a
cost Shs 1.5 billion. The machines are depreciated on reducing balance basis at 10%. On the other
hand, the machines are depreciated on straight-line basis at 20% for tax purposes.
The machines were revalued by a qualified valuer on 30 June 2020 to Shs 1.8 billion. On 30 June
2020, the legal team advised KUL that the former employees who sued the company for wrongful
dismissal had a 55% chance of winning the case and it was estimated that if they win, the company
would pay them Shs 200 million. Included in the draft financial statements for the year ended 30
June 2020 was interest receivable Shs 150 million. Expenses and revenues are considered for tax
purposes when paid and received respectively. At 1 July 2019, the balance on the deferred tax
liability was Shs 225 million.

The effects of these transactions on deferred tax were not included in the draft financial statements
for the year ended 30 June 2020. Apart from the above, there were no other assets and liabilities
with tax implications.

Question 8
IAS 12: Income Taxes sets out guidance for dealing with under provision and over provision of
income taxes by reporting entities.
During the year ended 31 March 2019, Dansoman Ltd finalised and paid its liability for corporate
tax on profit for year ended 31 March 2018, at an amount of shs 21 million. It had previously made
an estimated provision for corporation tax of shs 25 million in the financial statements for year
ended 31 March 2018. The directors estimate the liability for year ended 31 March 2019 at shs 24.5
million.
Required:
Explain the treatment of the above transactions in the financial statements of Dansoman Ltd for
the year ended 31 March 2019 in respect of taxation.

Question 9
On 1 July, 2015 Abuka acquired sophisticated production machinery at Shs 2.5 billion to be
depreciated on a straight-line basis for 20 years. On 30 June, 2018 the machinery was revalued to
Shs 2.7 billion. The capital allowance for this machinery is 20% on a reducing balance basis. The
tax rate was reduced from 40% to 30% in the fiscal year 2017/2018. In addition, the carrying value
of company inventory was Shs 3 billion while its fair value less costs of sale was Shs 2.7 billion. For
tax purposes, losses are deductible in the fiscal year the inventory is sold. The balance on the
deferred tax account on 1 July, 2017 was Shs 75 million.

Discuss the accounting treatment of each of the above transaction in the financial statements of
Abuka in accordance with relevant accounting standards.

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Question 10
KK Ltd was incorporated in Uganda and prepares its financial statements in accordance with
international financial reporting standards (IFRS). The Managing Director (MD) of KK Ltd has been
presented with financial statements that show profit before tax Shs 1,000,000,000 for each of the
years 1, 2 and 3. This profit is stated after charging depreciation expense Shs 200,000,000 per
annum. This is due to the acquisition of an asset at a cost Shs 600,000,000 in year 1 which is being
depreciated over its three-year useful economic life on straight line basis. The tax allowances
granted for similar assets are shown below:
Year Shs ‘000’
1 240,000
2 210,000
3 150,000
Income tax is at 30% of taxable profits.
Apart from the above depreciation and tax allowances, there are no other differences between the
accounting and taxable profits.
Required:
a) Ignoring deferred tax, prepare extracts from the statement of profit or loss for each of the years
1, 2 and 3.
b) Taking into account deferred tax implications, prepare extracts from the statement of profit or
loss and statement of financial position for each of the years 1, 2 and 3.

Question 11
On 1 January 2010 Simone LTD decided to revalue its land for the first time. A qualified property
value reported that the market value of the land on that date was shs 80,000. The land was
originally purchased six years ago for shs 65,000. Simone does not make a transfer to retained
earnings in respect of excess depreciation on the revaluation of its assets.

The required provision for income tax for the year ended 31 December 2008 is shs 19,400. The
difference between the carrying amounts of the net assets of Simone and their (lower) tax base at
31 December 2008 is shs 27,000. The opening balance on the deferred tax account was shs 2,600.
Simone’s rate of income tax is 25%.
Required
a) Prepare extracts of the financial statements to show the effect of the above transactions.
b) In a business meeting with revenue officials, the directors of JEL were informed that JEL’s tax
compliance and the computations with regard to the current tax, deferred tax and tax charge
were below expectation.
Required:
Explain to the directors of JEL, the following concepts in regard to IAS 12:
Income Taxes:
i) Accounting profits and taxable profits.
ii) Current tax and deferred tax.
iii) Timing differences and temporary differences.
iv) Taxable and deductible temporary differences.
v) Deferred tax assets and deferred tax liabilities.

Question 12 Dec 2020 L2

Gutujja Music Classical Ltd (GMCL) is a small company that services and repairs various kinds of
musical instruments in Uganda. In a bid to improve on its effectiveness and efficiency in operations,
GMCL purchased a special equipment at a cost of Shs 120million on 1April, 2019. The function of
the equipment among others was to detect technical faults within musical instruments that need
repair. GMCL depreciates its property, plant and equipment at a rate of 20% per year using straight-
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line method of depreciation although the tax authorities only allow a depreciation allowance at a
rate of 35% per year on cost of the equipment.
The company management is yet to discuss the financial statements for the year ended 31 March,
2020. The Director Finance of GMCL who recently attended a seminar organized by ICPAU where
one of the presenters hinted on deferred tax liabilities in accordance with IAS 12: Income Taxes,
has approached you for advice.
As a consultant with knowledge in financial reporting, and in accordance with the requirements of
IAS 12: Income Taxes.
Required:
Write a report to the director of GMCL addressing the following:
a) Explanation of the following terminologies used in IAS 12 Income Taxes:
i) temporary differences
ii) deferred tax liability
iii) deferred tax assets
b) Advice to the Director Finance on how the above transaction should be treated in the financial
statements of GMCL for the year ended 31 March, 2020 giving financial statement extracts
where applicable.(Corporation tax rate is 30%).

Question 13
Omiya Anyima Ltd (OAL) bought equipment, their only non-current asset at Shs 100 million on 1
January, 2016 being depreciated on a straight line basis over its expected useful life of five years.
For tax purposes the equipment is depreciated at 25% per annum on a straight line basis. The
company’s accounting profits before tax for the years 2016 – 2020 were Shs 70 million per annum.
The tax rate is 30%. Required: Set out computations of the current and deferred tax for the years
2016 - 2020 reported in the statement of profit or loss and other comprehensive income and
statement of financial position

Question 14
Musota Company Limited purchased a piece of equipment on 1 July, 2017 at a cost Shs 500 million
and it is depreciated at 10% and 20% per year on a straight line basis for accounting and tax
purposes respectively. The equipment was revalued at the end of the year ended on 30 June, 2019
to Shs 550 million. Management did not compute deferred tax for the year ended 30 June, 2019.
The deferred tax liability of shs 20million in the financial statement is in relation to deferred tax
determined at 30 June, 2018 in respect of the same equipment. The company pays corporation tax
at the rate of 40%. Please note that deferred tax is limited to this equipment.
Required:
Explain how the above transactions should be recorded in the books of accounts for the year ended
30 June, 2019 and 30 June, 2020.

Question 15
On 30 June 2020, AXL carried out an exercise to value its non-current assets. The results of the
exercise were as follows:
a) The fair value less costs to sell of industrial buildings was Shs 5.5 billion. The buildings were
acquired on 1 July 2015 at a cost Shs 6 billion and revalued to Shs 4.5 billion on 30 June 2020.
It is the group’s policy to depreciate these buildings at 5% per year on straight-line basis. For
tax purposes, industrial buildings are depreciated at 20% on reducing balance basis.
b) The fair value less costs to sell of property was Shs 1,500 million. The company acquired the
property on 1 July 2017 at a cost Shs 2.5 billion. The group policy is to depreciate property at
10% on straight-line basis. For tax purposes, property is depreciated at 30% on reducing
balance basis.

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c) The balance on the deferred tax account at the beginning of the year was Shs 777.93 million.
The accountant reported the tax implications of the above noncurrent assets in the financial
statements for the year ended 30 June 2020 as if the valuation exercise did not take place. Note
that these are the only transactions to be considered for tax purposes. Corporation tax is 30%.

Question 16
A company's trial balance shows a debit balance of Shs 2.1 billion brought forward on current tax
and a credit balance of Shs 5.4 billion on deferred tax. The tax charge for the current year is
estimated at Shs 16.2 billion and the carrying amounts of net assets are Shs 13 billion in excess of
their tax base. The income tax rate is 30%. Determine the amount to be shown as income tax in
the statement of profit or loss for the year.

Question 17
On 31 march, 2018 Tanga’s building that was acquired 31 march, 2008 at a cost of Shs 350 million,
had a recoverable amount of 185 million. Depreciation is chargeable on a straight-line basis over a
35 year period. The tax base and carrying amounts of the non-current assets before the impairment
write down were identical. The impairment of the non-current assets is not allowable for tax
purposes. Tanga has not made any impairment or deferred tax adjustment for the above and
expects to make profits for the foreseeable future and the tax rate is 30%.

Question 18
MBL purchased a warehouse in United Kingdom on 1 April, 2012 at a cost 2 million pounds as a
storage facility for its products before they are sold to UK customers. The building was revalued on
the 31 March, 2019 to 2.5 million pounds and it is depreciated at 2 % per year on straight-line
basis. The exchange rates at the date of purchase and on 31 March, 2019 were Shs 4,400 and Shs
4,700 respectively. Required explain how to account for the above transactions in the financial
statements to comply with IFRSs

Questions 19
JK ltd acquired an asset on 1/01/2016 and its annual profit before depreciation throughout each of
the useful life of the asset was UGX 30 million up to 31/12/2020. The historical cost of the asset
was ugx 100million and for tax allowance it had a capital deduction of 25% on straight line basis.
Assuming a corporation tax rate of 30%
Required: Determine the deferred tax assets/liabilities and reflect the implication in the financial
Statements on a comparative basis throughout the useful life of the asset

Question 20
Omiya Anyima Ltd (OAL) bought equipment, their only non-current asset at Shs 100 million on 1
January, 2016 being depreciated on a straight line basis over its expected useful life of five years.
For tax purposes the equipment is depreciated at 25% per annum on a straight line basis. The
company’s accounting profits before tax for the years 2016 – 2020 were Shs 70 million per annum.
The tax rate is 30%.
Required: Set out computations of the current and deferred tax for the years 2016 -
2020 reported in the statement of profit or loss and other comprehensive income and
statement of financial position

Question 21
Musolo Ltd disclosed a profit before tax for the year ended 31 March, 2016 of Shs 150 million. You
are provided with the following additional information:
1. The income tax rate is 30% of the taxable profit.
2. Included in the operating expenses are charitable donations of Shs 5 million.
3. The tax authority notified Musolo Ltd of a penalty for late payment of VAT of Shs 4 million. This
was charged under administrative expense when determining the profit before tax.
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4. During the year, Musolo Ltd incurred Shs 300 million to develop a new product. This was
capitalised and was to be amortised on a straight-line basis over 5 years inclusive of the year
ended 31 March, 2016. The tax authority has notified Musolo Ltd that these costs will be
deducted all at once for the computation of taxable profits for the year ended 31 March, 2016.
5. Musolo Ltd depreciates its industrial buildings at 10% per annum on straight-line basis. The
depreciation charge included in the cost of sales was Shs 50 million. The tax authority has
indicated that it will allow the depreciation at 5% on straight-line basis.
6. During the year ended 31 March, 2015 the taxable profits amounted to Shs 100 million and the
tax paid on these profits was Shs 20 million.
Required: Compute the current tax expense to be included in the statement of comprehensive
income. Show all your workings.

Question 22
The following information relates to Zee Ltd’s depreciable assets as at 31 March, 2015.
Shs ‘000’
Computers at cost 80,000
Motor vehicles at cost 50,000
Machinery at cost 100,000
The depreciation rates applied to the assets are 20%, 10% and 8% for computers, motor vehicles
and machinery respectively. For tax purposes, the assets are depreciated at the rates of 40%, 35%
and 30% respectively for computers, motor vehicles and machinery. The corporation tax rate is
30%.
Required:
a) According to IAS 12: Income Taxes, explain what is meant by ‘deductible’ and ‘taxable’
temporary differences giving any two examples of each.
b) Compute the deferred tax for the period ended 31 March, 2015, and state its nature with
reasons.

Question 23
a) Genge Ltd is an asset-based lucrative business located in Kamanve industrial park. The company
deals in the manufacture of a range of items that are consumed locally and in the export
markets. The tax authorities require a review of the computations of the current tax and the
deferred tax for the last three years. You have been contacted by the management of Genge
Ltd to assist with the tax computations. During the initial discussion, you were requested to
provide an explanation of particular terms that appeared in the tax authorities’ letter to Genge
Ltd.
Required: Discuss the terms ‘current tax’ and ‘deferred tax’ in accordance with IAS12: Income
Taxes.
b) The treasurer of Genge Ltd has further provided you with the following information: On 1 April,
2016 the management of Genge Ltd decided to revalue its land for the first time. A qualified
property valuer reported that the market value of the land on that date was Shs 800 million.
The land was purchased six years ago for Shs 650 million.

The required provision for income tax for the year ended 31 March, 2017 is Shs 194 million. The
difference between the carrying amounts of the net assets and their (lower) tax base as at 31
March, 2017 is Shs 270 million. The opening balance on the deferred tax account was Shs 26
million. Genge Ltd’s rate of income tax is 30%.
Required: Prepare extracts of the financial statements to show the effect of the above transactions.
Question 24
Genge Ltd is an asset-based lucrative business located in Kamanve industrial park. The company
deals in the manufacture of a range of items that are consumed locally and in the export markets.

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The tax authorities require a review of the computations of the current tax and the deferred tax for
the last three years. You have been contacted by the management of Genge Ltd to assist with the
tax computations. During the initial discussion, you were requested to provide an explanation of
particular terms that appeared in the tax authorities’ letter to Genge Ltd.
Required:
Discuss the terms ‘current tax’ and ‘deferred tax’ in accordance with IAS12: Income Taxes.

Question 25 DEC 2022 CTA

BEX Limited purchased machinery at Shs 150 million on 1 January, 2016. The machinery is
estimated to have a useful life of 5 years with no residual value. BEX Ltd depreciates the
machinery on straight line basis while the following amounts are allowed for tax purposes:
Years Shs ‘million’
2016 45
2017 36
2018 30
2019 24
2020 15
The tax rate is 30%.
Required:
In accordance with IAS 12: Income Taxes:
a) Determine the deferred tax adjustment to be reported in the statement of profit or loss
and the statement of financial position for each of the 5 years in a tabular form.
b) Prepare the deferred tax account for each of the 5 years.

Question 26
Mpiana purchased an item of property, plant and equipment on 1 October 2019 at a cost Shs 2.5
million. On 1 July 2020, the machine was revalued to Shs 1.875 million. The machine was revalued
again to Shs 1.3 million on 30 September 2021. Depreciation is charged at an annual rate of 25 %
on straight-line basis while capital allowances are claimed on straight-line basis at a rate of 30%.
Mpiana had a deferred tax liability Shs 170,000 at 30 September 2021. Mpiana is taxed at an annual
rate of 30%.
Note: Assume that other assets and liabilities had no deferred tax effects during the year to 30
September 2022 and that the cost of Shs 2.5 million was correctly calculated and valuations were
done by professional valuers.
Determine the income tax for the year ended 30 September 2022. (Include all the notes to the
financial statements as far as the information allows).

END

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