You are on page 1of 25

International Financial Reporting Standards

The views expressed in this presentation are those of the presenter,


not necessarily those of the IASB or IFRS Foundation.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
Quiz:
Income taxes
Joint World Bank and IFRS Foundation train
the trainers workshop hosted by the ECCB,
30 April to 4 May 2012
The views expressed in this presentation are those of the
presenter, not necessarily those of the IASB or IFRS Foundation.

2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
2 Quiz: income taxes
Question 1: Entity has tax loss 30,000 in 20X8
and taxable profit 20,000 in 20X7. Tax rate 40%.
Tax loss can be carried back one prior year only
(no carryforward). Correct entry?
a. Debit Current tax asset 8,000
Credit Current tax income 8,000
b. Debit Current tax asset 12,000
Credit Current tax income 12,000
c. Debit Current tax expense 8,000
Credit Current tax liability 8,000
d. Debit Deferred tax asset 8,000
Credit Deferred tax income 8,000
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
3 Quiz: income taxes
Question 1: Tax loss 30,000 in 20X8 and taxable
profit 20,000 in 20X7. Tax rate 40%. Tax loss
carried back one prior year only. Correct entry?
a. Debit Current tax asset 8,000
Credit Current tax income 8,000
b. Debit Current tax asset 12,000
Credit Current tax income 12,000
c. Debit Current tax expense 8,000
Credit Current tax liability 8,000
d. Debit Deferred tax asset 8,000
Credit Deferred tax income 8,000

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
4 Quiz: income taxes
Question 2: Entity has tax loss 30,000 in 20X8.
Projected taxable profit for 20X9 is 20,000. Tax
rate 40%. Tax loss can be carried forward one
year only (no carryback). Correct entry?
a. Debit Current tax asset 8,000
Credit Current tax income 8,000
b. Debit Current tax asset 12,000
Credit Current tax income 12,000
c. Debit Current tax expense 8,000
Credit Current tax liability 8,000
d. Debit Deferred tax asset 8,000
Credit Deferred tax income 8,000
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
5 Quiz: income taxes
Question 2: Entity has tax loss 30,000 in 20X8.
Projected taxable profit for 20X9 is 20,000. Tax
rate 40%. Tax loss can be carried forward one
year only (no carryback). Correct entry?
a. Debit Current tax asset 8,000
Credit Current tax income 8,000
b. Debit Current tax asset 12,000
Credit Current tax income 12,000
c. Debit Current tax expense 8,000
Credit Current tax liability 8,000
d. Debit Deferred tax asset 8,000
Credit Deferred tax income 8,000

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
6 Quiz: income taxes
Question 3: At 31/12/X2 entity has an interest
receivable CU4,000 that will be taxable in X3
when received in cash. Tax rate 20% first 500,000
income and 30% on excess. Taxable profit in X2
= 450,000. Estimated taxable profit X3 = 550,000.
What is deferred tax liability 31/12/X2 for
receivable?
a. 1,200 b. 1,000 c. 940
d. 836 e. 800
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
7 Quiz: income taxes
Ques. 3: What is deferred tax liability 31/12/X2 for
receivable?
a. 1,200 b. 1,000 c. 940
d. 836* e. 800
Estimated effective tax rate = [(500,000
20%) + (50,000 30%)] 550,000 =
115,000 550,000 = 20.91%.
4,000 20.91% = 836
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
8 Quiz: income taxes
Question 4: Tax rate is 30% on operating profit,
0% on capital gains. In 20X1 entity has pre-tax
operating profit 50,000 and gain on sale of an
asset of 5,000. Entity believes gain is capital
gain, but small possibility (estimated 20%) that
tax authority says it is operating. What is current
tax liability at 31/12/X1?
a. 16,500 b. 16,200
c. 15,300 d. 15,000

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
9 Quiz: income taxes
Question 4: What is current tax liability at 31/12/X1?
a. 16,500 b. 16,200
c. 15,300 d. 15,000
IAS 12 is silent on the treatment of uncertain tax
positions. One way of treating the uncertain tax
positions is to use probability weighted amounts:
CU50,000 x 30% = CU15,000 tax on oper. profit
(CU5,000 x 80% x 0%) + (CU5,000 x 20% x 30%)
= CU300 tax on capital gain

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
10 Quiz: income taxes
Ques. 5: Which is the correct use of discounting
in measuring income tax assets and liabilities?
Choice
Current tax
assets and
liabilities
Deferred tax
assets and
liabilities
a
Discounted Not Discounted
b
Not Discounted Discounted
c
Discounted Discounted
d
Not Discounted Not Discounted
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
11 Quiz: income taxes
Ques. 5: Which is the correct use of discounting
in measuring income tax assets and liabilities?
Choice
Current tax
assets and
liabilities
Deferred tax
assets and
liabilities
a
Discounted Not Discounted
b
Not Discounted Discounted
c
Discounted Discounted
d
Not Discounted Not Discounted
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
12 Quiz: income taxes
Question 6: Tax year ends 31 December.
By 30 September entity must pay provisional tax
based on prior years taxable profit.
Tax rate is 30%. For 20X4 taxable profit was
50,000. Consequently, on 30/09/20X5 entity paid
15,000 toward 20X5 taxes.
Taxable profit for 20X5 = 40,000.
What is tax expense for 20X5?
What is current tax asset at 20X5?
What journal entry should be made at 31/12/X5?

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
13 Quiz: income taxes
Question 6:
Tax expense 20X5: 30% x 40,000 = 12,000
Current tax asset at 31/12/20X5: 15,000 paid
minus 12,000 owed. Tax asset is a receivable
from the tax authority.
Journal entry at 31/12/20X5:
Debit current tax asset 3,000
Credit tax expense* 3,000

*Assumes that on 30/09/20X5 the debit for the
15,000 payment was to tax expense.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
14 Quiz: income taxes
Question 7:
Entity A purchased an item of PPE on 1 January
20X1 for CU1,000. The estimated useful life of the
PPE is 10 years and the residual value was
estimated to be zero. These estimates have not
changed.
The tax authorities in the jurisdiction in which
Entity A operates grant allowances over five
years for such PPE.
The applicable tax rate is 30 per cent.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
15 Quiz: income taxes
Question 7 continued:
At 31 December 20X1, the deferred tax balance
and profit or loss effect are:
a. Liability of CU30, income of CU30
b. Asset of CU30, income of CU30
c. Liability of CU30, expense of CU30
d. Asset of CU30, expense of CU30
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
16 Quiz: income taxes
Question 7 continued:
At 31 December 20X1, the deferred tax balance
and profit or loss effect are:
a. Liability of CU30, income of CU30
b. Asset of CU30, income of CU30
c. Liability of CU30, expense of CU30
d. Asset of CU30, expense of CU30
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
17 Quiz: income taxes
Question 8:
The facts are the same as Question 7.
On 31 December 20X1, Entity A revalued the asset
to CU1,300.
What journal entry should be processed in the
financial records of Entity A to account for the tax
effect of the revaluation?
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
18 Quiz: income taxes
Question 8:
Dr AssetPPE CU400
Cr IncomeOCI: revaluation gain CU280
Cr Deferred tax liability CU120
CU1,300 revalued amount CU900 previous carrying
amount = CU400.
CU400 increase in carrying amount x 30% = CU120
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
19 Quiz: income taxes
Question 9:
The facts are the same as Question 8.
What journal entry should be processed in the
financial records of Entity A to account for the tax
effect of the 20X2 depreciation of the PPE?
The estimates of estimated useful life and
residual value remain unchanged.

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
20 Quiz: income taxes
Question 9:
Dr Expenseprofit or loss: depreciation CU144
Cr AssetPPE CU144
CU1,300/9 years = CU144

Dr Expenseprofit or loss: deferred tax CU17
Cr Deferred tax liability CU17
(CU144 accounting depreciation less CU200 tax
depreciation) x 30% = CU17

IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
21 Quiz: income taxes
Question 10:
Entity A owns a piece of land classified as PPE.
The land is not depreciated and is measured
using the revaluation model in IAS 16.
On 1 January 20X1 the entity bought the land for
CU1,500 (ie historical cost).
On 31 December 20X1 the land was revalued to
CU2,000.
The applicable tax rate for operating profits is
30%. Proceeds on sale in excess of historical
cost are taxed only at 15%
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
22 Quiz: income taxes
Question 10 continued:
At what rate should the tax consequences of the
revaluation of the land be measured?

a. 30 per cent
b. 15 per cent
c. No tax consequences as the land is a non-
depreciable asset
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
23 Quiz: income taxes
Question 10 continued:
At what rate should the tax consequences of the
revaluation of the land be measured?

a. 30 per cent
b. 15 per cent
c. No tax consequences as the land is a non-
depreciable asset

Reason: the land can only be recovered through sale.
It is not consumed in the process of generating
income.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
24
Questions or comments?
Expressions of individual views by
members of the IASB and its staff
are encouraged.

The views expressed in this
presentation are those of the
presenter.

Official positions of the IASB on
accounting matters are determined
only after extensive due process
and deliberation.
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org
2011 IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK | www.ifrs.org
25

The requirements are set out in International Financial
Reporting Standards (IFRSs), as issued by the IASB at 1
January 2012 with an effective date after 1 January 2012
but not the IFRSs they will replace.
The IFRS Foundation, the authors, the presenters and the
publishers do not accept responsibility for loss caused to
any person who acts or refrains from acting in reliance on
the material in this PowerPoint presentation, whether such
loss is caused by negligence or otherwise.
25
IFRS Foundation | 30 Cannon Street | London EC4M 6XH | UK. www.ifrs.org