Income taxes

READER: IAS 12
INTRODUCTION TO IFRS: CHAPTER 7
 Learning outcomes
At the end of this learning unit, a student should be able to:

 Demonstrate an understanding of the treatment of all the various taxes.

 Calculate the taxable income and current taxation (tax payable for the year of assessment) in accordance with the Income Tax Act.

 Recognise current tax.

 Understand the concept of deferred tax.

 Calculate the carrying amount and tax base of assets and liabilities.

 Distinguish between taxable – and deductible temporary differences.

 Calculate deferred tax by application of the statement of financial position method.

 Demonstrate an understanding of the treatment and measurement of current and deferred, taxes.

 Demonstrate the application of the disclosure requirements with regard to taxes.

 Be able to apply the principles of accounting for taxes in discussion questions.

 Prepare financial statements in accordance with International Financial Reporting Standards.

 Exclusions
Please ignore all references to the following, as these aspects fall outside the scope of
the module:
• Unused tax losses, unused tax credits, assessed losses, unrecognised deferred tax
assets;
• Deferred tax on revalued assets;
• Changes in tax rates.
Background
Income tax expense consists of:
◦ 1. Current tax expense
◦ 2. Deferred tax movement
◦ 3. Capital gains tax
Current tax & Provisional tax payments
Companies calculate taxable income and complete their income tax returns.
They submit it to SARS.
SARS then issues a tax assessment that indicates the final amount payable/receivable by
the companies.
Six months prior Reporting date Six months after
Reporting date 30 June 20.27 Reporting date
First provisional Second provisional Third provisional
31 Dec 20.26 30 June 20.27 31 Dec 20.27

Textbook ref: Chap 7 pg 159

 Provisional tax payments

Do examples in
your textbook

EX 7.2

EX 7.3

Self-study: Example 7.3 (Provisional tax payments & process of paying tax) Textbook ref: Chap 7 Example 7.2 & 7.3
Homework on Provisional payments
You are required to do the following question to test your knowledge on provisional tax
payments:

•GAAP: Graded Questions 5.3 – Koogi Ltd

 Current tax – how to calculate
Taxable income x tax rate = Current tax expense

Profit before tax adjusted in terms of Income-tax Act.

Profit before tax +- differences = taxable income

Accounting
profit -
Determined in Permanent Taxable profit
accordance and (income) -
with IFRS temporary Determined in
differences accordance with
Textbook ref: Chap 7:3 income tax act
 Difference between accounting profit
and taxable income

Non-taxable and Explained through

non-deductible tax reconciliation in
Differences between differences NOTES
accounting profit
and taxable income
Temporary
Deferred tax
differences

Textbook ref: Chap 7:3 pg 156

 Measurement & Recognition of Current
Tax
Current tax - Amount of income tax payable on taxable profit for a period based on tax law
Measurement: Recognition:
Accounting profit R Debit Credit
Profit before tax (IFRS) xxx
Permanent differences: R R
Less: Non-taxable income (Dividend received) (xxx)
Current tax expense (P/L) xx
Permanent
differences Add: Non-deductible expense (Fines paid) xxx Liability: SARS (SFP) xx
Temporary differences:
Accounting items (IFRS) xxx
Tax allowances (SARS) (xxx)
Taxable income xx
Current tax (taxable income x 27%) xx
Textbook ref: Chap 7:4
 Permanent differences
Permanent differences:
◦ Are permanent in nature.
◦ Items that are never taxable (non-taxable) or never deductible (non-tax-
deductible)
◦ Deferred tax is NOT calculated on permanent differences  and goes to
tax rate reconciliation – this reconciliation forms part of the income tax
expense note

Textbook ref: Chap 7:3 pg 155

Permanent differences
Two of the most prevalent permanent differences:
- South African dividends received; and
- Fines paid
Treatment:
Permanent Example Accounting Current tax Deferred tax
difference treatment treatment treatment
Non-taxable SA dividend Included in PBT Exempt N/A
received (Other Income)
Non-deductible Fines paid Deducted for PBT Not allowed N/A
(Other Expenses)
 Temporary differences
Temporary differences:
◦ Are temporary in nature.
◦ In total the same amount is taken into account for tax and for accounting, but at
different amounts per period and/or over different periods.
◦ Split into taxable and deductible temporary differences
◦ Differences between the tax base (calculated in terms of Income tax act) of an
item and its carrying amount (calculated in terms of IFRS)

◦ Deferred tax is calculated on all temporary differences.

Textbook ref: Chap 7:5
 Temporary differences
Effect of Temporary Differences on the calculation of taxable income:
Accounting profit R
Profit before tax (IFRS) xxx
Permanent differences:
Less: Non-taxable income (Dividend received) (xxx)
Add: Non-deductible expense (Fines paid) xxx
Temporary differences:
Reverse the accounting treatment (either add back if it was deducted, or xxx
Temporary deducted it if it was added)
differences
Include the tax treatment (follow Income tax act guidelines) (xxx)
Taxable income xx
Current tax (taxable income x 27%) xx
Homework on Provisional payments
You are required to do a question form GAAP: Graded Questions 5.6 – Gennie Ltd to test your
knowledge on the following:
A) Calculation of income tax;
B) Preparation of the income tax journal entry;
C) Preparation of an extract from the statement of profit or loss; and
D) Preparation of the income tax expense note (including the tax rate reconciliation).
Current tax - example
Consider in the module guide – Taxing Ltd question.
Answer requirements a – d.
Deferred tax
Deferred tax is a “deferred” (future) tax…..
It is an accounting entry that is made to adjust for the temporary difference
between tax and accounting treatment, e.g. income received in advance that are
recognised in different financial periods.
It has no cash flow implications and does not change the amount of tax payable to
the South African Revenue Services (‘SARS’).
The entry originates in one year and reverses in subsequent years to compensate
for those differences.
 Deferred tax
Deferred tax is recognised for temporary differences. Temporary differences are
differences between the carrying amount of an asset or liability in the SFP and its
tax base.
Temporary differences may be either:
(a) taxable temporary differences, that will result in taxable amounts in future
periods, or
(b) deductible temporary differences, that will result in amounts that are
deductible in future periods.

Textbook ref: Chap 7:6

 Deferred tax
Deferred tax is calculated, following a reporting date balance approach (i.e. using
the closing balances of items in the Statement of Financial Position (‘SFP’).
Deferred tax can be classified in the Statement of Financial Position as either a:
1. Deferred tax asset
or
2. Deferred tax liability

Textbook ref: Chap 7:6

Deferred tax
1. Deferred tax asset (D/T asset )
The amounts of income taxes recoverable in future periods in respect of:
a) deductible temporary differences;
b) the carry forward of unused tax losses; Outside the
scope of this

c) and the carry forward of unused tax credits. module.

2. Deferred tax liability (D/T liability)

The amounts of income taxes payable in future periods in respect of taxable
temporary differences.
Both the D/T asset and/or the D/T liability is reported on the face of the
Statement of Financial Position. Textbook ref: Chap 7:6
 Deferred tax
The net movement of deferred tax is called the Deferred tax expense/income
(depending on the movement).

 It is calculated as the difference between the balance of the deferred tax

asset / liability for the current and previous period.
 It is recognised in the Statement of profit or loss and other comprehensive
income (‘SPL’) as part of the income tax expense or credit.

Textbook ref: Chap 7:6

 Deferred tax – how to calculate
How do we calculate DT? Deferred tax is calculated on all temporary differences.
Every year end we must do the following calculation to get to the balance of
deferred tax in the SFP:
Carrying amount Tax Base Temporary Deferred tax (SFP) Deferred tax (SPL)
(IFRS) (IT-act) Difference
(CA) (TB) (TD) Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

20.23
100 50 100-50 = 50 50*27% = 13.50 13.50– 0 = 13.50

20.24
80 40 80-40 = 40 40*27% = 10.80 10.80 – 13.50= (2.70)
 Deferred tax – how to calculate
Carrying amount (CA) Tax Base Temporary Difference Deferred tax Deferred tax
(TB) (TD) (SFP) (SPL)
Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

(1) (2) (3) (4) (5)

In order to calculate deferred tax, one must calculate the temporary differences by determining the difference between the carrying amount (1) of an
asset or liability in the SFP and its tax base (2). The calculated temporary difference (3) is then multiplied by the tax rate (27% or adjusted for tax rate changes) to
get the deferred tax balance as per the SFP (4). Movement between the current year and previous year balance would be the deferred tax expense or
income as recorded in the SPL(5).

Lets look at each component of the calculation separately:

(1) Carrying amount: The CA of assets and liabilities are calculated based on the accounting standard rules (i.e. IFRS). It is therefore the
value reflected in your SFP.
i.e. CA for PPE: Cost – Accumulated Deprecation = CA

(2) Tax Base: The TB refers to the amount attributed to the asset / liability for tax purposes. The definition for calculating the TB are different for each
element (i.e. Assets, Liabilities and Income received in advance). Lets look separately to each element’s definition.
 Deferred tax – how to calculate (CA)
Carrying amount Tax Base Temporary Deferred tax (SFP) Deferred tax (SPL)
Difference
(CA) (TB) (TD) Dr - Asset/Cr - Liability Dr - Expense/Cr -
Balance Income
MOVEMENT

Different methods: Some

memo’s indicate a DTA in ( )
Calculate i.t.o IFRS. and other as +. NB: Make sure
The value reflected in your SFP you indicate clearly what is
i.e CA for PPE: Cost – Accumulated Deprecation = CA what, e.g. is a dr or + amount
a DTA or a DTL, etc.
Carrying amount: The CA of assets and liabilities are calculated
based on the accounting standard rules (i.e. IFRS). It is therefore the
value reflected in your SFP.
 IAS 12 par 7 & 8
NB!

Deferred tax – how to calculate (TB)

Carrying amount Tax Base Temporary Deferred tax (SFP) Deferred tax (SPL)
Difference
(CA) (TB) (TD) Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

(Additional (non compulsory) material: See

Tabaldi video on IAS 12 - Tax Base Definition
of an Asset (IFRS) link to YouTube uploaded
on BB.
Do examples in
your textbook
The amount attributed to the asset/liability for tax purposes
EX 7.8
Tax base for an Asset: future economic benefits:
Amount deductible for tax purposes against future EX 7.9
when carrying amount of the asset is
economic benefits (feb). recovered: EX 7.10
If feb not taxable, TB = CA (e.g. debtors/trade - > through generating profit as you use it
receivables – sales have already been taxed (IAS12.7)) or when you sell it EX 7.11

EX 7.12
 Deferred tax Assets (TB)
Carrying amount Tax Base Temporary Deferred tax (SFP) Deferred tax (SPL)
Difference
(CA) (TB) (TD) Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

Is the future economic benefits taxable:

Yes No
Def: TB = amount deductible for tax purposes against Def: TB = CA.
FEB
(when recovering the CA of asset) (e.g. Trade receivables)
(e.g. Property, plant and equipment – W&T)

Temporary difference arises There is no temporary difference and deferred tax is not
and deferred tax is recognised recognised (as the future recovery of the carrying
amount of the asset will have no tax consequences)
Example 7.6 Introduction to IFRS
Example 7.6 Introduction to IFRS
 Deferred tax – how to calculate (TB)
Carrying amount Tax Base Temporary Deferred tax (SFP) Deferred tax (SPL)
Difference
(CA) (TB) (TD) Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT
(Additional (non-compulsory)
material: See Tabaldi video on IAS
12 - Tax Base Definition of a
Liability (IFRS ) link to YouTube
uploaded on BB. Do examples in
The amount attributed to the asset/liability for tax purposes your textbook
Income received in advance:
Tax base of Liability: EX 7.13
The carrying amount less any amount of the
The carrying amount less any amount that will be revenue that will not be taxable in future
deductible in future periods for tax purposes i.r.o that EX 7.14
periods
liability (Additional (non-compulsory) material:
See Tabaldi video on IAS 12 - Tax Base EX 7.15
Definition of Income Received in Advance
(IFRS) link to YouTube uploaded on BB.
EX 7.16
Deferred tax Liability (TB)
Carrying amount Tax Base Temporary Deferred tax (SFP) Deferred tax (SPL)
Difference
(CA) (TB) (TD) Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

In terms of the Conceptual Framework, a liability will require

the outflow of resources embodying economic benefits. If the
amounts paid are deductible for tax purposes, it will have a
Is the future Outflow deductible: future tax saving effect (make future tax payments smaller),
which can be seen as an “asset”. Again, the question should be
asked whether the future outflow will be tax deductible or not.
YES NO

Def: TB = CA – Future tax deductions Def: TB = CA.

(e.g. Leave pay accrual and SARS recognize (e.g. normal accrual and SARS already
when paid). recognised the expense).
Example 7.14 – Introduction to IFRS
 Deferred tax Liability (TB)
Carrying amount Tax Base Temporary Deferred tax (SFP) Deferred tax (SPL)
Difference
(CA) (TB) (TD) Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

Tax base for income received in advance

• Revenue taxable in future? Yes /
No
Def: TB = CA – Revenue not taxable in future
(e.g. subscriptions received in advance. Revenue already taxed or will never be taxed).
Example 7.15 – Introduction to IFRS
 Deferred tax – how to calculate (TD)
Carrying amount Tax Base Temporary Deferred tax (SFP) Deferred tax (SPL)
Difference
(CA) (TB) (TD) Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

Temporary Difference (TD):

Remember the following concepts:

Matching concept: Related expenses must reduce the applicable revenue in the SPL & OCI

Prudence concept: The full tax liability should be raised.

From both concepts, the SPL should reflect the true tax on net profit, regardless of when it is payable. CA – TB = TD
Exempt temp. differences Taxable differences Deductible differences

Differences that will not be taxable Diffs that will result in taxable Diffs that will result in deductible
amounts in future amounts in future
-- deferred tax liability -- deferred tax asset
Temporary Difference example:

Illustrative example:

Profit before tax 10 000

Add back: Depreciation 2 000 Temporary difference
Less: Wear & Tear (4 000)
Taxable Income 8 000
Current Tax @ 27% 2 160

But if we need to report the TRUE TAX PAYABLE on the NET PROFIT, it means that we should have a Tax
expense of: R 10 000 X 27% = R 2 700

What is the difference then?

It is called Temporary Difference (TD) and we calculate deferred tax on that.
 Temporary Difference example:
• TDs are differences between TB of an asset or liability and its CA in the SFP.

• The recognition of DT can be explained by the following example:

• A company has a plant with a cost of R200 000, accumulated depreciation of R40 000 and for tax purpose SARS allowed a wear and tear of R42 000.
Assume a tax rate of 27%.
CA TB TD DTL (SFP)
Plant 160 000 158 000 2 000 540

These TDs mainly arise from the following circumstances:

• The CA of the assets / liabilities in the accounting records differ from the TB of the assets / liabilities,

• The amounts are expensed for accounting purposes in a particular period and deducted for tax purposes in a different period, or

• The CA of an asset and accounting expenses or liability that are not deductible for tax purposes.
 Deferred tax – how to calculate (TD)
Asset: CA > TB

Taxable differences Differences that will result in taxable amounts in future

-- deferred tax liability

Tax base of an Asset:

= Amount deductible for tax purposes against future economic benefits.
If not taxable, TB = CA

Why? Taxable benefits exceed the amount that is deductible for tax purposes, more tax.
Textbook ref: Chap 7:6.1 Example 7.8 - 7.10
Example 7.8 – Introduction to IFRS
Future economic benefit 160 000
Future deductible allowance (150 000)
Future taxable income 10 000
 Deferred tax – how to calculate (TD)
Asset: CA < TB
Diffs that will result in deductible amounts in future
Deductible differences -- deferred tax asset

Tax base of an Asset:

= Amount deductible for tax purposes against future economic benefits.
If not taxable, TB = CA

Why? Taxable benefits is less than the amount that is deductible for tax purposes, more tax.
Textbook ref: Chap 7:6.1 Example 7.12
 Example 7.12 – Introduction to IFRS
Yr 1
Future economic benefit ?
Future deductible expense (5 000)
Future taxable income ?

Yr 2
Future economic benefit ?
Future deductible expense (3 000)
Future taxable income ?

Yr 3
Tax base of an Asset: Future economic benefit ?
= Amount deductible for tax purposes against future economic benefits. Future deductible expense (2 000)
If not taxable, TB = CA Future taxable income ?
 Deferred tax – how to calculate (TD)
Liability: CA < TB

Taxable differences Diffs that will result in taxable amounts in future

-- deferred tax liability

Tax base of a Liability :

The carrying amount less any amount that will be deductible in future periods for
tax purposes i.r.o that liability (in other words, what will NOT be deductible)

Textbook ref: Chap 7:6.1 Example 7.14

 Deferred tax – how to calculate (TD)
Liability: CA > TB

Deductible differences Diffs that will result in deductible amounts in future

-- deferred tax asset

Tax base of a Liability :

The carrying amount less any amount that will be deductible in future periods for
tax purposes i.r.o that liability (in other words, what will NOT be deductible)

Textbook ref: Chap 7:6.1 Example 7.14

Example 7.14 – Introduction to IFRS
Deferred tax – how to calculate (TD)
Income received in advance: CA < TB

Taxable differences Diffs that will result in taxable amounts in future

-- deferred tax liability

Tax base of a Income received in advance :

The carrying amount less any amount of revenue that will NOT be taxable in
future periods for tax purposes i.r.o that liability (in other words, what will NOT
be TAXABLE)
Deferred tax – how to calculate (TD)
Income received in advance: CA > TB

Deductible differences Diffs that will result in deductible amounts in future

-- deferred tax asset

Tax base of a Income received in advance :

The carrying amount less any amount that will be deductible in future periods for tax
purposes i.r.o that liability (in other words, what will NOT be deductible)

Textbook ref: Chap 7:6.1 Example 7.15

Example 7.15 – Introduction to IFRS
Deferred tax – how to calculate(D/T SFP)
Carrying Tax Base Temporary Deferred tax (SFP) Deferred tax
amount (CA) (TB) Difference (TD) (SPL)
Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

Temporary Difference x tax rate

The tax rates that are expected to apply in the period when the
asset(DR) realised or the liability (CR) is settled

BALANCE in the SFP

Deferred tax – how to calculate (D/T
SPL)
Carrying Tax Base Temporary Deferred tax (SFP) Deferred tax
amount (CA) (TB) Difference (TD) (SPL)
Dr - Asset/Cr - Liability Dr - Expense/Cr - Income
Balance MOVEMENT

Current year SFP DT

Less:
Previous year SFP DT

MOVEMENT in the SPL

Deferred tax - example
Consider in the module guide – Taxing Ltd question.
Answer requirement (e)
Homework
1.) Study and revise “SUMMARY OF PROVISIONAL TAX PAYMENTS” p159
including examples 7.2 & 7.3, in the Introduction to IFRS textbook.
2.) Work through the module guide question Taxing Ltd
3.) Study theory of deferred tax – class test in next class