Income taxes

IAS 12
 Objectives
By the end of the lecture students should be able to:
Calculate current tax
 Define tax base of:
 Asset
 Liabilities including revenue received in advance
 Calculate temporary differences
 Calculate deferred tax
 Differentiate between the movement of deferred tax and
the balance of deferred tax
 Process journals for deferred tax movement
  Current taxes
 Domestic taxes
 Foreign taxes
 Deferred taxes

SCOPE OF  The tax expense in the SoCI is the aggregate

of current tax and deferred tax.
IAS 12
 Deferred tax is not a cash flow
  Current income tax on companies
 Tax payable or recoverable on taxable profit or
tax loss for the period.
 Unpaid tax at the end of the period is a current
liability.

Current tax Tax assets and liabilities are measured at the
amount expected to be paid to or recovered from
the tax authorities.
 Use effective tax rates and laws enacted or
substantively enacted at the reporting date.
Class question 1 – basic calculation of companies’
tax
Shilongo Ltd incurred the following income and expenses for the
year ended 31 December 2022
N$
Sales 2 000 000
Cost of sales (800 000)
Lease income 50 000
Dividends received 20 000
Interest received 70 000
Interest paid (85 000)
Fines paid (15 000)
Shilongo Ltd also has 5 vehicles that were purchased on 1 January 2021
at $500 000 ($100 000 each). NamRa grants a wear-and-tear allowance
on these vehicles at 1/3 per year on the vehicle, not apportioned for
periods shorter than a year. On 31 December 2022 one of these
vehicles was sold for $120 000. The normal tax rate is 32%.
Vehicles are depreciated on a straight line basis 8 years.
 Required
a) Calculate Shilongo Ltd’s current income
tax expense for the year ended
31 December 2022.
CLASS
b) Assume that the cost of sales amounts to
QUESTION
N$2 100 000 instead of N$800 000.
CONTINUED Recalculate Shilongo Ltd’s current income tax
expense for the year ended 31 December 2022.
 When asset is sold @ profit
 NamRa gave W&T allowances when
the asset was used.
Recoupment  If sold NamRa taxes the company on
W&T previously granted
 Called
 Formula to calculate

RECOUPMENT OF WEAR & TEAR (Section 17(1)(a))

Selling price (limited to CP) LESS Tax Base
 Assets sold at a loss

Opposite treatment followed by NamRa

 NamRa allows deduction called
 Formula to calculate

SCRAPPING ALLOWANCE (Section 17)

Tax Base LESS Selling Price

SOLUTION

(1) Calculation of recoupment of wear-and-tear:

Selling price, limited to cost price 100 000

Less Tax base (33 333)
Cost price 100 000
Less cumulative wear-and-tear (100 000 X 1/3X 2 (66667)
years)
= Recoupment 66 667

(2) Fines paid were not incurred to earn income and

are therefore not tax-deductible.
 (a)

Sales 2 000 000

Lease income 50 000

Dividends received 20 000

Interest received 70 000

Recoupment of wear-and-tear (1) 66 667

Gross income 2206 667

Less: Exempt income (dividends received) (20 000)

Income 2 186 667

Less: Deductions (2) (1051667)

SOLUTION Cost of sales (800 000)

Interest paid (85 000)

Wear-and-tear (500 000 X 1/3) (166 667)

Taxable income 1135000

Current tax paid (Taxable income X 32%) 363200
Accounting method
Profit before tax 1 222 500
Permanent differences (50 000)
Fines 15 000
Dividends (20 000)
Non-taxable gain (45 000)

Temporary differences (37 500)

Depreciation 62 500
Wear and tear (166 667)
Recoupment 66 667
Taxable income 1 135 000
Current tax @32% 363 200
Gross income (as above) 2206 667
Less: Exempt income (dividends (20 000)
received)
Income 2 186 667
Less: Deductions (2) (2351 667)
Cost of sales (2 100 000)
Interest paid (85 000)
Wear-and-tear (400 000 X 20%) (166 667)

Tax loss (165000)

Current tax -
Current tax

 Current tax should be recognised as income or

expense and included in profit or loss.
 Penalties and fines are not deductible for tax
purposes they are not in line of trade.
.
Assessed losses

 Tax losses – the company has greater tax

deductions than revenue. i.e. tax loss
 No tax payable
 Tax loss that has been confirmed by the
NamRa is assessed loss.
 Maybe offset against future taxable
income.
 Introduction to deferred tax

What is DEFERRED TAX?

• In previous slides we dealt with CURRENT TAX and how it
is calculated.
Current Tax that the company must pay or recover which is calculated
ito Income Tax Act
• However for accounting purposes we follow IFRS
There are certain income/expenses which are recognised
for accounting purposes, but which NamRa does not
recognise as taxable/deductible for tax purposes, or the
amounts differ.
Therefore, there are differences between Taxation and
Accounting (differences between the two legislations)
This Photo by Unknown Author is licensed under CC BY
WHAT IS IT??

Vs.
Deferred tax

 Its an obligation or asset that will be payable

or recoverable at a future day.
 Deferred tax asset is only recognised if there
will be taxable profits in future to offset the
asset.
 Differences (TD) are due to different
treatments for accounting profit and tax profit.
 Amounts expensed for accounting purposes in
one period and deducted for tax in a different
period.
Deferred tax - cont

 Carrying amounts of assets and certain

expenses not deducted for tax purposes.
 Carrying amount of liabilities not deductible.
 Income not taxable.
 Income recognized in a different accounting
period and taxed in a different period.
 Tax losses set off against taxable income in
later years.
Calculation deferred tax

 Deferred tax ONLY arises from TEMPORARY DIFFERENCES

 Temporary Differences X Tax Rate = DEFERRED TAX
 Deferred Tax is the creation of an ASSET or LIABILITY for the
FUTURE tax effect of temporary differences
 If the company is going to pay MORE tax in future: create a
deferred tax LIABILITY (Taxable Temporary differences)

 If the company is going to pay LESS tax in future: create a

deferred tax ASSET (Deductible Temporary differences)

N/B NAMIBIA DOES NOT HAVE CAPITAL GAINS TAX

 CAUSES OF TEMPORARY
DIFFERENCES
Accounting Recognition
Income
 When earned (Accrual b)
Expenses:
When incurred (accrual basis)
Tax authority recognition
Income
When received (cash basis) or earned
(accrual basis) whichever happens first
Expenses:
When incurred (AB) unless the
expense:
Is prepaid hence deducted earlier
Relates to a provision which is only
deductible later
 Item = asset CA > TB DT LIABILITY
(e.g. PPE)

Item = asset CA < TB DT ASSET

(e.g. PPE)

Item = liability CA > TB DT ASSET

(e.g. loan)
USEFUL Item = liability CA < TB DT LIABILITY
SHORT CUT: (e.g. loan)
TAX BASE

 Up to now we have looked at calculation of DEFERRED TAX

BUT WHAT IS TAX BASE?
 Tax base of an asset/liability is the amount attributable to that
asset /liability for tax purposes.
 TDs can arise from any asset or liability in the company’s
records, e.g. from PPE, debtors, revenue in advance, creditors,
loans, inventories, etc.
 We need to calculate the tax base of all assets & liabilities and
compare them to their respective carrying amounts to identify
possible TDs
 How to calculate tax base
OF AN ASSET OF A LIABILITY
TAX BASE
(E.G. PPE) (E.G. CREDITORS)

RULE 2 RULE 2
RULE 1: (EXCEPTION TO (EXCEPTION TO
RULE 1): RULE 1:
TB = tax RULE 1):
If economic TB = CA less
deductions to be The TB of income
benefits of the tax
granted by received in advance =
asset are not deductions in
NamRa in future CA less amounts NOT
taxable, then TB = future
taxable in future
CA
E.g. Receivables,
share investment
Examples on tax base calculation

 Calculate the tax base on 31 December 2022 of each of the following items:
 Buildings purchased for N$200 000 on 1 January 2022. Wear-and-tear is
granted at 1/3 p.a.
 Share investment carried at a cost price of N$80 000
 Trade creditors of N$75 000
 Income received in advance of $110 000
 Capitalised development cost N$320 000, N$50 000 recognised as an
amortisation expense.NamRa allows capitalised investment to be written off
in 4 years.
 Trade receivables of N$60 000
 12% long term Loan received of N$800 000 and interest accrued no amount
repaid by year end.
 Subscriptions received in advance 380.
Example solution

Tax base of capitalized development costs

 $200 000 – 66 667 W&T = N$133 333 (future W&T deductions to be granted by IR = $133 333)
 Economic benefits of share investment (dividends) are not taxable. Therefore TB = CA = $80 000
 Transaction that led to creditors is the purchase of inventories. This purchase is granted as a tax deduction
by NamRa when costs were actually incurred (2022) and will not again be tax deductible in future
(payment of creditors has no tax consequences). Therefore TB = CA less amounts deductible in future =
$75 000 – $0 = $75 000
 Income is taxed by NamRa on the earlier of receipt or accrual (refer to subject Taxation). As income has
been received, it would have been taxed in 2022 and will not again be taxed in future. Therefore TB
= CA less amounts NOT taxable in future = N$110 000 – N$110 000 = N$0
 The development costs will generate taxable economic benefits in the future as the carrying amount is
recoverable. Therefore TB=amount deductible for tax purpses= 320 000-80 000= 240 000
 When carrying amount of receivables id recovered in the future the amount is not taxable since it was
already taxed when revenue was recognised hence TB =CA=60 000
 Repayment of loan has no tax implications therefore nothing is deductible from carrying amount to
determine tax base. TB=CA-0=800 000
 Interest is tax deductible as it is incurred during the current reporting period. Hence no future tax
deduction. TB=CA-0=96 000
 Tax base of the subscriptions in advance is CA-any amount of revenue that will not be taxable in future=
TB=(380-380=0)
Calculation of
deferred tax
 Temporary differences
 Arises due to differences between
the carrying amounts of assets and
liabilities in the Statement of
financial position and their tax
bases. 2 Types of temporary
differences i.e.
 Taxable
 Deductible
 Deferred Tax A/L= CA-
TB=TD*TAX RATE.
Movement in
deferred tax
 Recalculated at the end of each
reporting period.
 LESS prior year balance=
 Movement (Tax) is
presented in profit and
loss- tax line
 Deferred tax should be
recognised outside profit or
loss, directly in OCI/equity if
the tax relates to items
recognised directly in
OCI/equity
 deferred tax calculation recap

Deferred tax liability Deferred tax asset

• Asset: When CA>TB – • Asset: When CA<TB –
Taxable temporary Deductible temporary
difference difference
• Liability: When CA<TB – • Liability: When CA>TB –
Taxable temporary Deductible temporary
difference difference
Examples

 A company recognized the

following items at the reporting
date:
 Water and electricity accrual
N$1 250
 Leave pay accrual
N$4
500
Trade receivables of N$74 000
after allowing a credit loss of N$12
000. IR allows 25% as a deduction
on credit losses.
  Details ca
tb td
 Water & E (1 250) (1 250)
solution -
 Leave Liab (4 500) - (4
500)
 Details CA TB
TD

Solution Trade Rec 74 000 83 000 (9 000)

Gross amt 86 000 86 000 -
Credit losses (12 000 )(3 000) (9 000)
  Deferred tax can be calculated using the
METHODS SOCI approach or the SOFP approach.
OF BUT for examination purposes we can
MEASURING only use SOFP approach because it is
DT the only one recognised by IAS 12
Question

 Company A has a vehicle with a cost of N$100 000.

 Depreciation takes place at 20% per annum, on a straight-line
basis.
NamRa grants a wear-and-tear allowance of 33⅓% per annum. Tax
rate 32%
 Required: Calculate the deferred tax for year 1-5 using the
SOCI approach.
 DEPR W&T TD JOURNALS
(ACC) (TAX)

Dr Cr

Yr 1 20 000 33 333 -13 333 Inc Tax (p/l) DT (SoFP)

4267 4267

Yr 2 20 000 33 333 -13 333 Inc Tax (p/l) DT (SoFP)

4267 4267
DEFERRED
TAX – HOW TO Yr 3 20 000 33 333 -13 333 Inc Tax (p/l) DT (SoFP)

CALCULATE?? 4267 4266

? CLASS
Yr 4 20 000 0 20 000 DT (SoFP) Inc Tax (p/l)
EXAMPLE 1 6 400 (use 6 400
(CONTINUED) liab.)

Year 5 20 000 0 20 000 DT (SoFP) Inc Tax (p/l)

6 400 (use 6 400
liab.)

Total 100 000 100 000 0

 DEFERRED TAX – HOW TO CALCULATE???
CLASS EXAMPLE 2 (SoFP APPROACH)

 Lets use the same example as in Example 1 but this time use the SoFP
Approach
 Company A has a vehicle with a cost of N$100 000.
 Depreciation takes place at 20% per annum, on a straight-line basis.
NamRa grants a wear-and-tear allowance of 33⅓% per annum. Tax rate 32%
 Required: Calculate the deferred tax for year 1.
 Answer:
 Usihe the SoFP approach, a TD is calculated as the difference between the
carrying amount (CA) and the tax base (TB) of an asset or liability:
 CA of vehicle at end of year 1 = 100 000 – 20 000 depr = 80 000
 TB of vehicle at end of year 1 = 100 000 – 33 333 W&T = 66 667
 TD = 66 667 – 80 000 = -13 333
 DT = -4267 (-13 333 x 32%) (the same answer as SoCI approach!)
 SoFP method/approach works with balances at the end of the year, NOT
the movement for the year as with the SoCI method!!!
 DEFERRED TAX – HOW TO CALCULATE???
CLASS EXAMPLE 2 (CONTINUED)

CA (ACC) TB TD DT DT
(TAX) (LIAB)/ASS EXPENSE/
ET (INCOME)
(BALANCE (MOVEMEN
) T)
Yr 1 80 000 66 667 -13 333 (4267) 4267
Yr 2 60 000 33 333 -26 667 (8533) 4267
Yr 3 40 000 0 -40 000 (12800) 4267
Yr 4 20 000 0 -20 000 6400 (6400)
Yr 5 0 0 0 0 (6400)

Calculated as the movement between two years, e.g. for year 2 it is 7

466 – 3 733 = 3 733
 FORMAT OF THE SoFP APPROACH

CA TB TD DT Movement
(balance in SoFP) (in SoCI)

CA – TB TD x 32% This year’s SoFP

balance less last
year’s SoFP
balance
 SoCI METHOD VS. SoFP METHOD IN THE
EXAM
 CURRENT tax is always calculated by using the following format:
Profit before tax (from SoCI) XXXXX
Add/Less: Permanent differences XX/(XX)
Add/Less: Temporary differences XX/(XX)
Taxable profit XXXXX
Current tax (Taxable profit X 32%) XXXXX
Deferred tax (Temp differences X 32%) XXXXX
Total income tax expense XXXXX

 DEFERRED tax is always calculated by using the SoFP approach in slides

no 34
 When will you use the SoCI approach of calculating deferred tax?
 If the question specifically require you to do so.
 You can always test your SoFP method answer by taking the total TDs in your
CURRENT TAX calculation and multiply this by the tax rate. If this amount is the
same as the MOVEMENT in the SoFP approach DT calculation, you know your
answer is correct.
 This test is not a requirement
 TAXABLE AND DEDUCTIBLE TEMPORARY DIFFERENCES

When NOT to recognise deferred tax arising from taxable or deductible temporary
differences (IAS12.15)
◦ Temporary Differences arising from GOODWILL
◦ Temporary Difference arising from transactions that is not a business combination; and at
initial recognition, does not affect Accounting profit nor Taxable profit. For example:
PPE where neither depreciation nor wear-and-tear is recognised (e.g. LAND) Ito IAS 12.15
the tax base of land = amount deductible for tax purposes in the future. This is because land
cannot be used, therefore the carrying amount can only be recovered through sale.
Previously we use to say Land has a tax base of Nil (no future capital allowances) with the
temporary difference "exempt" in terms of IAS 12.15(b). This has now changed. The tax base of
land is now the same as the cost price.  Example 8.13 in DA still shows it as exempt. This is
wrong, please use above method when accounting for deferred tax on land PPE where
depreciation is recognised, but no wear-and-tear is granted
IN CLASS: DESCRIPTIVE ACCOUNTING 8.13
Exemption from recognising a deferred tax liability
 IN CLASS: DESCRIPTIVE
ACCOUNTING 8.13
Exemption from recognising a deferred tax liability
 LIMITATION ON DEDUCTIBLE TEMPORARY
DIFFERENCES
 As per the previous slides – deductible temp diff's results in
a DEFERRED TAX ASSETS, except on initial recognition
of asset/liability that has NO effect on accounting OR
taxable profit, for instance LAND
 There is a LIMITATION ON RECOGNITION OF
DEFERRED TAX ASSETS –
Deferred tax assets are recognised as far as it is probable
that sufficient taxable profit will exist in future against
which the deductible differences may be utilised.
Any unrecognised tax asset may be carried over to the
next year and recognised as soon as there is enough
taxable profit.
 Required: Determine the amount of deferred
tax (asset/(liability)) AND the unrecognised
deferred tax asset in each of the following 4
scenarios. The assumed normal tax rate is
currently 32%.
CLASS SCENARIO 1
QUESTION 2:  XYZ Limited has taxable TD of N$100
000 and deductible TD of N$50 000. It is
LIMITATION OF not probable that the entity will make
RECOGNITION enough taxable profits in future against
which the deductible TD may be utilised.
OF DEFERRED
Scenario 2
TAX ASSET
 XYZ Limited has a taxable TD of N$80
000 and a deductible TD of N$100 000. It
is not probable that the entity will make
enough taxable profits in future against
which the deductible TD may be utilised.
 SCENARIO 3
 XYZ Limited has a taxable TD of N$80 000
and a deductible TD of N$150 000. The
company estimates that it will make N$60
000 taxable profits in the following year and
no further tax planning opportunities exist.
SCENARIO 4
XYZ Limited has a taxable TD of N$80 000 and
Class a deductible TD of N$100 000. It is not probable
question(cont) that the entity will make enough taxable profits
in future against which the deductible TD may be
utilised, but management has recently appointed
a new tax consultant that identified opportunities
for favourable tax planning, so much so that all
deductible TD can be utilised in the following
couple of years.
 Scenario 1 solution
 ANSWER: Deferred Tax = (N$16 000),
Unrecognised DT Asset = N$0
 XYZ Limited can utilise the full N$50 000
deductible TD against the taxable TD of 100
SOLUTION 000. There remains a net N$50 000 taxable
TD , which at the 32% tax rate, leads to a
S deferred tax liability of N$16 000. The fact
that not enough taxable profit exist in future
is irrelevant, because the taxable TD were
already enough in order for the deductible
TD to be offset in full.
Scenario 2 solution

 ANSWER: Deferred Tax = N$0, Unrecognised DT Asset = 6 400

 XYZ Limited only has 80 000 of taxable TD and therefore only 80 000 can be
used to offset deductible TD against. The net effect is therefore deferred tax of
0. The 20 000 that could not be utilised this year, is carried forward to the
following year and can be utilised if enough taxable TD or taxable profit exist
in that year. 20 000 X 32% = 6 400 (not recognised, only disclosed in tax rate
reconciliation).
  ANSWER: Deferred Tax = 19 200,
Unrecognised DT Asset = 3 200
 XYZ Limited first uses the taxable TD against
which 80 000 of the deductible TD are
utilised. Therefore there remains a net
SCENARIO deductible temporary difference of 70 000. Of
this amount, only 60 000 may be recognised,

3 because only 60 000 of future taxable profits

are available. It therefore leads to a deferred
tax asset of 60 000 X 32% = 19 200 and the
SOLUTION unutilised deductible TD of 10 000 is carried
forward to be possibly utilised in the
following year. 10 000 X 32% = 3200 (not
recognised, only disclosed in tax rate
reconciliation)
  ANSWER: Deferred Tax = 6 400,
Unrecognised DT Asset = 0

SCENARIO  In this case there is no limitation on the

deferred tax asset that can be recognised

4 because sufficient tax planning opportunities

exist. The deductible and taxable temporary
differences lead to a N$20 000 net temporary
SOLUTION difference, which at the 32% tax rate results in
a net deferred tax asset of N$6 400
 UNUTILISED TAX LOSSES

 Reminder when you calculate current tax and you have taxable
income you DEBIT Income tax Cr NamRa CREDITOR.
 Now discuss in 2's: What is the entry if it is a taxable loss? Is NamRa
going to pay you for the tax loss? Does NamRa have an obligation to
pay you in cash?
 A tax loss in the current year is not going to be refunded by NamRa in
cash so we can't raise the following entry Dr NamRa, Cr Income tax
 ThinK about this: What is the implication of a tax loss then?
 A tax loss (called an “assessed loss” in the Income Tax Act) is carried
forward the o next year and deducted from next year’s taxable profit
 It, therefore, leads to the payment of LESS tax in future. Therefore we
create a deferred tax asset on tax losses, subject to the same limitation
as for normal deductible TDs (should expect enough taxable profit in
future)
 UNUTILISED TAX LOSSES (continued)

 Example: If your current tax calculation leads to a negative

taxable profit of N$650 000 for example, remember to include
the assessed loss in the DT (SoFP) calculation as follows:

CA TB TD DT
Tax loss - 650 000 650 000 208500 (DT asset)

 If the tax loss is used in the following year, the DT asset is

reversed to nil
 Same principle applies for capital losses transferred to the
following year
 CLASS QUESTION 3: UNUTILISED
ASSESSED LOSSES
 ABC Ltd, an investment company, provides the following information to you in
respect of the financial years ended 31 December 2021 and 2022:
 The profit before tax in the statement of comprehensive income for the year ended
31 December 2022 is N$250 000 (31 December 2021: N$100 000).
 ABC Ltd earns much of its revenue from dividends, therefore the profit before tax
(as in point 1) includes dividends received of N$100 000 for the year ended
31 December 2022 (31 December 2021: N$90 000).
 The company purchased machinery with a cost price of N$500 000 on
1 January 2021. Depreciation is recognised over 6 years (already taken into account
in the profit before tax as per point 1), whilst the NamRa allows wear and tear
allowance of 1/3.
 Current tax is paid immediately in cash.
 The company tax rate is currently 32%.
 Required
 Calculate and journalise ABC Ltd’s income tax expense (current and deferred
tax) for the years ended 31 December 20121and 31 December 2022.
 SOLUTION - CLASS QUESTION 3:
UNUTILISED ASSESSED LOSSES
2022 2021
Profit before tax 250 000 100 000
Permanent differences:
Dividends received -100 000 -90 000
Temporary differences (taxable)*: -83 334 -83 334
Depreciation on machinery (500 000 ÷ 6 yrs) 83 333 83 333
Wear-and-tear on machinery (500 000 X 1/3; 500 000 X 1/3) -166 667 -166 667
Taxable profit / (assessed loss) 66 666 -73 334
Utilise assessed loss of prior year -73 334 -
Tax loss -6668 -
Current tax - -

* Please note: if the net temporary differences according to the SoCI method is
negative, then it is a taxable temporary difference. If it is positive, it is a deductible
temporary difference.
 SOLUTION - CLASS QUESTION 3: DT@32%
Deferred Tax (SoFP
UNUTILISED ASSESSED
method) CA LOSSES
TB (continued)
TD DR/(CT) Movement
31-Dec-2021

Machinery 416 667 333 333 -83 333 -26 667 -26 667

Assessed loss - 73 334 73 334 23467 23467

Deferred Tax
Asset/(Liability) -3200 -3200

31-Dec-2022

Machinery 333 334 166 667 -166667- -53 333 -26 667
Assessed loss 6 668 6 668 2 134 -21 333
Deferred Tax
Asset/(Liability) -51 199 47 699-

31-Dec-2021
Deferred tax (SoCI – p/l section) 3 200
Deferred tax (SoFP) -3200
Recognition of deferred tax on machinery
and assessed loss

31-Dec-2020
Deferred tax (SoCI – p/l section) 47 699
Deferred tax (SoFP) -47 699
Recognition of deferred tax on machinery
and assessed loss
 DISCLOSURE: TAX RATE RECONCILIATION
 Think on this : What is the effective tax rate??
 Effective tax rate is calculated as Income tax expense ÷ Profit before tax
Extract from SoCI R
Profit before tax 500 000
160/500 = 32%
Income tax expense (160 000)
Effective tax rate
Profit for the period 340 000

 The Statutory tax rate IN QUESTION = 32%

 Discuss: Why is the effective tax rate not necessarily equal to the statutory tax
rate?
 There are differences between Accounting and Tax (NamRa) and therefore the
effective tax rate will most often not be equal to the statutory tax rate (32%)
 The recognition of deferred tax on temporary differences eliminates the
majority of these differences
 However, permanent differences will still cause a difference between
effective and statutory tax rates
 GOON LTD
 The accounting profit of Goon Ltd for the year-ended 31 December 2020
amounted to N$2 106 500 before any items for which the accounting and
tax treatment differs (see items below), were taken into Account.
 The final accounting profit of Goon Ltd for the year ended 31 December
2020 amounted to N$2 000 000 after all items were correctly accounted
for. The following differences between the accounting and tax treatment
were identified:
 During the year, Goon received a dividend of N$80 000
 Goon Ltd also incurred research costs of N$100 000 during the current
yearand correctly expensed it. Assume that 150% of this aount is
deductible for tax purposes for the current year
 Included in Goon’s other expenses are tax penalty and donations paid to
the amount of N$24 000.
CLASS  Goon Ltd acquired an item of plant and equipment on 1 January 2020 at
QUESTION a cost of N$500 000.The plant is depreciated evenly over 8 years with no
residual value. Assume that For tax purposes a1/3 was allowance is
RATE 
applied.
Assume a normal tax rate of 32%.
RECON  Goon Ltd made two provisional tax payments of N$230 000 and N$250
000 respectively during the year.
 Required: a). reconcile the accounting profit between N$2 106 500
and N$ 2000 000
 Calculate the income tax expense
 Journalise the above
 Reconcile the statutory rate to its effective tax rate using both
amounts and percentages
SOLUTION
Deferred tax calcn:
CA TB TD
DT
Plant 437 500 333333 104167 (33 333)
RATE RECONCILIATION
Accounting profit 2 000 000
Tax per standard rate(2 000 000*.32) 640 000
Dividends received(80 000*.) (25 600)
Extra research deductible(50 000*.32) (16 000)
Non-deductible expense (tax pena;lty)
(24 000*.32) 7 680
Tax expense 606 080
Effective rate =Inc tax/Acc profit= 606080/2 000 000= 30.3000%
Rate reconciliation using percentages

Tax rate
32%
dividend(80000*.32)/2000000)*100
(1.28)
Penalties (24000*.32)/ 2000000*100
.384
Research (50000*.32)/2000000*100
(.8)

Effective tax rate

30.30
 DISCLOSURE: TAX RATE RECONCILIATION
 To show the users of financial statements what causes this difference, a
reconciliation between the statutory tax rate and effective tax rate is
disclosed as part of the income tax expense note
 It is however not only permanent differences (e.g. dividends received
& fines paid) that cause differences between the effective and statutory
tax rates. The following additional items also cause such differences:
 Tax rate changes
 Unrecognised deferred tax assets (because of limitation already discussed)
 Previously unrecognised deferred tax assets that reversed in the current
year
 Using the previous example disclose the following notes:
 2.income tax expense
 Current tax payable at year end.
Disclosure solution
2. Income tax expense
Major components of tax expense
Current tax
572 747
Deferred tax
33 333
Income Tax expense
606080

The rate reconciliation is as follows

Tax rate 32%
Dividend (1.28)
Penalties .384
Research (08)
Effective tax rate 30.30
Disclosure continues
3.Deferred tax
Analysis of temporary differences:
Accelerated tax allowance for tax purposes
(437500-333333)*.32
33 3333

4 Current tax payable

Total current tax payable 572 747
Provisional tax pmt (480
000)
Amount payable @ 31 Dec 2020 92 747
 Calculatio
n methods

Income statement approach is

used in a hidden way:
> Disclosure is Income
Statement way - split between
Temporary, Permanent
Differences in %

Need to get the link

with Balance sheet
approach right
 Journals

Need to “see”
journals
when you
look at
SoP&LandO
CI (Income
statement)
and SoFP
(Balance
sheet)