AC303 lecture 18

1
AC303 lecture 18

• Methods of calculating deferred tax
• Deferral method
• Liability method
• Recent international and domestic guidance

2
Deferral method

• Calculate net timing differences each year
• Tax effect is debited or credited to the tax
  charge
• Double entry is effected by making an entry to
  the deferred tax account
• What happens if the rate of corporation tax
  changes?
• Ignores the effect of changing tax rates on
  timing differences from earlier periods
• Emphasis on the profit and loss account

3
Liability method

• Calculate total timing differences anew each
  period
• Apply the current corporation tax rate to net
  total timing differences each year. This equates
  to the asset/liability in the balance sheet.
• Emphasis is on the balance sheet
• Book the balance sheet movement from period to
  period to the profit and loss account

4
Recent guidance

• IAS 12 - Liability method and full provision
  requirements.
• FRS 19 (effective for periods ending after 22
  January 2002)
• liability method required (consistent with ASB
  emphasis on balance sheet)
• full provision required

5
FRS 19

• Requires full provision to be made for deferred
  tax assets and liabilities arising from timing
  differences between recognition of gains and
  losses in financial statements and their
  recognition in a tax computation
• Most common types of timing differences
• Capital allowances
• Expenses booked in financial statements on an
  accruals basis but allowable for tax on a cash
  basis - likewise income taxable on a cash basis

6
Presentation

• PL - include within heading for tax on profit
  on ordinary activities
• B/S - liabilities to be included under the
  heading Provisions for liabilities and charges.
  Assets to be included in debtors
• Consider materiality of the deferred tax amount
  and possible need for separate disclosure

7
Note disclosure

• PL taxation note
• Separately show amount charged or credited for
  deferred tax, identifying amounts attributable to
  changes in tax rates and re-assessments of
  recoverability of deferred tax assets
• Balance sheet note on deferred tax
• Opening balance, movements and closing balance
• Analysis by type of timing difference
• If deferred tax asset is recognised, outline
  basis of recoverability of the asset

8
FRS 19 matters not covered

• Discounting
• Partial recognition discussion
• Detailed assessment of recoverability of assets
• Timing differences that do not result in deferred
  tax