AF203(DFL) Notes on lesson 3:Accounting for Income Tax
Accounting for income tax is governed by AASB 112/IAS 12. The tax-effect method is adopted in AASB 112/IAS 12 is based on the assumption that income tax expense
(income) in a company’s financial statements is not equal merely to the current tax
liability (asset) but is also a function of the company’s deferred tax liability (DTL) and
Assets (DTA). It focues on future tax consequences.
When CA(carrying amount) ≠ TB (tax base) ---- TD (temporary difference)
Where TD = CA – TB
Tax base For Assets:
TB for asset = CA – FTA (future tax amount) + FDA(Future deductible amount)
Where TB from AASB 112/IAS 12 para. 5 states it is the amount that is attributed to an asset or liability for tax purposes.
The FTA is any amount derived from the asset that is expected to be received from that asset either through use or sale. However, for the purpose of the standard, the FTA is assumed to be, at a maximum equal to the asset’s CA.
The FDA for the asset represents the allowable tax deductions in future years applicable
to that asset
When FTA > FDA-- TTD (Taxable temporary difference)--TTD x tc =DTL
When FDA> FTA--- DTD (Deductible Temporary difference-DTD x tc=DTA
where tc is corporate tax rate
Examples of TTD items:
. Revenue receivable
. Prepaid expenses
. Tax depreciation rates > accounting tax rates
. Development cost capitalized and amortised
Examples of DTD items:
. Accrued expenses
. Unearned revenue
. Accounting depreciation rates > tax rates
. Tax losses
Tax base for liabilities:
AASB 112/IAS 12 para. 8 provides two calculations for the tax base of a liability depending on whether the liability represents revenue received in advance.
For a liability which does not represent revenue received in advance, the TB is :
TB for liability = CA – any future deductible amount for tax(DFA)
For a liability representing revenue received in advance, the TB is:...