AC303 lecture 18

• Methods of calculating deferred tax

– Deferral method

– Liability method

• Recent international and domestic guidance

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

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

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

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

Presentation

• P&L - 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

Note disclosure

• P&L 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

FRS 19 matters not covered

• Discounting

• Partial recognition discussion

• Detailed assessment of recoverability of assets

• Timing differences that do not result in deferred tax