|
Part 1 and 2 looked at [1]. Is Tax a Distribution of Earnings or a Business Expense? [2]. Accounting Profit versus Taxable Profit, Tax Paid versus Tax Expense and [3]. What is Deferred Tax? [4]. Deferred Tax Under International Accounting Standards (IAS) 12 and [5]. IAS 12 (1979) : Timing Difference Method based on [a]. Permanent differences and [b]. Timing differences.
[5]. IAS 12 (1979): Timing Difference Method
[c]. Deferred Tax Based on Timing Difference (IAS 12 1979)
Deferred Tax Asset
In Part 2, it looked at [a]. Permanent differences and [b]. Timing differences. This week, it looks at deferred tax asset (DTA). DTA occurs when the taxable profit is higher than accounting profit. A simple example would be, say Company ABC (ABC) recorded a taxable profit of RM500 and an accounting profit of RM300 in 2004. With the tax rate of 28%, the tax expense for ABC would be RM140. However, the tax expense attributable to financial year 2004 would be RM84 (RM300 X 28%), creating a deferred tax of RM56 (RM84 – RM140). Therefore, a deferred tax adjustment will arise to “match” the total tax expense with the current year’s performance. Table 1 shows modified financial statements for ABC to cater for this example.
Table 1: ABC's financial statements for 2004
Based on the table above, the deferred tax of RM56 is a reduction to the current tax expense, making the total tax expense attributable to 2004 to be RM84 (RM140 – RM56). The journal entry would be:
Dr: Deferred Tax Assets (in Balance Sheet) RM56
Cr: Tax expense (in P&L) RM56
In non-accounting language, the company has paid more tax in 2004 than it actually should by RM56. Since the excess tax will reverse out in the subsequent period/s (due to the nature of timing differences), the excess tax is considered as ‘prepaid’, and thus is categorized under the ‘Asset’ column in the balance sheet.
There are 2 instances when DTA is created: [i]. When revenues/gains are recognized in calculating taxable profits before the revenues/gains are recognized in calculating accounting profits, and [ii]. When expenses are recognized in calculating accounting profits before the expenses are recognized in calculating taxable profits.
An example for [i] would be assuming company ABC (ABC) received interest of RM300 in fiscal year 2004, where RM100 is attributable to that fiscal year and RM200 is attributable equally to fiscal years 2005 and 2006. The accounting profit for 2004, 2005 and 2006 would be RM100 each. However, the whole RM300 will be included in calculating taxable profits in 2004, as the whole amount was received in 2004. Assuming no other transactions, the timing differences would be calculated as follows:
Table 2: Calculation of timing differences
The deferred tax asset account in the balance sheet would be:
Table 3: Deferred tax asset account
As for [ii], the example would be assuming ABC recognized a warranty expense of RM600 in its P&L in 2004 due to a sale in that year. However, the actual warranty claim only occurs in 2005. Therefore, accounting profit will recognize the warranty expense in 2004 but taxable profit will only recognise the warranty expense when it is actually incurred (i.e. 2005). Assuming no other transactions:
Table 4: Calculation of timing differences
The deferred tax asset account in the balance sheet would look like:
Table 5: Deferred tax asset account
|
Deferred Taxation - Part 3