In the last 3 parts, i Capital 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, [b]. Timing differences and [c]. Deferred tax asset.

Deferred Tax Liability
In Part 4, it looked at deferred tax asset which occurs when taxable profit is higher than accounting profit. Deferred tax liability (DTL), which i Capital will look at this week, occurs when taxable profit is lower than accounting profit.

A simple example would be, say Company ABC (ABC) recorded a taxable profit of RM300 and an accounting profit of RM500 in 2004. With the tax rate of 28%, the tax expense for ABC would be RM84. However, the tax expense attributable to financial year 2004 would be RM140 (RM500 X 28%), creating a deferred tax of RM56 (RM140 – RM84). Therefore, a deferred tax adjustment will arise to “match” the total tax expense with the current year’s performance. Table 1 shows the modified financial statements for ABC.

Table 1: ABC’s Financial Statements for 2004

Based on the table above, the deferred tax of RM56 is an increment to the current tax expense. The journal entry would be:

Dr: Tax expense (in P&L) RM56
Cr: Deferred Tax Liability (in Balance Sheet) RM56

Table 2 : Calculation of Timing Differences

The deferred tax liability in the balance sheet is shown in table 3.

Table 3 : Deferred Tax Liability Account (RM)

A good example of instance [ii] would be timing difference when capital allowances claimed for tax purposes is more than the depreciation charged in a financial year. In accounting, depreciation is charged as an expense in the P&L statement. However, depreciation is a non-allowable expense based on tax rules. However, tax rules allow assets to be claimed for capital allowances, which are tax-deductible items. Nevertheless, not all assets qualify for capital allowances. Assets qualified are known as “qualifying assets”. The expenditure for qualifying assets is known as “qualifying expenditure”. Usually, the amount of depreciation charged is different from capital allowances given, thus generating timing differences. There are two types of capital allowances given, namely initial allowances and annual allowances. Initial allowances are allowances given to qualifying expenditures of the qualifying assets on the year of purchase whereas annual allowances are given to qualifying assets for each year that the assets are owned by a company.

To cite an example. ABC purchases its only machinery worth RM6,000 in 2004. ABC uses a depreciation rate of RM1,000 per annum. Assuming that the machinery qualifies for 20% initial allowance and 20% annual allowance. The calculation for timing difference in this instance would be shown in Table 4.

Table 4: Calculation of Timing Differences

Table 5 shows the deferred tax liability account from 2004 to 2009.

Table 5 : Deferred tax liability account (RM)

he deferred tax accounting method used by the original IAS 12 (1979), or the timing difference approach, is also known as the Income Statement Liability method. The reason behind this is that the timing difference method focuses on the timing difference between accounting profits and taxable profit to derive deferred tax. In short, it focuses on the income statement to calculate deferred tax. However, with the introduction of IAS 12 (1996), deferred tax accounting has totally shifted from Income Statement Liability method to Balance Sheet Liability Method, which caters for the usage of temporary difference in determining deferred tax.