In the last 6 parts, i Capital has 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, [c]. Deferred tax asset and [d]. Deferred tax liability. [6]. IAS 12 (1996): Temporary Difference Method.

[7]. Malaysian Accounting Standard Board's MASB 25: Income Taxes
In Malaysia, the International Accounting Standard (IAS) 12 was superseded with the adoption of Malaysian Accounting Standard Board (MASB) 25 : Income Taxes, which became operative for annual financial statements covering periods beginning on or after 1st Jul 2002. Similar to IAS 12 (1996), MASB 25 requires deferred tax to be calculated using Balance Sheet Liability Method (temporary difference method). The table below shows the main difference between MASB 25 and IAS 12 (1979).

Table 1: Differences between IAS 12 (1979) and MASB 25

[8]. Issues on MASB 25: Income Taxes
One of the issues regarding MASB 25 that i Capital would like to highlight is the recognition of deferred tax liabilities and assets, which as shown in the table above, differs in treatment between the IAS 12 (1979) and MASB 25.

The IAS 12 (1979) permits an enterprise not to recognise any deferred taxes when there is reasonable evidence that the timing differences will not reverse for some considerable period whereas MASB 25 requires all deferred taxes to be recognized (except for some that are subject to certain conditions). If this MASB 25 requirement is to be followed, the resulting financial reporting would not favour companies that continuously invest in tangible assets. Why?

This is because when a company continuously invest in new assets, it is not likely that the temporary differences will reverse out. This obliges the company to continuously provide deferred tax liability, thus continuously show lower net profit than it really should. To clarify this, assuming Company ABC, invests RM20 mln in 2004, RM20 mln in 2006, RM40 mln in 2007, RM20 mln in 2009, RM30 mln in 2011 and RM20 mln in 2012 in “Qualifying assets” in the beginning of each year.

All ABC's assets qualify for initial allowances of 20% and annual allowances of 20%. ABC has a policy of depreciating its assets at a rate of 10% per annum. Table 2 shows the calculation of the assets' carrying amounts, table 3 shows the calculation of the tax bases of the assets, and table 4 shows the deferred taxes calculation, from 2004 to 2012. The tax rate is assumed to maintain at 28%.

Table 2 : Carrying Amount of ABC’s Assets (RM mln)

Table 3 : Tax Base of ABC’s Assets (RM mln)

Table 4 : ABC’s Deferred Tax Liabilities’ Calculation (RM mln)

From this example, as long as ABC is incurring capital expenditures, it is not likely that the deferred tax liabilities will reverse out. Therefore, ABC will be burdened to provide deferred tax expenses and thus will continuously report a lower net profit figure as long as the deferred tax liabilities do not reverse out.