Topic 4

Accounting for company

income tax
Future Tax Consequences
Chapter 6

Learning objectives
1. Prepare a deferred tax worksheet to determine the
differences between the accounting and tax values
for assets and liabilities and use the worksheet to
record the entries for deferred tax
2. Determine the tax bases of various assets and
liabilities included in the statement of financial
position
3. Calculate the taxable and deductible temporary
differences of various assets and liabilities and
identify items that are excluded from the
calculation of deferred tax liabilities and assets
4. Describe the criteria for the recognition of deferred
tax liabilities and assets and how these balances

Deferred tax
Arise when the period in which revenue and
expenses are recognised for accounting is
different from the period in which items are
recognised for tax purposes
Arise principally due to the accruals vs cash
basis of recognising transactions.
Differences either result in:
1. The company paying more tax in the future

Taxable temporary differences (TTDs)

Result in deferred tax liabilities (DTLs)

2. The company paying less tax in the future

Deductible temporary differences (DTDs)

Result in deferred tax assets (DTAs)

Temporary differences
AASB 112 defines temporary differences
as:
the differences between the carrying amount of
an asset or liability in the statement of financial
position and its tax base.

There are two types of temporary

differences:
Taxable temporary differences
Which result in taxable amounts in future periods
when the carrying amount of the asset or liability is
recovered or settled

Deductible temporary differences

Deferred tax worksheet

info

The existence of temporary differences results in

the carrying amounts of an entitys assets and
liabilities being different from the amounts that
would arise if a balance sheet was prepared for
tax authorities
Carrying amount (CA) = asset and liability
balances (net of accumulated depreciation,
allowances etc) based on accounting balance
sheet
Tax base (TB) = asset and liability balances that
would appear in a tax balance sheet
Temporary differences are calculated as
follows:

The deferred tax

worksheet
p. 253-258
Illustrative Eg 6.3, 6.4, 6.5

Tax bases of assets and

liabilities
Calculating the tax base of an asset:
Taxable economic benefits from recovery:
tax base of asset = deductible amount in future
No taxable economic benefits from recovery:
tax base of asset = CA

Calculating the tax base of a liability:

General rule:
tax base of liability = CA deductible amount in
future
Unearned revenue:
tax base of liability = CA untaxed future revenue

Taxable temporary
differences
Asset: when CA > TB leads to deferred tax
liability
Liability: when CA < TB
tax liability

leads to deferred

Common examples include:

Depreciable plant
Revalued land
Interest receivable
Prepaid insurance
Development asset

Deductible temporary
differences
Asset: when CA < TB leads to deferred tax
asset
Liability: when CA > TB
tax asset

leads to deferred

Common examples include:

Research costs
Accrued interest
Provision for employee benefits
Provision for warranty
Unearned revenue for rent

Summary of Temporary
Differences
Taxable temporary
difference

Deductible temporary
difference

TTD x tax rate = DTL

DTD x tax rate = DTA

Assets

CA > TB

CA < TB

Liabilities

CA < TB

CA > TB

ACW2491/Accounting for Income

Tax: FutureTax Issues

10

Excluded temporary
differences
Certain temporary differences are excluded
from being recognised
AASB 112 prohibits temporary differences
from being recognised in relation to:
Goodwill
The initial recognition of assets and
liabilities that does not affect
accounting or taxable profit or loss

Deferred tax assets and

liabilities
Calculating a deferred tax asset
(DTA)
The
Thetax
taxrate
rate%
%
DTD tax rate % = DTA

Calculating a deferred tax

TTD tax rate % = DTL
Dr DTA

Journal entry

Cr ITE

Deferred tax asset

Dr
Income tax expense Dr/Cr
Deferred tax liability Cr

is
isthat
thatwhich
whichis
is
expected
expectedto
to
apply
applywhen
whenthe
the
asset
asset (DTL)
liability
will
willbe
berealised
realised
or
liability
BALANCING
orthe
theITEM
liability
BALANCING
ITEM
settled
settled
Dr ITE
CR DTL

Recognition of DTLs
Deferred tax liabilities
Deferred tax liabilities must be recognised in full
May reverse over time e.g. when plant becomes
fully depreciated for tax purposes, but not
accounting purposes

Dr ITE 7500
Cr DTL
7500

Dr ITE 7500
Cr DTL 7500

Dr DTL 7500
Cr ITE/ITI 7500

Dr DTL 7500
Cr ITE/ITI 7500

Recognition of DTAs
Deferred tax assets
Deferred tax assets relating to temporary

differences and tax losses are recognised only if:

there are sufficient taxable temporary differences

for the entity to use against the deductible

temporary differences; OR
if it is probable that the entity will have sufficient
future taxable profit (against which the tax benefit
can be offset)
May reverse over time e.g. with a decrease in

provision for employee benefits

Demonstration problem
The statement of financial position of ABC Ltd
Assets
Liabilities
TB
at 30 June 2015 TB
Cash

260

Trade receivables

300

Allowance for
d/debts

(30)

270

Interest
receivable

40

Inventory

100

Plant

500

Accum depn
360

(300
)

Goodwill

260

Trade payables

296

296

Loan

485

485
0

300

Annual leave
liability

15

Deferred tax
liability

100

805
Equity

200

140

Share capital

700

800

Retained
earnings

175

Demonstration problem
Additional information:
The balances in the deferred tax asset and
liability accounts are the carried forward
closing balances from the prior year

Accumulated depreciation of plant for tax

purposes is $360

Current tax liability is $54

Required:
Complete the deferred tax worksheet on the
following page and prepare the journal entries to
record the deferred tax movements for the 30 June
2015 year.

Deferred tax worksheet

Relevant assets &
liabilities
Trade receivables

CA

TB

TTD

270

300

40

40

Plant

200

140

60

Goodwill

800

800

15

Interest receivable

Annual leave liability

DTD
30

15

Total temporary differences

900

45

Less: excluded differences

(800)

Temporary differences

100

DTL
DTA @ 30%

30

Less: beginning balances

10

Increase for year

21

3.5

45
13.5

Notes and journal

entries
Notes to worksheet:
1. Items where the CA = TB have been omitted from
worksheet (eg cash, payables, loan)
2. AASB 112 does not permit the recognition of a DTL
relating to goodwill. The TTD arising is referred to
as an excluded temporary difference

. Journal entries to record deferred tax

movement:
30/6/15
DT Asset
Dr 3.5
IT Expense
Dr 17.5
DT Liability Cr 21

Other disclosures
Companies that prepare general purpose financial
statements must disclose many aspects in relation
to current and deferred tax and tax losses
Some disclosures must appear in the financial
statements and much detail is also required in
explanatory notes
Other disclosures include:
Major components of IT expense or IT income
Aggregate current tax or deferred tax for items
charged to equity
Reconciliation between IT expense and accounting
profit
Tax rate changes, unused tax losses, deductible

Offsetting tax assets and

liabilities
Tax assets and tax liabilities are to be offset
against each other and a net amount
recognised in the statement of financial
position for example:
Deferred tax asset $5,000
Deferred tax liability $7,000
Journal entry shows net balance of $2,000 only
30/06/17

Income tax expense

Dr 2,000
Deferred tax liability Cr
2,000
(Recognition of deferred tax included
in the profit or loss for the year)

Tax Rate Changes

AASB 112 (IAS 12) requires that deferred tax
assets and liabilities are carried at the amounts
required to recover/settle the asset or liability
with the net increase or decrease recognised in
the current periods tax expense
Adjustment = [(N O) / O] x A
Where
A = Existing Balance of Account
O = Old Rate
N = New Rate
ACW2491/Accounting for Income
Tax: FutureTax Issues

21

Tax Rate Changes

When a new tax rate is enacted, the new rate
is applied:
when calculating current tax liability
when calculating adjustments to deferred tax
accounts
to carried forward deferred tax balances from
previous years

Example DT balances based on 30% tax rate:

DT liability $36,000 DT asset $12,000

Journal entries to adjust tax rate (25%) on

opening balances:
30/6/xx

DT Liability ( 5 /30 x 36000)

Dr

Review Question
Webb Ltd started its operation on 1 July 2009 and has reported
an accounting loss before tax in the first year of operation
ending 30 June 2010 of $18,000. The only difference between
the recorded accounting loss and the taxable income/loss is
caused by a difference in the accounting and tax depreciation
rates for a machine.
The machine was purchased for $80,000 on 1 July 2009 and is
depreciated using a straight-line basis for 8 years for
accounting and 5 years by the Australian Taxation Office. The
management is certain that they will regain profitability in the
following years. Actg dep 10k tax dep 16k
For the years ended 2011 and 2012, the accounting profits
reported is $60,000 and $18,000, respectively. The applicable
tax rate is 30%. There are no other differences between
accounting and taxation over these 3 years.
Required: Prepare all tax journal entries (both current and

Review Question
Solution
Calculation of Taxable Income
2010
Accounting Profit

2011

2012

(18,000)

60,000

18,000

10,000

10,000

10,000

- Tax dep

(16,000)

(16,000)

(16,000)

Taxable profit/loss

(24,000)

54,000

12,000

+ Actg dep

Tax loss recoup

(24,000)

Taxable income

30,000

Review Question
Solution
Journal Entries
30.6.10 DTA (24,000x30%)

7,200

ITE

7,200

(to recognized taxable losses)

ITE (6,000x30%) or (70k-64k) x 30%
DTL
(to record temporary difference from depre)

1,800
1,800

Review Question
Solution
Journal Entries
30.6.11 ITE (30,000x30%)

9,000

CTL

9,000

(to record current tax liability)

ITE

7,200

DTA

7,200

(to record tax losses recovered)

ITE
DTL
(to record additional temporary difference

1,800
1800

Review Question
Solution
Journal Entries
20.6.12 ITE (12,000x30%)

3,600

CTL

3,600

(to record current tax liability)

ITE
DTL
(to record additional temporary difference
from depre)

1,800
1,800

Tutorial Week 5
Chapter 6
RQ9, 10, 14
PQ 6.7, 6.13 (part B), 6.14 (part B &
C)
In-Class Participation
All students are expected to have attempted all tutorial problems before attending
the tutorial. Specifically, the question(s) that has been bolded.
For further understanding, you are encouraged to attempt Demonstration Problem
1 & 2 on p. 272-280.