IAS 12 : Deferred Tax – basic idea 2

1	2	3	4	5	6	7	8	9	10	11	12	13
Calculation		(2)/10		(2)-(4)	(2)/12		(2)-(7)	(4)-(7)	(9) x 24%	(3 - 6) x 24%	(6) x 24%	(11)+(12)
YEAR	COST	DEPRECIATION EXPENSE		NET	TAX ALLOWANCE (CREDIT)		TAX BASE	TIMING DIFFERENCE	DEFERRED TAX-BALANCE SHEET	DEFERRED TAX-INCOME STATEMENT	CURRENT TAX	TOTAL TAX
		Year	Cum		Year	Cum
1	6 000	600	600	5 400	500	500	5 500	100	24	24	120	144
2		600	1200	4 800	500	1000	5 000	200	48	24	120	144
3		600	1800	4 200	500	1500	4 500	300	72	24	120	144
4		600	2400	3 600	500	2000	4 000	400	96	24	120	144
5		600	3000	3 000	500	2500	3 500	500	120	24	120	144
6		600	3600	2 400	500	3000	3 000	600	144	24	120	144
7		600	4200	1 800	500	3500	2 500	700	168	24	120	144
8		600	4800	1 200	500	4000	2 000	800	192	24	120	144
9		600	5400	600	500	4500	1 500	900	216	24	120	144
10		600	6000	0	500	5000	1 000	1 000	240	24	120	144
11				0	500	5500	500	500	120	-120	120	0
12				0	500	6000	0	0	0	-120	120	0

EXAMPLE - the purchase of a building in year 1. See table above.

Depreciation is charged in years 1-10, after which the building is fully depreciated. The tax allowance is spread over years 1-12.

In years 1-10, depreciation is more than the tax allowance.  In years 11 and 12, tax credits are received even though no depreciation is charged. This creates timing differences.

By charging deferred tax in years 1-10, and crediting deferred tax in years 11 and 12, the total tax for years 1-10 is equalised each year and matches the depreciation. In years 11 and 12, there is no total tax which matches the lack of depreciation in these years.

	DR/CR	0	1	2	3	4
Balance Sheet
Cost		3000
Amortisation			-1000	-1000	-1000	0
Off-Balance-Sheet
Tax		-3000
Amortisation			750	750	750	750
Tax Base		-3000	-2250	-1500	-750	0
Income Statement
Amortisation			1000	1000	1000	0
Tax @ 24%			-180	-180	-180	-180
			820	820	820	-180
Deferred tax
Net profit/loss

In the above example, a computer is bought for 3.000 with an economic life of 3 years, but the tax benefit will be spread over 4 years. The tax base is shown as the tax benefit less is accumulated amortisation. (The income statement is an extract, excluding other items.)

This creates 2 problems of presentation: the loss after tax is NOT at 76% (100-24), and in year 4 there is a tax credit without any economic activity.

	DR/CR	0	1	2	3	4
Balance Sheet
Cost		3000
Amortisation			-1000	-1000	-1000	0
Off-Balance-Sheet
Tax		-3000
Amortisation			750	750	750	750
Tax Base		-3000	-2250	-1500	-750	0
Income Statement
Amortisation		100%	1000	1000	1000	0
Tax @ 24%			-180	-180	-180	-180
			820	820	820	-180
Deferred tax
Net profit/loss		76%	760	760	760	0

The first step is to calculate the net loss as 76% of the expense for each period.

	DR/CR	0	1	2	3	4
Balance Sheet
Cost		3000
Amortisation			-1000	-1000	-1000	0
Off-Balance-Sheet
Tax		-3000
Amortisation			750	750	750	750
Tax Base		-3000	-2250	-1500	-750	0
Income Statement
Amortisation		100%	1000	1000	1000	0
Tax @ 24%			-180	-180	-180	-180
			820	820	820	-180
Deferred tax	CR		-60	-60	-60	180
Net profit/loss		76%	760	760	760	0

The second step is to compute the deferred tax as the difference between the net loss and the loss after tax. Identify whether the entry for Year 1 is a debit or a credit.

	DR/CR	0	1	2	3	4
Balance Sheet
Cost		3000
Amortisation			-1000	-1000	-1000	0
Off-Balance-Sheet
Tax		-3000
Amortisation			750	750	750	750
Tax Base		-3000	-2250	-1500	-750	0
Income Statement
Amortisation		100%	1000	1000	1000	0
Tax @ 24%			-180	-180	-180	-180
			820	820	820	-180
Deferred tax	CR		-60	-60	-60	180
		76%	760	760	760	0
Balance Sheet
Deferred tax	DR		60	60	60	-180
Asset / liability???
Cumulative			60	120	180	0

The entry to the balance sheet for each year is computed by double entry bookkeeping:

	Year 1	Year 2	Year 3	Year 4
Income Statement	-60	-60	-60	180
	Credit	Credit	Credit	Debit
Balance Sheet	60	60	60	-180
	Debit	Debit	Debit	Credit

The cumulative figure shows the number that will be seen in the balance sheet.

In this example, the balance sheet entry is a debit. A debit in the balance sheet is an ASSET, so the result is a deferred tax asset.

At the end of year 4, the balance on the balance sheet is eliminated – a control check that the deferred tax accrual has been reversed.

In the next example, a security is bought for 1.000 with an economic life of 5 years, but the tax benefit will be spread over 4 years. The tax base is shown as the tax benefit less is accumulated amortisation. (The income statement is an extract, excluding other items.)

This creates 2 problems of presentation: the loss after tax is NOT at 76% (100-24), and in year 5 there is economic activity a tax credit without a tax credit.

	DR/CR	0	1	2	3	4	5
Balance Sheet
Cost		1000
Amortisation			-200	-200	-200	-200	-200
Off-Balance-Sheet
Tax		-1000
Amortisation			250	250	250	250	0
Tax Base		-1000	-750	-500	-250	0	0
Income Statement
Amortisation		100%	200	200	200	200	200
Tax @ 24%			-60	-60	-60	-60	0
			140	140	140	140	200
Deferred tax
Net profit/loss		76%
Balance Sheet
Deferred tax
Asset / liability???
Cumulative

Following the procedure of the previous example:

	DR/CR	0	1	2	3	4	5
Balance Sheet
Cost		1000
Amortisation			-200	-200	-200	-200	-200
Off-Balance-Sheet
Tax		-1000
Amortisation			250	250	250	250	0
Tax Base		-1000	-750	-500	-250	0	0
Income Statement
Amortisation		100%	200	200	200	200	200
Tax @ 24%			-60	-60	-60	-60	0
			140	140	140	140	200
Deferred tax	DR		12	12	12	12	-48
Net profit/loss		76%	152	152	152	152	152
Balance Sheet
Deferred tax			-12	-12	-12	-12	48
Asset / liability???
Cumulative	CR		-12	-24	-36	-48	0