DEFERRED TAXATION

CHAPTER 6
IAS 12

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 OBJECTIVES

• Understand what is deferred tax

• How to account for deferred tax
• The calculation of deferred tax and the related
journals and disclosures
• Calculate deferred taxation on temporary
differences
• Disclosure of deferred taxation

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 DEFERRED TAXATION
• The income taxation figure (tax expense) on the
Statement of Comprehensive Income consist out of
two components, namely:
– Current taxation and Deferred tax.
• Current taxation is the tax for the year based on the
Income Tax Act.
• In order to understand deferred taxation an example
will be used to illustrate why deferred taxation is
important.

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 Example 1

The profit before tax (after depreciation) of A Ltd. is

R100 000 for the years ended 31 December 20X1 to
20X3.
On 1 January 20X1, A Ltd. purchased equipment for
R150 000 and depreciation of R75 000 was provided
for during 20X1 and 20X2.
Assume that SARS permits a wear-and-tear allowance
of R50 000 for 20X1 to 20X3.

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 Example 1
Current taxation (Income taxation)
20X3 20X2 20X1
Rand Rand Rand
Profit before dep 100 000 100 000 100 000
Depreciation 75 000 75 000
Wear-and-tear (50 000) (50 000) (50 000)
Taxable income 50 000 125 000 125 000
Taxation (30%) 15 000 37 500 37 500

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 Example 1
Tax expense incurred
20X3 20X2 20X1
Rand Rand Rand
Profit before dep 100 000 100 000 100 000
Taxation (30%) 30 000 30 000 30 000

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 Example 1
Comparison of current tax and tax expense
20X3 20X2 20X1
Rand Rand Rand
Current tax 15 000 37 500 37 500
Tax incurred (30%) 30 000 30 000 30 000
Adjustment needed 15 000 (7 500) (7 500)

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 Example 1
STATEMENT OF PROFIT OR LOSS FOR THE
YEAR ENDED 31 DECEMBER 20X3
20X3 20X2
Rand Rand
Profit before depreciation 100 000 175 000
Depreciation - equipment 0 (75 000)
Profit before tax 100 000 100 000
Current tax (15 000) (37 500)
Profit for the period 85 000 62 500
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 Example 1

STATEMENT OF PROFIT OR LOSS FOR THE

YEAR ENDED 31 DECEMBER 20X3
20X3 (R) 20X2 (R)
Profit before tax 100 000 100 000
Taxation expenses (30 000) (30 000)
• Current (15 000) (37 500)
• Deferred (15 000) 7 500
Profit for the period 70 000 70 000

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 DEFFERED TAXATION
• Based on the example above, the profit for the year
without deferred taxation was different even though
the operations of the company did not change.
• However after deferred tax was introduced, the
profit for the year was the same in both years.
• Deferred tax thus defer some taxation to the
following year.
• Deferred tax is calculated on all temporary
differences.

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 DEFFERED TAX ASSETS

• A deferred tax asset is a debit balance in the

deferred tax T-account.
• A deferred tax asset refers to tax which has been
charged but not yet incurred.
• Deferred tax asset – Example 3A page 276

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 DEFERRED TAX
LIABILITIES
• A credit balance in the deferred tax account is a
deferred tax liability.
• A deferred tax liability is when the tax has been
incurred but not yet charged by the tax authorities.
• Deferred tax liability – Example 3B page 277

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 DEFFERED TAXATION
• There is two types of deferred tax balances:
– Deferred tax liabilities – the amounts of income
taxes payable in future periods (taxable
temporary differences).
– Deferred tax assets – the amounts of income taxes
recoverable in future periods (deductible
temporary differences).

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 Methods of deferred tax

• Deferred tax is also a non-current item as the tax is

not currently being owed to SARS.
• The two methods to calculate the deferred taxation is
the income statement approach and the balance sheet
approach.
• IAS 12 refers to the balance sheet approach. The
income statement approach is used as a test.

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 Methods of deferred tax

• Balance sheet approach:

– First calculate the deferred tax balance (SOFP)
and
– Then calculate the deferred tax adjustment by
comparing the opening deferred tax balance with
the closing deferred tax balance (SOCI).

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 BALANCE SHEET
APPROACH
• The carrying amount of assets represents the future
income (future economic benefits) which will lead to
future taxes.
• The carrying amount of liabilities represents future
expenses which will lead to future deductible taxes.
• The balance sheet approach thus requires that the
carrying amount of assets and liabilities be compared
to the tax base of the assets and liabilities.

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 BALANCE SHEET
APPROACH
• IAS 12:7, the tax base of an asset is the amount that
will be deductible for tax purposes against any
taxable economic benefit that will flow to the entity
when it recovers the value of the asset (future wear
and tear).

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 BALANCE SHEET
APPROACH
• IAS 12:8, the tax base of a liability is its carrying
amount less any amount that will be deductible for
tax purposes in respect of future years.
– If the liability is income received in advance,
• the tax base of the resulting liability is:
• its carrying amount,
• less any of the revenue that will not be
• taxable in future periods.

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 BALANCE SHEET
APPROACH
• The following table is used to calculate deferred
taxation:
Carrying amount Tax base Temporary difference Deferred tax

(a) (b) (c)= (a) - (b) (c) x tax rate

• Refer to example 4B on page 284

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 DEFERRED TAXATION

Summary of Effects of DT

ASSET
CA > TB = DTL
CA < TB = DTA

LIABILITY
CA < TB = DTL
CA > TB = DTA

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 Year end accruals and
provisions
• IFRS uses the accrual basis of accounting while the
Income Tax Act uses a mixture of accrual and cash
balances.
• This leads to temporary differences in the carrying
amount of assets and liabilities and the tax base of
assets and liabilities.
• Deferred taxation should be accounted for on these
differences:

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 Year end accruals and
provisions
• Prepaid expenses – Example 5
• Expenses payable – Example 6
• Provisions – Example 7
• Income receivable – Example 8
• PPE - Example 9

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 Non-current assets

• Non-current assets are divided into two categories in

order to determine the deferred taxation on it:
– Deductible assets – the costs of the assets are
deductible for tax purposes (wear and tear
allowances)
– Non-deductible assets – the costs of these are not
deductible for tax purposes.

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 Non-current assets

Deductible and depreciable assets:

• In a situation where the depreciation rate and the
wear and tear rate is different the carrying amount
and the tax base of the asset will be different which
will result in deferred tax.

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 Non-current assets
Deductible but not depreciable:
• There might be cases where assets are deductible for
tax purposes, but no depreciation can be claimed on
this assets.
• The carrying amount and the tax base of these assets
will never be the same, thus this is not a temporary
difference, but rather a non-temporary difference.
• There is thus no deferred taxation to account for.

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 Non-current assets measured
at fair value
• Deferred tax must be measured at the rate that the
entity is expected to recoup the carrying amount of
assets and liabilities (IAS 12:51).
• Management’s intention is thus important in
determining which tax rate to be used.
• If it is management’s intention to recover the value
through use, then the normal tax rate will be
applicable, however if it is management’s intention
to recover the value to sale, then the capital gains tax
rate might be applicable.
• See example 12 26
 Presumed intention page 310

• IAS 12:51B and 51C contains two presumed

intentions.
• Based on IAS12:51B, deferred tax asset arising from
non-depreciable assets (example land), and the
revaluation method is used (per IAS 16), the carrying
amount of the asset is to be recover through sale and
not use.
• IAS12:51C, discusses deferred tax on investment
property under the fair value model. Investment
property will be covered next in this year and then
this paragraph will be explained. 27
 Management’s intentions

• Management’s intentions can be one of the

following:
– Sell the asset – deferred tax will be based on
recoupment/scrapping allowance and capital gains
tax
– Keep the asset – deferred tax will be based on the
normal tax rate
– Keep the asset for a period of time and sell it then
– a combination of tax will be used.

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 Management’s intentions

• New terms (same as income tax formulas):

– Recoupment – proceeds (limited to costs) – tax
base
– Capital gains tax = Proceeds – base costs
Examples 16 to 23 read

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 Disclosure

Statement of Financial Position

• The deferred tax asset or liability is always classified
as a non-current asset or liability. Even if an entity
believes that some of their deferred tax balance will
reverse in the next year, the amount may never be
classified as current (IAS 1:56)

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 Disclosure

Statement of Financial Position

• Setting-off of deferred tax assets and liabilities: If
there is a deferred tax asset and a deferred tax
liability, these should be disclosed as separate line-
items on the face of the statement of financial
position (i.e. they should not be set-off against
another; unless)

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 Disclosure

Statement of Financial Position

– Current tax assets and liabilities are legally
allowed to be set-off against each other when
making tax payments, and
– The deferred tax assets and liabilities relate to
taxes levied by the same tax authority on:
• the same entity; or on
• different entities in a group who will settle their
taxes on a net basis or at the same time.
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 Disclosure

Statement of Financial Position (continued)

Deferred tax note (asset or liability)
• The deferred tax balance may reflect an asset or
liability balance and therefore it makes sense to
explain, in the heading of the note, whether the
balance is an asset or liability.

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 Disclosure

Statement of Financial Position (continued)

Deferred tax note (asset or liability)
• You must disclose the amount of the deferred tax
asset or liability recognised for each type of:
– temporary difference (e.g. property, plant and
equipment, prepayments)
– tax losses and
– tax credits
Example of layout on pg 353(NB)
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 Disclosure

Statement of Financial Position (continued)

Deferred tax note (asset or liability)
Deferred tax Reconciliation pg 352
• A reconciliation showing the deferred tax adjustment
for each of these categories causing deferred tax
adjustments made to profit or loss are not clear by
simply comparing the year-end balances per
category of deferred tax.

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 Disclosure
• This means that if the deferred tax balance for a
specific category of temporary differences came
about after both:
– a balance sheet based deferred tax adjustment, and
– an income statement based deferred tax
adjustment,
• A reconciliation would be required so as to enable a
user to see how much of the movement between the
two balances affected the tax expense account (i.e.
profit or loss).
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 Disclosure

Statement of Comprehensive Income

• Normal tax and any other forms of tax considered to
be a tax levied on company profits are combined to
reflect the income tax expense in the statement of
comprehensive income.

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 Disclosure

Income Tax Expense Note

• The tax expense line item in the statement of
comprehensive income should be referenced to a
supporting note. The supporting note should provide
details of the major adjustments made in the tax
expense account.

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 Disclosure

Income Tax Expense Note

• The Tax expense note should comprise of the
following categories:
In respect of current tax, show the:
– Current tax for the current year;
– Any under/(over) provision of current tax in a
prior year/s.

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 Disclosure

Income Tax Expense Note

In respect of deferred tax:
– The adjustment of the current year movement in
temporary differences
– The effects of rate changes on prior year deferred
tax balances.

• Reconciliation explaining why the effective rate of

tax differs from the applicable rate of tax
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