Advanced II - Chapter 0; Tax.pdLlhzhhzhfggdj

Accounting Treatment of Taxes
•Withholding Tax,
•Withholding Tax Receivable(on sales)
•Withholding Tax Payable(on Purchases)
•VAT, and
•VAT Receivable(on purchases)
•VAT Payable( on sales)
•Profit tax (Income Tax)
•Accounting profit Vs Taxable profit
•Tax base, carrying amount and Temporary difference
•Current Tax expense
•Deferred tax expense
•Deferred tax asset
•Deferred tax liability

Withholding Tax
• Generally, payments for supply of goods (worth
ETB 10,000 or more) and provision of services
(worth ETB 3,000 or more) to a resident person
are subject to WHT at the rate of 2%.
• The 2% WHT applies if the supplier provides a
valid tax identification number (TIN) and a
business license.
• If the TIN and the license are not provided at the
time of making the payment, the payer is required
to subject the payment to a 30% WHT rate.

As a Buyer
WHT-Payable
WHT Requirements
As a Seller
WHT-Receivable

• Time of recognition of WHT
• When cash is collected or paid
• The WHT base
• The base is invoice price of goods/service before VAT
• Time of declaration
• WHT Payable: at the end of next month
WHT Payable……….xxx
Cash ……………………………..xx
• WHT Receivable: at the end of the year
Profit tax payable …….xxx
WHT receivable……….xxx
WHT Requirements

Withholding Tax Accounts
1. Withholding Tax Payable
2. Withholding Tax Receivable
• A withholding held by customers is debited to
withholding receivable (when we sale)
• A withholding we held from supplier is credited
to withholding payable ( when we buy)

Value-Added Tax
VAT is a consumption tax that is charged on the supply of
taxable goods or services made in Ethiopia and on the
importation of taxable goods or services into Ethiopia.
A person who, in the course of business, has supplied or
expects to supply taxable goods or services whose value is 1
million Ethiopian birr (ETB) or more in a period of 12 months
should register for VAT.
The standard VAT rate is 15% and applies to goods and
services that are neither exempt from VAT nor zero-rated

As a Buyer
VAT-Receivale
VAT Requirements
As a Seller
VAT-Payable

• Time of recognition of VAT
– When purchase/sales of goods & services are made and
invoice is issued
• The VAT base
– The selling price of goods/service
• Time of declaration
– At the end of every three months( it used to be on a
monthly bases)
VAT Requirements

VAT Accounts
• VAT Payable (Output VAT)
• VAT Receivable (Input VAT)
• Input VAT( VAT on purchase) is debited to VAT
Receivable
• Output VAT( VAT on sales) is credited to VAT Payable

Purchase, Input VAT( V/R) and Withholding payable
• In put VAT is paid during purchase of Inventory, PPE,
Service and Others after deducting a 2% withholding
from supplier(ETB 10,000 or more for goods or
services of ETB 3,000 or more)
Entry:
Asset(Expense)(Before VAT)…..xxx
Vat Receivable ………………….xxx
Withholding payable(2%)………..xxx
Cash…………………………………xxx

Purchase, Input VAT( V/R) and no Withholding payable
• In put VAT is paid during purchase of Inventory, PPE,
Service and Others but a 2% withholding is not deducted
from supplier if the goods worth less than ETB 10,000 or
services worth less than ETB 3,000 .
Entry:
Asset(Expense)(Before VAT)…..xxx
Vat Receivable ………………….xxx
Cash…………………………………xxx

Sales, Output VAT( V/P) and Withholding Receivable
• Output VAT is Collected from sales of
merchandise or service after customer withheld
2%.
Entry: cash sales
Cash……………………..……..xxx
Withholding Receivable …….xxx
Sales ..…………….…………….xxx
VAT payable………….…..……..xxx

Sales, Output VAT( V/P) and Withholding Receivable
• Output VAT is Collected from sales of merchandise or
service after customer withheld 2%.
Entry: credit sales( credit sales invoice)
Account Receivable ……..……..xxx
Sales ..…………….…………….xxx
VAT payable………….…..……..xxx
Collection( CRV)
Cash …………… xxx
WHT Receivable…..xxx
Account Receivable ……..……..xxx

Declaration of VAT
VAT Payable ……………xxx
VAT Receivable ………. xxxx
Cash ……………………… xxxx

Example
• Assume Eat fruit Enterprise has purchased Fruits
and Vegetables of ETB 600,000 before VAT from
Awash Agro processing Plc on cash. Eat fruit paid
Awash after deducting a 2% withholding tax.
• ENTRY:
Inventory 600,000
VAT receivable 90,000
WHT payable 12,000
Cash 678,000

Example -continued
• Sales Employee of Eat fruit enterprise has reported a weekly sales
in the following detail.
1. Fruits and Vegetables sold to individual consumer Birr 115,000
including vat of birr 15,000. Cash sales invoice and Deposit slip of
115,000 is attached.
2. Fruits and Vegetables sold to firms(hotels) Birr 230,000
including vat of birr 30,000. Cash sales invoice of 230,000,
deposit slip 226,000 and customers(hotels) withholding invoice
of 4,000 are attached
3. Fruits and Vegetables sold to firms(hotels) Birr 8,000 before VAT
on cash( what do you think about WHT?)
4. Fruits and Vegetables sold to firms(hotels) Birr 500,000 before
VAT to hotels on credit and credit sales invoice was issued.
5. The customer( hotels) paid for the sales under transaction 4 after
withholding 2% and cash receipt voucher was issued by eat fruit
enterprise.
• Record the sales.

Solution
1. Cash at bank……115,000
Sales ……………….. 100,000
Vat Payable …………. 15,000
( individuals cannot withhold tax from the company)
2. Cash at bank 226,000
Withholding receivable 4,000
Sales 200,000
Vat Payable …. 30,000
3. Cash at bank……9,200
Sales ……………….. 8,000
Vat Payable …………. 1,200
( For a goods less than ETB 10,000, customer cannot
withhold 2%)

Solution
4. Account Receivable ……575,000
Sales 500,000
Vat Payable 75,000
5. Cash 565,000
Withholding receivable 10,000
Account Receivable 575,000

Solution
Eat fruit Declaration of VAT and WHT payable
Vat Payable 121,200
Vat Receivable 90,000
Cash 31,200
(To record Vat Declaration)
Withholding Payable 12,000
Cash 12,000
(To record WTP Declaration)
WHT Receivable of 14,000 will be declared and deducted from profit tax payable at year end
Profit Tax Payable …………….14,000
WHT Receivable 14,000

Tax Code
Financial Profit before tax
IFRS
Income Tax Expense
Taxable Income
Income Taxes Payable
vs.


LO 1
Accounting for Income Taxes
IFRS- Financial Statements Income Tax payable to authority

Corporations and PLC must declare income(profit) tax as per tax laws
developed and declared by the tax authority.( Special Purpose Financial
Report)
 At the same time, these companies need to produce annual financial
reports for creditors and investors on the bases of IFRS. ( General
Purpose Financial Report)- Filed with accounting and auditing board of Ethiopia
Because IFRS and tax regulations differ in a number of ways, the
amounts of accounting profit ( IFRS income statement) and Taxable profit(
profit as per tax law) will differ too.
Therefore, the following balances will differ:
 Income tax expense ( based on financial statement Income)
 Income taxes payable (based on tax law income)
LO 1
Accounting for Income(profit) Taxes

Income tax expense
Is Computed based on financial statement/accounting profit
Is equal to financial statement profit * tax rate
 Is the sum of current tax expense and differed tax expense or
Income tax payable less deferred tax asset
Income taxes payable
Is computed based profit computed as per tax law
 is current tax expense actually paid to tax authority
Income tax payable = Taxable profit * tax rate
The difference between Income tax expense and Income taxes
payable is either differed tax asset or differed tax liability
Accounting for Income(profit) Taxes
Income tax expense = Accounting profit * tax rate

Why Accounting profit is different from taxable profit?
 There certain revenues that are not recognized by financial income
but allowed by tax authority.
– For example: Unearned revenues are reported as liability
for financial report purpose and become revenue when
the goods/service are provided. However, it is reported
as revenue for tax purpose when cash is collected( it
doesn't wait until goods are delivered)
– Thus, revenue for tax purpose will be more than revenue
for financial reporting purpose
 There are certain disallowed expenses by tax authority :
Depreciation expense difference( Financial statement
depreciation rate and Tax depreciation rate are
different)
 Annual Leave Expense
Severance expense
Bad Debts Expenses
Fine & Penalty expense
Entertainment Expenses
 Therefore, the financial statement profit is recomputed by considering these
revenues and expenses as shown in the next slide

Income tax Payable and Taxable Profit computation
Financial profit before tax( Accounting profit)……………....…xxx
Add: Unearned revenue …………………………………………………..x
Add: Disallowed expenses
– Depreciation expense (as per financial reporting)…………………. x
– Annual Leave Expense …………………………………………… x
– Severance Expense ………………………………………………… x
– Depreciation expense on leasehold Land…………………………. x
– Bad Debts Expenses ……………………………………………….. x
– Fine & Penalty……………………………………………………… x
– Entertainment Expenses …………………………………………… x
Less: Allowed expenses
Depreciation for tax purposes………………………………… (x)
Taxable profit……..……… ..……………………...… …....... …. xx
Tax Payable (30% of taxable profit)....……………………………….… xx

Basic Concepts- Income tax
26
Income Approach ( Revenue and expense)
Accounting Profit: It is profit or loss for a period
determined in accordance with IFRS.
Taxable profit (tax loss): It is the profit (loss) for a
period, determined in accordance with income tax law.
Balance Sheet Approach ( Asset and liability)
The tax base: The amount attributed to that asset or
liability for tax purposes
Carrying amount: The amount attributed to that asset
or liability as per IFRS
The difference between Accounting Profit and
Taxable profit or The tax base and Carrying amount
is temporary difference and permanent difference.

Basic Concepts
27
Taxable temporary difference:
It is temporary difference that will result in taxable
amounts in determining taxable profit of future periods.
Results in deferred tax liability today
Deferred tax liability: is the amount of income taxes
payable in future periods in respect of taxable temporary
differences at the end of current period .
Deductible temporary difference:
It is temporary differences that will result in amounts
that are deductible in determining taxable profit of future
periods at the end of current period
Results in deferred tax asset today
Deferred Tax Asset: It is the amounts of income taxes
recoverable in future periods in respect of deductible
temporary differences

A. Taxable temporary differences - Deferred tax liability
 Exists :
 When accounting profit > Taxable profit ( Income
approach)
 When carrying amount(BV) > tax base of
asset(B/sheet approach) or
 When carrying amount(BV) < tax base of
liability(B/sheet approach) or
 It reduce current tax payable in the year of origination but
will increase future tax payable on reversal.
 The effects of taxable temporary differences should be
recognized as deferred tax liabilities. LO 2
Basic Concepts

B. Deductible temporary differences - Deferred tax Asset
 Exists :
 When accounting profit < Taxable profit ( Income
approach)
 When carrying amount(BV) < tax base of asset(B/sheet
approach) or
 When carrying amount(BV) >tax base of liability(B/sheet
approach) or
 These increase current tax payable on origination but will
reduce future tax payable on reversal.
 The tax effects of deductible temporary differences should
be recognized as reductions in deferred tax liabilities or an
increase in deferred tax assets.
Basic Concepts

Permanent Differences
 Result from items that enter into financial income before tax
but never into taxable income
IT Affect only the period tax expense in which they occur.
 Do not give rise to future taxable or deductible amounts
( deferred tax asset or liability)
Tax expense : It is the aggregate amount included in the
determination of profit or loss for the period. It comprises
current tax expense (current tax income) and deferred tax
expense (deferred tax income).
Basic Concepts

Do the following generate?
• Future Deductible Amount = Deferred Tax Asset
• Future Taxable Amount = Deferred Tax Liability
• Permanent Difference
1. An declining depreciation system is used for tax purposes, and the
straight-line depreciation method is used for financial reporting
purposes.
2. A building rental firm collects rents in advance. Rents received are
reported as income for tax purpose when cash is collected, but
reported as liability for financial reporting purposes
1. Expenses are incurred from a violation of law
Future Taxable Amount
LO 2
Example:
Differed tax Liability
Future Deductible Amount
Differed tax Asset
Permanent Difference

Entry for tax expense
A. Initially Taxable Temporary difference
Income Approach
• Temporary difference * tax rate = deferred tax liability
• In the first year- Recognition of differed tax liability
Tax expense-current ( TP*rate) xxx
Tax expense- Differed(TD *rate) xxx
Income tax payable ( TP*rate) xxx
Differed tax liability (TD *rate) xxx
• In the following years – Reversal of differed tax liability
Tax expense………….. xxx
Deferred tax liability…… xx
Income tax payable( TP*rate) …….. xx
Taxable profit (TP) Accounting Profit (AP)
<

Cloud Software Plc’s Financial Report shows reported revenues of ETB 150,000 and
expenses of ETB 80,000 in each of its first three years of operations. ( ETB 80,000 is 20,000
other expenses and 60,000 annual depreciation expanse of equipment with zero SV and 3
useful life. For tax purposes, Cloud reported the same revenue as Financial report to the tax
authority in each of the years. But depreciation expense for tax purpose is ETB 90,000 in
2019, ETB 40,000 in 2020, and ETB50,000 in 2021. Assume 30% income tax.
a. What is the income(profit) for Financial Reporting Purpose
b. What is the income ( profit) for tax purpose
c. What is the temporary difference? Is the temporary difference taxable or deductable ?
d. What is differed tax asset( liability), current and differed tax expense, total tax expense?
e. If , yes, Record the necessary entry ? LO 1
Example 1: Accounting for Income Taxes

Revenues
Expenses ( with 60,000depreciation)
Income For Financial Reporting
150,000
80,000
70,000
150,000
2020
80,000
70,000
150,000
2021
80,000
70,000
450,000
Total
240,000
210,000
IFRS Reporting
Revenues
Expenses
Income For Tax Reporting
150,000
2019
110,000
40,000
150,000
2020
60,000
90,000
150,000
2021
70,000
80,000
450,000
Total
240,000
210,000
Tax Reporting
2019
Example1 – Accounting and Taxable profit- Income Approach( Answer)
LO 1
2019( Initial recognition of deferred tax liability )
Accounting profit (70,000 ) Vs. Taxable profit has (40,000) has 30,000 difference in 2019. But, this d/c is
fully reversed( offset) over the three years as cumulative balance of both profits over the 3 years is 210,000

Income for financial reporting (IFRS)
Temporary Difference( taxable)
70,000
40,000
30,000
70,000
2020
90,000
(20,00)
70,000
2021
80,000
(10,000)
210,000
Total
210,000
$0
Temporary Difference and initial balance of differed tax liability in 2019 & its reversal in 2020 and 2021
2019
Example1 -Taxable Temporary Differences- Income approach
LO 1
Tax rate 30% 30% 30% 30%
Deferred tax liability 9,000 (6,000) (3,000) 0
Are the differences accounted for in the financial statements?
Year Reporting Requirement
2019
2020
2021
Deferred tax liability account increased to 9,000( initial recognition of differed tax liability
Deferred tax liability account reduced by 6,000( reversal of differed tax liability )
Yes
At the end of 2021, the temporary difference is fully reversed( there is no longer difference between
Income for tax and reporting purpose)

2020 2021 Total
Computation of Income tax expense( current and deferred) and Income tax Payable
2019
Example1 -Taxable Temporary Differences- Income approach
LO 1
Income tax expense (AP *rate)
differed tax liability
21,000
12,000
9,000
21,000
27,000
(6,000)
21,000
24,000
(3,000)
63,000
63,000
$0
Income tax payable(TP* rate)
Accounting Profit(AP)
Taxable Profit( TP)
Tax rate
70,000 70,000 70,000 210,000
40,000 90,000 80,000 210,000
30% 30% 30%
In the period where differed tax liability is initially recognized or increases in subsequent years, Income
tax expense is the sum of current and deferred tax expense . The Income tax expense in the following year
when differed tax liability is reversed is only current period tax expense

Income tax expense (IFRS)
Income tax payable (Tax)
Difference
21,000
12,000
9,000
21,000
2020
27,000
(6,000)
21,000
2021
24,000
(3,000)
63,000
Total
63,000
$0
Computation of Income tax expense( current and deferred) and Income tax Payable
2019
Income Tax Expense 2019
LO 1
Cloud makes the following entry at the end of 2019 to record income taxes.
Income Tax Expense 21,000
Income Taxes Payable 12,000
Deferred Tax Liability 9,000
Income Tax Expense –Current 12,000
Income Tax Expense –Deferred 9,000
Or

Statement of Financial Position
Assets:
Liabilities:
Equity:
Income tax expense 21,000
Income Statement
Revenues:
Expenses:
Net income (loss)
2019 2019
Deferred taxes 9,000
Where does the “deferred tax liability” get reported in the financial statements?
Income taxes payable 12,000
Financial Reporting for 2019
LO 1

Difference
21,000
12,000
9,000
21,000
2020
27,000
(6,000)
21,000
2021
24,000
(3,000)
63,000
Total
63,000
$0
Comparison
2019
LO 1
Income Tax Expense -current 21,000

Deductable Temporary Difference : Income approach
Taxable profit (TP)
 The difference between the two profit is deductable
temporary difference as we pay more today than in the
future.
Entry: First year ( initial recognition of differed tax asset)
Tax expense( AP * rate)………………………………….xxx
Deferred tax asset (TD *rate) …………… xxx
Income tax payable ( TP* rate)………………… xxx
Entry: following year (reversal of differed tax asset)
Tax expense ( AP * rate)– Current …..…xxx
Income tax payable ( TP* rate)………………… ……xx
Deferred tax asset (TD *rate) ……………………xx
Accounting Profit (AP)
>

Deductable Temporary Difference : Income approach
Taxable profit (TP)
 Deductable temporary difference is deferred tax asset
 Temporary difference * tax rate = deferred tax asset
 A deferred tax asset represents the increase in taxes
refundable (or saved) in future years as a result of
deductible temporary differences existing at the end of the
current year.
Accounting Profit (AP)
>

Assume Cloud Software Plc’s Financial Report shows revenues of ETB
150,000 each of three years. Depreciation expenses are computed using
declining depreciation method for financial reporting purpose( 90,000 in 2019,
50,000 in 2020 and 40,000 in 2021) plus other expenses of 20,000 each year.
Therefore, total expense for financial reporting is 110,000 in 2019, ETB 70,000
in 2020, and ETB 60,000 in 2021 .
 For tax purpose revenue is the same as reporting revenue for each of three
years (150,000). Expenses are 60,000 annual depreciation expanse of equipment
plus other expense of 20,000 each year. Thus for tax purpose revenue is ETB
150,000 each year and Expenses are ETB 80,000 each year.
a. What is the income(profit) for Financial Reporting and for tax purpose
b. What is the temporary difference taxable or deductable ?
c. What is differed tax asset( liability), and entries ? LO 1
Example2: Deductable Temporary Difference : Income approach

Revenues
Expenses
Income For Financial Reporting
Income tax expense (30%)
150,000
110,000
40,000
12,000
150,000
2020
70,000
80,000
24,000
150,000
2021
60,000
90,000
27,000
450,000
Total
240,000
210,000
63,000
IFRS Reporting
Revenues
Expenses
Income taxes payable (30%)
150,000
2019
80,000
70,000
21,000
150,000
2020
80,000
70,000
21,000
150,000
2021
80,000
70,000
21,000
450,000
Total
2400,000
210,000
63,000
Tax Reporting
2019
Example2 -Deductable Temporary Differences- Income approach
LO 1

Income for financial reporting (IFRS)
40,000
70,000
(30,000)
80,000
2020
70,000
10,000
90,000
2021
70,000
20,000
210,000
Total
210,000
$0
Comparison
2019
Example2 - Deductable Temporary Differences- Income approach
LO 1
Or
Tax rate 30% 30% 30% 30%
Deferred tax Asset (9,000) 3,000 6,000 0

Income tax expense (AP *rate)
differed tax Asset
12,000
21,000
(9,000)
24,000
2020
21,000
3,000
27,000
2021
21,000
6,000
63,000
Total
63,000
$0
Comparison
2019
Are the differences accounted for in the financial statements?
2019
2020
2021
Deferred tax asset account increased to 9,000( initial recognition of differed tax asset
Deferred tax liability account reduced by 3,000( reversal of differed tax asset )
Deferred tax liability account reduced by 6,000( reversal of differed tax asset )
Yes
Example2 - Deductable Temporary Differences- Income approach
LO 1
Income tax payable(TP* rate)
At the end of 2021, the temporary difference is fully reversed( there is no longer difference between
Income for tax and reporting purpose)

Difference
12,000
21,000
(9,000)
24,000
2020
21,000
3,000
27,000
2021
21,000
6,000
63,000
Total
63,000
$0
Journal Entry
2019
LO 1
Income Tax Expense(AP*rate) 12,000
Deferred Tax Asset ( Initial) 9,000
Income Taxes Payable ( TP*rate) 21,000

Statement of Financial Position
Assets:
Liabilities:
Equity:
Income tax expense 12,000
Income Statement
Revenues:
Expenses:
Net income (loss)
2019 2019
Income Tax Payable 21,000
Where does the “deferred tax liability” get reported in the financial statements?
Deferred Tax Asset 9,000
Financial Reporting for 2019
LO 1

Difference
12,000
21,000
(9,000)
24,000
2020
21,000
3,000
27,000
2021
21,000
6,000
63,000
Total
63,000
$0
Comparison
2019
LO 1
Deferred Tax Asset ( reversal) 3,000

Difference
12,000
21,000
(9,000)
24,000
2020
21,000
3,000
27,000
2021
21,000
6,000
63,000
Total
63,000
$0
Comparison
2019
LO 1
Deferred Tax Asset (reversal) 6,000

BALANCE SHEET APPROACH
TAXABLE/ DEDUCTABLE TEMPORARY
DIFFERENCE

Carrying Amount(BV)-IFRS Tax Base
>
Asset
Taxable temporary difference( deferred tax liability
Liability
Carrying Amount(BV)-IFRS < Tax Base
OR

Carrying Amount(BV)-IFRS Tax Base
<
Asset
Liability
Carrying Amount(BV)-IFRS > Tax Base
OR
Deductable temporary difference( deferred tax Asset)

Carrying
Amount
Tax Base Assessment
Asset A 10 8 There is taxable temporary difference (i.e.,
the entity recognizes a deferred tax liability).
Asset B 8 10
There is deductible temporary difference
(i.e., the entity recognizes a deferred tax
asset).
Liability A 10 8
There is deductible temporary difference
(i.e., the entity recognizes a deferred tax
asset).
Liability B 8 10
There is taxable temporary difference (i.e.,
the entity recognizes a deferred tax liability).
54
Balance sheet Approach

We are given:
Carrying amount and tax base of assets and liability
Income or profit as per financial reporting
Therefore:
Taxable profit = Reporting profit –taxable temporary difference or
Taxable profit = Reporting profit + deductable temporary difference
Example: Balance Sheet Approach

Assume the previous Cloud Software Plc’s example 1:
 Equipment was acquired at a cost of 180,000 birr , SV is zero useful life is 3 years.
Annual Depreciation Expense for financial reporting purpose is 60,000(SLM)
Depreciation expense for tax purpose is ETB 90,000 in 2019, ETB 40,000 in 2020, and
ETB50,000 in 2021. Assume 30% income tax.
Financial Reporting Income ( Accounting income ) is birr 70,000 each of 3 years.
There is no other temporary difference
a. What is the income ( profit) for tax purpose
b. What is the temporary difference? Is the temporary difference taxable or deductable ?
c. What is differed tax asset( liability) and the necessary entry . LO 1
Example 1: Taxable Temporary difference- B/sheet approach

Cost
Less: Accumulated depreciation
Carrying Amount(BV)
180,000
(60,000)
120,000
180,000
2020
(120,000)
60,000
180,000
2021
(180,000)
0
Carrying Amount- IFRS Reporting
Cost
Tax Base
180,000
2019
(90,000)
90,000
180,000
2020
(150,000)
50,000
180,000
2021
(180,000)
0
Tax Base- Tax Reporting
2019
Example1 -Taxable Temporary Differences- B/sheet approach
LO 1
NB: 2019: Carrying Amount (120,000) Vs Tax Base(90,000)
The CA > Tax base or for tax purpose you look poor today(90,000 vs 120,000) and you pay less tax today, but
more tax in the future . Thus, the difference is taxable temporary difference( results in differed tax liability)

Carrying Amount (IFRS)
120,000
90,000
30,000
60,000
2020
50,000
10,00
0
2021
0
0
Taxable Temporary difference and computation of differed tax liability
2019
Example1 -Taxable Temporary Differences- B/sheet approach
LO 1
Change in Deferred tax liability during
the year
Tax Base -Tax Reporting
Tax rate 30% 30% 30%
Deferred tax liability( Ending Balance) 9,000 3,000 0
2019
2020
2021
Deferred tax liability account increased to 9,000( initial recognition of differed tax liability
to 9,000 by 6,000 by 3,000

Computing Taxable Profit –B/sheet Approach
Taxable Profit = Financial Profit +
depreciation difference( Financial
depreciation – Tax depreciation)

Computing Taxable Income- excluding already accounted IFRS depreciation and
including tax depreciation)
Example -Taxable Temporary Differences- B/sheet approach
LO 1
Financial Income –IFRS( Given)
70,000
40,000
70,000
2020
90,000
70,000
2021
80,000
2019
Taxable Income( Financial income + D difference
Year IFRS-Depreciation Tax Depreciation D. Difference
2019 60,000 90,000 -30,000
2020 60,000 40,000 +20,000
2021 60,000 50,000 +10,000
Total 180,000 180,000 0
Computing Tax Expense and Income Tax Payable
2019 2020 2021
Income tax Expense – AP * Rate
Income Tax Payable – TP* Rate
21,000
12,000 27,000 24,000
21,000 21,000
Change in Deferred tax liability
to 9,000 by 6,000 by 3,000

Example –Journal Entry - B/sheet approach
LO 1
Income Tax Expense –Current 12,000
Income Tax Expense –Deferred 9,000
70,000
40,000
70,000
2020
90,000
70,000
2021
80,000
2019
Taxable Income( Financial income + taxable TD)
2019 2020 2021
Income tax Expense(current + deferred) – AP * Rate
21,000
12,000 27,000 24,000
21,000 21,000
to 9,000 by 6,000 by 3,000
Entry -2019

LO 1
70,000
40,000
70,000
2020
90,000
70,000
2021
80,000
2019
2019 2020 2021
Income tax Expense(current + deferred) – AP * Rate
21,000
12,000 27,000 24,000
21,000 21,000
to 9,000 by 6,000 by 3,000
Entry -2020

LO 1
70,000
40,000
70,000
2020
90,000
70,000
2021
80,000
2019
2019 2020 2021
Income tax Expense(current + deferred) = AP * Rate
21,000
12,000 27,000 24,000
21,000 21,000
to 9,000 by 6,000 by 3,000
Entry -2021

Assume Cloud Software Plc’s Example2. uses a declining depreciation
method for financial reporting purpose which gives depreciation of 90,000 in
2019, 50,000 in 2020 and 40,000 in 2021. expenses for Financial Report
purpose 40,000 in 2019, ETB 80,000 in 2020, and ETB 90,000 in 2021 .
 For tax purpose , there is 60,000 annual depreciation expanse of equipment
and 20,000 other expenses:
a. What is the income(profit) for Financial Reporting and for tax purpose
b. What is the temporary difference, taxable or deductable ?
c. What is differed tax asset( liability), and entries ?
LO 1
Example2: Deductable Temporary Difference : B/sheet approach

Cost
Carrying Amount(BV)
180,000
(90,000)
90,000
180,000
2020
(140,000)
40,000
180,000
2021
(180,000)
0
Carrying Amount- IFRS Reporting
Cost
Tax Base
180,000
2019
(60,000)
120,000
180,000
2020
(120,000)
60,000
180,000
2021
(180,000)
0
Tax Base- Tax Reporting
2019
Example 2- Deductable Temporary Difference : B/sheet approach
LO 1
NB: 2019: Carrying Amount (90,000) Vs Tax Base(120,000)
The CA < Tax base or for tax purpose you look rich today(120,000 vs 90,000) and you pay more tax today, but
less tax(deductable) in the future . Thus, the difference is deductable temporary difference( results in differed tax

Carrying Amount (IFRS)
Temporary Difference( deductable)
90,000
120,000
(30,000)
40,000
2020
60,000
(20,00)
0
2021
0
0
Temporary difference and computation of differed tax asset
2019
Example2 - Deductable Temporary Difference : B/sheet approach
LO 1
Change in Deferred tax asset during the
year
Tax Base -Tax Reporting
Tax rate 30% 30% 30%
Deferred tax asset( Ending Balance) 9,000 6,000 0
2019
2020
2021
Deferred tax asset account increased to 9,000( initial recognition of differed tax asset
Deferred tax asset account reduced by 3,000( reversal of differed tax asset )
Deferred tax asset account reduced by 6,000( reversal of differed tax asset )
to 9,000 by 3,000 by 6,000

Computing Taxable Income
Example2 - Deductable Temporary Differences- B/sheet approach
LO 1
40,000
70,000
90,000
2020
80,000
80,000
2021
60,000
2019
Taxable Income( Financial income + D. difference)
Year IFRS-Depreciation Tax Depreciation D. Difference
2019 90,000 60,000 30,000
2020 50,000 60,000 -10,000
2021 40,000 60,000 -20,000
Total 180,000 180,000 0
2019 2020 2021
12,000
21,000 24,000 18,000
27,000 24,000
Change in Deferred tax Asset
to 9,000 by 3,000 by 6,000

Example 2- Deductable Temporary Differences- B/sheet approach
LO 1
40,000
70,000
90,000
2020
80,000
80,000
2021
60,000
2019
Taxable Income( Financial income + deductable TD)
2019 2020 2021
12,000
21,000 24,000 18,000
27,000 24,000
to 9,000 by 3,000 by 6,000
Deferred Tax asset 9,000
Entry -2019

Example 2 - Deductable Temporary Differences- B/sheet approach
LO 1
40,000
70,000
90,000
2020
80,000
80,000
2021
60,000
2019
2019 2020 2021
12,000
21,000 24,000 18,000
27,000 24,000
to 9,000 by 3,000 by 6,000
Entry -2020

Example 2- Deductable Temporary Differences- B/sheet approach
LO 1
40,000
70,000
90,000
2020
80,000
80,000
2021
60,000
2019
2019 2020 2021
12,000
21,000 24,000 18,000
27,000 24,000
to 9,000 by 3,000 by 6,000
Entry -2021

Net operating loss (NOL) = tax-deductible expenses exceed
taxable revenues.
Tax laws may permit taxpayers to use the losses of one year
to offset the profits of other yea( loss carry forward).
there may be improvements in the business environment that
enables a loss-making company to be profitable.
A deferred tax asset shall be recognized for the carry
forward of tax losses if it is probable (“more likely than not”)
that future taxable profit will be available against which the
tax losses can be utilized.
Accounting for Net Losses and Loss carry-forward
LO 3

Example
An entity has a tax loss of Br 8 million which can be
carried forward for 5 years. The estimated Probable
future cumulative taxable profits for the next five
years are Br 6 million. It is estimated that Br 2 million
of the tax loss will expire unused. The tax rate is 30%.
1. What is the deferred tax asset?
2. What is the journal entry?

Solution
The entity recognizes a deferred tax asset of Br
1.8 million (Br 6 million x 30%)
Deferred Tax Asset…………… 1,800,000
Deferred Tax Income…………………1,800,000
73

Presentation
• Current tax payable is always shown as a current
liability.
• Deferred tax items cannot be shown as current
assets or current liabilities.
• Current and deferred tax balances are to be shown
as separate items (offsetting is not allowed).
• Deferred tax assets or liabilities should not be
discounted
74

Exercise 1: Balance sheet approach
At the beginning of 2013, A Company purchased Equipment
for Br 200,000. The equipment had a carrying amount of Br
180,000 at the beginning of 2014 and Br 160,000 at the end
of 2014 for financial reporting purpose. The accumulated
depreciation of the item as per the income tax law is Br
50,000 at the beginning of 2014 and Br 80,000 at the end of
2014. The tax rate is 30%. The accounting income before tax is
Br 700,000 for 2013 and Br 900,000 for 2014.
76

Required:
a. What was the tax base of the equipment for 2013 and 2014?
b. What is the taxable income for 2013 and 2014?
c. What is the temporary difference for 2013 and 2014?
d. Is it taxable or deductible temporary difference?
e. What is the deferred tax for 2013 and 2014?
f. Is it deferred tax asset or deferred tax liability?
g. What is the current tax expense for 2013 and 2014?
h. What is the deferred tax expense for 2013 and 2014?
i. What is the appropriate journal entry for 2013 and 2014?
77

Exercise 2 : Income Approach
• A company purchases a machine on January 1, 2021, for $90,000. For
accounting purposes, it will be depreciated straight-line over a three-
year useful life with no residual value.
• For tax purposes, depreciation of first year equal to 50% of the
asset’s cost, and in the second and third years equal to 25% of the
asset’s cost. The accounting income before tax is Br 200,000, 250,000
and 240,000 on december31,2021,2022 and 2023 respectively.
a. What was taxable income for 2021,2022 and 2023
b. What is the temporary difference for 2021,2022 and 2023
c. Is it taxable or deductible temporary difference?
d. What is the deferred tax asset or deferred tax liability for 2021,2022
and 2023
e. What is the appropriate journal entry for 2013 and 2014?

Exercise 3 : Income Approach & Balance Sheet Approach
• A company has collected a revenue amounting birr 400,000 in
advance in 2020 to deliver merchandise. None of these merchandise
has been delivered in 2020. However all the goods are fully provided
in 2021. The accounting profit is Br 300,000, 420,000 in the year
2020 and 2022 respectively. Using Income approach:
a. What was taxable income for 2020 and 2021
b. What is the temporary difference for 2020 and 2021
c. Is it taxable or deductible temporary difference?
d. What is the deferred tax asset or liability in 2020 and 2021
e. What is the appropriate journal entry for 2020 and 2021?
f. Using Balance sheet approach :
a. What is carrying amount and Tax base
b. is the temporary difference taxable or deductible ?
c. What is the appropriate journal entry for 2020 and 2021?

Advanced II - Chapter 0; Tax.pdLlhzhhzhfggdj

More Related Content

Similar to Advanced II - Chapter 0; Tax.pdLlhzhhzhfggdj

Recently uploaded

Advanced II - Chapter 0; Tax.pdLlhzhhzhfggdj