Deferred Taxes in a nutshell

 

Taxable temporary difference

Taxable temporary difference is the timing difference that creates tax liability which the company needs to pay in the future. In other words, the taxable temporary difference creates deferred tax liability.

We will have a taxable temporary difference when:

• carrying value of an asset in the accounting base is bigger than its tax base, or

• carrying value of liability in accounting base is smaller than its tax base

Deductible temporary difference

 Deductible temporary difference is the timing difference that creates tax asset which the company can deduct in the future. In other words, deductible temporary difference creates deferred tax asset.

Both Give rise to Deferred Tax Provision

Example:

Last years Deferred Tax Provision = 1000$

This years Deferred Tax Provision = 490$

Moment in Deferred Tax Provision = Opening Deferred Tax balance – Closing Deferred Tax balance

 

If the moment is Negative, it is a Liability.

Dr. SPLOCI – P/L

Cr. Deferred Tax Liability – Non Current Liability

 

If the moment is Positive, it is an Asset.

Dr. Deferred Tax Asset – Non Current Asset

Cr. SPLOCI – P/L

 

Tax Base= Any Asset or Liability which has tax implications 

Tax Implications= Taxes Payable or receivable on Assets or Liabilities; Taxes Payable on Cash flows, economic benefits arising from Assets or Liabilities

When there are no Tax consequence, its Tax base is Zero (Deferred revenue reversal, Goodwill, for items not recognised in balance sheet) 

E.g. Trade receivables have a carrying amount of 100. The related revenue has already been included in taxable profit (tax loss). The tax base of the trade receivables is 100.

E.g. A loan receivable has a carrying amount of 100. The repayment of the loan will have no tax consequences. The tax base of the loan is 100.

(Or)

One can simply find out if your Deferred tax calculations are correct or wrong. 

You need to find out PBT & Taxable Income & this year's Deferred taxes, 

say (0.15 Mil DTA)

Profit & Loss Account : 

Profit before tax and provisions   10 Mil 

Less provisions : Depreciation on fixed assets        2 Mil 

Special reserve u/s 36(1)(viii)       2 Mil 

Leave encashment provision        2 Mil 

----- Profit before tax                          4 Mil 

                      Computation of Taxable Income : Profit before tax                          4 Mil 

Add : Depreciation as per books            2 Mil 

Special Reserve as per books      2 Mil

Leave encashment provision       2 Mil 

                                 Total           10 Mil 

Less : Allowable deductions : Depreciation as per I.T Act             3 Mil 

Special Reserve allowable                2 Mil

Leave encashment paid amount        0.5 Mil

Total          5.5 Mil

--------                                                                  Taxable Income                                               4.5 Mil

Tax on PBT= 4 Mil * 30%= 1.20 Mil

Tax on Taxable Income= 4.5 Mil*30%= 1.35 Mil

Deferred Tax = 0.15 Mil

Taxable Income - PBT = 1.35 - 1.20 = 0.15 Mil

This will be reversed in the future because the company paid more by 0.15 Mil. 

Net Tax Effect = 1.35 - 0.15 = 1.20 Mil 

FYI a deferred tax asset or a liability might arise in the Asset side or on the Liabilities side

Picture Source: PWC article Demystifying Deferred Taxes and I thought this might be useful to understand deferred taxes in US GAAP perspective. Some elements of it represent IFRS but not sure to what extent the initial recognition is plausible. However IAS general principles state 'A company recognises deferred tax when recovering an asset or settling a liability in the future will have tax consequences (that is, will affect the amount of tax the company will pay)'. I investigated further into Taxable temporary difference and Deductible temporary differences pertinent to IFRS/IndAS, and they are akin to the above picture.