• Deferred Tax
• What is deferred tax? It is an accounting measure, use to match the tax
effects of transactions with their accounting impact.
• To understand the problem, and how it can be ‘seen’ from the accounting
records, it is important that you understand the following concepts:
a) ‘Accounting profit’ - Application of ‘accruals’ principles – I presume you
understand this !!
b) ‘Taxable Profit’ - Generally based on ‘actual’ (IR rules)
c) ‘Carrying value’ - This is the balance sheet carrying-value of an asset or
liability !!
d) ‘Tax base’ - This indicate the future taxation implications attached to using
the asset or settling the liability. This is probably new to you !!
• The problem
• Unfortunately, ………the Revenue (IR) does not tax ‘accounting’ profits !!
• This means that transactions reported as part of the ‘accounting’ profit in
the current period often have future tax implications !!
• Lets take a simple example – one I hope you are familiar with !! Whenever
a company buys a fixed asset, we have to consider:
a) The accounting implications - we apply the accruals concept and
charge depreciation in accordance with the relevant standard (e.g. NZ IAS 16).
b) The taxation implications - we are told how much ‘actual’
depreciation loss is available by the taxation authorities.
• In most instances, since depreciation loss (by IR) generally exceed the
depreciation charge in early years (a) is the most likely scenario. However,
be flexible, the impact can go either way !! The important thing to
remember is that the impact will always reverse in the future – if we defer
the payment of tax in the current period, the liability will crystallize in the
future – or – if we accelerate the payment of tax in the current period, the
asset will crystallize in the future. These differences do not alter TOTAL
amount of tax payable – they simply alter the timing.
• Lets try Example 1
• IDENTIFICATION
How do we identify the effect from the financial statements? The answer is
simple – we look for differences and it can be approached from two different
perspectives:
• a) B/S (CUMULATIVE) Compare the carrying-value with the tax base.
• If these two are the same – no differences arise.
• What is deferred tax? It is an accounting measure, use to match the tax
effects of transactions with their accounting impact.
• To understand the problem, and how it can be ‘seen’ from the accounting
records, it is important that you understand the following concepts:
a) ‘Accounting profit’ - Application of ‘accruals’ principles – I presume you
understand this !!
b) ‘Taxable Profit’ - Generally based on ‘actual’ (IR rules)
c) ‘Carrying value’ - This is the balance sheet carrying-value of an asset or
liability !!
d) ‘Tax base’ - This indicate the future taxation implications attached to using
the asset or settling the liability. This is probably new to you !!
• The problem
• Unfortunately, ………the Revenue (IR) does not tax ‘accounting’ profits !!
• This means that transactions reported as part of the ‘accounting’ profit in
the current period often have future tax implications !!
• Lets take a simple example – one I hope you are familiar with !! Whenever
a company buys a fixed asset, we have to consider:
a) The accounting implications - we apply the accruals concept and
charge depreciation in accordance with the relevant standard (e.g. NZ IAS 16).
b) The taxation implications - we are told how much ‘actual’
depreciation loss is available by the taxation authorities.
• In most instances, since depreciation loss (by IR) generally exceed the
depreciation charge in early years (a) is the most likely scenario. However,
be flexible, the impact can go either way !! The important thing to
remember is that the impact will always reverse in the future – if we defer
the payment of tax in the current period, the liability will crystallize in the
future – or – if we accelerate the payment of tax in the current period, the
asset will crystallize in the future. These differences do not alter TOTAL
amount of tax payable – they simply alter the timing.
• Lets try Example 1
• IDENTIFICATION
How do we identify the effect from the financial statements? The answer is
simple – we look for differences and it can be approached from two different
perspectives:
• a) B/S (CUMULATIVE) Compare the carrying-value with the tax base.
• If these two are the same – no differences arise.
