Chapter 19
Accounting for
income taxes
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-1
Objectives of this lecture
• Understand that there is typically a difference between an
organisation’s profit or loss for accounting purposes, and its
profit or loss for taxation purposes
• Be able to identify some of the factors that will cause a
difference between profit or loss for accounting purposes and
profit or loss for taxation purposes
• Understand how deferred tax assets and deferred tax liabilities
arise
• Understand how to account for taxation losses incurred by
companies and understand how, in certain circumstances,
taxation losses can lead to the recognition of assets in the form
of deferred tax assets
• Be able to critically evaluate the balance sheet approach to
accounting for taxation and the associated asset, deferred tax
asset, and liability, deferred tax liability
.
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19-2
Introduction to accounting for income
taxes
Taxable profit
• Profit for taxation purposes is known as taxable profit
• Determined in accordance with Australian income tax
legislation, not according to general accounting rules
• There are differences between accounting principles of revenue
and expense recognition and taxation principles
• Accounting profit is therefore not the same as taxable profit
• Tax expense for accounting purposes (shown in the statement
of comprehensive income) calculated after applying relevant
accounting standards
• Income tax payable to tax office (statement of financial position)
based on taxable profit derived by the entity applying the rules
of taxation law
• Worked Example 19.1 (p. 615) shows the difference between
taxable profit and accounting profit
.
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19-3
Some differences between accounting and tax rules
.
Item
Generally accepted Tax rule
accounting rule
Many accrued expenses (e.g.
long-service leave, warranty
costs)
An expense when accrued
Recognised as a tax
deduction when paid
Many prepaid expenses (e.g.
prepaid rent)
Initially an asset—expensed
when economic benefits used
Typically a tax deduction
when paid
Revenue received in advance
(e.g. rental revenue)
Treated as a liability and
recognised as revenue when
earned
Typically taxed when received
Entertainment and goodwill
impairment
Treated as an expense
Not a tax deduction in current
or subsequent periods
Doubtful debts
Treated as an expense when
recognised
Treated as a tax deduction
when debtor is actually written
off in subsequent period
Development expenditure
Often capitalised and
subsequently amortised
Typically a tax deduction
when paid for
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-4
Worked Example 19.1—Calculating taxable profit and accounting profit
You are provided with the following information from the accounts of Big Kahuna Ltd for
the year ending 30 June 2012. You are to calculate accounting profit and taxable profit
•Cash sales
$100 000
•Cost of goods sold
$40 000
•Amounts received in advance for services to be performed in August 2012
$5 000
•Rent expense for year ended 30 June 2012
$10 000
•Rent prepaid for two months to 31 August 2012
$1 000
•Doubtful debts expenses
$1 000
•Amount provided in 2012 for employees’ long-service leave entitlements
$3 000
Cash sales
Cost of goods sold
Amounts received in advance by Big Kahuna Ltd for services
to be performed in August 2012
Rent expense for year ended 30 June 2012
Rent prepaid for two months to 31 August 2012
Doubtful debts costs
Amount provided in 2012 for employees’ long-service leave
entitlements
.
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Accounting
profit
$100 000
($40 000)
Taxable
profit
$100 000
(40 000)
–
($10 000)
_
($1 000)
$5 000
($10 000)
($1 000)
–
($3 000)
$46 000
–
$54 000
19-5
Balance sheet approach to accounting for
taxation
Accounting for income taxes
• Governed by AASB 112
• Applies the ‘balance sheet’ method—this means the recognition
of tax-related assets and liabilities in the balance sheet
(statement of financial position) is based on the differences
between accounting and tax values of assets and liabilities
• Focuses on comparing the carrying value of an entity’s assets
and liabilities (determined by accounting rules) with the tax
base for those assets and liabilities
– Effectively involves comparing the balance sheet derived
using accounting rules with the balance sheet that would be
derived from taxation rules
.
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19-6
Balance sheet approach to accounting for
taxation (cont.)
Carrying amount vs tax base of asset or liability
• Carrying amount is the amount the asset or liability
is recorded at in the accounting records
• Tax base is defined as the amount that is
attributed to an asset or liability for tax
purposes(AASB 112)—tax base represents the
amount an asset or liability would be recorded at if
the balance sheet (statement of financial position)
were prepared applying taxation rules
• Where the carrying amount of an asset or liability
is different from the tax base a ‘temporary
difference’ can arise
.
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19-7
Balance sheet approach to accounting for
taxation (cont.)
Temporary differences can be of two types
1. A taxable temporary difference
– will result in an increase (decrease) in income tax
payable (recoverable) in future periods when the
carrying amount of the asset or liability is recovered or
settled
 Creates a liability—deferred tax liability
2. A deductible temporary difference
– will result in a decrease (increase) in income tax payable
(recoverable) in future periods when the carrying amount
of the asset or liability is recovered or settled
 Creates an asset—deferred tax asset
.
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19-8
Balance sheet approach to accounting for
taxation (cont.)
• Deferred tax liability
– The carrying amount of the asset exceeds the tax base
– Taxation payments have effectively been deferred to
future periods
– Tax is reduced or ‘saved’ in early years, but additional tax
will need to be paid later
.
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Balance sheet approach to accounting for
taxation (cont.)
Example of deferred tax liability
• Carrying amount of a non-current depreciable
asset exceeds the tax base in early years, as
depreciation allowable as a deduction for tax
purposes is greater than depreciation for
accounting purposes
• This will be reversed in later years when no
depreciation is allowable for tax purposes
.
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19-10
Balance sheet approach to accounting for
taxation (cont.)
Justification for deferred tax liability (AASB 112, par. 16)
It is inherent in the recognition of an asset that its carrying
amount will be recovered in the form of economic benefits
that flow to the entity in future periods. When the carrying
amount of the asset exceeds its tax base, the amount of
taxable economic benefits will exceed the amount that will be
allowed as a deduction for tax purposes. This difference is a
taxable temporary difference and the obligation to pay the
resulting income taxes in future periods is a deferred tax
liability. As the entity recovers the carrying amount of the
asset, the taxable temporary difference will reverse and the
entity will have taxable profit. This makes it probable that
economic benefits will flow from the entity in the form of tax
payments
.
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19-11
Balance sheet approach to accounting for
taxation (cont.)
Deferred tax asset
– The carrying amount of an asset is less than the tax base
Example of deferred tax asset
• Tax base of a depreciable asset exceeds the carrying
amount in early years, as depreciation allowable as a
deduction for tax purposes is less than depreciation for
accounting purposes
• This will be reversed in later years when the asset is fully
depreciated for accounting purposes, but depreciation is still
allowable as a deduction for tax purposes
.
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19-12
Balance sheet approach to accounting for
taxation (cont.)
Income tax expense
• Represents the sum of the tax attributable to taxable
income, plus or minus any adjustments relating to
temporary differences
• Defined in AASB 112 as:
– the aggregate amount included in the determination of profit
or loss for the period in respect of current tax and deferred
tax
.
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19-13
Balance sheet approach to accounting for
taxation (cont.)
Income tax payable
• The amount of tax generally expected to be paid to
the tax office, as a result of the year’s operations,
within the next financial period
• Under the ‘taxes payable method’ would be same
as tax expense, i.e. the amount payable to the tax
office is also treated as the tax expense by the
organisation
– This method not permitted in Australia
• Under balance sheet method income tax payable
does not necessarily equate to tax expense
– Tax expense affected by temporary differences
.
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19-14
Balance sheet approach to accounting for
taxation (cont.)
Calculation of income tax payable
• Income tax payable is based on taxable income, not
accounting profit
• Necessary to make adjustments to accounting profit to
determine tax profit, e.g.:
– add back accounting depreciation
– deduct depreciation for taxation purposes
• Calculation of income tax payable
– Tax rate multiplied by tax profit
Refer to Worked Example 19.2 on pp. 616–19—Temporary
differences caused by the depreciation of a non-current asset
.
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19-15
Worked Example 19.2—Temporary differences caused by the
depreciation of a non-current asset
• Robert August Ltd commences operations on 1 July 2009
• On the same date, it purchases a fibreglassing machine at a
cost of $600 000
• The machine is expected to have a useful life of four years, with
benefits being uniform throughout its life. It will have no residual
value at the end of four years
• Hence, for accounting purposes the depreciation expense
would be $150 000 per year
• For taxation purposes, the ATO allows the company to
depreciate the asset over three years—that is $200 000 per
year
• The profit before tax of the company for each of the next four
years (for years ending 30 June) is $500 000, $600 000, $700
000 and $800 000 respectively
• The tax rate is 30%
.
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19-16
Worked Example 19.2—Solution
Year 1 (ending 30 June 2010)
Carrying
value
($)
Fibreglassing machine: cost 600 000
Accumulated depreciation
150 000
450 000
.
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Tax base
($)
600 000
200 000
400 000
Temporary
difference
($)
50 000
19-17
Worked Example 19.2—Solution (cont.)
Accounting profit before tax
$500 000
Add back accounting depreciation
$150 000
Subtract depreciation for taxation purposes ($200 000)
Taxable profit
$450 000
Tax at 30%
$135 000
The journal entries at 30 June 2010 would be:
Dr Income tax expense
15 000
Cr Deferred tax liability
Dr Income tax expense
Cr Income tax payable
.
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15 000
135 000
135 000
19-18
Worked Example 19.2—Solution (cont.)
Year 2 (ending 30 June 2011)
Fibreglassing machine: cost
Accumulated depreciation
Carrying
value Tax base
($)
($)
600 000 600 000
300 000 400 000
300 000 200 000
Temporary
difference
($)
100 000
The temporary difference at 30 June 2011 totals $100 000.
Applying the tax rate of 30% provides a deferred tax liability of $30
000. Because $15 000 has already been recognised in 2010, an
increase (or ‘top up’) of $15 000 is required
.
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19-19
Worked Example 19.2—Solution (cont.)
Accounting profit before tax
$600 000
Add back accounting depreciation
$150 000
Subtract depreciation for taxation purposes ($200 000)
Taxable profit
$550 000
Tax at 30%
$165 000
The journal entries at 30 June 2011 would be:
Dr Income tax expense
15 000
Cr Deferred tax liability
Dr Income tax expense
Cr Income tax payable
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
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15 000
165 000
165 000
19-20
Worked Example 19.2—Solution (cont.)
Year 3 (ending 30 June 2012)
Fibreglassing machine: cost
Accumulated depreciation
Carrying
value
($)
600 000
450 000
150 000
Tax base
($)
600 000
600 000
0
Temporary
difference
($)
150 000
The temporary difference at 30 June 2012 is $150 000. Applying the
tax rate of 30% provides a deferred tax liability of $45 000. Because
$30 000 has already been recognised in 2010 and 2011, an increase
of $15 000 is required
.
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19-21
Worked Example 19.2—Solution (cont.)
The tax on the taxable income would be determined as follows:
Accounting profit before tax
$700 000
Add back accounting depreciation
$150 000
Subtract depreciation for taxation purposes ($200 000)
Taxable profit
$650 000
Tax at 30%
$195 000
The journal entries at 30 June 2012 would be:
Dr Income tax expense
Cr Deferred tax liability
Dr Income tax expense
Cr Income tax payable
.
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15 000
15 000
195 000
195 000
19-22
Worked Example 19.2—Solution (cont.)
Year 4 (ending 30 June 2013)
Fibreglassing machine: cost
Accumulated depreciation
Carrying
value
($)
600 000
600 000
0
Tax base
($)
600 000
600 000
0
Temporary
difference
($)
0
The temporary difference at 30 June 2013 is $nil, which means that
there should be no deferred tax liability or deferred tax asset
recorded in relation to this asset. This means the balance accrued in
the deferred tax liability must be reversed in 2013
.
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19-23
Worked Example 19.2—Solution (cont.)
The tax on the taxable income would be determined as follows:
Accounting profit before tax
$800 000
Add back accounting depreciation
$150 000
Subtract depreciation for taxation purposes
0
Taxable profit
$950 000
Tax at 30%
$285 000
The journal entries at 30 June 2013 would be:
Dr Deferred tax liability
45 000
Cr Income tax expense
Dr Income tax expense
Cr Income tax payable
.
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45 000
285 000
285 000
19-24
Worked Example 19.2—Solution (cont.)
A review of Worked Example 19.2 indicates that the balance sheet
approach to accounting for income tax ‘smooths’ the tax expenses
across the four years, as indicated below:
Tax expense based on taxable profit
Adjustment for ‘temporary’ difference
Total taxation expense
.
Year 1
($)
135 000
15 000
150 000
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Year 2
($)
165 000
15 000
180 000
Year 3
($)
195 000
15 000
210 000
Year 4
Total
($)
($)
285 000 780 000
(45 000)
–
240 000 780 000
19-25
Balance sheet approach to accounting for
taxation (cont.)
Overview of journal entries
• Journal entry if temporary differences result in
deferred tax asset
– To recognise tax expense that relates to the temporary
difference
Dr Deferred tax asset (temp. difference x tax rate)
Cr
Tax expense
– To recognise tax expense that relates to the entity’s
taxable profit
Dr Taxation expense
Cr
Income tax payable
.
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19-26
Balance sheet approach to accounting for
taxation (cont.)
• Journal entry if temporary differences result in
deferred tax liability
– To recognise tax expense that relates to the temporary
difference
Dr Tax expense
Cr
Deferred tax liability (temp. difference x tax rate)
– To recognise tax expense that relates to the entity’s taxable
profit
Dr Taxation expense
Cr
Income tax payable
.
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19-27
Balance sheet approach to accounting for
taxation (cont.)
Reversal in future periods
• In future periods, timing differences will reverse
– Deferred tax asset will be credited
– Deferred tax liability will be debited
.
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19-28
Tax base of asset and liabilities:
further consideration
Calculation of tax base for assets
• Carrying amount + future deductible amount—future
assessable amount
• Although an asset might be expected to give rise to
future assessable amounts that exceed the asset’s
carrying amount, AASB 112 focuses on the tax
consequences of recovering an asset to the extent of
its carrying amount only
• Where the carrying amount of an asset exceeds the tax
base there is a deferred tax liability
• If the carrying amount of the asset is less than the tax
base there will be a deferred tax asset
.
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19-29
Tax base of asset and liabilities:
further consideration (cont.)
• Consideration of doubtful debts when examining
accounts receivable
– amounts provided for doubtful debts are not deductible
for tax purposes
 deductible only when the account receivable is
actually written off
– any provision for doubtful debts will result in a difference
between carrying amount and tax base
 this will result in a deferred tax asset
Refer to Worked Example 19.3 on p. 620—Determining
the tax base of assets
.
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19-30
Tax base of asset and liabilities:
further consideration (cont.)
Calculation of tax base for liabilities
• Carrying amount—future deductible amount +
future assessable amount
• Exception to the rule
– Tax base of a liability that is in the nature of ‘revenue
received in advance’ must be calculated as the liability’s
carrying amount less any amount of the revenue received
in advance that has been included in assessable
amounts in the current or a previous reporting period
– This will result in a deferred tax asset
.
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19-31
Tax base of asset and liabilities:
further consideration (cont.)
• Tax base of a liability for ‘revenue received in
advance’
– Tax base of the liability is equal to the carrying amount of
the liability where the ‘revenue received in advance’ is
taxed in a reporting period subsequent to the reporting
period in which received
– The tax base of the liability is equal to zero where
‘revenue received in advance’ is taxed in the reporting
period when received
– Carrying amount—amount of revenue received in
advance that will not be subject to tax in future periods =
tax base
Refer to Worked Example 19.4 on pp. 669—Determining
the tax base of liabilities
.
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19-32
Deferred tax assets and deferred tax
liabilities
• Assets
– Deferred tax liability arises when:
 carrying amount > tax base
– Deferred tax asset arises when:
 carrying amount < tax base
• Liabilities
– Deferred tax liability arises when:
 carrying amount < tax base
– Deferred tax asset arises when:
 carrying amount > tax base
.
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19-33
Deferred tax assets and deferred tax
liabilities (cont.)
Summary
• Carrying amount of assets or liabilities—tax bases of assets
or liabilities = taxable or deductible temporary differences
• Taxable or deductible temporary differences x tax rate =
deferred tax liabilities or deferred tax assets
– Assessable temporary difference results in increase in
tax payable in future years
– Deductible temporary difference results in decrease in tax
payable in future years
Refer to Worked Example 19.5 on p. 623—Temporary
differences and the recognition of a deferred tax liability
Refer to Worked Example 19.6 on p. 624—A deductible
temporary difference resulting in a deferred tax asset
.
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19-34
Deferred tax assets and deferred tax
liabilities (cont.)
Deferred tax asset—Recognition criteria
• A number of assumptions are made:
– The entity will remain in business (going concern)
– Taxable income will be derived in future years
– Recognition of deferred tax asset same as applied to
other assets—reliance on ‘probability’ test
 AASB 112 provides the general rule that a deferred
tax asset must be recognised for all deductible
temporary differences that reflect the future tax
consequences of transactions and other events to the
extent that it is probable that future taxable amounts
within the entity will be available, against which the
deductible temporary differences can be utilised
• AASB 112 notes that the ‘probable’ test will always be met in
relation to deferred tax liabilities
.
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19-35
Unused tax losses
• Deferred tax assets can arise as a result of tax losses
– Losses incurred in previous years can generally be
carried forward to offset taxable income derived in future
years
• Tax losses can generate subsequent benefits in the form of
tax payments saved in future profitable periods
– For example, if we make a tax loss of $300 000 this year,
but next year we make a taxable profit of $300 000 then
we will be able to carry forward the loss and not have to
pay tax in the next year. The prior loss has created an
economic benefit in the form of tax that has been saved
• Consistent with the test for deferred tax assets generated by
temporary differences, deferred tax assets generated as a
result of unused tax losses must also be able to satisfy the
‘probable’ test before they are recognised as assets
.
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19-36
Unused tax losses (cont.)
AASB 112 (par. 34)
• A deferred tax asset shall be recognised arising from the
carry-forward of unused tax losses and unused tax credits to
the extent that it is probable that future taxable profit will be
available against which the unused tax losses and unused
tax credits can be utilised
• As a general principle applicable to all deferred tax assets it
is a requirement that they be reviewed at each reporting date
to ensure that the assets are not overstated (refer to AASB
112, par. 56)
• Refer to Worked Example 19.7 on p. 625, which illustrates
the utilisation of unused tax losses
.
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19-37
Worked Example 19.7—Utilisation of unused tax
losses
•
•
•
•
•
•
Grommit Ltd commenced operations in 2012
In the year ending 30 June 2012 it incurred a loss of $1 million
It is expected that the company will not incur losses again and will
generate taxable profit in subsequent years
The profits before tax in the following years are as follows:
Year
Profit before tax
2013
$300 000
2014
$400 000
2015
$600 000
It is assumed that there are no temporary differences between the
carrying values of Grommit Ltd’s assets and liabilities and the
respective tax bases
The tax rate is 30%
REQUIRED
Provide the journal entries to show the recognition of the asset associated
with the tax loss, as well as the journal entries to recognise the use of the
loss
.
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19-38
Worked Example 19.7—Solution
2012
Accepting that it is probable that the entity will be able to recoup the
benefits associated with the tax loss, the entry in 2012 would be:
Dr
Cr
Deferred tax asset
Income tax revenue
300 000
300 000
2013
In 2013 the entity generates a profit of $300 000. In the absence of a tax
loss, $90 000 would be payable. We still recognise tax expense, but rather
than crediting income tax payable, we credit the deferred tax asset. This
will reduce the balance of the deferred tax asset account to $210 000, and
no amount will be payable to the ATO
Dr
Cr
.
Income tax expense
Deferred tax asset
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90 000
90 000
19-39
Worked Example 19.7—Solution (cont.)
2014
In 2014 the entity generates a profit of $400 000. In the absence of a tax
loss, $120 000 would be payable. As noted above, we still recognise tax
expense, but rather than crediting income tax payable, we credit the
deferred tax asset. This will reduce the balance of the deferred tax asset
account to $90 000.
Dr
Cr
Income tax expense
Deferred tax asset
120 000
120 000
2015
In 2015 the entity generates a profit of $600 000. In the absence of a tax
loss, $180 000 would be payable. We can use the balance of the
previously unused tax loss ($90 000) and the remaining amount will then
be treated as income tax payable—a current liability
Dr
Cr
Cr
.
Income tax expense
Deferred tax asset
Income tax payable
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180 000
90 000
90 000
19-40
Transfer of tax losses to other
entities within a group
• Transfer of tax losses within a group or economic entity is
not addressed in AASB 112
• Importance of this issue diminished following introduction
(from 1 July 2001) of tax consolidation regime in Australia
• Loss transfer rules in the Income Tax Assessment Act 1997
no longer apply to most entities (other than in relation to
certain transfers Australian branches of foreign banks)
• New legislation requires corporate groups to form a ‘tax
consolidated group’ if they want to be treated as a single
entity for income and capital gains tax purposes
• Election to form a ‘tax consolidated group’ is optional—if
entity elects not to form such a group the individual
companies will be treated separately and tax losses in one
company will not be available to offset taxes payable by
another
.
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19-41
Revaluation of non-current assets
• According to AASB 112 (par. 20) revaluations of non-current
assets can create temporary differences
• When non-current assets are revalued, the revaluation
increment is not deductible for tax purposes, even though
depreciation for accounting purposes will be based on the
revalued amount
• The tax base is not affected by the revaluation because
depreciation for tax purposes will be based on the original
cost of the asset
• However, any increase in the carrying value of a non-current
asset through a revaluation undertaken to recognise an
increase in fair value implies an expected increase in the
future flow of economic benefits
• This increase can be taxable and can lead to a deferred tax
liability if the carrying amount is greater than the tax base
(refer to AASB 112, par. 20)
.
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19-42
Revaluation of non-current assets (cont.)
• Unlike previous examples where the temporary difference is
adjusted against income tax expense, asset revaluations give
rise to a special case
• AASB 112 requires that, to the extent that the deferred tax
relates to amounts that were previously recognised in equity as
either direct credits or direct debits, the journal entry to
recognise the deferred tax asset or liability must also be
adjusted against the equity account
• AASB 112 (par. 61)
– Current tax and deferred tax shall be charged or credited
directly to equity if the tax relates to items that are credited
or charged, in the same or a different period, directly to
equity
.
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PPTs to accompany Deegan, Australian Financial Accounting 6e
19-43
Revaluation of non-current assets (cont.)
• As the revaluation is adjusted against equity
(revaluation surplus account), the accounting entry to
record the recognition of the deferred tax liability is
Dr
Revaluation surplus
Cr
Deferred tax liability
• Recognition of future tax associated with an asset
that has a fair value in excess of its cost as
recognised by a revaluation acts to reduce the
amount of the revaluation surplus account
• Entry assumes that the revalued amount of the asset
will be recovered by the entity’s continued use of the
asset
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-44
Revaluation of non-current assets (cont.)
As an example, assume the following:
• Tax Ltd acquired land two years ago for $450 000
• Its fair value is now $600 000
• The tax rate is 30%
The entries to recognise a revaluation would be:
Dr
Land
150 000
Cr
Revaluation surplus
150 000
Dr
Cr
.
Revaluation surplus 45 000
Deferred tax liability
45 000
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-45
Revaluation of non-current assets (cont.)
• If there is an expectation that the revalued asset is to be sold
– Journal entries to record the deferred tax liability will be
different if the entity operates in a country with capital
gains tax indexation
– If a non-current asset is sold there is often a ‘tax break’
given to the organisation as the tax base is increased by
an index that reflects general price increases
– If the tax that will be assessed in future is to be reduced
because of capital gains indexation, the reduction in the
amount of tax that would be paid is accounted for by
debiting the deferred tax liability and crediting the
revaluation reserve
– Result—the tax base of an asset can depend on the
manner in which the entity's management expects to
recover the benefits inherent in the asset
– Refer to Worked Examples 19.8 and 19.9 on pp. 629–
631—Accounting for a revaluation
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-46
Change of tax rates
• Tax rates will change across time
• Will have implications for value to be attributed to pre-existing
deferred tax assets and deferred tax liabilities
• An increase in tax rates will create an expense (which will be of
the nature of income tax expense) when an entity has deferred
tax liabilities, and will create income in the presence of deferred
tax assets
• Conversely, a decrease in tax rates will create income when an
entity has deferred tax liabilities, whereas a decrease will create
an expense in the presence of deferred tax assets
Consider Worked Examples 19.11—Change in tax rates—
and 19.12—Impact of changing tax rates (pp. 634–35)
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-47
Worked Example 19.12—Impact of changing
tax rates
Taxi Ltd has the following deferred tax balances as at 30 June
2012:
Deferred tax asset
$500 000
Deferred tax liability
$300 000
The above balances were calculated when the tax rate was 30%.
On 1 August 2012 the government reduced the corporate tax rate
to 25%.
REQUIRED
Provide the journal entries to adjust the carry-forward balances of
the deferred tax asset and deferred tax liability
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-48
Worked Example 19.2—Solution
Deferred tax asset
Deferred tax liability
Balance at
30 June 2012
Balance at
1 August 2012
Change
$500 000
$300 000
$500 000 × 25/30 = $416 667
$300 000 × 25/30 = $250 000
($83 333)
($50 000)
The accounting entry at 1 August 2012 would be:
Dr
Deferred tax liability
50 000
Dr
Income tax expense
33 333
Cr
Deferred tax asset
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
83 333
19-49
Evaluation of the assets and liabilities
created by AASB 112
Deferred tax assets vs the AASB ‘Framework for the
Preparation and Presentation of Financial Statements’
– Deferred tax asset might not meet AASB Framework
definition of asset—a resource controlled by the entity as
a result of past events and from which future economic
benefits are expected to flow to the entity (par. 49)
– At reporting date the company really has no claim
against the government for the value of the deferred tax
asset
– The realisation of the benefit will only arise if the
company earns sufficient revenue in the future and if the
relevant tax legislation does not change
– It is questionable whether benefits are actually controlled
by the entity at balance date as there might be a
contingent element involved
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-50
Evaluation of the assets and liabilities
created by AASB 112 (cont.)
Definition of liability under AASB Framework—a
present obligation of the entity arising from past
events, the settlement of which is expected to result
in an outflow from the entity of resources embodying
economic benefits
– When a deferred tax liability exists the company is not
presently obliged to transfer funds of an amount equal to
the balance of the account
– Funds will only be transferred in the future if the company
earns sufficient revenue—there is a dependency on future
events, not past events
– Also an assumption that the relevant taxation legislation will
not change
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-51
Summary
• Main purpose of the lecture is to consider how to account
for tax
• Taxable profit and accounting profit will often be different
because expense and recognition rules used in accounting
are often different from those applied for taxation purposes
• AASB 112 Income Taxes applies the balance sheet
method in accounting for taxes—carrying values and tax
bases are compared for assets and liabilities
• The difference between carrying values and tax bases
leads to either deductible temporary differences or taxable
(assessable) temporary differences—multiplying these
differences by the tax rate gives rise to either a deferred
tax asset or deferred tax liability
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-52
Summary (cont.)
• Generally speaking, if the carrying amount of an asset is
greater than its tax base there will be a deferred tax liability
and if the carrying amount of an asset is less than its tax
base there will be a deferred tax asset
• If the carrying amount of a liability is greater than its tax
base there will be a deferred tax asset and if the carrying
amount is less than the tax base there will be a deferred tax
liability
• For an entity to recognise deferred tax assets there is a
requirement that the derived associated economic benefits
be probable
• When a temporary difference associated with the
revaluation of a non-current asset takes place the balance
of the revaluation reserve account is reduced
.
Copyright  2010 McGraw-Hill Australia Pty Ltd
PPTs to accompany Deegan, Australian Financial Accounting 6e
19-53