Defered Tax & Current Tax - Printable Version

Defered Tax & Current Tax - Printable Version

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Defered Tax & Current Tax - mhn786 - 03-01-2006

Hi All,

Can please any one explain explain what is current Tax & Deffered Tax.
and what is there treatment

Thanks

MHN

- Ali Akbar - 03-01-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by mhn786
 Hi All,

Can please any one explain explain what is current Tax & Deffered Tax.
and what is there treatment

Thanks

MHN
<hr height="1" noshade id="quote"></blockquote id="quote">

It is detailed discussion, however, deferred tax arises due to temporary differense(s) b/w accounting profit and taxable profit, and to ensure the comparability of financial statements deferred tax is created. Illustration will help u to understand the ensurance of comparabilty.
(Figures in rupees)
Cost of asset is 10,000
Useful life is 5 yrs
RV is zero
Method of depreciation is SL
Tax depreciation as per tax laws is 4,000 in 1st year, 3,000 in 2nd year, 2,000 in 3rd year and 1,000 in 4th year.
Accounting profit is constant i.e 10,000 per annum.
Tax rate is 40%

Now look
In 1st year
If we add back acc dep and deduct tax dep for calculating current tax, the perofit will be 8,000(10,000+2,000-4,000) and after tax profit is 4,800

2nd year
restated profit for tax puposes is 9,000(10,000+2,000-3,000) and after tax profit is 5,400.

3rd year
restated profit for tax puposes is 10,000 (10,000+2,000-2,000)

4th year
restated profit for tax puposes is 11,000 (10,000+2,000-1,000)

5th year
restated profit for tax puposes is 12,000(10,000+2,000+0)

Now the question arises in the mind of investor that why does the graph of net profit after tax fall and then rise (becz of reversal) keeping in view the constant performance of the company?

So, to keep in line the profit of the company with the actual performance, deferred tax arises and it is reversed as and when the effect of temporary difference(s) reverses.

Hope it will help u a bit.

ICAPians, the unaparalleled..

- Ali Akbar - 03-01-2006

Further to my previous post following is the treatment of deferred tax.

Formula for calculating deferred tax is
Carrying amount - tax base=temporary difference x effective tax rate
This will give you the amount of deferred tax to be recognized in balanace sheet, in order to deteremine the status of this amount i.e whether it is deferred tax asset or deferred tax liability, following shortcut will help u alot

Temporary difference in case of asset
If carrying amount of asset (CA) > tax base then resulting deferred tax is deferred tax liability.

If CA<tax base, then resulting deferred tax is deferred tax asset.

Temporary difference in case of liability
If CA (of liability) >tax base, then resulting deferred tax is deferred tax asset.

If CA < tax base, then resulting deferred tax is deferred tax liability.

If u have understood these shortcut formulas then Inshallah u will never get beat in deferred tax issues/questions.

ICAPians, the unparalleled..