11-20-2009, 05:36 PM
Dear,
I will treat different components separately for understanding
1. ASSETS SIDE EXCEPT FINANCE LEASE ASSETS
From the accounting base of the assets, exclude both of the free-hold land and leased asset (under finance lease). [finance lease will be seprately considered].
This will come to Rupees 563,170,374.
Against this accounting base, the tax base will also be taken excluding freehold land and leased assets (under finance lease). You have not given tax base of leased assets (USED BY YOU) so calculations will have to be made by you.
Just for assumption, if we consider that leased assets had similar tax base as they had in accounts (i.e. Rupees 121,445,468), then the net figure of tax base of assets (net of land and leased assets) would be Rupees 93,211,840.
The resultant taxable difference would be Rs. 469,958,534. Deferred tax impact on this taxable difference @35% comes to Rupees 164,485,487.
{these figures may not be correct since I dont know what is the tax base taken for leased assets and here i used assumption, as discussed above}.
2. LIABILITIES SIDE EXCEPT FINANCE LEASE LIABAILITIES
As per query, there is no liability which gives rise to deductible temporary difference. [Finance lease is seprately discussed].
3. CARRY FORWARD AVAILABLE TAX LOSSES
Tax losses are Rs. 6,633,725. These cannot simply be added/deducted form deferred tax calculation. Rather the tax impact has to be calculated at 35% (rate being used.) Since the tax losses carry a debit balance so these will give rise to a taxable temporary difference. Deferred tax impact @35% is Rupees 2,321,804.
Here your calculation was wrong.
4. TREATMENT OF FINANCE LEASE ASSETS AND FINANCE LEASE LIABILITIES
First of all you need to understand how temporary differences arise in this case. What is recognised in accounts and what is accepted in tax etc.
One important thing I let you know is, there is no tax base of finance leased assets and there is no tax base of finance lease liabilities. This is weird but is real. Tax allows only rentals and does not accept or recognise any asset or liability unless the lease term is over, liabilities are Nil and assets have been transferred to operating assets.
Here if I use the word tax base of leased asset or liability, these are merely in response to data given by you.
To simplify the things I here deliberately follow the old approach of Profit and Loss instead of accounting and tax base of assets and liabilities although both give rise to similar results. (Other approach will follow).
Profit and loss approach
In accouting profit and loss account you recognise two things i.e. depreciation charge and finance charges on lease.
In tax profit determination, you add back the both of the above (i.e. depreciation and finance chares on lease) and instead of it deduct total rentals (including financial charges and principal portion).
Here lies the difference. The "depreciation charged in accounts" does represent the principal portion of liability (since asset is accounted for equal to liability) and "finance charges in accounts" do represent the finance cost embeddded in rentals but strictly these both cannot be equal to rentals because of charging of depreciation as per useful life instead of lease term.
Now if specific to any lease contract, you add up
(1) all depreciation and finance charges accounted for in current and previous years' profit and loss accounts at one side; [accounting figure/base] and
(2) all rentals paid against such contract in current and previous years on the other side.[tax figure/base]
The difference between the above two calculated figures would be the temporary difference regarding such one lease contract. (either taxable or deductible).
To arrive at an aggregate figure, you will have to repeat this exercise for all lease contracts in running at reporting date and closed during the year.
Liability method approach
Now instead of doing such massive exercise, if we follow balance sheet liability method (new approach) instead of profit and loss method, we can do it in a far simpler way. Here it goes
Don't treat leased assets or liabilities separately at all (leases under finance arrangement). Instead treat them together as under
1. Take the figure of written down value of all leased assets at the balance sheet date. (accounting base).
2. Take the figure of finance lease liabilities including long term and current portions. (Tax base). and
3. Assume that finance charges are same both in accounts and tax (since these are included in Profit and loss (in accounts) as well as lease rentals (in tax).
â¦â¦â¦â¦.{Mind it the WDV of leased assets carries the effect of the total depreciable amount i.e. depreciation to be charged or have been charged on all lease liabilities in past or future. Whereas, the liability carries the effect of all rentals to be paid or have been paid on all lease liabilities in past or future. If we take finance cost similar in both cases, the temporary differences remains between only these two.}â¦â¦â¦..
In your query, the WDV of finance lease assets is Rupees 121,233,628 while liability (I assume includes both current and long term portions) is Rupees 76,788,729. The difference is Rupees 44,444,899. Since the debit side is larger, it has obviously given rise to taxable difference. The deferred tax liability on this taxable difference @35% is Rupees 15,555,715.
5. CONCLUSION
Summarize the above 4,
- Deferred tax liability on taxable difference of assets side (Rs. 164,485,487)
- Deferred tax liability on deductible difference of liabilities side (Rs. Nil)
- Deferred tax asset on deductible difference of unused tax losses (Rs. 2,321,804)
- Deferred tax liability on taxable difference of finance leases arrangements (both assets and liabilities) (Rs. 15,555,715)
Total deferred tax liability as at reporting date Rupees 177,719,398.
6. OTHER MATTERS
a). You need to check the figure to be deducted from tax base of assets in respect of leased assets. I on assumption deducted the figure that you mentioned as accounting base. In other words you have to exclude any figure included by you in respct of leased assets (under finance) from the aggregate figure of tax base of assets. (You will see I also excluded it from accounting base of assets for seprate treatment).
b). Define and calculate temporary differences and deferred tax effect for all assets and liabilities separately instead of adding up all and arriving at a net result. This may lead to incorrect results as different account heads may need different treatment due to different reasons.
c). Check if any other item has been missed e.g. provisions (for employees benefits, impairments, or doubtful debts etc) and their reversals, items that make part of equity as per IAS-12 and need to be treated separately in equity (e.g. Revaluation surplus on fixed assets or Fair value gains on unquoted investments etc) and other such things.
If you have further questions, do post here.
Regards,
KAMRAN.
I will treat different components separately for understanding
1. ASSETS SIDE EXCEPT FINANCE LEASE ASSETS
From the accounting base of the assets, exclude both of the free-hold land and leased asset (under finance lease). [finance lease will be seprately considered].
This will come to Rupees 563,170,374.
Against this accounting base, the tax base will also be taken excluding freehold land and leased assets (under finance lease). You have not given tax base of leased assets (USED BY YOU) so calculations will have to be made by you.
Just for assumption, if we consider that leased assets had similar tax base as they had in accounts (i.e. Rupees 121,445,468), then the net figure of tax base of assets (net of land and leased assets) would be Rupees 93,211,840.
The resultant taxable difference would be Rs. 469,958,534. Deferred tax impact on this taxable difference @35% comes to Rupees 164,485,487.
{these figures may not be correct since I dont know what is the tax base taken for leased assets and here i used assumption, as discussed above}.
2. LIABILITIES SIDE EXCEPT FINANCE LEASE LIABAILITIES
As per query, there is no liability which gives rise to deductible temporary difference. [Finance lease is seprately discussed].
3. CARRY FORWARD AVAILABLE TAX LOSSES
Tax losses are Rs. 6,633,725. These cannot simply be added/deducted form deferred tax calculation. Rather the tax impact has to be calculated at 35% (rate being used.) Since the tax losses carry a debit balance so these will give rise to a taxable temporary difference. Deferred tax impact @35% is Rupees 2,321,804.
Here your calculation was wrong.
4. TREATMENT OF FINANCE LEASE ASSETS AND FINANCE LEASE LIABILITIES
First of all you need to understand how temporary differences arise in this case. What is recognised in accounts and what is accepted in tax etc.
One important thing I let you know is, there is no tax base of finance leased assets and there is no tax base of finance lease liabilities. This is weird but is real. Tax allows only rentals and does not accept or recognise any asset or liability unless the lease term is over, liabilities are Nil and assets have been transferred to operating assets.
Here if I use the word tax base of leased asset or liability, these are merely in response to data given by you.
To simplify the things I here deliberately follow the old approach of Profit and Loss instead of accounting and tax base of assets and liabilities although both give rise to similar results. (Other approach will follow).
Profit and loss approach
In accouting profit and loss account you recognise two things i.e. depreciation charge and finance charges on lease.
In tax profit determination, you add back the both of the above (i.e. depreciation and finance chares on lease) and instead of it deduct total rentals (including financial charges and principal portion).
Here lies the difference. The "depreciation charged in accounts" does represent the principal portion of liability (since asset is accounted for equal to liability) and "finance charges in accounts" do represent the finance cost embeddded in rentals but strictly these both cannot be equal to rentals because of charging of depreciation as per useful life instead of lease term.
Now if specific to any lease contract, you add up
(1) all depreciation and finance charges accounted for in current and previous years' profit and loss accounts at one side; [accounting figure/base] and
(2) all rentals paid against such contract in current and previous years on the other side.[tax figure/base]
The difference between the above two calculated figures would be the temporary difference regarding such one lease contract. (either taxable or deductible).
To arrive at an aggregate figure, you will have to repeat this exercise for all lease contracts in running at reporting date and closed during the year.
Liability method approach
Now instead of doing such massive exercise, if we follow balance sheet liability method (new approach) instead of profit and loss method, we can do it in a far simpler way. Here it goes
Don't treat leased assets or liabilities separately at all (leases under finance arrangement). Instead treat them together as under
1. Take the figure of written down value of all leased assets at the balance sheet date. (accounting base).
2. Take the figure of finance lease liabilities including long term and current portions. (Tax base). and
3. Assume that finance charges are same both in accounts and tax (since these are included in Profit and loss (in accounts) as well as lease rentals (in tax).
â¦â¦â¦â¦.{Mind it the WDV of leased assets carries the effect of the total depreciable amount i.e. depreciation to be charged or have been charged on all lease liabilities in past or future. Whereas, the liability carries the effect of all rentals to be paid or have been paid on all lease liabilities in past or future. If we take finance cost similar in both cases, the temporary differences remains between only these two.}â¦â¦â¦..
In your query, the WDV of finance lease assets is Rupees 121,233,628 while liability (I assume includes both current and long term portions) is Rupees 76,788,729. The difference is Rupees 44,444,899. Since the debit side is larger, it has obviously given rise to taxable difference. The deferred tax liability on this taxable difference @35% is Rupees 15,555,715.
5. CONCLUSION
Summarize the above 4,
- Deferred tax liability on taxable difference of assets side (Rs. 164,485,487)
- Deferred tax liability on deductible difference of liabilities side (Rs. Nil)
- Deferred tax asset on deductible difference of unused tax losses (Rs. 2,321,804)
- Deferred tax liability on taxable difference of finance leases arrangements (both assets and liabilities) (Rs. 15,555,715)
Total deferred tax liability as at reporting date Rupees 177,719,398.
6. OTHER MATTERS
a). You need to check the figure to be deducted from tax base of assets in respect of leased assets. I on assumption deducted the figure that you mentioned as accounting base. In other words you have to exclude any figure included by you in respct of leased assets (under finance) from the aggregate figure of tax base of assets. (You will see I also excluded it from accounting base of assets for seprate treatment).
b). Define and calculate temporary differences and deferred tax effect for all assets and liabilities separately instead of adding up all and arriving at a net result. This may lead to incorrect results as different account heads may need different treatment due to different reasons.
c). Check if any other item has been missed e.g. provisions (for employees benefits, impairments, or doubtful debts etc) and their reversals, items that make part of equity as per IAS-12 and need to be treated separately in equity (e.g. Revaluation surplus on fixed assets or Fair value gains on unquoted investments etc) and other such things.
If you have further questions, do post here.
Regards,
KAMRAN.
