08-18-2010, 11:06 AM
Deferred tax is an accounting concept (also known as future income taxes), meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.
The following example assumes that a company purchases an asset for Rs100,000 which is depreciated for accounting purposes on a straight-line basis of five years. The company claims tax depreciation of 25% per year on a declining balance basis. The applicable rate of corporate income tax is assumed to be 35%. And then subtract the net value.
Purchase year 1 year2 year 3 year 4
Accounting Value 100,000 80,000 60,000 40,000 20,000
Tax Value 100,000 75,000 56,300 42,200 31,600
Taxable/temp Diff Nill 5,000 3,700 (2,200) (11600)
Def Tax liab/asset 1750 1295 (770) (4060)
As the tax value, or tax base, is lower than the accounting value, or book value, in years 1 and 2, the company should recognise a deferred tax liability. This also reflects the fact that the company has claimed tax depreciation in excess of the expense for accounting depreciation recorded in its accounts, whereas in the future the company should claim less tax depreciation in total than accounting depreciation in its accounts.
In years 3 and 4, the tax value exceeds the accounting value, therefore the company should recognise a deferred tax asset (subject to it having sufficient forecast profits so that it is able to utilise future tax deductions). This reflects the fact that the company expects to be able to claim tax depreciation in the future in excess of accounting depreciation.
Calculate deprication some figures are rounded off
Feel free to ask if the concept is still not yet clear
The following example assumes that a company purchases an asset for Rs100,000 which is depreciated for accounting purposes on a straight-line basis of five years. The company claims tax depreciation of 25% per year on a declining balance basis. The applicable rate of corporate income tax is assumed to be 35%. And then subtract the net value.
Purchase year 1 year2 year 3 year 4
Accounting Value 100,000 80,000 60,000 40,000 20,000
Tax Value 100,000 75,000 56,300 42,200 31,600
Taxable/temp Diff Nill 5,000 3,700 (2,200) (11600)
Def Tax liab/asset 1750 1295 (770) (4060)
As the tax value, or tax base, is lower than the accounting value, or book value, in years 1 and 2, the company should recognise a deferred tax liability. This also reflects the fact that the company has claimed tax depreciation in excess of the expense for accounting depreciation recorded in its accounts, whereas in the future the company should claim less tax depreciation in total than accounting depreciation in its accounts.
In years 3 and 4, the tax value exceeds the accounting value, therefore the company should recognise a deferred tax asset (subject to it having sufficient forecast profits so that it is able to utilise future tax deductions). This reflects the fact that the company expects to be able to claim tax depreciation in the future in excess of accounting depreciation.
Calculate deprication some figures are rounded off
Feel free to ask if the concept is still not yet clear
