IAS 12 - Tax base

Ubaid15 · 12-31-2009, 04:16 AM

As salam o Alekum to all.

I'd highly appreciate it if anyone could explain tax bases of an asset and liability as defined in IAS 12 with the help of some examples and secondly if someone can show me by way of example and explanation how taxable temporary differences lead to deferred tax liabilities and deductible tax differences lead to deferred tax assets.

Thanks

Muhammad Amir · 01-03-2010, 02:03 PM

For Deferred Tax.

There are two types of Assets

1)Normally Eventually Charged to P/L. Examples of such assets are, Property Plant & Eqipment and Prepayments. Their Tax base is the related amount that will be allowed as expense in furture by Tax authorities.

For Example, a property whose cost was 200m and tax depreciation was 100m means that its tax base is 100m (200-100). This 100m is an amount that the tax authorities will allow as expense in future. Another example of assets of this category is Development cost, where all the expenses incurred were claimed through P/L in previous years, however, in future, when such cost will be capitalized as development cost then its tax base will be zero because its has already been allowed by tax authorities in past.

2)Normally Eventually Converted into Cash. Examples of such assets are Freehold land, investment property and inventories etc. Their tax base is the extent of related reciept on which no tax will be imposed in future by Tax authorities. For example, a company purchased a freehold land for Rupees 100m. Its tax base will be 100m because this asset falls in the category of assets which are normally eventually converted into cash and tax base of such assets is the amount on which no tax will be imposed in future by tax authorities. So, the tax authorities have already allowed 100m in past (at the time of its purchase) so it will not be allowed again in future, Carrying amount of the asset was 100m and its tax base is also also 100m. If however, for example, this asset has been revalued upto 110m, the carrying amount will be 110m, Tax base will be 100m and the taxable temporary difference of 10m will arise.

There are two types of Liabilities as well

1) Revenue Received in Advance/Unearned Income. Its tax base is carrying amount of the liability less any amount on which no tax will be imposed in future by tax authorities.

2) All other Liabilities. Its tax base is carrying amount of the liability less any amount that will be allowed as expense in future by tax authorities.

<blockquote id="quote">quote<hr height="1" noshade id="quote">how taxable temporary differences lead to deferred tax liabilities and deductible tax differences lead to deferred tax assets.<hr height="1" noshade id="quote"></blockquote id="quote">

Concept # 1 When Carrying amount of an asset exceeds its Tax Base, the resulting temporary difference will be taxable temporary difference, which is deferred tax liability.

Explanation

Suppose a company purchased a machine on 1 Jan 2009 for $10,000, it is the policy of the company to depreciate machinery @ 10%. However, tax regulations of the country in which the company operates allows all companies to claim First Year Allowance on machinery items at 40%.

The Carrying amout will be ($10,000 - $1,000)=> $9,000
the Tax base will be ($10,000 - $4,000)=> $6,000
__________________________________________________________________
Carrying Amount exceeds Tax Base=>$3,000 (Taxable temporary difference)

Lets suppose the profits of the company are $ 100,000 for both tax and accounting purposes.

====================Accounting=========================Tax
Profit------------------$100,000==========================$100,000
LessDepreciation---------($1,000)========================($4,000)
___________________________________________________________________
Taxable Profits===========$99,000=========================$96,000
___________________________________________________________________
Tax rates @ 30%========$29,700========================$28,800
___________________________________________________________________

Therefore, the difference between accounting profit and tax profit is $900, which is due to $3,000 (taxable temporary difference. 3,000*30% will be 900). Now the question is why such difference is taxable temporary difference? The Answer is, this difference is primerily due to the different treatments of realization of certain expenses by tax authorities and accounting regimes. At the end of first year the accounting regime allowed only $1,000 as deprecation to be deducted from the profits of the company and hence the higher accounting profit gave rise to higher accounting tax, however, on the other hand, the tax authorities allowed $4,000 to be deducted from the profits of the company. If we see it from today's perspective then we effectively saved $3,000 to be taxed and this is because of $3,000 higher depreciation charge to taxable profits. However, this saving of $3,000 from tax is temporary and it will eventually reverse in future, when tax authorities will be allowing very nominal charge as depreciation to taxable profits while, at the same time accounting regime will be allowing fixed rate $1,000 per anum as depreciation charge to the profits of the company. This means that this saving of $3,000 is not saving actually because we have to pay it in future and anything that has to be paid in future is our liability.

Concept # 2 When Tax Base of an asset exceeds its Carrying Amount, the resulting temporary difference will be Deductable temporary difference, which is deferred tax asset. Similar concept applies here as that of concept 1.

Ubaid15 · 01-06-2010, 11:05 PM

Thanks a lot for your elaborate reply Muhammad amir. Highly appreciate it !

diky823 · 01-23-2011, 10:54 PM

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