Question

List the factors which cause the difference between accounting profit and taxable profits.

In terms of accounting for taxation, what would be the consequence If a certain expense is taxed on cash rather accrual basis? Don’t write more than 6 lines.

Write the three reasons for recognizing deferred tax.

What are the three requirements for IAS 12 in terms of deferred tax liabilities? Don’t write more than 8 lines.

Answer 1

Solution:

Factors which cause the difference between accounting profit and taxable profits :

• Revenues and expenses may be recognized in one reporting period for tax purposes and in another period for accounting purposes;
• Specific revenue and expense items may be either not recognized for accounting purposes but recognized for tax purposes, or alternatively, recognized for accounting purposes but not recognized for tax purposes;
• The tax base and carrying amount of assets and/or liabilities may differ;
• The deductibility of gains and losses of assets and liabilities may vary for income tax and accounting purposes;
• The tax losses of prior years may be used to reduce the taxable income in later years, subject to tax rules. This will result in differences between the accounting and taxable income (tax loss carry forward); and
• The adjustments of reported financial data from prior years may not be recognized equally for accounting and tax purposes or may be recognized in different periods.

Expense is taxed on cash rather accrual basis :

If the expenses taxed on cash basis rather than accrual basis it results into more taxable profit and less accounting profit and company needs to pay tax on these additional income during the current period results into an deferred tax asset for the entity.

Reasons for recognizing deferred tax.

• To ensure current year income should be taxed in the same year.
• To comply with matching concept, taxes on income are considered to be an expense incurred by the entry in earning income and are accrued in the same period as the revenue and expenses to which they relate irrespective of actual payments.
• To increase the fair presentation of financial statements.

Three requirements for IAS 12 in terms of deferred tax liabilities

• Current tax for current and prior periods shall, to the extent unpaid, be recognized as a liability.
• The exact liability of current tax crystallizes only on preparation and finalization of financial statements at the end of the reporting period.
• Any excess of this liability over the prepaid taxes (advance tax) and withhold taxes (TDS) is to be treated as current liability. This liability may be for the current REPORTING period or may relate to earlier reporting periods.