Question

Question 5

While there have been several approaches in accounting for deferred taxes, MFRS 112 Income Tax requires the use of the provision approach that has an advantage of being able to match between revenue and tax expenses. Discuss the effect of the full provision approach on the recognition and measurement of deferred taxes.

a) Under the accounting rules, interest revenue is recorded when it is receivables. However, under the tax rules, interest revenue is recorded when it is received. If Raiso Bhd. Has a pre-tax accounting income in 2015 amounting to RM240,000 but the amount is inclusive of RM40,000 interest that is only receivable 2016, then deferred tax liability exists. Using this scenario, elaborate on the recognition criteria for deferred tax liability (assuming the tax rate 25%).

b) Under the accounting rules, interest expense is recorded when it is payable. However, under the tax rules, interest expense is recorded when it is paid. If Fasola Bhd. Has a pre-tax accounting income in 2015 amounting o RM 240,000 after deducting an interest of RM40,000 that is only payable in 2016, then deferred tax assets exists. Using the scenario. Elaborate on the recognition criteria for deferred tax assets (assuming the tax rate is 25%).

c) MFRS112 indicates that a deferred tax asset is recognized only when there is evidence of probable taxable profits that can be used against the deductible temporary difference in the future. Identify the situations in which there is no evidence of such probable taxable profits that would lead to companies having unrecognized tax benefits.

d) Often in the early years of incorporations, companies have negative taxable income, possibly due to not having enough taxable revenues but incurring huge taxable expenses. Tax losses that are recognized during those years can later be used as a carryback or carry forward. Differentiate the accounting treatment for loss carryback and carry forward for deferred taxes.

e) The Malaysian national budget, which is tabled in Parliament every year, contains relevant information that affects corporate income tax. Aside from the rate of tax, incentives that are intended to prosper the Malaysian economy are tabled. In Budget 2015, for example, deductions are granted in training expenses incurred by companies for the employees, to obtain industry-recognized certifications and professional qualifications such as in the field of accounting, finance and project management. Discuss the effect of tax rates or tax rule changes on accounting for deferred taxes.

f) In one financial reporting period, companies will occasionally have multiple temporary differences, resulting in several items with deferred tax assets and several items with deferred tax liabilities. How are these deferred tax assets and deferred tax liabilities reported in a Statement of Financial Position?

g) Information about taxes is relevant to users of financial statements as taxes indicate not only expenses, but also the cash outflow of the companies. To assist users of financial statements in understanding the tax obligations of a company, suggest two disclosure notes pertaining to deferred tax account in the Statement of Financial Position.

h) During a management meeting, Mr Katsuki, a director from Japan, indicates that never in his past experiences in Japan had he encountered any discussions involving the need to make any adjustment for tax in the preparation of a company’s account. He argues that the tax paid by the company to the tax authorities will be similar to its expenses presented by the financial statements. Explain to him the differences between tax rules and financial accounting and reporting standards that might cause the tax calculated for tax purposes and accounting purposes to differ, especially in the context of Malaysian tax and accounting systems.

Answer 1

a) Under the accounting rules, interest revenue is recorded when it is receivables. However, under the tax rules, interest revenue is recorded when it is received. If Raiso Bhd. Has a pre-tax accounting income in 2015 amounting to RM240,000 but the amount is inclusive of RM40,000 interest that is only receivable 2016, then deferred tax liability exists. Using this scenario, elaborate on the recognition criteria for deferred tax liability (assuming the tax rate 25%).

The difference of RM40,000 between the carrying value of interest receivable of RM40,000 and its tax base of NIL is a taxable temporary difference.

Raiso Bhd. has to recognise a deferred tax liability of RM10,000 (RM40,000 x 25%) in its financial statements for the reporting period ended 2015.

Tax Expense

b) Under the accounting rules, interest expense is recorded when it is payable. However, under the tax rules, interest expense is recorded when it is paid. If Fasola Bhd. Has a pre-tax accounting income in 2015 amounting o RM 240,000 after deducting an interest of RM40,000 that is only payable in 2016, then deferred tax assets exists. Using the scenario. Elaborate on the recognition criteria for deferred tax assets (assuming the tax rate is 25%).

The difference of RM40,000 between the carrying value of interest payable of RM40,000 and its tax base of NIL, is a deductible temporary difference.

Fasola Bhd. has to recognise a deferred tax asset of RM10,000 (RM40,000 x 25%) in its financial statements for the reporting period ended 2015.