[Link].

com Example 1: Current Income Tax IAS 12

Taxico ltd. is a manufacturing company who wishes to calculate its taxable profit or loss for the year ended 31 December 20X5. There are the statement of
profit or loss and other comprehensive income, the statement of financial position and the notes below.
Tax rate for 20X5 is 30%, but the new tax rate of 32% for the year 20X6 and beyond has already been enacted before the year end. Calculate taxable profit
for 20X5 and the related current tax expense.

Statement of financial position as of 31 December 20X5

ASSETS EUR EQUITY & LIABILITIES EUR

Equity
Non-current assets Share capital 600,000
Accumulated profits 408,919
Property, plant and equipment 600,000 Revaluation surplus 44,000
Product development costs 30,000
Investment in subsidiary TaxPall 220,000 Long-term liabilities
Deferred income - government grants 20,000
Current assets Liability for product warranty costs 8,000
Deferred tax liability (from 20X4) 11,081
Trading investments 104,000
Trade receivables 313,000 Current liabilities
Inventories 152,000 Trade payables 382,000
Cash and cash equivalents 90,000 Health care benefits for employees 35,000

TOTAL ASSETS 1,509,000 TOTAL EQUITY & LIABILITIES 1,509,000

Statement of profit or loss and other comprehensive income for the year ended 31 December 20X5 (incomplete)

Revenue 2,402,000
Cost of sales -1,920,000
Gross profit 482,000

Operating costs -384,000

Profit from operations 98,000

Finance costs -13,000

Profit before taxation 85,000

Notes:
1. Depreciation expense for the year 20X5 allowable in line with tax legislation is 103 000 EUR. Accounting depreciation included in operating costs is
85 000 EUR. Cost of PPE is 800 000 EUR and Taxico deducted expenses of 208 000 EUR in its tax returns prior the year 20X5. Moreover, as of 31
December 20X5, Taxico for the first time revalued its property, plant and equipment to market value of 600 000 EUR (revaluation surplus = 44 000 EUR).

2. In 20X2, Taxico incurred product development costs of 50 000 EUR. These costs were recognized as an asset and amortized over period of 10 years .
For tax purposes, Taxico deducted full product development costs in 20X2.

3. Trading investments were acquired in 20X4 with cost of 115 000 EUR. These investments are classified as at fair value through profit or loss and thus
recognized in their fair value. Fair value adjustments are not allowable by the tax authorities.

4. Bad debt provision amounts to 65 000 EUR and relates to 2 debtors: debtor A - 40 000 EUR (receivable originates in 20X3 and 100% provision was
recognized in 20X4) and debtor B - 25 000 EUR (receivable originates in 20X4 and 100% provision was recognized in 20X5). Tax law allows deduction of
20% of provision for debtors overdue for more than 1 year, another 30 % for debtors overdue for more than 2 years and remaining 50% for debtors
overdue for more than 3 years.

[Link] accounts for inventory obsolescence provision. New provision created in 20X5 was 5 400 EUR (total provision: 9 000 EUR). This provision is
not tax deductible, as it is a general provision.

6. Government grants are not taxable. Full government grant received in 20X5 is included in the statement of financial position.

7. In 20X5, Taxico increased a liability for product warranty costs by 2 500 EUR. Product warranty costs are not tax deductible until the company pays
claims. Claims paid in 20X5 amounted to 3 100 EUR.

8. During the year, Taxico introduced health care benefits for employees. The expenses are allowable for tax purposes only when benefits are paid
but in line with IAS 19, recognized in profit or loss when employees provide service.

9. Expenses for representation and promotion included in operating expenses amount to 900 EUR. These are not deductible for tax purposes.

10. Tax law allows to deduct expenses for petrol only up to 2 000 EUR per vehicle per year. Taxico had 4 vehicles in 20X5 and its total petrol expenses
amounted to 10 300 EUR.

CALCULATION OF CURRENT TAX EXPENSE

Accounting profit 85,000

Add back:
[Link] Example 1: Current Income Tax IAS 12

Accounting depreciation 85,000

Amortization of product development costs 5,000
Revaluation of trading investments 11,000
Bad debt provisions - 20X5 25,000
Inventory obsolescence provision 5,400
Product warranty costs provision - 20X5 2,500
Provision for health care benefit costs 35,000
Representation & promotion expenses 900
Petrol over limit 2,300
Total 172,100

Deduct:
Tax depreciation -103,000
Tax allowance for bad debt provisions -17,000
Product warranty costs provision - claims paid -3,100
Total -123,100

Taxable profit / loss: 134,000

Tax rate: 30%

Current income tax: 40,200

Debit Profit or loss - Current income tax expense 40,200

Credit Current income tax liabilities -40,200

Workings

Product development costs:

Annual amortization (50 000/ 10) 5,000

Bad debt provisions:

#1 Debtor A - 40 000 EUR from 20X3
> 2 years - 30% deductible in 20X5 12,000

#2 Debtor B - 25 000 EUR from 20X4

> 1 year - 20% deductible in 20X5 5,000

Total - tax deductible in 20X5 17,000

Petrol expenses
Tax deductible (4*2 000) 8,000
Actual expenses 10,300
Excess 2,300
[Link] Example 2: Deferred Tax Overview IAS 12

ABC company acquires a machine for 400 000 EUR and decides to depreciate it straight-line over its useful life of 5 years. Income
tax legislation in ABC's country allows depreciating machines straight-line over 4 years. In the years 1-5, ABC's taxable income
before tax depreciation expense is 200 000 EUR and the tax rate is 30%.
Show ABC's current tax expense, deferred tax expense, deferred tax asset/liability and the net profit in the years 1-5.

1. Current tax expense

Year 1 Year 2 Year 3 Year 4 Year 5

Taxable income 200,000 200,000 200,000 200,000 200,000
Less tax depreciation expense 100,000 100,000 100,000 100,000 0
Taxable profit 100,000 100,000 100,000 100,000 200,000
Current tax expense (30%) 30,000 30,000 30,000 30,000 60,000

2. Deferred tax

2.1 Carrying amount

Year 1 Year 2 Year 3 Year 4 Year 5

Opening carrying amount 400,000 320,000 240,000 160,000 80,000
- accounting deprec. expense 80,000 80,000 80,000 80,000 80,000
Closing carrying amount 320,000 240,000 160,000 80,000 0

2.2 Tax base

Year 1 Year 2 Year 3 Year 4 Year 5

Opening tax base 400,000 300,000 200,000 100,000 0
- tax depreciation expense 100,000 100,000 100,000 100,000 0
Closing tax base 300,000 200,000 100,000 0 0

2.3 Deferred tax

Year 1 Year 2 Year 3 Year 4 Year 5

Closing carrying amount 320,000 240,000 160,000 80,000 0
Closing taxable base 300,000 200,000 100,000 0 0
Temporary difference 20,000 40,000 60,000 80,000 0
Closing DT liability (30%) 6,000 12,000 18,000 24,000 0
- opening DT liability 0 6,000 12,000 18,000 24,000
Deferred tax expense 6,000 6,000 6,000 6,000 -24,000

3. Net profit

Year 1 Year 2 Year 3 Year 4 Year 5

Income 200,000 200,000 200,000 200,000 200,000
Accounting depreciation 80,000 80,000 80,000 80,000 80,000
Profit before tax 120,000 120,000 120,000 120,000 120,000
Current tax expense 30,000 30,000 30,000 30,000 60,000
Net profit before deferred tax 90,000 90,000 90,000 90,000 60,000
Deferred tax expense 6,000 6,000 6,000 6,000 -24,000
Net profit 84,000 84,000 84,000 84,000 84,000
[Link] Example 3: Tax Base IAS 12

Based on the statement of financial position and notes of Taxico ltd. from previous example, calculate tax base of its assets and liabilities as of 31
December 20X5. Note that statement of financial position has been adjusted by current tax expense and liability.

Statement of financial position as of 31 December 20X5

ASSETS EUR EQUITY & LIABILITIES EUR

Equity
Non-current assets Share capital 600,000
Accumulated profits 368,719
Property, plant and equipment 600,000 Revaluation surplus 44,000
Product development costs 30,000
Investment in subsidiary TaxPall 220,000 Long-term liabilities
Deferred income - government grants 20,000
Liability for product warranty costs 8,000
Current assets Deferred tax liability (from 20X4) 11,081

Trading investments 104,000 Current liabilities

Trade receivables 313,000 Trade payables 382,000
Inventories 152,000 Health care benefits for employees 35,000
Cash and cash equivalents 90,000 Current tax liability 40,200

TOTAL ASSETS 1,509,000 TOTAL EQUITY & LIABILITIES 1,509,000

Notes:

1. Depreciation expense for the year 20X5 allowable in line with tax legislation is 103 000 EUR. Accounting depreciation included in operating costs is
85 000 EUR. Cost of PPE is 800 000 EUR and Taxico deducted expenses of 208 000 EUR in its tax returns prior the year 20X5. Moreover, as of 31
December 20X5, Taxico for the first time revalued its property, plant and equipment to market value of 600 000 EUR (revaluation surplus = 44 000
EUR).

2. In 20X2, Taxico incurred product development costs of 50 000 EUR. These costs were recognized as an asset and amortized over period of 10 years .
For tax purposes, Taxico deducted full product development costs in 20X2.

3. Trading investments were acquired in 20X4 with cost of 115 000 EUR. These investments are classified as at fair value through profit or loss and thus
recognized in their fair value. Fair value adjustments are not allowable by the tax authorities.

4. Bad debt provision amounts to 65 000 EUR and relates to 2 debtors: debtor A - 40 000 EUR (receivable originates in 20X3 and 100% provision was
recognized in 20X4) and debtor B - 25 000 EUR (receivable originates in 20X4 and 100% provision was recognized in 20X5). Tax law allows deduction of
20% of provision for debtors overdue for more than 1 year, another 30 % for debtors overdue for more than 2 years and remaining 50% for debtors
overdue for more than 3 years.

[Link] accounts for inventory obsolescence provision. New provision created in 20X5 was 5 400 EUR (total provision: 9 000 EUR). This provision is not
tax deductible, as it is a general provision.

6. Government grants are not taxable. Full government grant received in 20X5 is included in the statement of financial position.

7. In 20X5, Taxico increased a liability for product warranty costs by 2 500 EUR. Product warranty costs are not tax deductible until the company pays
claims. Claims paid in 20X5 amounted to 3 100 EUR.

8. During the year, Taxico introduced health care benefits for employees. The expenses are allowable for tax purposes only when benefits are paid
but in line with IAS 19, recognized in profit or loss when employees provide service.

9. Expenses for representation and promotion included in operating expenses amount to 900 EUR. These are not deductible for tax purposes.

10. Tax law allows to deduct expenses for petrol only up to 2 000 EUR per vehicle per year. Taxico had 4 vehicles in 20X5 and its total petrol expenses
amounted to 10 300 EUR.

DETERMINATION OF TAX BASE

Carrying
Item Tax base
amount
Property, plant and equipment 600,000 489,000
Product development costs 30,000 0
Investment in subsidiary 220,000 220,000
Trading investments 104,000 115,000
Trade receivables 313,000 353,000
Inventories 152,000 161,000
Cash and cash equivalents 90,000 90,000
Deferred income - government grants -20,000 0
Liability for product warranty costs -8,000 0
Trade payables -382,000 -382,000
Health care benefits for employees -35,000 0
[Link] Example 3: Tax Base IAS 12

Workings

Property, plant and equipment

Cost 800,000
less current tax depreciation -103,000
less PY tax depreciation -208,000
Tax base 489,000

Trade receivables - bad debt provisions:

#1 Calculation of cost
Carrying amount 313,000
add back bad debt provision 65,000
Cost 378,000 A

#2 Debtor A - 40 000 EUR from 20X3

> 1 year - 20% deducted in 20X4 8,000
> 2 years - 30% deducted in 20X5 12,000
Already deducted for tax: 20,000

#3 Debtor B - 25 000 EUR from 20X4

> 1 year - 20% deducted in 20X5 5,000

Total deducted for tax purposes 25,000 B

Tax base of trade receivables: 353,000 A-B

[Link] Example 4: Temporary Differences IAS 12

Based on the previous example of Taxico, calculate temporary differences and deferred tax. Note from example 1: Tax rate for 20X5 is 30%,
but the new tax rate of 32% for the year 20X6 and beyond has already been enacted before the year end.

CALCULATION OF TEMPORARY DIFFERENCES / DEFERRED TAX

Carrying Temporary Taxable / DTA / DTL

Item Tax base
amount difference deductible at 32%
Property, plant and equipment 600,000 489,000 111,000 taxable -35,520
Product development costs 30,000 0 30,000 taxable -9,600
Investment in subsidiary TaxPall 220,000 220,000 0 0
Trading investments 104,000 115,000 -11,000 deductible 3,520
Trade receivables 313,000 353,000 -40,000 deductible 12,800
Inventories 152,000 161,000 -9,000 deductible 2,880
Cash and cash equivalents 90,000 90,000 0 0
Deferred income - government grants -20,000 0 -20,000 excluded 0
Liability for product warranty costs -8,000 0 -8,000 deductible 2,560
Trade payables -382,000 -382,000 0 0
Health care benefits for employees -35,000 0 -35,000 deductible 11,200

Deferred tax asset - total 32,960

Deferred tax liability - total -45,120
Deferred tax total -12,160
[Link] Example 4: Temporary Differences IAS 12

0.375
0.1875
[Link] Example 5: Investments and Recognition of Deferred Tax IAS 12

On 31 December 20X5, Taxico acquired 100% share in TaxPall for 220 000 EUR. The statement of TaxPall's net assets is below.
There is currently no deferred tax recognized in the accounts of TaxPall. Goodwill arising on acquisition is not allowable for taxation
and no amortization of goodwill has been charged to the financial statements so far (as it's the date of acquisition). Together with
results from previous examples, calculate the deferred tax that would appear in Taxico's group accounts for the year ended 31
December 20X5.

TaxPall - statement of net assets as of 31 December 20X5

(in EUR)

Temporary Taxable /
Item Fair value Carrying amount Tax base
difference deductible
Property, plant and equipment 145,000 130,000 120,000 25,000 taxable
Trade receivables 34,500 34,500 36,000 -1,500 deductible
Inventories 50,000 50,000 52,000 -2,000 deductible
Cash and cash equivalents 10,000 10,000 10,000 0
Health care benefit -18,000 -18,000 0 -18,000 deductible
Current liabilities -54,000 -54,000 -54,000 0
TOTAL NET ASSETS 167,500 152,500 164,000 3,500 taxable

Goodwill on acquisition of TaxPall:

Cost of investment 220,000
Less FV of net assets -167,500
Goodwill 52,500

Calculation of deferred tax

Deferred tax liability - Taxico

(from previous example) -12,160
Deferred tax liability - TaxPall
(-3 500*32%) -1,120
DTL in Taxico group accounts -13,280

Less opening DTL in group accounts -11,081 (see Example 1, Taxico's statement
Total change of DTL in group accounts -2,199 of financial position)

Thereof:
Adjustment for tax rate change Taxico
(11 081*100/30*2%) -739
Deferred tax - Taxico revaluations (see
working below) -14,080
Deferred tax - TaxPall revaluations -1,120
Deferred tax - charge to profit or loss
(Taxico) 13,740

Working - Taxico revaluations

Deferred tax related to revaluation of PPE:

Fair value 600,000
Revaluation surplus: 44,000

Tax base 0

DTL (44 000*32%) -14,080

Accounting entry in the group accounts:

Debit - Revaluation surplus 14,080

Debit - Goodwill 1,120
Credit - Deferred tax income -13,001
Credit - Deferred tax liability
-2,199
0
[Link] Example 6: Disclosures IAS 12

Based on previous examples, draft numerical disclosures for Taxico's notes to the individual financial statements as of
31 December 20X5 related to deferred tax.

1. Major components of tax expense

EUR
Current tax expense 40,200
Deferred tax income related to the origination and reversal of
-13,740
temporary differences

Deferred tax expense resulting from increase in tax rate 739

Total tax expense 27,199

2. Income tax relating to the components of other comprehensive income

EUR
Deferred tax related to revaluation of property, plant and
14,080
equipment

3. Explanation of the relationship between tax expense and accounting profit

EUR
Accounting profit 85,000
Tax at the applicable rate of 30% 25,500
Tax effect of tax non-deductible expenses:
representation & promotion expenses (900*30%) 270
petrol over limit (2 300*30%) 690
Increase of opening DTL resulting from increase in tax rate 739
Total tax expense 27,199